“It's All Downhill From Here, Folks”
The Bush Bust of '08

On January 14, 2008 the FDIC web site began posting the rules for reimbursing depositors in the event of a bank failure. The Federal Deposit Insurance Corporation (FDIC) is required to “determine the total insured amount for each depositor....as of the day of the failure” and return their money as quickly as possible. The agency is “modernizing its current business processes and procedures for determining deposit insurance coverage in the event of a failure of one of the largest insured depository institutions.” The implication is clear, the FDIC has begun the “death watch” on the many banks which are currently drowning in their own red ink. The problem for the FDIC is that it has never supervised a bank failure which exceeded 175,000 accounts. So the impending financial tsunami is likely to be a crash-course in crisis management. Today some of the larger banks have more than 50 million depositors, which will make the FDIC's job nearly impossible. Good luck. It's worth noting that, due to a rule change by Congress in 1991, the FDIC is now required to use “the least costly transaction when dealing with a troubled bank. The FDIC won't reimburse uninsured depositors if it means increasing the loss to the deposit insurance fund....As a result, uninsured depositors are protected only if a bank acquiring the failed bank will pay more for all of the deposits than it would for insured deposits only.” (MarketWatch) Great. That's reassuring. And there's more, too. FDIC Chairman Shiela Bair warned that “as of Sept. 30, there were 65 institutions with assets of $18.5 billion on its list of "problem" institutions;” although she wouldn't give names. So, what does it all mean? It means there's going to be an unprecedented wave of bank closures in the US and that people who want to hold on to their life savings are going have to be extra vigilant as the situation continues to deteriorate. And it is deteriorating very quickly.

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The Demise of the American Middle Class

American as well as all western white and blue collar workers will soon realize that they will either have to decrease their wage demands to conform with "global standards" or chose jobs in the service sector. These global standard wages are now being set by worker in India and China, where average hourly wages are about 65 cents and one dollar respectively. The high paying jobs created in Mexico under NAFTA, the whopping $3.50 per hour ones, are moving to China because even this princely wage level is much too generous according to U.S. businessmen. So currently unemployed workers and anyone laid off in the future better get their applications into McD and Wal-Mart in a hurry because these will be the premier jobs of the future. But, if American workers are willing to accept these "global standard wages" (adjusted for product transportation costs), no more than $3.00 per hour, perhaps they can get work here in the U.S., but only if their employers believe these wages will be maintained in the future. Unfortunately no one an live on $3.00 per hour in the U.S. unless he doesn't mind living on a subsistence level, without car or medical coverage (even if minimum wage laws were waived to allow them to do so).

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Sales of New Homes Fell by 26% in 2007

The housing industry, caught in a maelstrom of sinking demand, rising foreclosures, and bulging inventories, is in its worst slump in decades, a growing body of economic evidence shows. Sales of new homes fell last year by 26 percent, the steepest drop since records began in 1963, the Commerce Department said on Monday. Last week, the National Association of Realtors reported that sales of previously owned single-family homes, a large portion of the overall housing market, suffered their biggest annual drop in 25 years. And the median price of those homes fell for the first time in at least four decades, and possibly since the Great Depression.

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Jingle mail

Homeowners whose homes are losing value as their mortgage resets to much higher levels increasingly feel no need to tough it out. Instead, they just mail the keys back and walk away. This happens enough that it’s called ‘jingle mail.’ There have been so many foreclosures in Cleveland that parts of it now resemble a ghost town. When block after block of residential areas become empty, then businesses in the area suffer too. Tax revenue for the municipality drops, causing budget shortfalls. And so on. In theory, when home prices drop enough, then speculators will move in, buying at the bottom. But if entire blocks are ravaged and no businesses are nearby, prices will have to drop way down indeed to attract the vultures. It took parts of the South Bronx decades to come back. Or will it be like the Anasazi in Temecula?

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The Anasazi in Temecula

Almost two thousand years ago the Anasazi people lived in the Four Corners area of the southwestern U.S. Somewhere near 490 A.D. they established permanent settlements in that arid region, steadily developing a culture, and even a viable economy. And then, almost 1,000 years later, in what is still something of a mystery, the Anasazi disappeared. Some people think it was struggles with warring neighboring tribes that caused their disappearance. While that is possible, it seems increasingly likely the cause was an over-large settlement and a change in climate. The Anasazi established themselves in that desert region during a period of peak rainfall, and that precipitation decreased significantly over the next few hundred years. As a result, by that argument, the Anasazi steadily moved away, leaving the old and the infirm behind with the hillside caves and potteries. I got to thinking about the Anasazi while driving from San Diego to Palm Desert today. North of San Diego, a little southeast of Los Angeles, there is a city called Temecula. It has grown incredibly over the last 20 years, largely with people priced out of the L.A. and Orange County (and even San Diego) markets buying real estate there, and then enduring monstrous commutes. You have to see it to believe it. Chaparral-clad high-desert hillsides are paint-gunned with subdivisions, most of which look alien, more like they fell from space than growing organically from the existing city of Temecula. Either way, the new subdivisions are endless, especially on the north side of the city, all stretching out in a quilt of home non-biodiversity. As I rubber-necked at 70 mi/h from freeway overpasses it struck me: These subdivisions are emptying out. They have to be. Foreclosures are forcing every adjustable-rate-mortgage developer-driven subdivision like this in California to empty out, from Stockton to Chula Vista. With that thought in the back of my mind, the typical mid-day emptiness of a modern suburb changed. These developments went from half-built and merely quiet, to progressively abandoned. And I began to feel like John Wesley Powell finding an ancient settlement of puzzling origin.

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