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What's Behind the Current Economic Collapse?

What's really behind the coming economic collapse? Some houses are now worth less than their copper pipes, which are being stolen from empty, foreclosed properties. But there are economists who think the REAL cause of the recession isn't sub-prime mortgages, it's that perennial problem: credit card debt.

Across the US, empty houses are being stripped of their copper, aluminum, and brass by looters. These metals are used in plumbing, heating systems and telephone lines. Chinadaily quotes Cleveland city councilor Tony Brancatelli as saying, "We're in an incredibly unfortunate time where the nonferrous metals commodities market for scrap is at an all-time high. Houses are getting stripped pretty quickly once they go through the foreclosure process."

Economist Steven Fazzari thinks the root cause of the current economic slowdown in the US goes back several decades, with a wave of increasing consumer spending and rising consumer debt. In the past, consumer spending actually helped the economy as it raised firms' sales and encouraged more hiring. But the associated rise in household debt, most obviously in the recent housing bubble, has come back to haunt us. Fazzari says, "Part of the reason we had mild recessions [the early 1990s and 2001] was due to consumer strength. But we kept building up debt. It was also a period of falling nominal interest rates. This meant that every cycle of low interest rates was another opportunity for people to refinance on better terms and extend their spending further."

"?Unfortunately, the cost of letting institutions fail is worse than the cost of bailing them out, but ultimately, the Fed will not be able to stop the downturn in consumer spending. The household sector just has to retrench and repair its balance sheet. In the meantime, the result is a weak economy."

He thinks the new government bail out policies aren't nearly large enough to prevent a deep recession, and says, "With those proposals, we're talking about something that is a quarter of the size of what's necessary to turn things around."

Art credit: freeimages.co.uk

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