UK mirrors US' economic woes

Jan 27, 2011

Baltimore, Maryland

We shift our attention to the United Kingdom today. To make a long story short, if a bottle is tossed into the Atlantic off the coast of Maryland, it may eventually wash ashore on the coast of Cornwall. But there is no point putting in a note asking for help.

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First, let's look again at the latest news from the US:

Stocks rose a bit yesterday. Gold was flat. The Great Correction continues:

WASHINGTON (AP) - Buyers purchased the fewest number of new homes last year on records going back 47 years.

Sales for all of 2010 totaled 321,000, a drop of 14.4 percent from the 375,000 homes sold in 2009, the Commerce Department said Wednesday. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming.

The year ended on a stronger note. Buyers purchased new homes at a seasonally adjusted annual rate of 329,000 units in December, a 17.5 percent increase from the November pace.

Still, economists say it could be years before sales rise to a healthy rate of 600,000 units a year.
Neither housing nor employment show any sign of recovery. Nearly 4 years after the collapse of Countrywide the nation's biggest sub-prime lender housing is still going down.

How far will it go? Gary Shilling says it will take another 20% drop in housing prices to bring them in line with their historical trend. Housing usually rises with the economy. Not more. Not less. To get back on track with the economy now, house prices have to go down.

What about over-shoot?

Yes, that's a risk too. Bubble markets don't tend to go back to 'normal' levels right away. Instead, they tend to go below normal.

At first, homeowners think it is a just a temporary break in an upward trend. They hold on...hoping to catch another move to the upside. Then, they gradually resign themselves to a long slump, but still believe that "you can't go wrong on real estate, not over the long term."

Then, housing prices continue to sink. More homeowners give up. Some sell. Some default. More foreclosures depress prices even further.

The peak in foreclosures is not expected until March of 2012. When it comes -five years after the crisis began most homeowners will be ready to throw in the towel. 'Housing may go up in the long run,' they'll say to each other, 'but this downturn could last longer than I do.'

Prices are likely to drop below their historical trend. Homeowners will tell their children: 'Don't bother to buy a house. Rent. Housing is a losing proposition. It never goes up.'

Then, with housing prices perhaps 25% to 40% lower than they are today, the market will have found its bottom.

When? Housing markets move slowly. It could happen by 2015...maybe 2020...

*** Pity the poor English. Here's the latest:
LONDON - Prime Minister David Cameron 's coalition government received a body blow on Tuesday after official figures showed that Britain's economy shrank by half a percent in the last three months of 2010.

The figures on the economy's performance from October to December are subject to revision as the data are refined in coming weeks. But the message to the Cameron government seemed clear: Its policies of steep spending cuts and tax increases, Europe's most ambitious austerity program, faced, at a stroke, a sharply heightened political vulnerability.

The decline came after four consecutive quarters of economic growth. Spokesmen for the opposition Labour Party and trade union officials seized on the new figures, saying they showed the government had lost its gamble that it could impose the tough austerity measures and still keep the economy growing.

The government responded by blaming the snow blizzards that hit Britain last month, the country's coldest December in 100 years, and saying it would "not be blown off course by bad weather."
The government blames the weather. Analysts blame the conservative government's austerity measures. They're both wrong.

The weather had some effect. But not enough to take a full percentage point off GDP. (The difference between expectations and the actual result.) Cuts in government spending, meanwhile, should reduce GDP at first. But the cuts haven't even begun yet. It's not the weather. It's not the government. It's the "Great Correction", doing its job

In the minds of most economists, any slowdown, whatever the cause, is bad news. They think economies have to run hot all the time in order to provide 'growth', jobs and profits. Here at the Daily Reckoning we take a different view. Sometimes economies need to take a rest. They need to check the map. Just racing along is not necessarily a good thing. They need to be sure they're headed in the right direction.

But there's the problem right there. London has the same knuckleheads in the drivers' seat as Washington. Mervyn King, England's answer to Ben Bernanke, said that since he and his colleagues took over, "there has not been a single quarter of negative growth." But that speech was made in 2007. To what did he attribute this grand performance? In a more recent speech, he explained that since "monetary policy is a flexible instrument that can be changed in either direction each month, it is the best tool for managing the economy in the short run."

Well, the bank of Mervyn King and the bank of Ben Bernanke are on the same page. Neither government can use fiscal policy both are out of money. But they still have monetary policy...or to be more exact, they still have the printing press.

So, they push down on the accelerator...and head for a ditch.

*** Here's an item that helps us understand better how the zombie state works. The New York Times reports:

"Mortgage Giants Leave Legal Bills to the Taxpayers.
"Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.

"The bulk of those expenditures - $132 million - went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.

"Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie's former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller."
See how the zombies do it? The mortgage companies collude with the Fed (artificially low rates) and Congress (deductibility of interest payments, implied federal backing of Fannie and Freddie) to stick Americans with trillions in mortgage debt. Then, when the bubble blows, the feds take over Fannie and Freddie, adding $5 trillion to America's national debt. And the taxpayers get to pay the legal bills too.

What's not to like? The lawyers are happy. The feds are happy. Fannie and Freddie's bondholders are happy.

All the insiders are happy.

It's just the outsiders the poor schmucks who haven't figured out how to get on the gravy train who aren't happy. And who cares about them?

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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