Moon of Alabama Brecht quote
February 28, 2007

The Start Signal for Recession

Yesterday's 3%+ stock market plunge was not due to losses in the China stock market or computer glitches. Instead several data points showed a deteriorating economic climate in the U.S. and probably world wide.

After years of low central bank rates and easy credit availability the U.S. housing market last year went nuts. People could get mortgages of 100% of the inflated house value without down payments and many borrowers took out ARM's, mortgages with adjustable rates. But as rates started to climb through inflationary pressure, the party suddenly, but not unexpectedly, stopped.

New home sales are down and last month they plunged. But builders still had and have lots of new houses in the pipeline and as these are finished those additionally come into the market. More house offered but less customers able to pay the now higher rates results in sinking house prices.

Those borrowers who were barely able to afford the initial payments for their ARMs on 100% of their house value now experience a double crunch. The real value of their houses go down and the amount of their loan may now be at 110% of the house value. At the same time the increased rates increase the monthly payments of the original loan. For many the result is bankruptcy. Their houses go into receivership and will add to the glut of offered homes.

With too many houses in the market and little sales, home builder companies are in trouble. New home sales plunge. Also affected are home improvement markets like Home Depot. Last year the construction industry had been a leading hiring sector. It may become the leading firing sector now.

The lenders who gave the sub-prime mortgages bundled the mortgages they issued, repacked those and sold them to institutions and individuals as Mortgage Backed Securities. Those securities promised a relatively high rate of return for the buyer, if the payments would actually come in. But with borrowers going under, lots of the involved mortgages default, and those who did buy the MBS bonds now will have negative returns, i.e. they are losing money.

Several lending companies have shut down. Some big institutions have already taken losses in the range of several billions. This of course will show in their balance sheets and take a toll on their share prices.

Now lending standards are tightened going back to the regular standards which demand down payments and an appropriate stable income. For those borrowers already in trouble, refinancing to stretch their loans will thereby become impossible. The result is more bankruptcy cases, more houses in the market, lower house prices, more bankruptcy cases... A downward spiral has started that will only stop after house prices, which have been high above historical norms, are well below those.

The side effects on the general economy will take a while to get visible. Manufacturing is already in trouble. Expect higher unemployment, lower stock markets and lack of lenders who, licking their wounds, will only loan for higher rates and to very secure borrowers. A credit crunch that will affect businesses, small and big, too.

All this points to general deteriorating economic conditions beyond isolated sectors that will be reflected in the stock markets. Yesterday's drop may therefore only have been the start signal of a wider  recessionary phase that could well take some years to find a bottom.

Posted by b on February 28, 2007 at 18:43 UTC | Permalink


I may have been too soft in the above piece. Nouriel Roubini is alarmed:

So whenever you hear the spin about the sub-prime meltdown not being such a big deal as “sub-prime mortgages” are only 6% of the housing market beware of such misleading spins. Properly measured sub-prime and near sub-prime and effectively sub-prime (because of creative accounting) mortgages accounted for almost 50% of all originations last year. So the mountain of “garbage” and “trash” that has been piling up in this sub-prime carnage includes a good half of new mortgages created in recent times. And the meltdown of these mortgages – both those that are formally sub-prime and those that are effectively sub-prime – will create a massive credit crunch in short order. At the end of the day “garbage” is garbage, whatever you name it. What is labeled as “Prime Garbage” stinks as much as the “Subprime Garbage”. And if it walks, ducks and quacks like garbage it passes the smell test of being garbage. Some of that garbage may rot more or faster than the rest but the overall state of the mortgage and housing market is the worst in decades.

Also, note that with new home sales down 16.4% in January ( the biggest drop since 1994 as reported today) and housing starts down another 14% in January alone, both the demand and the supply side of the housing market are in literal free fall and collapse. The only things that are mushrooming in the housing market are cancellations (in the 30 to 40% range for major home builders) and the stock of unsold new and old homes that is at historically unprecedented highs. All this means home prices headed sharply south in the months ahead. As I argued last summer (see here and here and here) this is the worst housing recession in the last five decades.

