Recession Time! The Housing Bubble Bursts the Economy

By Dean Baker
    t r u t h o u t | Perspective    Tuesday 11 September 2007

    The downturn in jobs reported last month by the Labor Department provided evidence of an economic downturn that even the economy’s greatest cheerleaders could not ignore. Healthy economies do not shed jobs.

    During the core periods of the upturns in the eighties and nineties, there were three months in which the economy lost jobs. In two of these, the loss was attributable to major strikes. (The jobs of striking workers are not counted in the survey.) That leaves a grand total of one month in more than twelve years of recovery in which the economy lost jobs. In other words, the August job loss leaves the economic optimists somewhat less credible than the deniers of global warming.

    The backdrop for the August job loss is the collapse of the subprime mortgage market. Millions of low- and moderate-income homeowners are now looking at the resetting of interest rates on adjustable rate mortgages to levels that they cannot afford. While the Fed chairman and other leading economists assured the public that the problems would be restricted to the subprime segment of the housing market, this assertion was always ridiculous on its face.

    Subprime mortgages accounted for one-fourth of all mortgages issued in 2006. The equally troubled Alt-A mortgage category accounted for another 15 percent. With segments that account for 40 percent of the mortgage market going into convulsion, there was no way that the housing market as a whole would not be affected. Of course, record supplies of unsold new homes and vacant homes also ensured that there would be substantial downward pressure on house prices.

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