Before I cite a few reports on yesterday’s collapse in markets around the world, let me pause for these two observations:

1. This was all predictable. My colleague Dean Baker warned of the housing bubble as far back as 2002. And you didn’t have to be a rocket scientist, or even an economist, to feel like something was really wrong–wages basically stagnant and not keeping up with the cost of living (I mean by the cost of living not the official government statistics but what it really costs to live) and, yet, people wanted to ignore basic fundamentals–not to mention sanity–because, in some way, the housing bubble kept some of the lid on the ugly fact that people were really struggling…if you had a home, it was a place to dig into for cash (re-fi) to keep yourself afloat.

2. The workers will get screwed–even more than they have until now–by a long-term debacle in credit markets. First, anyone who had a risky mortgage is getting squeezed–people will lose their homes. Second, as the debacle continues to cascade through the markets over the coming months, companies will respond by laying off workers.

Here’s an example of what I mean–

In The New York Times story on the stock market plunge, you get this mumbo-jumbo:

“Everybody now recognizes that the elimination of creative finance in housing leaves us with a problem for new homebuyers,” said Robert J. Barbera, the chief economist of ITG, because their income is not high enough to buy homes with interest rates and home prices at current levels.

Translation: "creative finance" is market-speak for really risky mortgages that lenders were giving out to people with very shaky finances who were pretty likely to default when the bubble collapsed–but the lenders didn’t care. And, now, the evaporation of "creative finance" that has destabilized the market means that new homebuyers are shit out of luck.

It gets worse. In a second story in The Times on the evaporation of easy credit, the ominous signs for workers loom, even if the reporter can’t see them:

Beyond leveraged buyouts, the dissolution of the credit markets will probably cut off debt-financed transactions. On Monday, the travel Web site Expedia called off a large stock buyback, citing its inability to get debt terms it wanted.

 

But the crumbling of the debt markets may pave the way for strategic mergers, which can use cash and stock instead of debt, although companies may also decide to hold onto their cash.

Typically, when "strategic mergers" occur, particularly when they are conjured up because of a crisis, the merged company cuts jobs as the first step to be able to pay off the inevitable debt taken on to make the merger happen. So, presto, CEOs do well, the banks and law firms and advisors who do the deal rake in nice fees and, thousands of families end up facing financial ruin.

Paul Krugman points out some of these issues in today’s column (which is for Times’ subscribers only):

Eventually the bubble had to burst, and when it did it left us with prices way out of line with reality and a huge overhang of unsold properties. This in turn has caused a plunge in housing construction and a lot of mortgage defaults. And the experience of past boom-and-bust cycles in housing tells us that it should be several years at least before things return to normal.

And…

Anyway, now reality is settling in. And there’s one more thing worth mentioning: the economic expansion that began in 2001, while it has been great for corporate profits, has yet to produce any significant gains for ordinary working Americans. And now it looks as if it never will.

    What a system.