That system, as the world's leading economist, Lyndon LaRouche, has repeatedly warned, is hopelessly bankrupt; it has been kept on life support through the speculative flows, drained from the real, physical economy, into financial speculation, including on housing assets. The hyperinflated housing bubble was financed by huge flows of credit in mortgages, the which have penetrated every pore of the financial and banking system, and are on the books of those institutions. As these mortgages go up in smoke, and as the physical assets (homes, townhomes, condos, etc.) that ostensibly back them up are liquidated in foreclosure or other "fire-sales" for losses, those mortgages blow up the institutions that hold them, and the whole rickety financial system goes down the tubes.

It was this knowledge that made the U.S. housing bubble a major concern, especially in those away-from-the-public corridor discussions of the global stewards of the financial system at the recent International Monetary Fund meeting in Singapore. In the "Risks" section of the IMF World Economic Outlook report, released before the conference, the collasping U.S. housing bubble was discussed in the standard hushed tones of IMF-speak: "Growth in the United States is expected to slow from 3.4 percent in 2006 to 2.9 percent in 2007, amid a cooling housing market." At its Aug. 23 IMF Board meeting, the directors noted, "Risks to the [economic] outlook appear to be slanted to the downside, with a more abrupt cooling of the housing market being a particular concern."

While public statements on the matter were muted, the U.S. housing crash and related crises among the hedge funds reportedly cast a dark shadow over the meeting.

Where LaRouche's warnings on the bubble could be dismissed by foolish people in the past, the visible signs of the ongoing crash, including warnings by public figures from the housing and financial industry itself, have brought the problem front and center.
The Numbers Don't Lie-For a Change

In Loudoun County, Virginia, the hottest of the white-hot speculative housing "boom" markets, and the place which LaRouche identified as "ground zero" of the great housing bubble crash, there is a running joke that the county's official flower is the real estate "for sale" signs that dot almost every street and byway in this ex-burb of Washington, D.C. With more than 20,000 new homes coming on-line in the next several months, and with an existing housing stock that, at the current reduced rates of sales, could suffice for several years, Loudoun is now an example of national trends, in extremis. In the course of one year, the average length of time a property offered for sale stays on the market has risen from less than a month to more than three months. Realtors say that even that figure understates the problem since there have been many properties that could not be sold at any price, and have been withdrawn from the market.

The Loudoun market had been driven in large part by speculators who bought homes with the expectation that they could flip them in a few months for great profits. Those speculators have now basically left the market, having dumped their properties, in many cases for losses. Many homeowners themselves got caught up in this speculative frenzy, buying homes, not so much to live in, but to flip in a year or so; those homeowners now find themselves stuck in expensive houses that they can't afford and never thought that they would have to pay for. According to local realtors, it is this segment of the market that is breeding a panic, as they dump homes, and when the homes don't sell, owners push them to lower prices.

As one local realtor reported, the panic is beginning to spread to other homeowners, who now fear that they will be caught in an equity collapse. "When you see one, two, then three and four of your neighbors putting their homes up for sale, you begin to think that you had better get out as well," said the realtor, who also commented that, although he might normally welcome such business, too many sellers "means that everyone will lose money."

The "official" line, backed up by statistics provided by realtors, is that housing prices, as measured by the median price, have not yet started to decline, absolutely in Loudoun; that prices have only dropped against expectations and are still rising, albeit more modestly than at the height of the bubble. But as anyone familiar with the market realizes, in a bubble economy, such expectations are what drives-and either pumps up the bubble-or causes it to go bust.

"I don't care any more what the numbers say," said the realtor. "The life's gone out of this bubble, period. We're headed down."

This sentiment is also being driven nationally by a spate of new figures that show the broad decline of the market. For example, the index of builder confidence, as reported by the National Association of Home Builders/Wells Fargo Bank, dropped from 33 to 30, from August to September. According to this widely watched index, any reading under 50 means that builders view conditions as "poor." An economist at Countrywide Financial Corp. in California warns that the decline is "very precipitous.... Residential construction is becoming a headwind for the economy instead of a tailwind."

Nationally, the growth in home prices, once soaring by double digits, slowed to a mere 1.7% in the second quarter, while the national inventory of unsold homes soared to a record of more than 4.4 million. Meanwhile, Lombard Street Research economist Gabriel Stein expects the median U.S. home price to fall next year for the first time since the Great Depression.
The ARM Time Bomb

In Northern Virginia, well more than half of all mortgages, including refinancings, are of the risky "zero interest" adjustable-rate types and similar non-traditional mortgages, reflecting a dangerous national trend. These mortgage instruments were designed to fuel the speculative frenzy, and gave buyers short-term low payments, with a time bomb fused over the longer term, when the interest rates and payments jump. As long as there was a rapid turnover, and as long as the housing-price growth covered the borrowing, the buyers and the lenders, which included every stripe of financial institution, appeared to be all right.

