The housing market slump is likely to produce over $3.15 trillion in paper losses. Our stock market swoon has already produced $3 trillion in paper losses in the total value of all American shares since November. Not to fear, our selfless agents in Washington have June dated $600-$1200 checks that might have your name on them. Some restrictions apply. That should buy $100 billion worth of votes, I mean right the economy. Businesses will also get $50 billion in tax cuts and investment inducements. Thus, we will get $150 billion in June to prevent the recession we are likely already in. Eureka! Our task today, if you are kind enough to afford me a few minutes of your time, is to examine our great big slump and their flaccid little stimulus.
The economy has been sputtering for months. The most high profile areas of severe economic weakness have been housing and equity markets. Across our fair nation all things related to building, buying, selling, furnishing and financing homes have been heading south. Financial markets have suffered as builders, bankers and retailers have seen their stock prices and profits tumble. Many and large firms have report massive losses. Total profits reported have softened. The size of losses, fears of further losses and recession have spilled over into financial markets with great drama. We are in the midst of the worst January stock market performance ever. This kind of pain, pain for banks, financial firms and large investors, registers quickly in Washington. I am sure you don't need a reminder as to why?
How bad is it?
Well over a quarter million people lost their homes in the second half of 2007. Our best estimates suggest that over a million Americans will face foreclosure in 2008. Tough times for tens of millions have been getting much tougher fast. This causes these folks to spend less and has pushed many off the debt cliff. For years tens of millions of Americans -- let's be honest and call them the citizens formerly known as middle class -- spending meant borrowing. There was no other way to continue to live like a middle class person with stagnant wages and rising prices. The most popular -- cheapest/easiest -- way for millions to borrow became their house. Between 2002 and August 2007 we borrowed an additional $4.4 trillion in home mortgages and home equity loans. That is an increase in American household borrowing of 73% in five years. The total increase in disposable income -- all types of income to all people -- was only $4.5 trillion across the same period. From 2002-2007 home mortgage borrowing generated as much money for America as the increase in disposable income! That is how we ended up with a big, fat, dragging slump. That is how we ended up with $10.4 trillion in home mortgage debt and $21 trillion in real estate holdings. If we assume that American household real estate holdings decline by 15% -- a generous assumption -- the loss in paper wealth will be $3.15 trillion -- or $3 trillion more than the stimulus! Our stock market losses since October 2007 total about $3 trillion on our $16 trillion in total equity holdings. Equity market losses and likely housing losses are more than 40 times the size of the stimulus.
Our slump is big, the stimulus is small. Our slump is in the mood right now, the stimulus comes in June. The checks are for people who pay income taxes and will be mailed out after April taxes are due. Millions are hurting now and don't know how they will pay their taxes. I just don't think you can stimulate a slump this big and now and with a stimulus that small and late.