December 21, 2024

The Zero Sum Game Of Lower Interest Rates And Why Mortgage Rates Will Rise

July 28, 2012 by 1 Comment

The Federal Reserve has forced long term interest rates to historic lows in a desperate attempt to “stimulate” both the housing market and the economy in general.  The results have been mixed but the benefits of lower rates to borrowers are undeniable.  Lower rates reduce the cost of large debt burdens carried by many Americans and increases the spending power of those able to refinance.

Exactly how much lower the Fed intends to repress mortgage rates is anyone’s guess but as interest continue to decline, the overall benefits diminish.  Here’s three reasons why the Fed may wind up discovering that the economic benefits of further rate cuts will be muted at best, self defeating at worst.

1.  Lower rates are becoming a zero sum game for the economy as lower rates for borrowers translates into lower income for savers.  Every loan is also an asset of someone else and lower interest rates have merely been a mechanism for transferring wealth from savers to debtors.  Every retiree who prudently saved with the expectation of receiving interest income on their savings have been brutalized by the Fed’s financial repression. Even more infuriating to some savers is the fact that many debtors who took on irresponsible amounts of debt are now actually profiting from various government programs (see Foreclosure Settlement Q&A – A Victory For The Irresponsible).

A significant number of retirees that I know have been forced to drastically curtail their spending in order to make ends meet while others have been forced to draw down their savings.  The increased spending power of borrowers has been negated by the reduced spending power of savers.  This fact seems to elude Professor Bernanke who hasn’t been able to figure out why lower rates have not ignited the economy.

2.  Many consumer who would like to incur more debt are often turned down by the banks since their debt levels are already too high.  Those who can borrow often times chose to deleverage instead, considering the fragile state of the economy.  Anyone saving for a future financial goal (college tuition, home down payment, retirement, etc) is forced to reduce consumption and increase savings due to  near zero interest rates.  The Federal Reserve has destroyed Americans most powerful wealth building technique – the power of compound interest.  A 5% yield on savings will double your money in about 14.4 years while a 1% yield will double your money in 72 years – and that’s before taxes and inflation.

3.  As mortgage rates decline into uncharted territory, the mathematical benefit of lower rates diminishes.  As can be seen in the chart below the absolute dollar amount of monthly savings as well as the percentage decrease in the monthly payment diminish as rates race to zero.

Benefits of a refinance on a $200,000 mortgage diminish as rates decline

% Rate Mo Payment Mo Savings % Reduction Yearly Savings
6.00% $1,199.00
3.00%    $843.00 $356.00 29.70% $4,272.00
1.50%    $690.00 $153.00 18.10% $1,836.00
0.75%    $621.00  $69.00 10.00%    $828.00

Closing costs at lower rates also become problematic, making it impossible to recapture fees within a reasonable period of time.  With closing costs of $8,000 on a $200,000 mortgage refinance, it would take a decade to recoup closing costs.

Many astute analysts have made elaborate and compelling arguments that interest rates can only go lower.  From a contrary point of view, I believe that a future rise in interest rates is a high probability event.  This is the opposite of my prediction in March 2009 when I surmised that mortgage rates would decline to 3.5% – see 30 Year Fixed Rate of 3.5% Likely.

The Chart of the Day has a long term chart of the 10 year treasury and notes that the recent sharp decline in interest rates “has brought the 10-year Treasury bond yield right up against resistance of its 26-year downtrend channel.”

 

Filed Under: 3.5% Fixed Rate 30 Year Mortgage, Bernanke, Deleveraging, Federal Reserve, Housing, Interest Rates, Mortgages, Saving Money Tagged With: , , , , , , , , ,

Optimists On Housing Recovery May Have To Wait Another Decade – Humpty Dumpty Vs The Fed

May 16, 2012 by Leave a Comment

It wasn’t supposed to be like this.

Housing prices were never supposed to decline year over year.

Economic depressions were supposed to be a relic of the past.