Now, with the market in a tailspin, the homeowners find themselves trapped in their homes, when the time-bomb increase in financing costs explodes. This is pushing many homeowners over the edge, into default, and precipitating a sharp rise nationally in home foreclosures.

Not surprisingly, this increase in foreclosures, the worst since the Great Depression, has hit the so-called auto-wreck states of the Midwest the hardest. Foreclosures in the Metro Detroit area jumped a whopping 137%-more than double-in the first eight months of 2006, compared to last year. A mass foreclosed-home auction in the state will take place in late September, with more than 250 bank-owned single-family homes, condos, and duplexes on the auction block. The majority of the properties, about 150 in all, lie within 60 miles of Detroit.

Nationwide, 115,292 properties entered some stage of foreclosure in August, RealtyTrac reported, up 24% from July, and 53% higher than a year ago.

The ARM time bomb and related spurious methods that have financed the bubble have drawn the finger-pointing scrutiny of both Congress and the so-called financial industry. While many Senators and regulators have expressed alarm at the extent of the problem and the lax regulation of these loans, these gentlemen either knew of this before and did not speak up, or should have known, and looked the other way. No matter. Such protestations and proposals are now, in effect, well after all the horses are out of the barn, and the barn has burned to the ground!

At a Sept. 20 Senate Banking Committee hearing, there was a push to put tighter restrictions on "non-traditional mortgage lending." Such mortgages put both borrowers and lenders at increased financial risk. "It seems to me there's been a race to the bottom," noted Sen. Jim Bunning (R-Ky.), referring to lending standards. He said that if real estate values continue to fall, the market pullback could become a prelude to a crash. Whereas the risky mortgages were originally designed for those with very strong financial records, according to the GAO, 75% of those with such mortgages packaged into securities in the first half of 2005 were not required to fully document their income.

Even more worrisome is that the Federally created mortgage re-lender, Fannie Mae, which former Federal Reserve chairman Alan Greenspan turned into a cash cow to finance his housing bubble, is ready to blow up from the glut of worthless mortgages it holds. Fannie Mae could lose more than half its capital on sub-prime mortgage blowouts, warns Gilchrist Berg, founder of the $2 billion hedge-fund firm Water Street Capital. Berg said that Fannie could lose $22 billion to $29 billion of its $46 billion capital, if, as he expects, the housing bubble bursts and foreclosures increase. "We are not sure the folks running the show fully embrace the risk of declining house prices," Berg wrote in a letter to investors. Berg also said most that analysts and investors are underestimating the impact of the end of the "historic housing and mortgage bubble."

Fannie is involved in financing one-fifth of U.S. mortgages through bundling into mortage-backed securities (MBS), and it has increased its exposure to sub-prime mortgages in recent years. In 2004, it bought 44% of all sub-prime MBSs; in 2005 it bought 35%, and in the first half of 2006, it bought 25%. Berg says that sub-primes could be 15% of Fannie's portfolio.
Saving Themselves

The financial fools who created the bubble that is now collapsing are desperately trying to manage the coming financial shipwreck. No longer able to keep the collapse of the bubble "secret," they are attempting to give it an air of "inevitability," while trying to limit the panic within the general population. That is what is behind the explosion of press reportage, which attempts to tell people, that while they will lose money, and most certainly the function of their home as a cash-producing ATM machine, the worst effects can be contained.

Meanwhile, several banking sources have reported that Treasury Secretary Henry Paulsen, the former head of Goldman Sachs, may be cooking up a scheme to try to save the banks and their financial books. According to these sources, Treasury, along with the Fed, is trying to come up with a Federally funded mechanism that would take the explosive short-term and ARM debt off the books of lenders, and reissue it at longer-term debt-a scheme that sounds strikingly similar to Felix Rohatyn's Big MAC debt recycling operation that "handled" the New York City debt crisis three decades ago. (Fannie Mae might have been a possibility for this role- but, Fannie Mae is itself hopelessly bankrupt and may have to be bailed out.)

As LaRouche has warned, such taxpapyer-financed bailouts cannot save the housing market or the bankrupt financial system. The only solution to the housing crisis is the global solution proposed by LaRouche-the one that makes the speculators and financiers pay for their incompetence, taking away their power to control financial policy. And, nothing can save the hyperinflated equity values of residential real estate.

Thomas Hoenig, Kansas City Fed president, was more hopeful, saying subpar growth was likely to linger into 2007 and pull inflation down by injecting more slack in the economy.

"The inflation numbers will stabilize and then continue to come down," Hoenig told business leaders in Lincoln. He anticipated a "very modest, but very steady" downtrend in the core consumer price index toward 2 percent.

Core CPI, a measure which excludes energy and food prices, was 2.8 percent higher in August than a year earlier.

