|
Economists Upbeat About U.S. Financial Rescue Efforts
The economy of the U.S. has tumbled into a serious recession, with the world economy close on its heels, but the financial institution rescue efforts of the Treasury and the Federal Reserve should help bring the downturn to an end around the second half of next year, according to economists participating in NAHB’s Fall Construction Forecast Conference on Oct. 22 at the National Housing Center in Washington, D.C.
 Maury Harris, U.S. chief economist for UBS, noted that the U.S. government, intent on not repeating the mistakes that led to the Great Depression, is pursuing a range of policies just getting underway that will gradually get credit flowing again to businesses and consumers.
“Markets in the pessimistic frame of mind they are in, they are acting like they are not going to give us a chance,” Harris said. Injecting banks with capital to encourage them to return to prime lending is an important step in restoring the health of the financial system, he said.
“There’s still a lot of money in the global economy,” he said, “but the problem is a widespread loss of confidence in financial intermediaries and institutions.”
Conceptually, the Treasury is pursuing a policy of “recirculating money in the financial system using the government’s credit card,” he said, and he called that “very powerful stuff.”
Along with other panelists, Harris predicted that the Federal Reserve would be making further cuts to the federal funds rate, adding stimulative monetary policy to the mix of initiatives being used to repair the U.S. economy. He forecast that the Federal Market Open Committee would reduce that key interest rate by one-quarter of a percentage point at its Oct. 29 meeting, and do the same thing again in December, bringing the rate down to 1%. The economists anticipated that the Fed would hold the rate at that level until late 2009.
Harris said that the Treasury was also likely to be testing its authority to direct lenders to provide forbearance on foreclosures, and that the government would be looking at “a smorgasbord of proposals” to rally the financial markets, including allowing delinquent borrowers to rent their homes and beefing up staffing services to handle mortgage delinquencies.
“Economists missed the severity of this crisis,” said Harris. “But the world’s expert on depressions, Ben Bernanke, is running the Fed right now. We are on the way to finding solutions. Things should work out in the coming year.”
 Michael Moran, chief economist for Daiwa Securities America Inc., told the conference that the current recession would be neither especially deep nor protracted in duration, but about average. However, with consumers battered by a loss of wealth in their homes and stock market accounts, there will be “softer” spending in the household sector coming out of the slump, resulting in only “moderate” economic activity in the U.S. for a period of about five years.
Low inventories and the continuation of a positive trade sector, even as both imports and exports slow, will help the economy avoid lapsing into a deep recession, Moran said.
Also, the turmoil in the financial markets, which is “almost a panic situation,” is “out of bounds with what’s going on in the economy,” he said.
A case in point, the spread between the three-month Libor interest rate and the Fed funds rate, which is normally about 10 basis points, surged to an “unimaginable” 350 basis points in September, and is now about 250 basis points, he said.
Moran added that the Case Shiller index of housing prices in 20 cities has exaggerated the decline in the nation’s housing prices during the downturn because it is too narrowly focused and is weighted by housing markets that experienced the biggest bubbles in prices during the housing boom.
He cited findings of a Zillow survey of home owners this summer showing that 38% of the households responding reported that their homes had lost value, while 62% reported no change or a higher value.
Moran told the conference that the Treasury Department’s drive to buy subprime and Alt-A mortgage-backed securities should help increase prices in the secondary market and make some money for the taxpayer. The Treasury is buying these packages at 4% and under various assumptions could be selling them for anywhere from 12.7% to 34.5%, or roughly 20% on average, he said.
At its worst, the cost of losses from troubled subprime and Alt-A mortgages will equal about 2.1% of the nation’s gross domestic product, Moran calculated, which is about the equivalent of the losses stemming from the savings and loan crisis of the late 1980s. “That’s not what makes for a depression,” he said. “If we survived the S&L crisis, we should be able to survive this.”
Moran conceded that rising delinquencies on credit cards are another risk factor for the economy and are likely to experience the normal cyclical upward movements that occur when people are losing their jobs and the economy is slowing, but he said that this would amount to nothing akin to the meltdown in the housing market.
Photos by Morris Semiatin
|
