Bursting bubbles.

ITEM: "The housing market is rapidly losing touch with reality" warned the September 20 cover story in Fortune magazine, describing the Fed-fueled nationwide housing and mortgage "bubble." "Fueled by interest rates that have remained near record lows, prices have continued to soar, and the gap between home values and the underlying fundamentals, such as personal income and job growth, is greater than ever."

With the Fed beginning to raise interest rates, indications abound that the "bubble" is about to burst, with potentially devastating economic consequences, continued Fortune. "The most likely trigger would be a sustained rise in interest rates, coupled with continued increases in a burden on housing that most experts ignore: soaring property tax rates."

While the popping of previous housing bubbles has created severe localized hardship, "this time around there is a real danger that a downturn in prices, or even a stall, could slam the economy, especially all-important consumer spending," continued the report. "Americans have used their homes like ATMs, taking out $662 billion in home-equity loans and refinances since 2001...."

"For now, home buyers" are coping with higher rates by taking out adjustable rate [mortgage] loans [ARMs]," observes the financial periodical. When "rates do jump, some people who stretched to buy their houses with the shorter-term ARMs won't be able to afford their monthly payments."

Business Week for July 19 offered a similar warning. "A downturn in housing would squeeze recent buyers who overleveraged themselves to pay top prices--and risk slowing the entire economy by cooling consumer spending as well as housing construction, lending, and the real estate business," noted the journal in an article headlined "Is A Housing Bubble About to Burst?" "Interest rates are inching up. It was the Federal Reserve-engineered decline in rates that inflated the housing bubble.... The most troublesome aspect of the price runup is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates."

AHEAD OF THE CURVE: In a feature story entitled "Will the Housing Bubble Burst?" THE NEW AMERICAN warned in our May 17 issue that "millions of Americans have been building their homes on a financial bubble created by the Federal Reserve's loose money policies. The housing bubble, in turn, has inflated a huge consumer credit bubble as homeowners ... have repeatedly refinanced their mortgages to consolidate debt. The inevitable bursting of those bubbles may result in an unprecedented financial catastrophe."

Our analysis highlighted the role played by both the Federal Reserve and federal subsidies in creating "an explosion of mortgage lending to debtors who otherwise wouldn't have qualified. This, in turn, has artificially stimulated housing demand and inflated housing prices."

We also pointed out that last February Fed Chairman Alan Greenspan, the architect of the bubble, "floated the incredible suggestion that homeowners consider switching from fixed-rate mortgages to adjustable-rate mortgages (ARMs), despite the fact that interest rates can only go in one direction--up.... Those homeowners who act on Greenspan's advice will be clobbered once rates begin to rise, as they inevitably must. And those who already have second (or third) mortgages face similar prospects when housing prices start to fall, as they inevitably must."