Hoenig gave a mostly upbeat reading on the economy, looking for growth to bounce back -- but still stay below trend -- in 2007 after dipping to an annualised rate in the second half of 2006 of 2.0 percent to 2.5 percent.

The Federal Open Market Committee (FOMC) held its benchmark federal funds rate steady this month at 5.25 percent in a 10-1 vote in which Lacker was the sole dissent.

It was the second straight meeting in which policy-makers decided to sit pat after 17 straight hikes from mid-2004 to June of this year. It was also Lacker's second-straight dissent.

Financial markets expect the Fed to hold steady for the rest of 2006, reflecting suggestions by Fed officials that they want to watch how the earlier rate moves played out.

The next policy move is uncertain and will rely on incoming data, said Hoenig, who under a rotating system does note vote in FOMC meetings this year but who will vote in 2007.

"Actions we have taken in the past, in the first half of this year ... are still working their way through the economy."

UNREPENTANT DISSENTER

Lacker said that while the U.S. economy was on solid ground, inflation was still a worry and that another rate increase would have helped.

"The question is how are we going to bring about restoring price stability," he said. "My colleagues' views differed from mine. I thought that we needed another policy move to ensure that we had a high enough probability of getting back (to lower inflation levels)."

"Growth doesn't slow inflation, central banks slow inflation. It has to do with what really drives inflation dynamics," he said.

Nor has he been mollified by the recent drop in inflation expectations implied by U.S. treasury inflation-protected securities (TIPS), which he saw driven mostly by changes in the headline CPI as energy costs fall.

Earlier, Federal Reserve Governor Randall Kroszner said in a speech in New York that recent declines in the price of energy had helped mitigate concerns about inflation in the short run.

Hoenig, meanwhile, said the decline in energy prices was likely to drag down headline inflation levels and was "favorable to the U.S. economy overall."

NO HOUSING CONTAGION SEEN

While differing on the growth/inflation linkage, Lacker and Hoenig agreed that the much-discussed cooling U.S. housing market did not threaten the overall economy.

Weakness in residential real estate and its potential to affect other parts of the economy are cited by some economists as reason for the Fed to cut rates aggressively in 2007..

Lacker said that he saw no sign the cooling housing market had spilled into other parts of the economy, while Hoenig said the long-anticipated topping out in residential real estate after a multi-year bull run has been "orderly."

Lacker declined to comment on monetary policy expectations in financial markets. But he said he was not convinced U.S. factories were hurting, as some had concluded after Wednesday's weak durable goods orders data and last week's tumble in the Philadelphia Fed's monthly factory survey.

For one thing, the Richmond Fed's own manufacturing survey, which covers a region twice the size of the Philly Fed, rose in September.

"The fundamentals for investment are pretty solid," he said. "Growth is going to be a bit below par for a quarter or two, maybe longer, but I'm looking for it to return to potential next year."

Hoenig said that the U.S. jobs market was solid and monthly payrolls could rise 100,000 to 125,000 in the months ahead. The jobless rate could tick up toward 5 percent from its current 4.7 percent, he said.

Kroszner warned that a recent spike in unit labor costs suggested wages were catching up with productivity, a trend economists sometimes interpret as an omen of future inflation.

Still, other measures of compensation gains were not as robust, painting a mixed picture of the inflation outlook, said Kroszner, who joined the Fed in March.

"It's not the real thing of the 1970s," said David Shulman, the UCLA Anderson Forecast senior economist who wrote the report. "This is sort of a whiff."

A rise in unemployment will add to the look and feel of stagflation, Shulman said.

He expects the U.S. jobless rate to increase to 5.1 percent by the end of next year from 4.7 percent last month.

At the same time, the core consumer price index will rise at an average rate of 3.2 percent, limiting options for the Federal Reserve, Shulman said.

Shulman expects policy makers to cut the Federal Funds rate to 4.5 percent by mid-2007 from the current 5.25 percent.

"We suspect that we have seen the last hike in the Fed Funds rate for a long time and in fact the next move will be to cut rates in early 2007," according to his report.

Rate cuts and an improvement in trade, some easing in oil prices, a healthy pace of commercial construction activity that helps offset the housing slowdown and the homes market hitting a bottom will enable the economy to avoid recession and return to growth of 3 percent to 4 percent in 2008, he added.

However, the housing market could upset that forecast, Shulman said, noting he is keeping a close watch on how the pace of housing starts slows.

"If we're going to have a recession, its origins will be in the housing market," Shulman said. he state to 1990 levels, or by about 25 percent, by 2020.

Broader stock indicators were also up. The Standard & Poor's 500 index rose 2.17, or 0.16 percent, to 1,338.51, and the Nasdaq composite index advanced 5.80, or 0.26 percent, at 2,267.14.

