For most of us, the current crisis in America’s housing market is a distant echo, a barely understood series of headlines that might as well be in Greek, in a section of the newspaper often left unread. But the crisis is real. It threatens hundreds of thousands of American families who are in danger of losing their homes, and it threatens America’s status as a superpower on the world stage. It is the first payment for George Bush’s other mismanagement, the fiscal and financial wrong-headedness that so many, including this page, have warned about for years.
Although this crisis consists of a complicated series of events, each leading to the next, it is not hard to understand. Thanks partly to the decline of America’s manufacturing-based economy, partly to the deregulation of banking and finance two decades ago, and partly to tax “reforms,” there’s been a tremendous growth in financial services — borrowing and lending for profit — as a share of our economy in recent years.
To the naked eye, this surge is most visible in a constant barrage of advertising, telemarketing and junk mail urging us to borrow — to acquire new credit cards, to apply for easy mortgages, to refinance our personal debt and then roll it over again. Financial institutions, under constant pressure for growth, have continually lowered the requirements for consumer credit, extending loans to people who may not be able to repay. Most insidious are “balloon” mortgages that start cheap, with higher payments promised somewhere down the road. Based largely on the availability of easy money, the housing industry has experienced a frenzy of building. It is the era of the McMansion.
Now we have arrived at that place somewhere down the road. Throughout the country, families are finding their mortgages ballooning — or their incomes declining, as factories flee — and cannot make payments. Lending institutions are finding themselves short of cash, and cannot pay their investors. Investment funds based on buying up debt — promising their investors great profits when the borrowers repay — are simply failing. The housing industry itself, one of the main engines of American economic growth in recent years, is slowing down. Not surprisingly, the economy’s growth in 2007 has been the slowest in four years, according to the Commerce Department. Slow growth lowers the value of the dollar on world markets, and so Americans — consumers and Uncle Sam alike — can buy less. Retail sales were alarmingly slow in July.
And now comes the big bomb: the failure of foreign funds that had invested in American credit, especially mortgages. Two big German institutions shut down trading in July to prevent a panicked sell-off. Last week, one of France’s biggest banks shut down three of its funds for the same reason. The European Central Bank stepped in by injecting $130 billion in new cash to prop up banks that are low on cash — because their American-based investments aren’t paying.
With the American economy in distress, foreign investors are shying away from the dollar and putting their money in other currencies. That pushes the value of the dollar further down. It also raises the price our federal government must pay to feed its constant appetite for borrowing instead of taxing. Reassuringly — or frighteningly, depending on where you stand — the overall world economy is not yet threatened by America’s crisis. As the respected British newsweekly The Economist noted recently, “Today, the world economy is growing strongly, despite the weakness in America.”
President Bush assured us last week that things are under control. “The fundamentals of our economy are strong,” Bush told a press conference August 9, the day after the three French banks shut their mortgage funds, sending the New York stock market tumbling in response.
“I am told there is enough liquidity in the system to enable markets to correct,” the president added. That is, Bush believes there’s enough cash to cover the current failures. The market is saying there isn’t.
Not coincidentally, the big news in Israel last week was the announcement that the Jewish state’s defense budget had to be slashed by a shocking 10%, suddenly and unexpectedly. The reason: Washington told Jerusalem it was not going to deliver an expected infusion of military aid, because Uncle Sam doesn’t have the money. The world economy may not be troubled by the weakness in America, but there’s one little corner of the world that’s terrified.