We featured a link to Dean Baker’s ZNet article here last week. The Baker link below gives a pretty good tutorial on what this first stage of the meltdown looks like. For an in-depth and more macro-economic and historical account of “fictional value”, the basis of this meltdown, see Peter Gowan [Link appears broken, here is a html cached version from Google]:

The military budget has acted as a crucial counter-cyclical fiscal policy tool in macroeconomic management — a functional alternative to a large welfare state repertoire of instruments.

Military spending has also acted as an important lever of industrial policy by offering a protected state market for large industrial sectors, ranging from aircraft manufacturers like Boeing to the big car companies and many other, largely civilian sectors, as well as armaments contractors.

Military spending has also acted as a very important center of state research and development (R&D) spending, which, though formally devoted to military R&D (plus “dual use” R&D during the Clinton period), in reality provides a central mechanism for generating new high-tech sectors in the national civilian economy.

Military spending has also been an important way of binding the American South into the American state through the large role of southerners in the military, the large numbers of U.S. bases in the South and Sun-Belt states, and the significant military-industrial activity in the South/Sun-Belt (in addition to California).

The defeat in Vietnam did lead to a serious split in the governing elites of the American state in the 1970s, but the militarization of the United States was not, in the end, reversed. On the contrary, it was eventually reinforced by the Reagan administration in the early 1980s.

Today, we’ll follow up with Dean Baker’s latest at Truthout:

Safe Ground in a Housing Market Meltdown?
By Dean Baker
t r u t h o u t | Columnist

Wednesday 14 March 2007

As reports of problems in the mortgage market build, the number of people who view a collapse of the housing market as a serious possibility is growing rapidly. At the moment, the surge in defaults is taking place primarily in the sub-prime market, which is composed of borrowers who have poor credit histories. However, the problems are likely to affect the broader housing market and the economy as a whole before the end of the year.

The basic story in the sub-prime market is straightforward. Mortgage bankers were anxious to sell mortgages even when they knew that the borrowers could not make the payments, because they derive their income from selling the mortgage, not holding it. Hundreds of thousands of low- and moderate-income homebuyers were lured into buying homes by discounted “teaser” rates on mortgages. These teaser rates would reset to market rates, typically after three years, at which time many borrowers would be unable to make their monthly payments.

As long as house prices keep rising, everything works fine. Homeowners can always borrow against their equity to make their monthly payments, or they can sell their home, pay off the mortgage and pocket whatever gains they may have.

However, in 2006, supply finally outpaced demand, and home prices began falling. This led to a huge surge in defaults in the sub-prime market. As a result, some sub-prime lenders have gone bankrupt, and many others are leaving the business or radically curtailing their lending. The same thing is happening in the Alt-A market, which consists of borrowers with somewhat… FULL

Posted by stan in Analysis