Posted by: b | Feb 28 2007 18:51 utc | 1

The Great Dollar Crash of ‘07

The massive equity bubbles which arose from artificially low interest rates and the deliberate destruction of the dollar by reckless increases in the money supply have shifted trillions of dollars from working class Americans to the predatory aristocrats at the top of the economic food chain. The gulf between rich and poor has grown so wide that it now poses a direct threat to our increasingly fragile democracy.

“Whatever future developments may prove to be, my best guess is that the US will continue to maintain a façade of Constitutional government and drift along until financial bankruptcy overtakes it.” Chalmers Johnson, “Empire V. Democracy: Why Nemesis is at our Door” [*]

Someone said the following, "I dunno, I got chicken-littled with the crashing economy, it seems to me we've been sailing off the edge of the cliff for so long without hitting ground I have to question if we ever will. No doubt, the arguments presented here are solid, but they were solid in 1999, too, and we're still here." And I concur, the work b has done on this post as well as the link above are ominous, however, I can't help but question, if the world economy goes to shit, wont the people with the money, the same currency system we all use, wont the paper dollar be worth nothing to them too? Or maybe the saying really is true, "he whom has the Gold", and all that...

Just letting my mind walk barefoot in the mud here, but would it be con-, er uh, convenient a time to usher in the New World Order North American Union.

One thing is crystal clear, -and as Hersh recently mentioned- it is certainly their modus operand to plot without the knowledge of the congress **, nor 'we the people'.
Our Constitution makes Congress the most powerful branch of government, but we see how much power they really have.

In other words, 'the family' with out the consent of our so called reps have highjacked a nation.

*Chalmers Johnson was interviewed yesterday on DemocracyNow, worth a listen.

I suspect Hersh is only half right here, I believe the elite, many in congress know precisely what is going on.

Posted by: Uncle $cam | Feb 28 2007 19:43 utc | 2

grrr,'s a direct link to, zee blitzer /Hersh match that I fooked on my post above...Major Bush Scandal. Bush admin funneling money to Sunni groups linked to Al Qaeda.

Posted by: Uncle $cam | Feb 28 2007 19:51 utc | 3

A recent sample of my sources with respect to the economy:

Mauldin 16 Feb 07 - Expect a Recession

Mortgage Equity Withdrawal (MEW) accounted for over 2% of last year's GDP growth. Take away that and 1% for construction, and we would have been close to a recession. MEWs are going to be harder and harder to get, especially for sub-prime mortgages. A decade ago sub-prime mortgages were a mere $35 billion. Today they are one-fourth of all mortgages, about $665 billion. Somewhere in the neighborhood of $1 trillion in adjustable-rate mortgages is eligible to be reset in the next two years, sharply increasing payments and lowering the discretionary spending ability of those homeowners. But the real hit is going to be the inability of many to actually get loans. So, will there be a recession? I still think so, and I think the culprit is going to be the housing market, which is going to trigger a slowdown in consumer spending, the first such slowdown since 1991. 22 Feb 07 - GDP Growth Revised Down

Q4 GDP revisions will be severe. Should leave growth near 2.5%. Advanced estimate showed 3.5% growth, final sales rose 4.2% -- both the strongest since Q1. Revisions will leave 4 of the last 5 quarters below the 3% estimate for potential growth. Actual growth for the trade deficit and business inventories provide the majority of the revision. Business capital investment fell as structural investment was the weakest in five quarters. Another strong decline in residential investment as the housing effect lightens in late 2007. Fed looks for sub-3% potential growth in 2007 and 2008.

Economist 25 Feb 07 - Signs of a Market Top

As a proportion of market value, margin debt is now at its highest since the late 1920s and has jumped by $40bn in the past three months, a similar rate to early 2000, when the markets were in frenzy. The proportion of cash held in mutual funds has dropped to 3.9%, equal to its record low (although those lows were recorded only in 2005). The stockmarket has gone almost 950 trading days without a 10% correction, the third-longest period in history. If volatility rises, shares will look riskier. Hedge funds will be tempted to cut their borrowings, and investment banks their trading positions. This could cause a sharp correction, as investors all try to head for the exits at the same time. Until such an event occurs, the circle is virtuous. Low volatility props up markets, which keeps volatility low. So the bears are dependent on a satan ex machina - a huge corporate default, a geopolitical risk come true, or a bird-flu epidemic�to turn sentiment around.

