Bloomberg reports:

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

These are wonderful promises, but we see little substance to back up Geithner’s “targets”.   More concerning was the sell-off in bonds yesterday indicating that foreign central banks may be anticipating a ratings cut in the U.S.A itself and are selling on the rumor.  While concerns over inflation through quantitive-easing have risen over the past weeks, the far greater concern is the threat of a serious bond-market meltdown should Bernanke’s dreams of low interest rates crash against the rocks of inflationary fears  — forcing rates ever higher.

What then of our “green shoots”?   With America’s deficit exploding almost 30% to over $2 trillion in a matter of months, America’s circle of creditors are sure to be casting nervous sideways glances at one another.  Growing international concern that the US may not be a reliable debtor were hightened yesterday, as Britain’s AAA rating was called into question by Standard & Poors, who lowered the nation’s outlook to “negative”.  (It does not take a particularly keen observer to note that the USA may be next in line.)

Also concerning is the “rot within”, as municipal defaults around the USA threaten to place an impossible burden on the shoulders of the Federal government.  One must concede that the concept of “too big to fail” has not yet been truly considered until one grapples with the issue of defaulting state and local governments.    There exists no framework, or precedence for these massive stormclouds forming on the US horizon.  Policy makers everywhere are deeply troubled with the prospective issue of whether the federal government should run to the rescue of state and local budgetary fiascos:  Fiascos brought about by irresponsibility, fraud and the very same ingredients that made up the subprime scandal itself.   To take on these burdens at the federal level would seriously call into question the financial health of the USA itself, and yet allowing local governments collapse under their own financial burdens will have deep and extraordinarily painful repurcussions.

Bloomberg reports:

Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said.

Geithner said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” he said.

No, Mr. Geithner, they are not.  But while Treasury is correct in not extending TARP support at this time — Geithner’s promise to “work with Congress” hardly sounds like restraint.  The US is sailing swiftly into a scenario which will demand significantly higher interest rates.  While we are fuly cognisant of the pain and hardship that accompany a laissez-faire response to corporate and municipal financial failures — such pain is deeply preferable to the broad systemic collapse that will follow if the federal government tries to backstop our entire bathtub of bursting bubbles.

It’s a rare thing when insiders speak their minds publicly against the powers-that-be.   Today in a global investment conference held in Qatar,  an insider accused the entire US bank bailout of being a “sham”, and said it publicly at a global conference of his peers.   Meet Mark Patterson, chairman of MattlinPatterson advisers, a firm which utilized the TARP program’s ‘matching funds’ to buy Flagstar Bancorp in Michigan.   Patterson certainly didn’t pull any punches in blasting US Treasury Secretary, Tim Geithner’s bailout as being a deeply flawed plan which will not only ultimately fail, but is enriching Wall Street insiders in the process.

The Telegraph UK reports:

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

Well said indeed, Mr. Patterson.  We’d love to hear Mr. Geithner respond, but he’s off skipping through fields of green shoots, and worse yet, seems blissfully unaware that the US taxpayer is bearing most of the cost while seeing precious little of the upside.  Perhaps when the last $100 billion of TARP funds has been magically transferred into private coffers, Mr. Geithner will make the hard choices we’re hoping for.

More from the Telegraph UK:

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

We couldn’t agree more with Mr. Patterson, and he has our sympathies for exercising good judgment, but bad luck in choosing to short this rally from the start.    As our colleague Tyler Durden at Zero Hedge once said, “Anyone with any common sense is losing money in this market”.   Our only hope is that more insiders speak up like Mark Patterson did before the situation gets any worse than it already is.

Unemployment claims continue to drive ever higher in the United States, hitting the 15th straight week of records for the week ending May 9.   Last week’s new jobless claims came in at an alarming 637,000 according to the US Department of Labor — bringing the continuing claims total to 6.56 Million. (Continuing claims data lags new jobless claims data by one week).   The unemployment rate reached 8.9% in April and judging from the new claims, is apparently continuing to rise.

