The Staton Jones Report

There is a story in The Washington Monthly that all home owners should read.

Greenspan's rather ham-handed effort to get them to go for ARMs, is a sign not of the chairman's own eccentricity or advanced age, but, instead, of the economy's current unsteadiness. Greenspan knows, perhaps better than anyone, that this economy is perched nervously on top of a wobbly, Dr. Seuss-like tower. Our recovery is propped up by consumer spending, which is in turn propped up by mortgage refinancing, and if that refinancing dries up before more props can be put in, the whole edifice could fall. "Since long-term interest rates cannot fall low enough to facilitate another wave of fixed-rate refinancings, he is trying to encourage homeowners to refinance one last time: fixed to ARM," Peter Schiff, president of Euro Pacific Capital in Los Angeles told the San Francisco Chronicle.

Bottom line: you kept spending through the Bush Recession because Greenspan kept lower interest rates, and that allowed you to (in some extreme cases) refinance each year. And everytime you did, you "paid off" some debt, but at the expense of your home's equity and based on a rising (and if the bubble bursts, fake) property value. What happens when that bubble bursts? Banks will be holding trillions in notes that are not backed by real estate worth the paper. Sound familar? I remember the late 1980's well.

So if (or when) the bubble bursts, expect the "jobless recovery" to come crashing down because the Feds will have to step in to prop up Fannie Mae (among others) and a mere $500B won't cover this check this time like it did in 1990. The U.S. government will be facing literally trillions of debt. That could lead to a currency crisis ... HERE. The rest is ... a great depression.