Yardeni 26-Feb-07 - Bullish to the Max

The US economy deserves an Academy Award for its outstanding performance. Despite all its critics and naysayers, the economic expansion has lasted 63 months so far. The average of the previous 10 cycles since 1945 was 57 months. The previous two recessions lasted only 8 months each from July 1990 to March 1991 and from March 2001 to November 2001. In other words, since the November 1982 recession trough, there have been 275 months of economic expansion and only 16 months of contraction. The economy has grown 94.5% of the time, while the Alarmists seem to have been predicting a recession 100% of the time. I wouldn�t give the Fed the Academy Award for the Great Moderation. The other more deserving nominees include Globalization following the end of the Cold War, industrial deregulation in numerous countries around the world, and the Internet. The two big concerns at present are a credit crunch in the mortgage market triggered by the woes in the subprime market and a crunch in the oil market triggered by Iran�s uranium enrichment program. I still expect that both these issues will be resolved without any significant impact on the economy or the stock market.

Bill Gross at Pimco 27-Feb-07 - Rates will Fall, Risk will Rise

The Fed will cut rates later this year and their two key criteria will be employment and asset prices. With construction laborers about to hit the unemployment lines and the [unemployment] rate in jeopardy of rising more than the Fed feels comfortable with, an ease as soon as mid-year may be in the cards. I have a strong sense as well, that mortgage credit availability is in the midst of a cyclical squeeze due to subprime defaults and "��better late than never"�� moral suasion/congressional supervision of mortgage bankers. This should not only continue to floor the housing sector but dampen consumption, as the combined effect of layoffs and Mortgage Equity Withdrawal, "��withdrawal"�� produce a 2% or less real and a 4% or less nominal economy. Those numbers when extended for three or four quarters (which they now have been) are the stuff leading to output gaps, rising unemployment, declining inflation, and an easing in overnight Fed Funds rates. What the last six months have shown us is that the U.S. economy and its asset markets are sensitive to 5 1/4% overnight rates and that asset prices are going down -�� first for those categories most sensitive to negative carry.

There is always disagreement, because whatever concensus exists is already reflected in the market. A sports analogy - the issue is not which team will win the series, but which team will beat the current bookies' spread...

Sorry about the lack of links, but these sources are sourced from email.

Posted by: PeeDee | Feb 28 2007 20:22 utc | 4

@Uncle "*Chalmers Johnson was interviewed yesterday on DemocracyNow, worth a listen."

Indeed, or a read; the transcript.

A nation can be one or the other, a democracy or an imperialist, but it can't be both.

[George] Washington said [!] that the great enemy of the republic is standing armies; it is a particular enemy of republican liberty. What he meant by it is that it breaks down the separation of powers into an executive, legislative, and judicial branches that are intended to check each other -- this is our most fundamental bulwark against dictatorship and tyranny -- it causes it to break down, because standing armies, militarism, military establishment, military-industrial complex all draw power away from the rest of the country to Washington, including taxes, that within Washington they draw it to the presidency, and they begin to create an imperial presidency, who then implements the military's desire for secrecy, making oversight of the government almost impossible for a member of Congress, even, much less for a citizen.

According to the official count right now -- it's something called the Base Structure Report, which is an unclassified Pentagon inventory of real property owned around the world and the cost it would take to replace it -- there are right now 737 American military bases, on every continent, in well over 130 countries.

Posted by: PeeDee | Feb 28 2007 20:32 utc | 5

Annie said it yesterday, I'll repeat it, I sure wish the fuck billmon was around to synthesize all the latest plots, I'd especially be interested to hear what he would say about Hersh's latest revelations, -Iran/CONtra redux- along with the libby libby libby on the table table table, jury, Chalmers stuff and , and...