The Department of Labor reports:

UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT

SEASONALLY ADJUSTED DATA

In the week ending May 9, the advance figure for seasonally adjusted initial claims was 637,000, an increase of 32,000 from the previous week’s revised figure of 605,000. The 4-week moving average was 630,500, an increase of 6,000 from the previous week’s revised average of 624,500.

The advance seasonally adjusted insured unemployment rate was 4.9 percent for the week ending May 2, an increase of 0.1 percentage point from the prior week’s unrevised rate of 4.8 percent.

The advance number for seasonally adjusted insured unemployment during the week ending May 2 was 6,560,000, an increase of 202,000 from the preceding week’s revised level of 6,358,000. The 4-week moving average was 6,337,250, an increase of 128,750 from the preceding week’s revised average of 6,208,500.

The fiscal year-to-date average for seasonally adjusted insured unemployment for all programs is 5.011 million.

UNEMPLOYMENT INSURANCE DATA FOR REGULAR STATE PROGRAMS

---

	Advance				Prior1
WEEK ENDING	May 9	May 2	Change	April 25	Year

---

Initial Claims (SA)	637,000	605,000	+32,000	635,000	375,000
Initial Claims (NSA)	565,395	537,539	+27,856	580,377	325,480
4-Wk Moving Average (SA)	630,500	624,500	+6,000	638,250	369,500

	Advance				Prior1
WEEK ENDING	May 2	April 25	Change	April 18	Year

---

Ins. Unemployment (SA)	6,560,000	6,358,000	+202,000	6,293,000	3,063,000
Ins. Unemployment (NSA)	6,166,785	6,262,622	-95,837	6,299,278	2,845,952
4-Wk Moving Average (SA)	6,337,250	6,208,500	+128,750	6,081,500	3,006,750

While most of the increase in claims is due to auto-worker layoffs,  (Chrysler laid off an estimated 27,000 workers after declaring bankruptcy on April 30th. )  we should expect an additional bout of layoffs next month when General Motors slashes jobs.

Even with such dismal employment figures, the mainstream media is awash with reports of “improvement”.  Again, we’re forced to point out that a slowing rate of decline is a far cry from actual improvement.  As we’ve noted before, pointing to the second derivative as a sign of “improvement” is akin to watching a parachutist open his chute — and as his descent begins to slow, concluding that he is about to start gaining altitude.

An editorial by Andy Kessler in today’s Wall Street Journal asks the obvious of its readership:  “Was it a Sucker’s Rally?”   While the question may seem rhetorical to our readership and the other free-thinkers of the blogosphere, we take some pleasure in seeing the slumbering mass-media wake up to the obvious.  Yes.  It was a sucker’s rally.

You can have a jobless recovery, but you can’t have a profitless recovery. Consider: Earnings are subpar, Treasury’s last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying “I don’t stand with them,” California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . . Shall I go on?

Until these issues are resolved, I don’t see the stock market going much higher. I’m not disagreeing with the Fed’s policies — but I won’t buy into a rising stock market based on them. I’m bullish when I see productivity driving wealth.

For now, the market appears dependent on a hand cranking out dollars to help fund banks. I’d rather see rising expectations for corporate profits.

(Full article on WSJ:  http://online.wsj.com/article/SB124208415028908497.html )

A “jobless recovery” too, is unlikely in the American case. One must note that the very same pages of the Wall Street Journal consistently lauded the mighty, magical American consumer as the driving force of economic expansion during the boom years.  We think it should be clear to everyone by now that the American consumer is pushing up dasies.  Retail sales are anemic.  Credit card defaults are skyrocketing.   Unemployment is spiking and under-employment is still a near-invisible statistic.

While Kessler seems to think that unemployment isn’t the problem, but corporate profits are — we see this question of chicken and egg to be somewhat missing the point.  Credit destruction and demand destruction are a viscious cycle which feed each other and exist very much in tandem.

