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Is a General Economic Crisis in the Making?

 

By People's Tribune

More than 2 million homes in the US were in foreclosure in December 2007. Between January and July 2008, $690 billion in mortgages are scheduled for interest rate jumps, based on adjustable rate mortgages (ARMs) contracted two years ago.

 

These ARMs are not sub-prime mortgages. They are higher quality mortgages, supposedly with less risk of default. However, the lenders expect that at least $325 billion of these loans will go into default, adding another 1 million homes to those already scheduled for foreclosure. The housing bubble, which was created by the Federal Reserve Bank and major US lending institutions to artificially keep the economy afloat, has burst.

 

In 2005, the housing bubble accounted for 50 percent of all US economic growth. There was a tremendous amount of housing bubble borrowing during the middle of this decade, which inflated home prices by 30 to 40 percent beyond their actual worth. New home buyers purchased houses with little or no money down, as housing prices kept inflating upward. And those who already owned homes refinanced their mortgages to get the cash difference for what appeared to be a constantly rising market price for their homes.

 

As the housing bubble deflates and home prices continue to drop, many of these homeowners will find themselves with negative equity-owing more than their houses are worth. Negative equity leads to foreclosures and very big losses for lenders. If home prices fall by 30 percent, there will be 20 million homeowners with negative equity.

 

New home sales are now down 23.5 percent from a year ago and home prices are down 13 percent over the same time period. Even the affluent suburban communities that surround America's big cities are now reporting foreclosure trends not seen in 60 years.

 

The financial system-banks, mortgage houses and other non-bank financial institutions-made a lot of loans that are likely to tank. Many of these bad loans they sold to investors, including pension funds, other banks and financial institutions, "hidden" in bundled securities.

 

Economists are predicting a "Financial Tsunami," saying that all of these events are just the tip of the iceberg. As a result, lending institutions are not lending. From August to November 2007, lending was down 9 percent. Not since the Federal Reserve began tracking these numbers in 1973 has lending constricted so rapidly. The mortgage crisis has already become a credit crisis that has now begun to choke many credit-worthy, economically healthy small- and medium-sized businesses that are being denied loans they have regularly gotten in the past.

 

On top of this is the exploding national debt that is increasing at $1.4 billion a day, or nearly $1 million a minute. As our government continues to print money to fund its military budget, the national debt stands at more than $9 trillion. Foreign investors and governments own 44 percent ($2.23 trillion) of the publicly held portion of the US debt. They are losing money on these holdings, as the dollar continues to drop in value against other major currencies.

 

China, Japan and the petro-dollar rich Middle Eastern countries account for most of the foreign-owned publicly held US debt. China and Japan combined own more than $2 trillion in dollar-denominated assets.

 

There is no question that the US economy faces a major crisis. The only question is how long the capitalist class can forestall the inevitable crash that precipitates a general world economic crisis. At present, a large part of that depends on how long China, Japan and the oil-producing nations of the world can continue to prop up the economy through buying US debt.

 

What can we conclude? First, we can be certain that the situation and the consequences for our class are serious. What must we do? Certainly, nothing can be done without organization and a strategic understanding that the coming of this crisis means that this society of necessity must be transformed into one that distributes the necessities of life according to need, not ability to pay.

This article originated in the People's Tribune
PO Box 3524 , Chicago , IL 60654 , 773-486-3551, info@peoplestribune.org .
Feel free to reproduce unless marked as copyrighted.
Please include this message with reproductions of the article.

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