Posted by: Uncle $cam | Feb 28 2007 20:59 utc | 6

Just for the record, housing in Denmark is also starting to emit a sound like a bubble losing air -- particularly in the capital, Copenhagen where owner apartments are losing value and yet still are hard to sell.

The problem at the moment is with people who have purchased new housing without having sold their present home/apartment. For a long time, interest on housing loans has been low and, although nothing like the 14-18% of the early 80's, it is a crunch for buyers who still have a lot left to pay, or worse, have opted for only paying the interest for the first years.

The point I think is that things are shaky elsewhere than in just the US and any collapse there will reverberate more in the global economy

Posted by: Chuck Cliff | Feb 28 2007 21:49 utc | 7

Mortgages for full house value (buyer puts down nothing) were being offered as far back as 2004. I was shocked then, when I learned about it. Who would make such a loan? I questioned. And, in a market as hot, as bid up, as it already was in late 2004, anyone who took such a loan would be a fool.

I still have the same question, in a way. Why were lenders willing to offer these mortgages? Why was mortgage money so easy? Are there no regulatory or market restrictions. I guess Fannie Mae and the rest of the resale market should be the restricting factor. If so, why did they lower their standards, or even exercise no discretion at all? The absurd housing values in some markets wouldn't have been possible without such easy money, would they?

Were the secondary markets so flush with cash and no place to put it? If so, wouldn't a little income/ wealth redistribution be very healthy for the whole economy? What is the macro picture here?

Posted by: small coke | Feb 28 2007 21:52 utc | 8

Excellent work, b. The other frightening factor in the equation is the US dollar. Interest rates (and so sub-prime mortgage rates) have been low in the United States because foreigners have been so willing to invest here. There are signs that that willingness is, if not disappearing, at least receding. The U.S. dollar has been on a gradual decline for some time. If the rate of decline increases, the U.S. government will be forced to raise interest rates to continue to sell its bonds to foreign buyers. Yet higher interest rates will accelerate the housing crash and generally make everything more expensive.

The United States is caught in a double whammy -- we need to cut interest rates to head off a recession, but if we cut interest rates, the dollar goes down, which makes imports more expensive, raising inflation, pushing the Fed to raise interest rates, etc. What it ultimately comes down to is (1) Greenspan's decision to create a bubble in housing prices to allow the Republicans to cut taxes on the rich, and (2) the Bush Administration's fiscal profligacy. The whole point of Keynsian theory is that governments accumulate surpluses in good times so they can spend them in bad. Because of the size of the budget and trade deficits, the United States has effectively thrown away its ability to use fiscal policy in the face of a recession.

And this is the rosy scenario. You don't want to hear what I think will really happen.

Posted by: Aigin | Feb 28 2007 22:02 utc | 9

@small coke - I'll give it a try

Why were lenders willing to offer these mortgages?
Because unlike Savings&Loans, the lenders did not carry the risk, but bundled the loans into MBS and sold those off.

Why was mortgage money so easy?

Because easy Alan G. decided that there could not be a resession after the Internet bubble broke down. He made money so cheap that toilet paper looked expensive. You could not invest in regular bonds and expect more than 2-3%. People who had money available looked around and found nothing giving more than those 2-3%, then they were offered MSB that would give 3-4%. Of course they took these.

Are there no regulatory or market restrictions. I guess Fannie Mae and the rest of the resale market should be the restricting factor.

No restrictions on resale of loans (which I find criminal). Fannie Mae is a political institution, so there was nothing to expect from them to dampen the Bush boom. Fannie Mae's profits are privatized by its shareholders. Its risk is sozialized as its bonds are guaranteed by the people of the U.S.

If so, why did they lower their standards, or even exercise no discretion at all? The absurd housing values in some markets wouldn't have been possible without such easy money, would they?

No, but it was a political decision.

Were the secondary markets so flush with cash and no place to put it? If so, wouldn't a little income/ wealth redistribution be very healthy for the whole economy?

Yes and yes, it would be healthy, but its politics.