We applaud the WSJ for calling a spade a spade (This is, indeed a “sucker’s rally”) but can’t help noticing that Kessler’s rationale is staunchly supply-side:  A one-sided economic outlook which is in no small part responsible for the mess we’re in.

Fannie Mae’s recently published first quarter results offer a resounding refutation of the economic positivity that has been driving the current stock market rally, green shoots, second derivatives and all.

So what pieces of information are probably giving the administrations economic recovery spin-machine the biggest headaches?  How about…

• US home price forecast to decline 7-12% for 2009
• 2009 credit losses predicted to be greater than 2008
• Fannie Mae management does not expect to operate profitably in “the foreseeable future”.
• The company reported a quarterly loss of $23bn, its seventh consecutive quarter in the red.
• Fannie Mae asks the US Treasury for another $19bn in capital

Even more shocking is the revelation that Fannie’s losses are no longer even close to being limited to the subprime mortgages that had previously been identified as problems.  This quote, directly from the report, is via FT Alphaville

Our entire guaranty book of business, including loans with lower risk characteristics, has begun to experience increases in delinquency and default rates as a result of the sharp rise in unemployment, the continued decline in home prices, the prolonged downturn in the economy, and the resulting increase in mark-to-market LTV ratios.

In addition, certain loan types have continued to contribute disproportionately to the increases in serious delinquencies and credit losses we reported for the first quarter of 2009. These include loans on properties in California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans in higher-risk categories such as Alt-A loans and interest-only loans.

The substantial portion of our Alt-A and subprime private-label mortgage-related securities were rated AAA when we purchased these securities; however, many of these securities have suffered significant downgrades since we acquired them.

As indicated in Table 22 above, approximately 54% and 74% of our Alt-A and subprime private-label mortgage-related securities, respectively, were rated below investment grade as of April 28, 2009. Approximately 25% and 13% of our Alt-A and subprime private-label mortgage-related securities, respectively, were rated AAA as of April 28, 2009.

Although our portfolio of Alt-A and subprime private-label mortgage-related securities primarily consists of senior level tranches, we believe we are likely to incur losses on some securities that are currently rated AAA as a result of the significant and continued deterioration in home prices and the increasing delinquency, foreclosure and REO levels, particularly with regard to 2006 to 2007 loan vintages, which were originated in an environment of significant increases in home prices and relaxed underwriting criteria and eligibility standards. These conditions, which have had an adverse effect on the performance of the loans underlying our Alt-A and subprime private-label securities, have contributed to a sharp rise in expected defaults and loss severities and slower voluntary prepayment rates, particularly for the 2006 and 2007 loan vintages.

We finally got to see the results of the so called “Stress Tests” which were conducted on America’s banking system. As expected the tests marked all participants to be “solvent”, but in need of additional capital in the event that financial conditions deteriorate more severely in the future.   On the very same day that these results were released to great public applause and an enthusiastic equity market,  a largely ignored Fannie Mae press release hit the newswires which conclusively shows the Stress Test assumptions to be grossly inaccurate and dangerously unstressful.

The results of the stress tests are as follows:

_Bank of America Corp. must raise $33.9 billion. It would lose $43.5 billion on home mortgages and $24.1 billion on complex securities and derivatives deals.

_Citigroup Inc. must raise $5.5 billion. It would lose $27.5 billion on home mortgages and $22.4 billion on complex securities and derivatives deals.

_Fifth Third Bancorp must raise $1.1 billion. It would lose $2.9 billion on commercial real estate loans and $2.8 billion on other business loans.

_GMAC LLC must raise $11.5 billion. It would lose $3.1 billion on home mortgages and $1 billion on business loans.

_KeyCorp must raise $1.8 billion. It would lose $2.3 billion on commercial real estate loans and $1.7 billion on other business loans.

_Morgan Stanley must raise $1.8 billion. It would lose $18.7 billion on complex securities and derivatives deals, and $600 million on commercial real estate loans.