If the economy weakened, the Fed would fix everything with lower interest rates and Congress would pass some new laws to create new jobs.

If things got really tough, the government would temporarily increase the debt and the magic of Keynesian economics was supposed to quickly “re-stimulate” the economy.

Our children were expected to lead more prosperous lives.  They were not supposed to move back in with Mom and Dad after four expensive years of college – arriving on the doorstep with a diploma in one hand, student loan notes in the other, telling us that they couldn’t find a job.

Day by day, we are discovering that a lot of things that were never supposed to happen are happening and no one seems able to turn things around.

The Federal Reserve and the White House promised to re-inflate the collapsed humpty dumpty real estate bubble with printed money and bailout programs for banks and defaulted homeowners.

An ex Princeton professor, now Chairman of the Federal Reserve, spent his life studying the Great Depression of the 1930’s.  He was supposed to know how to prevent another one, or so he assured us.

Fast forward to 2022 – housing prices that were supposed to have recovered a decade ago are still at levels seen more than 20 years ago.

Not possible you say?  Optimists and shills for the housing industry might want to consider some inconvenient truths.

Will the U.S. have 20 years of stagnant home prices?

What if real estate prices remain the same for another decade?  As I look at economic trends in our nation including the jobs we are adding, it is becoming more apparent that we may be entering a time when low wage jobs dominate and home prices remain sluggish for a decade moving forward.  Why would this occur?  No one has a crystal ball but looking at the Federal Reserve’s quantitative easing program, growth of lower paying jobs, baby boomers retiring, and the massive amount of excess housing inventory we start to see why Japan’s post-bubble real estate market is very likely to occur in the United States.  It is probably useful to mention that the Case-Shiller 20 City Index has already hit the rewind button to 2003 and many metro areas have already surpassed the lost decade mark in prices.  This is the aftermath of a bubble.  Prices cannot go back to previous peaks because those summits never reflected an economic reality that was sustainable.

Courtesy: doctorhousingbubble.com

The days of “no doc” loans are long gone and not likely to return anytime soon.  Lenders have reactivated a quaint old mainstay of mortgage underwriting and now require borrowers to verify the capacity to service debt payments.  Higher home prices require rising incomes but real incomes for many Americans have been declining for decades.

The income of the typical American family—long the envy of much of the world—has dropped for the third year in a row and is now roughly where it was in 1996 when adjusted for inflation.

The income of a household considered to be at the statistical middle fell 2.3% to an inflation-adjusted $49,445 in 2010, which is 7.1% below its 1999 peak, the Census Bureau said.

The Census Bureau’s annual snapshot of living standards offered a new set of statistics to show how devastating the recession was and how disappointing the recovery has been. For a huge swath of American families, the gains of the boom of the 2000s have been wiped out.

Earnings of the typical man who works full-time year round fell, and are lower—adjusted for inflation—than in 1978.

Gary Shilling, who correctly called the housing bubble collapse, tells the Wall Street Journal that housing prices could decline another  20% or more.

It will take a 22% drop to return median single-family house prices to the trend identified by Robert Shiller of Yale University that stretches back to the 1890s and prevailed until the housing bubble began. (It adjusts for inflation and the tendency of houses to get bigger over time.) And corrections usually overshoot on the downside just as bubbles do on the upside.

The problem is excess inventories. They are the mortal enemy of prices, and we’ve calculated an excess of two million housing units, over and above normal working levels of inventories of new and existing homes. That is huge, considering that before the housing market collapsed, about 1.5 million new homes were being built annually, a figure that shrank to 568,000 in February. At current rates of housing starts and household formation, it will take four years to work off the excess inventory, plenty of time for those surplus houses to drag down prices.

Additionally, our inventory estimate doesn’t even include future foreclosures, some five million of which are waiting in the wings. The 49% drop in new foreclosures since the second quarter of 2009 is a mirage, and was partly due to the Obama administration pressuring mortgage lenders to try to modify troubled mortgages to keep people in their homes. (They were largely unsuccessful.)

