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PRESS RELEASE


De-Leveraging of U.S. Housing Bubble
Will Cause `Terrible Shock'

by Richard Freeman

March 13, 2006 (EIRNS)—In response to a U.S. housing bubble report in The Nation, Lyndon LaRouche stated today, "This indicates that the Senate and House have no time to waste on adopting the measures I've proposed. There are those who propose that we wait until after the election to deal with these problems. That is irresponsible."

In an article in the March 12 issue of The Nation, entitled, "Leaking Bubble," Doug Henwood writes: "The past several years have seen the most extraordinary boom in the U.S. housing market in history, rivaling the dot-com stock market madness of the late 1990s. In the third quarter of 2005, the average new house sold in the United States cost 4.9 times the average household's yearly income, up from 3.9 times in the late 1990s.... Turnover of new and existing houses in the third quarter of last year was more than 16% of GDP, way above its long-term average of 9 to 10%, and easily beating the levels reached in the housing frenzies of the 1970s and '80s."

Families are buying homes on outrageously risky terms: In 2005, 43% of first-time home buyers "made no down payment at all." The housing bubble has metastasized into the entire U.S. economy, especially as homeowners borrow against the bubble-ized increase in the value of their homes. Henwood writes, "Americans have been using their houses as MasterCards, turning about $726 billion of their home equity into (borrowed) cash between 2001 and 2005. That's a big number, even by the standards of the U.S. economy; it's equal to almost 40% of the growth in personal spending." Moreover, he declared, "Wall Street economists estimate that 40 to 50% of the growth in GDP and employment over the last several years has been driven by the housing boom" (emphasis added).

In 2000, when the financial system was threatened with the bursting of the dot.com stock market boom, Alan Greenspan intentionally fed the housing bubble, by lowering U.S. interest rates to 1%, Henwood said. However, mortgage rates are rising; home sales are sagging: "So many households have taken on so much mortgage debt that if prices merely stop rising, they're going to find themselves under water.... The broad economy has become so dependent on home-equity credit that its withdrawal could come as a terrible shock."