_PNC Financial Services Group Inc. must raise $600 million. It would lose $7 billion on home mortgages and $4.5 billion on commercial real estate loans.

_Regions Financial Corp. must raise $2.5 billion. It would lose $4.9 billion on commercial real estate loans and $2.1 billion on home mortgages.

_SunTrust Banks Inc. must raise $2.2 billion. It would lose $5.3 billion on home mortgages and $2.8 billion on commercial real estate loans.

_Wells Fargo & Co. must raise $13.7 billion. It would lose $47.1 billion on home mortgages and $9 billion on business loans.

_ Nine banks were told they do not need to raise more capital. They are: JPMorgan Chase & Co., Goldman Sachs Group Inc., MetLife Inc., U.S. Bancorp, Bank of New York Mellon Corp., State Street Corp., Capital One Financial Corp., BB&T Corp. and American Express Co.

_ The banks that need more capital have until June 8 to come up with a plan to raise the additional resources and have the plan approved by their regulators.

As an aside, we sincerely hope the efforts to raise capital include a wipe-out of shareholder equity and a transferral of common shares to bond holders.  But such justice may be too much to ask for in an environment which has grown more unjust (and un-capitalist) by the day.

Almost universally ignored by the media was an almost simultaneous announcement from Fannie Mae which gives lie to the primary assumptions made by the so-called Stress Tests, and shows the tests to be dangerously flimsy and unrealistic:

Today we learned that Fannie Mae has requested an additional $19 Billion from Treasury.  This alone would be bad enough, as it is a clear indication that with every assumption of FNM losses there seems to come an  inevitable revision to the downside.  Fannie Mae management has even come forward with an admission that their endless revisions are due to their total inability to estimate losses accurately:

“Because of the existing stress in the housing and credit markets, and the speed and extent to which these markets have deteriorated, our process for determining the adequacy of our loss reserves has become more complex and involves a greater degree of management judgment. The current state of the housing and mortgage markets is unprecedented in many respects, greatly reducing the usefulness of relying on our historical loan performance data in estimating our loss reserves.”

But the most alarming part of Fannie’s admissions is that management cannot see FNM as a profitable entity “for the forseeable future”.

Now let’s look at Fannie’s losses within the framework of the Stress Test assumptions:  The level of debt default being experienced by Fannie Mae at this time is already as bad as the Fed’s “Worst Case” scenario (twice the level of it’s “base line” or expected scenario), and includes an alarming level of defaults in “Prime” mortgages.

Since we are already at the worst-case scenario, it should be noted that there is no provision in the above capital recommendations for any scenario that gets worse from this point forward.   Remember that the banks listed above have been advised to raise capital for a hypothetical possibility that we reach the worst case scenario.   But we are already here, now. Given that we have, after only a few short weeks arrived at the supposed worst case scenario, it does not take a great mathematician to arrive at the conclusion that the worst case scenario was hardly realistic, that the banking system is currently insolvent, and that no contingency plan for a scenario worse than worst-case (ie: worse than now) exists.

Clearly these so-called “Stress Tests” were not stressful at all, and worse yet:  The recommendations listed above, which are intended to provide cushion against future defaults, barely serve to make the system solvent at this very moment, and provide zero safety margin for any increased rate of deliquency.

In our opinion, anyone who thinks that the “worst” has been priced in is dreaming.

The next wave of mortgage defaults is almost certain to contain a significant percentage of non-subprime loans and may include a significant wave of defaults in the mid to high range.

We know that there is a mortgage default season because we know that there is a new home buying season.  Most new homes are purchased in the summer, and most ARM mortgages reset roughly 3 months later (after their 3 to 5 year interest holiday), usually in August, September and October.  Many market watchers have been waiting to see what those months will have in store for us this year.  According to  Bloomberg, it almost certainly won’t be contained to subprime mortgages and may include a significant wave of defaults in the mid to high range.

In February, JPMorgan analysts almost doubled their projections for losses on jumbo mortgages (loans over $417,000 in most areas) to as much as 10 percent because of increasing defaults.