We can say that “We are not Japan” but every passing day proves otherwise.  And for those misguided souls who still believe that the government and Fed can put humpty dumpty back together again, don’t you think that if they could have they would have?

Filed Under: Banking Industry, Bernanke, Economy, Federal Reserve, Japan, printing money Tagged With: , , , , , , ,

Americans Stubbornly Deny All Time High In Personal Income

March 2, 2011 by 1 Comment

American workers should be celebrating the latest numbers from the U.S. Department of Commerce that show personal income at all time highs.  Since taking a rather sharp dip during the recession of 2008-2009, personal income has soared to almost $13 trillion, up from $12 trillion in early 2009.

Getting Americans to believe that their incomes have actually increased is another story.  While the Department of Commerce is reporting all time highs in income,  another survey released by Fannie Mae shows the opposite.

Fannie Mae (FNMA.OB) conducts a National Housing Survey every quarter that polls homeowners and renters in depth about their confidence in homeownership, overall confidence in the economy and the current state of their household finances.

The latest National Housing Survey for the fourth quarter of 2010 polled 3,407 Americans and the results do not reflect the rosy income numbers reported by the Department of Commerce.

The survey revealed that 62% of all respondents believe the U.S. economy is on the wrong track, 60% reported that monthly household income was the same as a year ago and 34% said that their monthly expenses were “significantly higher” than a year ago.  Only 19% of those polled said their incomes were significantly higher.

Keep in mind that Americans do not normally “inflation adjust” their perception of personal income – when respondents say that their income has not changed, it means they are receiving the same absolute amount of dollars, unadjusted for inflation.

Total personal income may have increased but income gains seem to have been limited to a small minority of Americans.

In any event, if most Americans have not seen an increase in their monthly incomes, there is little reason for comfort going forward.  As higher oil and commodity prices work their way through the system, the basic cost of living will increase for everyone.  If that’s not enough, once Fed Chairman Bernanke’s obsession with creating higher inflation succeeds, we are all apt to feel poorer.

Filed Under: Bernanke, Economy, Federal Reserve, Housing Tagged With: , , ,

Will Mortgage Rates Soar As Fed Programs Wind Down?

July 21, 2009 by Leave a Comment

Fed Support No Longer Unlimited

There seems to be near unanimous agreement at all levels of government that a recovery in housing prices is essential for economic stabilization and future growth.   The Federal Reserve has supported this effort by driving short term interest rates to near zero and initiating a program to purchase as much as $1.75 trillion in mortgage debt and treasuries.  As of mid year, the Fed had purchased over a half trillion dollars of mortgage-backed securities and housing agency debt in an attempt to keep mortgage rates low.

How much longer will unlimited Fed support for the housing market continue and will mortgage rates increase when Fed support is withdrawn?  The Federal Reserve has indicated that the credit markets have stabilized.  The Federal Reserve’s balance sheet has been shrinking for weeks and is now below the $2 trillion level reached in March.   With financial Armageddon apparently no longer an immediate threat, the Fed also seems to be responding to political pressure to reduce various emergency lending programs.

In response to pointed warnings from foreign creditors about monetizing US debt,  Chairman Bernanke said:

WSJ – “We absolutely will not monetize the debt,” Mr. Bernanke says, using economist-speak that means he won’t let the Fed become the government’s source of cash for deficits. Fed-fueled deficits would be inflationary. Mr. Bernanke says, “we will not abandon price stability.”

In addition, the Fed faces a full assault on its authority from Ron Paul who is attempting to introduce legislation to audit the Fed.  Many other members of Congress have also been critical of the cost and secrecy of Federal Reserve programs and bailouts.

WSJ – As Mr. Bernanke heads to Capitol Hill today for two days of testimony on the economy, the central bank is fending off attacks on many fronts from critics who want to rein in its power and autonomy.