Arthur Hogan, chief market analyst at Jefferies & Co., said he doesn't see the rise in stocks as being short-lived given that the three-week run-up has been based on a range of events, most notably the Federal Reserve's decision to again hold interest rates in place and a decline in price of oil.

"The economy has been doing well and yet the market hadn't been in step with that because we had the specter of high interest rates and rising energy prices.

"As long as we can continue to see that economic data stream remain relatively positive I think we can continue," he said.

The Commerce Department said Wednesday orders to U.S. factories for large manufactured goods fell for a second straight month in August, the first time in more than two years there have been consecutive declines. Demand for durable goods dropped 0.5 percent last month to $209.7 billion.

Some good news came from a report that new home sales rose 4.1 percent in August, their biggest increase in five months. The Commerce Department report raised hopes that a sharp decline in the housing industry could be easing.

Perhaps adding to investor enthusiasm, Federal Reserve Governor Randall S. Kroszner said Wednesday he expects productivity growth should continue.

"I think a good case can be made for the view that the strong productivity growth of the post-1995 era will persist for some time," he said in prepared remarks for a conference in New York.

Stocks gained after an Energy Department report showed stockpiles of U.S. crude and gasoline were greater than expected last week. A barrel of light crude was quoted up 64 cents at $61.65 a barrel on the New York Mercantile Exchange.

Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.60 percent from 4.58 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices rose.

Good news for several Dow components could help the average, which has flirted with its Jan. 14, 2000, closing high as investors have grown more confident in the strength of the economy. The enthusiasm grew after the Federal Reserve has signaled interest rates are in check for now and as oil prices have receded from highs seen in recent months. McDonald's Corp. rose 78 cents, or 2 percent, to 39.84 after saying it would boost its dividend 49 percent to $1 from 67 cents.

Another Dow component, Merck & Co., had another victory Tuesday in its legal battle over the painkiller Vioxx. A federal jury determined after a two-week trial that there wasn't sufficient evidence to link Vioxx to a Kentucky man's heart attack in 2003. Though it was a win for Merck, thousands of cases are still pending over the drug. Merck was up 40 cents at $42.16.

The markets often move higher near the end of a quarter as investors engage in a bit of window-dressing and bid up stocks in the hopes of burnishing their quarterly numbers.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 926 million shares, compared with 910.7 million traded at the same point Tuesday.

The Russell 2000 index of smaller companies was up 3.82, or 0.52 percent, at 733.43.

Overseas, Japan's Nikkei stock average closed up 2.51 percent. Britain's FTSE 100 closed up 0.96 percent, Germany's DAX index was up 0.49 percent, and France's CAC-40 was up 0.45 percent.

The U.S. government has warned that Chavez is a destabilizing force in Latin America.

"Regardless of politics, we sympathize with many Americans' concern over derogatory comments about our country and its leadership recently made by Venezuela's president," said 7-Eleven spokeswoman Margaret Chabris.

"Certainly Chavez's position and statements over the past year or so didn't tempt us to stay with Citgo," she added.

Instead, 7-Eleven, which sells gasoline at 2,100 of its 5,300 U.S. stores, will now purchase fuel from several distributors, including Tower Energy Group of Torrance, Calif., Sinclair Oil of Salt Lake City, and Houston-based Frontier Oil Corp.

Chabris said 7-Eleven's decision to sell its own brand was based on many factors, including Citgo's decision this summer to stop supplying stations in parts of Texas and other states to focus on retailers closer to its refineries in Corpus Christi, Lake Charles, La., and Lemont, Ill.

But 7-Eleven had been considering creating its own brand of fuel since at least early last year, and some analysts suggested 7-Eleven may now be hyping the political angle a way to curry favor with U.S. consumers.

"This has nothing to do with Chavez," said Oil Price Information Service director Tom Kloza. "They (7-Eleven) just didn't want to be tied to one supplier."

Kloza said all 7-Eleven did was seek out suppliers who could sell it the cheapest fuel and "that was not Citgo."

Citgo spokesman Fernando Garay declined to comment on whether Chavez's comments had a bearing on 7-Eleven's change in suppliers. He said the break was "a mutual agreement of the two companies."

Garay said 7-Eleven was a "significant" part of Citgo's retail presence in Texas and Florida. "It was a valued relationship," he said.

In July, Citgo decided to stop distributing gasoline to 1,800 independently owned U.S. stations because it was a lackluster segment of its business.

In order to meet service contracts at 13,100 Citgo-branded stations across the U.S., Citgo had to purchase 130,000 barrels a day from third parties - a less profitable business model than selling gasoline directly from its refineries.

Citgo was founded in 1910 as the Cities Service Co., according to the company Web site, and 7-Eleven's predecessor, The Southland Corp., bought Citgo from Occidental Petroleum in 1983.

7-Eleven sold half its interest in Citgo in 1986 and the remaining stake in 1990 to Petroleos de Venezuela SA.