According to Bloomberg, The number of U.S. homes entering the foreclosure process with values qualifying them for jumbo-loans  jumped 127 percent during the first 10 weeks of this year from the same period of 2008. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes,  data compiled by RealtyTrac, Inc. of Irvine, California, show.

About $500 billion of prime-jumbo mortgages are bundled into bonds, according to Memphis, Tennessee-based FTN Financial.    President Obama’s Homeowner Affordability and Stability Plan has no provision to help jumbo mortgage borrowers. That plan focuses on conforming loans, loans small enough to be bought by Fannie Mae and Freddie Mac.

From Bloomberg:

“There was this unrealistic view that the crazy financing was limited to subprime when of course it was across the board. A lot of jumbo mortgages were nothing down with high debt-to-income ratios.”  – Andrew Laperriere, Washington-based managing director at research firm International Strategy & Investment Group

Those stress test worst-case scenarios still looking realistic to anyone?

In an excellent piece published in Foreign Policy, historian Niall Ferguson illustrates the broad geopolitical ramifications of economic decline.  Ferguson contrasts the willful malice of George Bush’s “Axis of Evil”, against the less intentionally destabilizing influence of regimes undergoing waves of political and fiscal turbulence.

Ferguson’s “Axis of Upheaval“, as he calls it includes Russia, Somalia, Mexico and other nations desperately fighting to stay afloat through the gale-force winds of  political instability:  An instability magnified by a world undergoing economic deflation.

Now the third variable, economic volatility, has returned with a vengeance. U.S. Federal Reserve Chairman Ben Bernanke’s “Great Moderation”—the supposed decline of economic volatility that he hailed in a 2004 lecture—has been obliterated by a financial chain reaction, beginning in the U.S. subprime mortgage market, spreading through the banking system, reaching into the “shadow” system of credit based on securitization, and now triggering collapses in asset prices and economic activity around the world.

After nearly a decade of unprecedented growth, the global economy will almost certainly sputter along in 2009, though probably not as much as it did in the early 1930s, because governments worldwide are frantically trying to repress this new depression. But no matter how low interest rates go or how high deficits rise, there will be a substantial increase in unemployment in most economies this year and a painful decline in incomes. Such economic pain nearly always has geopolitical consequences. Indeed, we can already see the first symptoms of the coming upheaval.

As the economic conditions within his “Axis of Upheaval” disintegrate rapidly, so too do the socio-political moorings of society –  A deterioration which will likely result in radical power-shifts, militarization, social divisions and other bad eggs which are often mitigated during eras of economic prosperity.  Ferguson also points out that these ill-effects are compounded by our decreasing ability to intervene through the traditional means of financial incentive or military intervention:

The problem is that, as in the 1930s, most countries are looking inward, grappling with the domestic consequences of the economic crisis and paying little attention to the wider world crisis. This is true even of the United States, which is now so preoccupied with its own economic problems that countering global upheaval looks like an expensive luxury. With the U.S. rate of GDP growth set to contract between 2 and 3 percentage points this year, and with the official unemployment rate likely to approach 10 percent, all attention in Washington will remain focused on a nearly $1 trillion stimulus package. Caution has been thrown to the wind by both the Federal Reserve and the Treasury. The projected deficit for 2009 is already soaring above the trillion-dollar mark, more than 8 percent of GDP. Few commentators are asking what all this means for U.S. foreign policy.

The answer is obvious: The resources available for policing the world are certain to be reduced for the foreseeable future. That will be especially true if foreign investors start demanding higher yields on the bonds they buy from the United States or simply begin dumping dollars in exchange for other currencies.

Economic volatility, plus ethnic disintegration, plus an empire in decline: That combination is about the most lethal in geopolitics. We now have all three. The age of upheaval starts now.

