DR. HOUSING BUBBLE has predicted each step of the housing bubble and economic crisis.  He also points out how isolated people are and that people die with authorities unable to find relatives or even friends.

In fact civil society is fragile.  Unlike the 1930s there are now extended families today.  Worse yet the basic family economic unit is broken.  Today people are not going to move in with extended family on farms as they did in the 1930s to create a subsistence existence.  When money runs out, there is no job, and the house gets foreclosed there is no where for the elderly, mothers with children, or single men to go.  Further, fraternal organizations of the 1930s like the Masons, Elks, Moose, Odd Fellows, that used to provide connections for people in distress for work, cheap housing, and charity are all but dead.  People today are isolated.

What Dr. Housing Bubble has not noticed before is civil society cannot take the shock of a really severe recession.  There was almost no crime during the Depression, and almost no civil disorder.  This time, should the US have depression conditions with unemployment in excess of 15% and over 10 million home foreclosures, and municipal bankruptcies already occurring,  civil society will begin to dissolve in some metro areas.  Widespread crime, violence, and riots can be expected as cities and counties become unable to cope with millions of unemployed, hunger, homelessness, and lack of basic necessities.

Long term bad policy fiscal and financial decisions in the US have been mirrored by equally poor social policy now enshrined in family and civil laws.

MARKET WATCH in testimony before Congress today reports that mortgage modifications are not working for homeowners who are losing their homes.

This is accurate.  A few loan modifications are being made, but not enough to stem the tide of foreclosures and declining home prices.  Until something is done, such as amending the Bankruptcy Act, record foreclosures and declines in home values will accelerate as the recession deepens.

FORBES MAGAZINE article by Nouriel Roubini forecasts stag-deflation over the next five years.  The article provides the economic technical data for anyone who prefers statistical heuristics.

For readers who are concerned about midterm inflation resulting from all the money the Fed is pumping into the financial system, I would point out that historically economists have been completely unreliable in predicting inflation.  Roubini’s analysis does not take into account international monetary effects, like the value of the dollar.   I’m still concerned about the dollar’s value.  Over the next five years if the dollar decreases in value prices go up.  And for real estate owners with ARMs mortgage payments increase.

DOCTOR HOUSING BUBBLE has an excellent analysis of where the economy is heading here.  Read the whole thing.  The Federal Reserve to avoid deflation is sacrificing the dollar over the long term.  I agree with Dr. Housing Bubble.  The US economy is heading into a type of depression created not by deflation as occurred during the Great Depression, but a solvency depression or “sever recession”.

Current Federal Reserve actions will not have much effect immediately, and the outcome of these actions will not be known until the second quarter of 2009.

The most important aspect of the global credit crisis will be the upcoming Bretton Woods II G-20 summit November 15th in Washington.  The fact that the Federal Reserve is sacrificing the dollar, and consequently other world currencies, is also known to G-20 nations.  Since G-20 nations like China and Saudi Arabia are financing half of the US deficit what the G-20 decide to do will be critical to value of the dollar.  The most likely outcome over the short term is that the dollar will be “allowed” to slide lower incrementally causing US inflation/stagflation.  The current increase in the value of the dollar is occurring because foreign investors have no other safe haven as they unload emerging market currencies.  But these multi-trillion dollar investors are looking for an alternative to the dollar.

What does this have to do with local Silicon Valley real estate?  It means for now mortgage money will remain available at interest rates in the 6%-7% range. The increase in the value of the dollar will hurt local tech companies that have had record export sales.  It means volatility and instability as international corporations race to prepare for a recession.  Job losses, and corporate spending cutbacks are now common.  Home sales previously recovering will probably slow down as some people contemplate “depression”.

A moritorium on foreclosures is likely.  Lenders are trying to short out mortgage portfolios as is Freddie and Fannie.  It will take them at least a year.  Further, Congress, or California, may act to stop lenders from foreclosing for a period of time.

The worst can be expected over the next six months.  Neither recessions nor depressions happen all of a sudden.  Typical recessions take 18 months to bottom out.  Depressions take 30 months or so to develop.  One thing to count on is that the Federal Reserve is not going to allow a deflationary depression.  The opposite type of depression is possible with insolvency being the problem for business, trade, and world economies.

Don’t sit on pins and needles waiting.  Uncertainty and volatility will be with us for months to come.

YESTERDAY GRAND CHEF BERNAKE performance at the NY Economics Club Luncheon was broadcast on Bloomberg TV. The Chef’s main course being Stuffed Bank Preferred Stock Enflamme followed by Bubbles of Asset Price Curbs; Baked Rescue of Investment Bank Ad Hoc. Side dishes of Fantasy of Global Credit Melt and Chaos Imaginer, both to be eaten later.  The Luncheon was $234 billion dollars a plate.

A desert of iced Agradir of House price was advertised, but Jejune Foreclosure City Tea was served instead, angering some patrons.  As a result the Luncheon was not seen as a success by some who stormed out throwing aside their doggie bag side dishes of Fantasy of Global Credit Melt and Chaos Imaginer.  However, many members we seen blowing Asset Price Bubble Curbs and glowing from the Baron Lafitte Rothschild Bailout (2008) wine.

The CEO of Wells Fargo interviewed afterward said he was already stuffed with Wachovia-World Fricassee and didn’t need the Stuffed Bank Preferred Stock Enflamme, but could use the $25 billion dollar rebate on the Luncheon ticket “somewhere.”

Bon Appetite.