The Dismal Economist’s Joyless Triumph

NEW YORK – I have long been forecasting that it was only a matter of time before America’s housing bubble – which began in the early days of this decade, supported by a flood of liquidity and lax regulation – would pop. The longer the bubble expanded, the larger the explosion and the greater (and more global) the resulting downturn would be.ampnbsp;

Economists are good at identifying underlying forces, but they are not so good at timing. The dynamics are, however, much as anticipated. America is still on a downward trajectory for 2009 – with grave consequences for the world as a whole.

For example, as their tax revenues plummet, state and local governments are in the process of cutting back their expenditures. American exports are about to decline. Consumer spending is plummeting, as expected. There has been an enormous decrease in (perceived) wealth, in the trillions, with the decline in house and stock prices. Besides, most Americans were living beyond their means, using their houses, with their bloated values, as collateral. That game is up.ampnbsp;

America would be facing these problems even if it were not simultaneously facing a financial crisis. America’s economy had been supercharged by excessive leveraging; now comes the painful process of deleveraging. Excessive leveraging, combined with bad lending and risky derivatives, has caused credit markets to freeze. After all, when banks don’t know their own balance sheets, they aren’t about to trust others’.ampnbsp;