Ferguson’s essay is an excellent read and highly recommended by The Analytic:

http://www.foreignpolicy.com/story/cms.php?story_id=4681

Sometimes we would love to know exactly what data Bernanke is looking at to give him such vivid hallucinations of optimism.  Take for example his prediction today, that the economy would “start growing again” by the end of 2009.   Through some alchemical process, Bernanke has managed to magically transform the 2nd derivative into a prediction of growth. This of course is akin to observing a skydiver’s parachute opening , and concluding that because his fall to Earth has begun to slow that he is on the verge of gaining altitude.

The AP reports his conclusions as follows:

WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke told Congress Tuesday the economy should start growing again later this year, his most optimistic assessment of the country’s financial health since the recession struck with force last year.

But Bernanke warned that even after a recovery gets under way, economic activity is likely to be subpar. That means businesses will stay cautious about hiring, driving up the nation’s unemployment rate and causing “further sizable job losses” in the coming months, he told the Joint Economic Committee.

The recession, which started in December 2007, already has snatched a net total of 5.1 million jobs. The unemployment rate “could remain high for a time, even after economic growth resumes,” Bernanke said.

But while some economists believe unemployment could hit 10 percent by the end of this year, the Fed doesn’t share that view. The unemployment rate will probably climb “somewhere” in the 9 percent range, Bernanke said.

“The loss of jobs is one of the most distressing aspects of this whole episode,” he said.

Even with all the cautionary notes, the Fed chief offered a far less dour assessment of the economy.

“We continue to expect economic activity to bottom out, then to turn up later this year,” he told lawmakers. “We expect that the recovery will only gradually gain momentum.”

Recent data suggest the recession may be loosening its grip on the country, Bernanke said.

“The pace of contraction may be slowing,” he said. It was similar to an observation the Fed made last week in deciding not to take any additional steps to shore up the economy.

With an ephemeral assessment like, “The pace of contraction may be slowing”, it’s hard to imagine how he can in the same breath “expect economic activity to..turn up later this year”.  (One would normally assume the former to be a foregone conclusion before leaping to predict the latter).  So what do the numbers tell us?  The numbers tell us that wages are being slashed, unemployment is rising, business is contracting and real estate continues to decline. Commercial real-estate is an unmitigated disaster, and municipal bankruptcies can at this point, only be staved off by a Federal government whose tax receipts are being decimated by job losses and declines in personal and business income.

Where is the engine of this supposed recovery?  Bernanke doesn’t say. Instead he exercises faith over reason:  He simply believes that the economy will turn around, and provides no data to support this belief other than the second derivative — which is currently being manipulated by his own stimulus.

John Wasik at Bloomberg offers a more rational assessment:

We might be looking at a lost generation for U.S. home values.Far too many analysts are calling a bottom to the housing market after home prices in 20 metropolitan areas declined at a slower pace in February, according to the Standard & Poor’s/Case-Shiller Index.

Don’t be blinded by the glint of optimism in headlines about rising consumer confidence and slowing price declines. Demographic and market realities tell a more sobering story.

You won’t see a widespread housing rebound in an economy in which 600,000 jobs a month are lost and foreclosures ravage the most overleveraged areas. These are just the visible barriers to a recovery.

Mortgage lending has also been an unusually tightfisted process of late. Lenders are demanding a 20 percent deposit for home purchases, and want impeccable credit ratings. About 45 percent of U.S. banks surveyed by the Federal Reserve said they had “tightened their lending standards on prime mortgages.” I suspect that number is much higher.

Then there’s the reality that the market is glutted with homes. A record 19 million homes stood empty at the end of 2008.

What you can’t see in the most recent housing numbers is the least-visible driver of home prices today: demographics.

Baby Boomers

The baby-boomer generation, the largest in American history, will be buying fewer single-family homes.

The U.S. is experiencing a 40-year generational peak in consumer spending, one that will lead to “the first and last Depression of our lifetimes,” author Harry Dent predicts in his book “The Great Depression Ahead” (Free Press, 2008).

Yes John, we at The Analytic concur.