Snake oil sales up along with CA's rosy economy

17 Sep, 2013 by Katy Grimes

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Pay no attention to that man behind the curtain. You know… the guy who keeps repeating how rosy California's economic recovery is.

The numerous reports announcing California's economic recovery appear designed to make consumers feel enough confidence to go out and spend. But spending money you only have on paper is a recipe for disaster — again. Remember 2007-2009?

Millions of Americans have bought the snake oil about an economic recovery and are out running up huge amounts of debt again.

The real health of an economy should be measured by looking at numbers for jobs, housing, debt and poverty. What we are experiencing is not an economic recovery — it is just a bubble of false hope.

Illusion masks reality. Google “California's economic recovery.” Hundreds of cheery stories appear from all over the state. They all say the same thing, as if one giant press release went out from the State Capitol.

But it's time to look behind the curtain. “The housing recovery, for instance, seems to be just another stage of the foreclosure crisis,” said Heidi Moore, the Guardian's U.S. finance and economics editor.

Moore warned in May we all want to believe a recovery is here, but indicators are that it's not. “We're getting swindled again by banks and politicians.”

Moore said financial institutions may be creating the boom themselves.

“House-flipping in California has reached levels not seen since 2005, according to the Wall Street Journal. This rise in price is, by all accounts, artificial. Housing, like all products, responds to the laws of supply and demand. When supply decreases – when there are fewer homes on the market – then prices will rise. This is what is happening now.”

Analysts have said there is evidence that lenders are controlling the housing supply by reducing the number of houses for sale. Moore agrees”

“Last year, AOL Real Estate's reporting suggested that as many as 90 percent of available properties were not even really on the market, but just polished for sale and being held back to keep supply low,” Moore said.

“In April, three major banks, including Citigroup and Wells Fargo, halted all their sales of homes in foreclosure; this also reduced the supply of homes on the market. The reduction in housing supply, then, is largely artificial, designed by the banks and institutions that hold thousands of houses and thus have the most to gain from higher house prices.”

“The result is what looks like a housing recovery to the rest of us, but is, in fact, something of a trap. Fitch, the ratings firm, issued a warning that the alleged recovery in housing is moving too fast and could reverse.”

“There is one thing that housing prices do accomplish, however: the so-called “wealth effect.” Along with a booming stock prices, higher property values make people feel rich. This then encourages them to go out and spend money.”

“There are enough problems with the wealth effect idea, but let's leave it here: spending real money based on vaporous paper wealth is unwise. Household debt is still high and savings are still low, which has been a persistent problem in the US for years.”

Skilled worker shortage

Just last Thursday, Economists at the UCLA Anderson Forecast said the pace of job growth has slowed in California.

“UCLA economists said in their quarterly forecast that a large proportion of California workers' education and training is obsolete for jobs in technology and other industries that require “21st century” skills,” the LA Times reported. “The latest economic data are not encouraging, showing that some parts of the Central Valley and Inland Empire actually declined in some industries, such as manufacturing.”

The only California industry showing any improvement is the tech industry. But remember, most of the tech companies which announced expansions last year, did not expand in California — they built new and larger facilities in other states.

Staggering loan debt

“Young adults are facing staggering student loan debt that will force them to put off buying homes until later in life, said senior economist David Shulman,” the LA Times reported. “Outstanding student loans have tripled since 2004, according to Federal Reserve Bank figures. In 2012, public and private student loan levels reached $966 billion.”

Evidence of this is in California, where most of the residential construction has been multi-unit housing, apartments and condos, particularly in cities. Young people cannot afford homes.

“Don't believe the hype about rising interest rates smothering housing market improvement,” Moore said. “Homes are simply unaffordable.”

Snake oil sales up

More than half of Americans report earning less today than they did a decade ago. Moore said the ongoing unemployment crisis is worse than reported:

“And there is a persistent unemployment crisis in the United States that has gone unaddressed by either Congress or corporate America, Moore said. “Around 12 million people are unemployed, about 40 percent of whom have been out of work for six months or more – rendering them unemployable in the near term.”

“Even if a recovery is made of vapor, it can make people feel good,” Moore said. “So why not believe in a recovery if it makes us feel better?”

“The reason to maintain skepticism of good times a-coming is that an economic recovery can – and is – used to package a lot of political snake oil.

“As long as people believe in a recovery, Congress can keep ignoring the unemployment and equality crises and enjoy ginning up imaginary problems like the plague of corporate tax rates. If Americans believe in a recovery, CEOs can keep claiming that they don't need to invest in the United States or hire American workers.

“A recovery allows real estate agents and banks to tell Americans that they can't borrow money for the home they want, that they can't participate in the housing market, while wealth private investors scoop up as much as they can. A recovery allows lawmakers to pretend that their destructive policies of deficit cutting and austerity were productive, rather than destructive.”

Moore warns, “Washington dysfunction may cause your 401k or stock investments a few rough months. The more Washington screws up, the more your portfolio will feel the pain.

“The first and most important risk ahead is the debt ceiling debate. If it takes too long, this debate may pitch the stock market into a mild panic.”

With a worsening unemployment crisis, which currently stands at roughly 12 million people out of a job, this is no recovery.