What is the macro picture here?

A robber baron economy.

Posted by: b | Feb 28 2007 22:16 utc | 10

Wow! Thanks, b.
Succinct. Enlightening.
Sharp as a scorpion's sting, to riff on Lear.

Posted by: small coke | Feb 28 2007 22:45 utc | 11

it's not a question of if, but when and how fast (speaking as one still nervously inside the belly of the beast). the market value of my house has declined by about 25 pct over the last few months from a feverish high in early 2006 or so...

Posted by: DeAnander | Mar 1 2007 1:56 utc | 12

small coke- the banks don't take the risk on the no-downpayment loans, or loans that have downpayments less than 20% of the value of a house.

people who take out such mortgages are required to purchase private mortgage insurance (pmi) in case they cannot make the payments. pmi is factored into their monthly payment to the bank...payments are increased accordingly. when someone's property reached the minimum 20% value via payments and property value, someone with a mtg based upon a less than 20% down payment can request that the bank review the loan and drop pmi. if such a request isn't made, the bank will continue to charge that fee forever and ever and ever...

unless things have changed drastically in other parts of the country...but in every place I've ever lived, such insurance was bank would lend w/o it.

now, who offers pmi? I don't know. but it would seem those entities, plus the person holding the mtg on a house losing value would be the losers. the banks would have the money thus far plus a property to sell if someone just walked away from their loan. if the bank then sold the property for less money, they would still not be hurt, it would seem, since they'd already made sure they were covered in the event a borrower couldn't carry the debt incurred.

Posted by: fauxreal | Mar 1 2007 2:23 utc | 13

"The Rothschilds, and that class of money-lenders of whom they are the representatives and agents - men who never think of lending a shilling to their next-door neighbors, for purposes of honest industry, unless upon the most ample security, and at the highest rate of interest - stand ready, at all times, to lend money in unlimited amounts to those robbers and murderers, who call themselves governments, to be expended in shooting down those who do not submit quietly to being robbed and enslaved."
~Lysander Spooner

Posted by: Uncle $cam | Mar 1 2007 2:57 utc | 14

"The Rothschilds, and that class of money-lenders of whom they are the representatives and agents - men who never think of lending a shilling to their next-door neighbors, for purposes of honest industry, unless upon the most ample security, and at the highest rate of interest - stand ready, at all times, to lend money in unlimited amounts to those robbers and murderers, who call themselves governments, to be expended in shooting down those who do not submit quietly to being robbed and enslaved."
~Lysander Spooner

Posted by: Uncle $cam | Mar 1 2007 2:58 utc | 15

the United States has effectively thrown away its ability to use fiscal policy in the face of a recession.

good grief. this has been going on for fifty years.>this is still a touchstone text on "fiscalization." could go on for another fifty years, so long as america remains the consumer society par excellance. we consume whatever you throw at us. you need us, as much as we need you.

Posted by: slothrop | Mar 1 2007 4:01 utc | 16

fidel & hugo chatted a little about the "crisis of the world economy" yesterday on chavez's alo presidente show. edited bbc transcript here

Posted by: b real | Mar 1 2007 4:31 utc | 17

From Aigin @#9:

The U.S. dollar has been on a gradual decline for some time. If the rate of decline increases, the U.S. government will be forced to raise interest rates to continue to sell its bonds to foreign buyers. Yet higher interest rates will accelerate the housing crash and generally make everything more expensive.

But what's new is massive Fed rigging of the market, as we've linked previously. So, what if the Fed. decides to put some wild up & downs in the market, to remind investors of the risk of equities, thus making it's bonds look more attractive?

Posted by: jj | Mar 1 2007 4:54 utc | 18

I hope the reference to computer glitches and Chinese losses in the first sentence of this thread was not a smackdown for something I might have shared yesterday.

I assure you that my tongue was firmly in my cheek when I posted that, and I did not believe either version of events. Typepad does not support Sarcasm Sans Serif, so it's not always easy to know how genuine these sentiments are.

