Why then the title the perfect economic storm if GDP will be impacted yet that economic contraction is temporary? After all, the reconstruction should give a stimulative boost to the first half of 2013. The reason is the fiscal cliff and the third element in the economic storm trifecta, Obama's grand bargain, being negotiated by Congress in secret, under the guise of addressing the fiscal cliff and being lobbied for by CEOs.
The CBO projects if Congress does not act to stop the across the board budget cuts, known as the fiscal cliff, America will sink into recession. The CBO has been sounding the alarm bell as has the Federal Reserve on the fiscal cliff. Current law's sharp deficit cuts are projected to cause a -0.5% GDP contraction from Q4 2012 to Q4 2013 and increase the unemployment rate by 1.1% by Q4 2013. This is a 5.1% deficit reduction as a percentage of GDP. The sharp cuts will throw the U.S. into a recession, defined as two consecutive quarters of negative GDP growth. Below are the CBO slides illustrating what will happen...
Bill Black has been warning of Obama's grand bargain to reduce social security benefits by claiming to deal with the fiscal cliff.
Robert Kuttner has written much of the column I intended to write on this subject, so I will point you to his excellent column and add a few thoughts.Way back in the 2008 primaries, we warned Obama would partially privatize social security, a long desired Wall Street objective.
Kuttner wrote to warn that Obama intends to seek a “grand bargain” causing the U.S. to adopt the type of austerity program that threw the Eurozone back into a gratuitous recession.
Worse, Obama intends to begin to unravel the safety net (Social Security, Medicare, and Medicaid) to convince the Republicans to enter into this Faustian bargain.
There are other critical programs on the chopping block, all propping up the poor and lower income Americans which, lest we forget, is most of America. The earned income tax credit, the child tax credit and the college tuition tax credit are all set to expire. The home mortgage interest deduction is also on the table to be cut.
2--Is It Time to Bomb Iraq Again?, Hornberger's blog
3--Canada housing crash alert, Macleans
Others aren’t so sure the landing will be all that soft. The 15 per cent drop in resale numbers registered in September, analyst Ben Rabidoux pointed out, was the market’s weakest September performance since 2001.
Sales of existing home are falling sharply, and prices will soon follow. That construction of new homes is still robust is bad news, as it means the market is creating excess supply that will only further depress home values.
Capital Economics predicts home prices could drop as much as 25 per cent. The dive will leave Canadian consumers hurting and could wipe out as many as 115,000 construction jobs, the firm predicts.
Another telling estimate foreshadowing a sharp correction is the Economist’s price-to-rent ratio, which calculates that Canadian homes are overvalued by as much as 76 per cent.
2. Will Canadians start defaulting on their mortgages like Americans did?
According to the latest estimate by Statistics Canada, which just revised its methodology for calculating the ratio of debt to disposable income to adjust to standards set by the IMF and the UN, Canadians are even deeper in the red than previously thought, owing $1.63 in debt for ever dollar they make.
The BOC called household debt “the biggest domestic risk” to the economy and recently suggested the state of Canadian families’ balance sheets will play a role in its interest-rate setting decisions.
4-Yanis Varoufakis: “The Return to Growth Should Not Come at Any Price”, naked capitalism
5--Canada economy shrinks in August, clouds outlook, Reuters
6--Foreclosures decline, inventory stays flat: CoreLogic, Housingwire
7--Hurricane Sandy and capitalist “free enterprise”, WSWS
In a society whose basic productive forces are owned by private interests, those interests dictate the priorities of politicians and governments. Thus, all necessary resources were deployed to get the New York Stock Exchange up and running by Wednesday, while Bloomberg warned working class residents of public housing projects and blacked out communities in Manhattan, Brooklyn and Queens that it might take days, or even a week or more, to restore electricity to their homes.
More broadly, “fiscal constraints” did not prevent the US government from handing over trillions of dollars in taxpayer funds and subsidies to rescue the Wall Street banks and insure the fortunes of the financial speculators. Events such as Hurricane Sandy highlight the crippling consequences of a system that diverts massive social resources to maintain an utterly parasitic financial aristocracy....
What is required is a huge allocation of resources—in the tens and even hundreds of billions of dollars—to restore power and mass transit as quickly as possible, repair the infrastructure damage, make families that have been hit by the storm whole, and launch a comprehensive program to upgrade and modernize anti-storm and flood-control systems, mass transit, and the electrical generation and transmission system.
This, however, is made impossible by the existing, capitalist system. Private ownership of the means of production and the subordination of economic life to corporate profit, the foundations of capitalism, at every point cut across the mobilization of social resources in the common interest.
8--Self-defeating austerity?, VOX
The direct implication is that the policies pursued by EU countries over the recent past have had perverse and damaging effects. Our simulations suggest that coordinated fiscal consolidation has not only had substantially larger negative impacts on growth than expected, but has actually had the effect of raising rather than lowering debt-GDP ratios, precisely as some critics have argued. Not only would growth have been higher if such policies had not been pursued, but debt-GDP ratios would have been lower.
It is particularly ironic that, given that the EU was set up in part to avoid precisely such 'prisoner's dilemma' type problems in economic policy coordination, it should currently be delivering the exact opposite. Current policy looks less like optimal coordination – and more like a suicide pact
9--Tighter mortgage standards for GSEs will encourage private lending, oc housing
After the collapse of lending caused by skyrocketing delinquency rates which ultimately brought down the housing market, lending was taken over by the US government. The FHA, which was an existing government program, saw its share of mortgage origination balloon from 4% to 25%. The government sponsored entities of Fannie Mae and Freddie Mac were taken into conservatorship by the Department of Treasury and injected with about $150 billion to keep them solvent. With takeover of the GSEs and the increase in FHA lending, the government insured the loans on as much as 98% of the housing market. The current footprint is still well over 90%
Most of the parties involved with supervision of the GSEs and FHA agree that the government footprint in lending should be reduced. However, any proposals to accomplish this end is always greeted with the same shrill cries about increasing costs or reducing eligibility. Lenders have morphed from companies with large portfolios of loans to an origination model where they underwrite the loan to government standards then sell them in the secondary market. This new origination model requires little capital to operate because they don’t have to keep any of the loans their originate on their own balance sheets. These new players vehemently oppose a new requirement in the Dodd-Frank law that mandates they keep 5% of the origination value of loans on their books that do not conform to the new “qualified mortgage” standard. It’s primarily these groups who operate on the origination-to-sell model that are lobbying to relax the Dodd-Frank standards.