Rallying one charge is Ron Paul, an iconoclastic Texas Republican who wants to abolish the central bank entirely.

Still, Mr. Paul has persuaded nearly two-thirds of the House to co-sponsor a bill requiring far-reaching congressional audits of the Fed. Audits would show “that it’s the Fed that has caused all the mischief” in the U.S. economy, Mr. Paul says.

Mr. Bernanke will face a tough audience in his semiannual report to Congress Tuesday and Wednesday. The Fed “went too far in bailing out companies and exposing taxpayers” to the costs, says Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee. “They utterly failed the American people as a bank regulator.”

Outlook For Mortgage Rates

With the credit markets stabilized and the Fed under political pressure to reduce its multi trillion dollar financial  commitments, how will mortgage rates respond as the Fed reduces its programs to keep rates low?  Two top rated bond managers at Pimco and American Beacon Advisors have similar opinions.

July 20 (Bloomberg) — Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of mortgage debt last month and added to cash and equivalent securities.

Gross cut the $161 billion Total Return Fund’s investment in mortgage bonds to 54 percent of assets, the lowest in almost two years, from 61 percent in May, according to a report on Pimco’s Web site.  Gross trimmed holdings of government-related bonds to 24 percent of assets, the least since February, from 25 percent.

Gross has been selling mortgage-backed securities over the past few months after loading up on them last summer in the midst of the financial crisis, which started with the collapse of the U.S. property market in 2007.

AMERICAN BEACON ADVISORS’ BOND MAVENS, Kirk Brown and Patrick Sporl, have done an admirable job of flying their respective fixed-income funds, AB Treasury Inflation Protected and AB Intermediate Bond, through the credit-market turbulence of the past two years.

He thinks that stagflation — the dreaded combination of a stagnant economy and inflation — is more of a possibility now than at any time since the 1970s.

AB Intermediate Bond, meanwhile, is underweight mortgage-backed securities and overweight corporates.

A reduction of the Fed’s massive intervention in the mortgage market is certain to result in higher mortgage rates, but will not be the disaster that some fear.   The real disaster has already occurred based on the Fed’s past policy of ultra low interest rates to increase lending and inflate housing prices.

Disclosures: No positions

Filed Under: Bernanke, Congress, Federal Reserve, Housing, Mortgages Tagged With: ,

Fiscal Discipline – Endorsed By All, Practiced By None

June 7, 2009 by

Has anyone noticed the correlation  of “fiscal discipline” chatter to rising interest rates?  Efforts by the Fed to manipulate rates lower through the outright purchases of treasuries and mortgage securities seem to be failing as the long end of the yield curve continues to steepen.  Is the fiscal discipline talk simply an effort to calm bond investors or is the plan deeper?

Consider some recent comments by the President and the Fed Chairman.

Obama Urges Congress To Pass Law Enforcing Fiscal Discipline

(Bloomberg) — President Barack Obama said he is committed to imposing fiscal discipline on the government and called on Congress to pass a law requiring any new spending be matched by higher taxes or cuts elsewhere. Obama, in his weekly radio and Internet address, said that while his initiatives to confront the economic crisis have deepened the country’s debt,

“We need to adhere to the basic principle that new tax or entitlement policies should be paid for,” Obama said.

“We cannot sustain deficits that mortgage our children’s future, nor tolerate wasteful inefficiency,” Obama said.

Earlier this week, Obama was criticized as doing too little to confront the deficit when he ordered his Cabinet to cut $100 million out of the budget

And right on cue, Mr Bernanke followed up with  sobering remarks on the perils of deficit financing and fiscal imbalances.

Fed Chief Calls For Plan To Curb Budget Deficits

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.

The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more.

Why Bernanke is Right to be Worried

Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”

These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns.

Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar.

It’s Your Problem, Bernanke Tells Congress

Congress and the people who elected it must decide how much government they want to afford, Bernanke said. Stating the obvious, he went on to say: “Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run.”

