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March 17, 2007
I see that the Australian Financial Review is beginning to take the meltdown in the US subprime market a little more seriously than before. Last Thursday its editorial said:
Jittery American investors, spooked by cracks in dodgy end of the US housing market, are casting a temporal pall on an otherwise robust local market. In reality, the impact of the US housing sector's troubles should be kept in perspective. The consequences could be more optimistically interpreted as a serendipitous pause for securities markets in a steadily growing economy.
The market will self-correct the wobbles. The AFR is like the Wall Street cheerleaders mocking as Chicken Little "sky is falling" hysteria those who interpret the bad news on the housing finance sector as a clear and present danger. But the adamant denial is no longer repudiating economic reason about the housing price 'bubble land', even if the AFR thinks in terms of mitigate the "fallout" when it occurs and easing the transition to the next expansion into a new bubble land. We have 'jitters', 'cracks', 'dodgy,' 'pall' in the one paragraph. 'Jitter's' is another word for panic.
And there is reason for panic. As Henry C K Liu says in Asia Times Online:
In the United States, when house prices have generally tripled in less than a decade, it is evidence that the value of the dollar has declined by a factor of three in the same time period. Consumer prices have not risen by the same amount because of outsourcing of manufacturing to low-wage economies overseas also acts as a depressant on domestic wages. Imbalance in the economy appears if wages and earnings have not risen proportional to prices. A homeowner whose house has increased 300% in market price while his income has risen only 30% has not become richer. He has become a victim of uneven inflation. He may enjoy a one-time joyride with cash-out financing with a new mortgage, but his income cannot sustain the new mortgage payments if interest rates rise, and he will lose his home.
It looks more like a foreclosure bloodbath to me. One that is far broader than the AFR's tacit view that it is only a sub-prime niche problem that is contained and will have no spillover and contagion effects to other mortgages, to the credit market, to the economy and to the US growth rate. Wall Street, like the AFR, continues to deny there is a serious problem, even though 30 or more subprime lenders have gone out of business since December.
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The evidence is similar here - house price growth at unsustainable levels, while wages remain under control.