What I was getting at with that post was that it's very, very difficult to get any news stories about economic matters since a blatant assessment by any authority has a direct effect on the reality being described (viz. it correlates directly with investor confidence). A statement of bad news by anyone whose analysis is worth listening to will cause bad news... which is why real bad news is attributed to comfort devices such as computer snafus and Chinese foul-ups.

Try, for example, using the search term "housing bubble". The only "expert opinions" you will find deny that any such thing exists. You can find confirmation from official sources (as Bernhard did above), but only couched in arcane language that keeps investors from panicking. Heisenberg wasn't an economist, but he might well have been describing the same phenomenon if we think of investor confidence and the rate of returns as canonically conjugate variables.

Anyway... let me just say for the record that I was being snarky yesterday and I don't believe that the problem is a computer glitch or incompetent Chinese investors.


Posted by: Monolycus | Mar 1 2007 6:45 utc | 19

De, if you are planning to sell let me give you my house sale story.

Had to move, bought a new house in another country using an equity loan on current US house. It was a zero-interest for one year loan, the retail banker assured me that no one had repayed it within a year.

Take equity loan on house 1 as down payment on house 2. House 2 mortgage for remainder of purchase price.

Then check the spreadsheet one more time to see what I need to sell house 1 for, keeping a special column for US and local dollar value.

The advice is here: knowing what I needed to secure from house 1, I still held out for what the real estate agent promised I might get for it.

Six months later as the US dollar continued to fall, I recalculated what I actually required for the house and told the agent the final number.

The house sold within two weeks.

At that point it was time to move, paid off the house 1 equity loan as part of sale process, move to new location.

Painless although I am now both gray and bald!

The operative lessons were priming the market with a high initial price, a desperate call to the realtor, and of course having found an attractive and affordable house 2.

The whole US$ vs other currencies is a continuous opportunity to lose a few more percent of your hard-earned bucks as well.

Posted by: jonku | Mar 1 2007 7:59 utc | 20

PRChina: Quandary Wrapped In Very Ripe Baloney

And there comes the rub about the emergence of PRChina on the international economic and political scene. PRChina has been growing in GDP terms at double digit rates for the last decade or so (10.7% in 2006). Pundits expect similar growth in the next decade.

Wal*Mart, which once prided itself on stocking goods made in the US of A, now quietly imports thousands and thousands of items from PRChina. Wal*Mart is not alone in selling goods made in PRChina.

PRChina long ago eclipsed Japan as supplier of choice to America's retailers. The trade deficits involved in American consumption profligacy escalate to match. PRChina now holds over USD One Trillion in US Treasury instruments. The leverage involved in terms of manipulating the once US of A economy is almost beyond imagination, which may explain why so little is mentioned about it in tightly restrained American media.

Recent articles in The Financial Times report that PRChinese economic authorities are planning to diversify their holdings. They are going to use some unknown percentage of their US Treasury holdings and other trade surpluses to buy assets throughout the world. In part, they are not going to add to their Treasury holdings but invest strategically. A very intelligent direction.

They know they must move cautiously or risk devaluation of their USD position as well as risk reducing sales to the US market. A delicate and very sophisticated balancing act.

While retaining a communist political facade, PRChina now out-capitalizes the Capitalists. Ironic, no?

The ol' "Now watch this drive", colloquialism dies hard eh?

Posted by: Uncle $cam | Mar 1 2007 12:28 utc | 21


Lest ye forget...

President Bush's uncle Jonathan Bush and the Riggs Bank $25 million fine for a "willful, systemic" violation of anti-money-laundering laws.

CONNECTION – JONATHAN BUSH AND RIGGS: Jonathan Bush, President Bush's uncle, was appointed CEO of Riggs Bank's investment arm in May of 2000, just months after his nephew secured the nomination for the presidency. At the time of the appointment, Jonathan Bush had already become a major financial backer of his nephew, rising to "Bush Pioneer" status by raising more than $100,000 for his nephew in 2000. The move solidified the relationship between Jonathan Bush and Riggs, which was originally initiated in 1997 when, according to American Banker newsletter, Riggs paid Bush $5.5 million for his smaller investment firm. That transaction, according to the NYT, "deepened [Riggs's] links to the Bushes." While Riggs denies any connection between Bush and the accounts being investigated in the money laundering probe, Riggs President Timothy Lex told the Washington Times in 1997 that "there's a blurring of distinctions between banks, mutual-fund families, broker dealers and everything else across the board."