Unfortunately, Congress and the people have seldom gotten the balance right. We want the benefits of a large government without paying the costs, just as we wanted a loftier personal living standard than our income could support.

The current economic crisis — which demanded “strong and timely actions,” in Bernanke’s view — has accelerated the day of reckoning for our public and private debt…

Both Obama and Bernanke are intelligent men.  I doubt that either one truly believes that unlimited borrowing or printed money create enduring economic prosperity.   The bailouts, guarantees and deficit spending were necessary to prevent the economic crisis from turning into something much worse, but the cost has  accerlerated  the “day of debt reckoning”.

Now that the crisis seems contained and rates are rising,  the emphasis by both Obama and Bernanke is on ‘balancing spending with revenues”.   Since neither man  mentions reduced  spending, what exactly do they have in mind?

The way this plays out should be interesting.  The President wants his numerous costly programs implemented and Bernanke, a “student of the depression” will be loathe to endorse tax increases on a still very fragile economy.  Bernanke tells Congress that paying the bills is their problem and Obama states that new entitlements should be paid for.  So what is the solution? 

The solution is the only one it has ever been-  defer any meaningful action to the next administration, defer the unwinding of the excesses to the next business cycle, and defer  the debts to the next generation.  The “solution”  will keep on working until it doesn’t.

Filed Under: Bernanke, Economy, Federal Reserve, Government spending, printing money Tagged With:

Geithner – “I am not a crook”

June 4, 2009 by 1 Comment

“Chinese assets are very safe”

This remarkable assertion regarding the safety of US debt securities held by China was made by Timothy Geithner, US Treasury Secretary, during his visit to China.   That Mr. Geithner felt compelled to make this statement probably reinforced the unease China has about the finances of the United States.  If the Chinese assets were actually “safe” and everyone knew it, there would have been no need to say that they were safe.

Mr. Geithner’s denial brings to mind another famous denial made by Richard  Nixon during the Watergate affair – “I am not a crook”.  We all know how that turned out.  If it wasn’t obvious that everyone knew Nixon was a crook, he would not have had to deny it.  If US assets are really safe, Geithner would not have to say that they are safe.

Almost a Vaudeville Act

Mr Geithner’s “Chinese assets are very safe” line was  greeted with loud laughter by the student audience he made his remark to.   The laughter speaks for itself regarding the credibility given to Mr. Geithner’s assurances.  Perhaps our Treasury Secretary should have countered the laughter by saying, “I am totally serious about this”.

At the same time, the President and Chairman of the Federal Reserve were very publicly proclaiming that the US deficits would be cut, future spending would be “disciplined” and that fiscal imbalances would be addressed.  These remarks probably confused the Chinese as they watch the United States implement programs that require trillions of dollars a year of new deficit spending.  You can say you will do something but what really counts is what you actually do.   Words are a cheap commodity while confidence is precious.

The recent remarks by Geithner, Obama and Bernanke promising fiscal restraint may have something to do with the following chart.

10 Year Treasury

10 Year Treasury

Courtesy: Yahoo finance

Despite the Fed’s massive purchases of mortgage and treasury securities,  price action in the long term treasury market clearly indicates more sellers than buyers, with rates nearly doubling since late last December.  Rates at 3.75% on the 10 year treasury are certainly not a disaster, but if all the powers of the Fed and Treasury to lower interest rates are failing, then maybe things aren’t so “safe” after all.

Filed Under: Bernanke, Confidence, Federal Reserve, Geithner, Government spending, Interest Rates Tagged With: , ,

Chinese Likely To Halt Purchases Of US Treasury Debt

March 13, 2009 by 4 Comments

Nervous Times In China

The Chinese are learning the hard way about an old American banking story. The man who owes the bank $50,000 dollars on a secured loan may lay awake at night worrying about how he can repay the loan. If the same man owes the bank $5,000,000 of unsecured debt, it is probably the banker who is awake all night wondering if he is going to get paid.

