ECONOMIC VORTEX FORMING IN GULF OF STUPIDITY (WHY IT AIN'T LOOKIN' A LOT LIKE CHRISTMAS)

BY MICHAEL LINN JONES

Recently I wrote about the possibility that an economic Nathan Bedford Forrest would come charging in on some economic experts and badly upset their applecarts. And cause a stampede.

This morning I am scanning the business section of news.yahoo.com and three stories are lined up one after the other. The Federal Reserve dropped interest rates another 1/4 point yesterday, despite the fact that the GDP grew at a rate of 3.9%. Ordinarily a cut would be strongly resisted....but...but...there are those issues to deal with involving the collapse of the subprime mortgage market and its spreading effects.

This AP article by Alex Veiga, FORECLOSURE FILINGS SOAR IN 3RD QUARTER, is one part of the equation.

LOS ANGELES - A soaring number of U.S. homeowners struggled to make mortgage payments in the third quarter, with properties in some stage of foreclosure more than doubling from the same time last year, a mortgage data company said Thursday.

A total of 446,726 homes nationwide were targeted by some sort of foreclosure activity from July to September, up 100.1 percent from 223,233 properties in the year-ago period, according to Irvine-based RealtyTrac Inc.

The current figure was 33.9 percent higher than the 333,731 properties in foreclosure in the second quarter of this year.

There was one foreclosure filing for every 196 households in the nation during the most recent quarter, RealtyTrac said.

Next, Oil above $96 on drop in US supplies by John Wilen, AP Business Writer:

SINGAPORE - The price of oil rose to a new record above $96 a barrel Thursday after a surprise drop in U.S. crude stockpiles raised concerns about supplies for coming winter demand. Other energy futures also gained.

It was the second week in a row the U.S. Energy Information Administration reported a sharp and unexpected drop in oil inventories.

"The decline in U.S. crude oil inventories has been a key driver of oil prices," said David Moore, commodity strategist at the Commonwealth Bank of Australia in Sydney.

SNIP,

Much of that decline was due to a big drop in crude supplies at a closely watched oil terminal in Cushing, Oklahoma.

Cushing supplies have been under pressure in recent months due to differences in the price between front-month oil contracts and those for delivery in future months. This price difference, or spread, has given storage tank owners a financial incentive to sell their oil, rather than hold it in inventory. Analysts have also blamed falling Cushing supplies, in part, for the rally in which oil prices have jumped 35 percent since August

Finally, Stock Investors Fear End To Rate Cuts, again an AP story by Joe Bel Bruno.

Mindful of a warning from the Federal Reserve Wednesday about inflation, the market nervously watched the price of oil, which passed $96 a barrel overnight for the first time before dipping on profit-taking. The Fed, which cut interest rates a quarter point, said in a statement that inflation remained a concern, and oil's ascent to another record raised the possibility not only that the Fed might stop cutting rates, but that it might even consider raising them if inflation accelerates.

These, of course, are just snippets from the articles. I strongly recommend reading each in full. After reading what I've done so far I thought of renaming this "That 70's Show (Again)." If one were to take into account the three stories listed above...and Jimmy Carter was President instead of George W. Bush, there would be hell to pay. We would be talking in terms of a "malaise" or some such. But we're not, because we are being reassured (again) that everything is A-okay.

Am I crazy? Okay, don't answer that...but even if that's been established it doesn't take away the sense of wrongness when I read that oil prices go up because stocks are down because oil price "spreads" caused by the commodities markets give an incentive to keep oil storage tanks dry. Which information is used to further increase the price of oil, etc., etc. It's a nasty circular logic that does three things: makes some people a lot of money, costs many more to spend what they don't have, and screws the pooch on retail sales.

The other day I heard George Will say a couple of things. Bear in mind I admire Mr. Will's logic and prose even when I don't agree with him. He said (and I'm paraphrasing here) that even if crude oil reaches inflation-adjusted levels of the early 80's it doesn't matter that much since the influence of oil as a part of the economy has shrunk since then.

Oh yeah? Well what is the minimum wage when inflation-adjusted? I'm not arguing for the minimum wage, but rather using it as a standard of sorts since many jobs offer compensation that is compared to the minimum wage. Besides, gasoline at $3 or $4 a gallon is still that....money that would otherwise go elsewhere.

He also made the point that a lot of the subprime mortgage failures were by people speculating in 2nd or 3rd homes. Again, what difference does that make? Whether for a 1st, 2nd, or 5th mortgage, those subprime deals were sold as securities that have evaporated in value. The end effect is the same no matter WHO held the paper.

I'm a capitalist. I once lived in what once euphemistically called a "semi-state" environment and it was terrible. Capitalism is indeed the only form of economic activity that works. But, it is quite caustic in nature and also self-destructive if left unregulated. I live in a fairly stable neighborhood. I never ordinarily have contact with law enforcement. But I know that if a wildman was trying to walk off the property with everything I own I would call the police. They would intervene between stability and chaos. I think they call it the "Thin Blue Line."

For the last twenty years or so we've had one politician after another cutting that thin blue line of economic regulation like a local mayor with oversize scissors opening a county fair. Our nation has changed, as all things change, but not all change is necessarily good.

And the result is that our economic neighborhood is overrun with wildmen gleefully filling their stockings because the police are now forbidden to even look for crime. It is a sad fact that the first Chairman of the Securities & Exchange Commission, Joseph P. Kennedy (himself a notorious Wall St. speculator) had to have bodyguards while on the floor of the stock exchange.

Kennedy's job was to pour some unpalatable liquid into many bowls of cornflakes, and the consumers of said cornflakes did not like it a bit. They still don't and that's why they pay out a lot of money to ensure their meals taste sweeter every year.

So if the bottom falls out of the bucket we all can rest assured that in the long run things will straighten out. But like Harry Hopkins once told a Senate committee, " the problem is, people have to eat in the SHORT RUN."

And they have to drive cars to work so as to keep the economy going. And they have to heat their homes (those who still have them).

And they have to hold their noses next November to elect people who like the taste of their cereal and aren't about to allow any cops in THEIR neighborhood.
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Cross-posted at Michaellinnjones.com