All hail the elite!

Posted by: Uncle $cam | Mar 1 2007 12:50 utc | 22

Even with all of the menacing words coming out of Freddie Mac, the freeboot lenders keep trying to think up new scams.

I received an offer today to refi (how? I don't have and don't want a mortgage, thank you) from Millenia Mortgage offering to pay for the first year. Sound too good to be true? Yup--just read the very fine print at the bottom.

What they'll do is absorb payments at the rate of 0.25% (one-quarter of one percent) for the first year, whilst adding the interest you should have paid to your principal. As a matter of fact, it looks as if they can keep this up for 10 years or until your principal is 135% of what it was when you started, at which time you've inherited a adjustable-rate 20 year mortgage of 135% of your principal.

It's unbelievable that this kind of stuff still goes on.

Posted by: cpg | Mar 2 2007 0:11 utc | 23

Satan’s Portfolio (Long or Short Capital)

What, you thought you were gonna get rich investing in GOOD things? Hahahahaha!

Posted by: Uncle $cam | Mar 2 2007 5:47 utc | 24

Paul Krugman (liberated version): The Big Meltdown

FEB. 27, 2008

The great market meltdown of 2007 began exactly a year ago, with a 9 percent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand’s currency in the summer of 1997, it took many months before people realized how far the damage would spread.
What made the market so vulnerable to panic? It wasn’t so much a matter of irrational exuberance — although there was plenty of that, too — as it was a matter of irrational complacency.
Sooner or later, however, reality was bound to intrude. By early 2007, the collapse of the U.S. housing boom had brought with it widespread defaults on subprime mortgages — loans to home buyers who fail to meet the strictest lending standards. Lenders insisted that this was an isolated problem, which wouldn’t spread to the rest of the market or to the real economy. But it did.

For a couple of months after the shock of Feb. 27, markets oscillated wildly, soaring on bits of apparent good news, then plunging again. But by late spring, it was clear that the self-reinforcing cycle of complacency had given way to a self-reinforcing cycle of anxiety.

There was still one big unknown: had large market players, hedge funds in particular, taken on so much leverage — borrowing to buy risky assets — that the falling prices of those assets would set off a chain reaction of defaults and bankruptcies? Now, as we survey the financial wreckage of a global recession, we know the answer.

Posted by: b | Mar 2 2007 8:08 utc | 25

U.S. to develop new hydrogen bomb

The Energy Department will announce today a contract to develop the nation's first new hydrogen bomb in two decades, involving a collaboration between three national weapons laboratories, The Times has learned.
The cost of the development is secret, though outside experts said it would cost billions of dollars — perhaps tens of billions — to develop the bomb, build factories to restart high-volume weapons production and then assemble the weapons.
Proponents of the effort say that the nation's existing nuclear stockpile is getting old and that doubts will eventually grow about weapons reliability. They say the new bomb will not have a greater nuclear yield and could not perform any new military missions beyond those of existing weapons.

So far, those arguments have attracted bipartisan support, including from Democrats who have long played a leading role in nuclear arms issues.

Critics say the existing stockpile is perfectly reliable and can be maintained for decades. The new bomb will undermine U.S. efforts to stop nuclear proliferation, they say. In addition, a recent study showed that plutonium components in existing weapons were aging much more slowly than expected.

Posted by: b | Mar 2 2007 9:41 utc | 26

on the hydrogen bomb idea, i know someone who works at a company that is developing hydrogen fuels alternatives to fossil fuel and recently learned that they are no longer allowed to travel outside of the united states. not sure when this went into effect, but made me wonder at the time... and in light of b's comment above...

Posted by: write2esme | Mar 2 2007 21:40 utc | 27

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