The US media seems to be slow to reveal the extent of economic troubles the US could expect. Either because the media doesn’t thoroughly understand economics or it is afraid crying wolf could lead to a self-fulfilling prophecy, news outlets have yet to paint the full picture.
This past week a number of new revelations came to light. The US “Mortgage Meltdown” showed signs that there is no end in site to the troubled US mortgage crisis as the Federal Government announced that it may have to step in to secure ailing Fannie Mae and Freddie Mac, lending institutions that offer government-backed mortgages like the FHA program.
If Fannie Mae or Freddie Mac collapsed, it could cripple the U.S. housing market, dealing a staggering blow to the wider economy, and would saddle the federal government with massive debts if it chose to seize control of either firm.
A failure of either company would also rattle global financial markets because their shares and debt are widely held by pension funds, mutual funds and foreign governments.
In this week’s Economist, it was revealed that the “Big 3″ US auto manufacturers are caught in a so called “perfect storm” of economic conditions.
Carmakers have been ambushed by the disastrous housing market and, above all, by the soaring cost of fuel. Falling house prices have persuaded many people to put off buying a new car, and petrol at over $4 a gallon is radically changing demand. Detroit is still stuck with model ranges heavily biased towards the big, thirsty sport-utility vehicles (SUVs) and pickup trucks that raked in the profits when petrol cost half of today’s price.
So just how bad are things for the Big Three? Their survival has been in doubt before. But two things are different this time. The first is that the carmakers’ finance arms used to bring in cash even in hard times. That is not happening now. More buyers are defaulting on their car loans, and the resale value of SUVs and pickups has collapsed so catastrophically (see chart) that the finance offshoots are losing huge sums on vehicles returned after lease.
The second change is that it seems increasingly unlikely that consumers will eventually shrug off the high price of fuel and return to their old buying habits, which means that Detroit’s old business model is now obsolete.
Fueled by rapidly increasing oil and food prices, inflation in the US is already a major concern. The lack of confidence that would be created with the collapse of either one of the lending institutions or a Big 3 automaker would have devastating consequences for the US economy, and the effects of that would certainly ripple throughout the world.
If you look at recent events in the context of the recent near collapse of Bear Stearns (and connect the dots), the direction of the economy seems clear. I think we’re a long way from seeing the bottom of this economic cycle.
Tags: finance // 1 Comment »
If you get a chance, go to OPB.org and see if you can watch Bill Moyers which aired Friday 18 July. The focus of the program was the collapse of sub-prime mortgages, the foreclosure of homes and how we’ve gotten to that point, specificly in Cleveland, Ohio.
There were clips of President Bush assuring reporters the economy was turning around, jobs were up and the government was going to take care of Fannie and Freddie.
Later, there was another clip of a couple senators “discussing” the pros and cons of a government bail-out. The out-going senator arguing for the bail-out was fine with the tax payers taking care of private institutions. The senator that was staying for another term was not. [I can't help but think of Lee Iacoca and Chrysler and wondering if that concession has harmed in the long run more than helped in the short term.]
There was also mention of laws that had been in place since the “New Deal” in 1934, repealed in 1980 under a democratic president, and government in general siding with banks and lending institutions, and not protecting consumers.
Seeing people lined up outside a bank to pull their funds and close their accounts was not settling either.
I’m not an expert, but I suspect we’re in for a long slide downward.