Chinese Premier Wen sounds like he is having some sleepless nights worrying about whether or not the US will be able to repay the $700 billion that China invested in US treasury securities. In a remarkable statement, Premier Wen publicly stated that he is “worried” about the ability of the US to pay back its huge debts to China. As reported in Bloomberg, Wen is asking for assurances from the US that the debt is safe.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today after the annual meeting of the legislature. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a “safe investment.”

“China is worried that the U.S. may solve its problems with the fiscal deficit and banks by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the U.S. can make sure this won’t happen, then China will continue to invest.”

Delegates of China’s legislative advisory body suggested that the biggest foreign holder of U.S. debt diversify away from Treasuries into more risky assets at the annual meeting that started on March 3.

Jesse Wang, executive vice president of China Investment Corp., said on March 4 that his $200 billion sovereign wealth fund may invest in “undervalued” commodity assets. Zhang Guobao, head of the National Energy Administration, said China should invest more in commodities instead of hoarding the U.S. dollar, the official Xinhua News Agency reported on March 7.
China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves and will safeguard its own interests, Wen said. Chinese investors held $696 billion of U.S. Treasuries as of Dec. 31, an increase of 46 percent from the prior year.

Chinese Concerns Justified

China is justified in worrying about its large US treasury investment, despite the worthless assurances from our Secretary of State. Congress is blithely spending money by the trillions, as Chairman Bernanke continues to speak of buying mortgage backed securities and long term treasuries. One of the major constraints on Chairman Bernanke’s desire to print money (via the purchase of US government debt) has, no doubt, been the worry about a potential backlash from China, the biggest buyer of US debt.

The heretofore mutually beneficial arrangement of China purchasing US debt with trade surpluses generated by American purchases of Chinese goods is drawing to a close. China’s trade surplus has all but evaporated, eliminating the need or ability of China to purchase additional US debt. In addition, the Chinese have made it clear that their national interests are best served by diversifying into commodities and other real assets, the value of which is not contingent upon an overleveraged debtor nation.
End Game Clear

As long as China continues to purchase US debt, Bernanke is constrained from blatantly printing money. As China throttles way back on its purchase of US debt, America will have three choices – 1. Borrow and spend less 2. Raise taxes tremendously or 3. Print money. Based on what we have seen so far, it will be some of number 2 and a lot of number 3.

The odds are that China will ultimately get its money back, but the value of what they receive will be far less than what they gave.

Filed Under: Bernanke, China, Federal Reserve, Sovereign Default, Uncategorized Tagged With: , , ,

Do Bernanke And Obama Talk To Each Other?

February 24, 2009 by 1 Comment

Bernanke Gives Upbeat Assessment On Economy

Chairman Bernanke predicted today that the recession would end in 2009.  Some of his upbeat, optimistic comments included:

“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery”.

“I would anticipate some stabilization in the housing market going forward.”

“I do believe that once the economy begins to recover, we will see improvement in the financial market.”

The Big Question

The really big question is, was the President listening to him?

The Bloomberg report that follows is really tough to reconcile with Bernanke’s comments earlier in the day.  Do these guys talk to each other?  There does not appear to be a consistent message or plan for dealing with the greatest economic chaos since the 1930’s.

Feb. 24 (Bloomberg) — President Barack Obama will tell the public tonight the “day of reckoning has arrived,” and that pulling the U.S. out of a recession will mean sacrificing “some worthy priorities” the nation can no longer afford.

“We have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election,” Obama will say in his first address to a joint session of Congress, according to excerpts released by the White House.

“The only way this century will be another American century is if we confront at last the price of our dependence on oil and the high cost of health care; the schools that aren’t preparing our children and the mountain of debt they stand to inherit,” he will say

Obama is seeking to convince lawmakers and voters that his plans to revive growth will succeed while cautioning that the recovery will take time. The president has spent his first month in office focused on three initiatives — a $787 billion stimulus bill, a bank-rescue plan and an effort to limit home foreclosures — while warning of economic “catastrophe” if the government doesn’t take aggressive action.

