‘US Housing Market Crash to Result in the Second Great Depression’ by Mike Whitney Essay (Article)

Introduction

Human society lives in a setting that is dominated by needs and wants. These needs and wants were fulfilled in the days before currency through a system of barter of goods. The concept of currency came in much later. According to Max Weber, economics is about the study of ‘ends and means’ in a society. People buy something for its own sake like food and clothing. They also buy a product as a means of achieving something else; say for example, a luxury car for the sake of achieving status in society. But this concept of ends and means results in an economic activity indicating that practically every transaction for achieving ends and means is an economic activity. This is the basic reason why the topic of economics and its study is an integral part of human activity. The term has its origin from Greek and French and basically means managing the household.

As a result many great thinkers have brought out many theories on this topic. Over the years many economists have appeared and have contributed to the field in many ways. People like Weber, Adam Smith, Karl Marx, Amartya Sen, Milton Freidman, and Schumpeter are some of the few great economists who come to mind. There are countless others, and are far too many to be mentioned here. Moreover, many articles and opinions have also been written about economics and the state of economy of a region (a country, state, political regions, and even the world in general). This paper is a criticism of the state of the US economy during the early part of 2007 with focus on the housing market in the country.

Synopsis of the article

The article is titled ‘US Housing Market Crash to result in the Second Great Depression’ and is written by Mike Whitney for the publication, The Market Oracle. The article appeared on its online version on February 23, 2007. Whitney, as the name of the article indicates, writes about the crashing of the US housing market due to extremely poor policies of the government and the highly developed consumer culture of its population. The housing slump will soon trickle down to other sectors also.

The burst of the housing bubble, as Whitney puts it, is illustrated by some figures in the article. Construction of new homes fell by 14%, prices of homes fell in nearly 50% of the states across the country (with four states bearing the brunt of the decline), and sales fell by 40%. Whitney focuses on the rising gap between the rich and the poor throughout the paper. He even quotes Karl Marx by bringing up the issue of class struggle. This problem is compounded by a general slowdown of the US economy with falling sales, rising national debt, retrenchment of jobs, and rising unemployment.

Whitney blames government policies and specifically those introduced by Alan Greenspan allowing credit at super cheap rates. People were lured into buying homes that in reality were beyond their capacity. The Adjustable Rate Mortgages will result in people being unable to keep paying monthly repayments of their loans. This will naturally lead to foreclosures and a lot of people without homes to call their own. Whitney accuses of Greenspan of deliberately plotting this scenario of private spending to hide the actual state of the economy and the national debt.

The author also shows similarities in government policies that led to the great depression of the 1920s. The dollar is losing its value as an investment and the US would need huge FDI to offset its public debt. But FDI into the US in such a state is not practical to investors. The gloomy, but correct picture given by Whitney is that the country is moving towards a financial meltdown under the current circumstances.

Reference to context

It appears from news in 2009 that things may not be as bad as predicted by Whitney two years back. “Official figures showed U.S. housing starts – new building – surging 22.2 percent in February. That marked the first increase since April of last year, before troubles in the U.S. mortgage market prompted the full-scale financial crisis now ripping through world trade and industry.” (Mutikani and Hughes). This news release by Reuters says that the housing market has already reached its rock bottom stage and the only way now is to go up. But he was right about the slump in the housing market resulting in negatively affecting other areas of the economy also. But whatever else has been stated is appearing to hold good. One thing that Whitney could not have predicted is the disastrous war campaigns that had cost the economy nearly and also the election of Barack Obama as the new president with his bailout plan.

Economic importance of the topic

Housing boom or slump is often associated with economic cycles. When the economy is strong, people tend to invest in durable assets because they have the perceived capacity to repay the amounts due on acquiring the assets (loans and mortgages). But economists have discovered more serious relationship with the growth of the housing industry and the economy and GDP of a country. According to Professor Edward E. Leamer, “residential investment consistently and substantially contributes to weakness before the recessions, but business investment in equipment and software does not. And the recovery for residences begins earlier and is complete earlier than the recovery for equipment and software.” (Leamer). Leamer adds that the housing market has a peculiarity in the sense that once it takes an upward trend, it continues to do so. This will jack up the prices resulting in over-valued homes. The situation today is that many house owners have mortgage balances that are worth more than the actual value of the property. The best way to prevent this is to bring in a credit squeeze once a housing boom starts so that the inevitable recession due to this reason can be avoided. But Whitney’s article is very relevant when considering the strong relationship between housing and the level of economy of a nation.

Economic Intuition and concepts

Intuition can lead to solutions and discoveries. “As remarked in Fabozzi, Focardi, and Ma, any process of model selection must start with strong economic intuition.” (Fabozzi, Focardi and Kolm). It is such intuitions that have helped in the evolution of many theories and it is not just based a lot of data and analysis. The intuition will either prompt the theorist to search for data, or a set of data might result in an intuitive process in his or her mind. There are many economic concepts that are relevant here. The main one is the theory of demand and supply. Availability of cheap housing created a housing boom which resulted in high demand. This in turn led to limited supply and hiking of prices. Whitney mentions about productivity in the country increasing nearly 32% between 1925 and1929 while wages rose only 8%. This resulted in huge increase in income for the capitalist, while only a moderate rise for the worker. The IT revolution would also have contributed to this inequality in modern times. But this is in tune with Marx’s theory that capitalism will only increase the gap between the rich and the poor. The link between housing industry and the state of the economy is also a lesson.

Conclusion

A paper on the housing industry bust in the US two years back has been reviewed here. The preceding boom is one of the factors that led to recession in the economy. Whitney has been right on many counts when compared with the current situation two years later. But there are signs of optimism since the industry seem to be recovering slightly. What Whitney did not foresee was the disastrous war in Iraq and Afghanistan and its economic fallout. He could also not have foreseen the presidential election results and the economic bailout package that has been announced. The war had already badly affected the economy. The bailout package may lift the economy from its current status and push it on its way to recovery.

Works Cited

Mutikani, Lucia., and Hughes, Krista. Business with Reuters: U.S. Housing Market Offers Hope. International Herald tribune. 2009. Web.

Leamer, Edward E. NBER Working Paper Series: Housing the Business Cycle. National Bureau of Economic Research. 2007. Web.

Fabozzi, Frank J., Focardi, Sergio M., and Kolm, Petter N. Financial Modeling of the Equity Market. John Wiley and Sons. 2006. Web.