With all the warnings about the severity of the economic crisis, Obama now must look for ways to boost public optimism, analysts and economists say.

“It’s a real balancing act,” said Stuart Rothenberg, a Washington-based political analyst. “The president’s got to walk this fine line between reminding people of the difficult situation we’re in and emphasizing the inevitable victory.”

“It’s all about confidence,” said Bruce Foerster, a former Lehman Brothers Holdings Inc. managing director and now president of South Beach Capital Markets in Miami. “That’s the heart of what is going on. We have problems but they are being exacerbated because there’s no confidence in the capital markets.”

I applaud the President’s honesty on the challenges we face and I wish him the best of luck. The stock market, however, has lately been registering a resounding vote of no confidence in the actions taken by Washington.  The nation is searching for a thoughtful, workable plan to solve the economic problems we face.  A coherent and unified message from Washington would be good for starters.

Predicting an end to the recession in 2009 while concurrently describing the economic situation as “catastrophic” and a “day of reckoning” does not project a coherent message.   But it could have been worse – at least they didn’t let Tim Geithner say anything.

Filed Under: Bernanke, Confidence, Economy, Federal Reserve Tagged With: ,

Bernanke Predicts 2010 Recovery In Stocks, Housing & Economy

February 24, 2009 by Leave a Comment

Bernanke Predicts Recession To End In 2009

The stock market jumped over 200 points today, partly due to Federal Reserve Chairman Ben Bernanke’s optimistic comments to the Senate Banking Committee.  Some selected comments by the Chairman follow:

“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery”.

Mr. Bernanke also sounded optimistic on housing as well, although without a specific time projection for recovery.

“I would anticipate some stabilization in the housing market going forward.”

Mr. Bernanke seemed to dismiss the need for bank nationalization stating that:

“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn’t necessary”.

Better financial market performance was also seen by the Chairman:

“I do believe that once the economy begins to recover, we will see improvement in the financial market.”

Mr. Bernanke also stressed his commitment to provide ample amounts of credit for all purposes:

“Our objective is to improve the function of private credit markets so that people can borrow for all kinds of purposes.”

Mr. Bernanke did temper his optimistic statements by noting that his forecast

“is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside.”

Conclusion?

If the downside risks outweigh those on the upside, how can Bernanke be so optimistic for a recovery in stocks, housing and the economy??  Based on the confusion and conflicting signals, let’s examine some previous comments by the Chairman for perspective on his batting average as an economic prophet.

Previous Forecasts By The Chairman

“At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt.”
—February 14, 2008

The U.S. federal budget deficit has declined recently and is officially projected to improve further over the next few years. Unfortunately… the United States has already reached the leading edge of major demographic changes that will result in an older population and a more slowly growing workforce. A major effort to increase public and private saving is needed to prepare for the economic consequences of this demographic transition and to address external imbalances. As the global perspective makes clear, the reduction of the U.S. current account deficit also requires efforts on the part of the surplus countries to reduce the excess of their desired saving over desired investment.
—September 11, 2007

“Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend.”
—July 18, 2007

“We will follow developments in the subprime market closely.  However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.”
—June 5, 2007

“We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers. At the same time, we must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.”
—May 17, 2007

“The information, expertise, and powers that the Fed derives from its supervisory authority enhance its ability to contribute to efforts to prevent financial crises; and, when financial stresses emerge and public action is warranted, the Fed is able to respond more quickly, more effectively, and in a more informed way than would otherwise be possible. “
—January 5, 2007

No need to assign a grade letter to the Chairman, but maybe we should hold off on celebrating the economic recovery.

Filed Under: Bernanke, Economy, Federal Reserve, Housing Tagged With: , ,