The 2008 Economic Crisis

[Brandan Kraft]

The global economic party is over

BEIJING, March 12 -- With the United States bordering on recession, the global economic boom has ended. The boom was unusually long and persistent, with four years of roughly 5 percent growth - a period of sustained economic dynamism not seen since 1970.

The clearest sign that the boom is ending is the International Monetary Fund's forecast of 1.5 percent growth for the US in 2008. That may not sound like a recession, but the IMF's marginally positive projection primarily reflects the growth overhang from 2007, with hardly any new contribution in 2008. It is compatible with three consecutive quarters of zero growth in 2008.

Many argue that a US recession will no longer affect the world because China has supplanted America as an engine of the global economy.

Wrong. Although China is growing fast, its economic power remains tiny. While the US contributes 28 percent to world GDP, China accounts for only 5 percent. The whole of Asia, from Turkey to China, contributes 24 percent, less than the US alone.

At some stage, the world may no longer catch a cold when the US sneezes, but that is far from being true now. Twenty-one percent of China's exports and 23 percent of the European Union's exports to non-member countries go to the US. Thus, the world cannot help but be pulled down by a US slump.

.....

The prices of US homes are also declining at an accelerating rate, in many areas by more than 10 percent per year. The prices of traded mortgage-backed securities have followed house prices down.

Only US stock market prices have remained relatively stable. But it is only a matter of time until they fall, too. After all, the Standard & Poor's US price-earnings ratio is still above its long-term average - 26.84 in 2007, compared to its long-term average since 1881 of 16.31.

This asset meltdown is the reason for the likely recession. First, consumers, faced with tighter credit and falling house values, will need to cut spending, slowing the US economy and affecting all countries via world trade.

Second, with banks losing substantial amounts of equity capital - estimates now reach $300 billion and more - the need to maintain minimum equity-debt ratios will force them to curtail business lending, hindering investment demand.

True, the US Federal Reserve has tried to prevent a recession by cutting its interest rates. But the Fed cannot endow the banks with new equity capital and prevent a credit crunch.

More promising is the $150 billion tax cut that the US Congress recently enacted. Equivalent to 1 percent of US GDP, it is large by all accounts. Whether it is enough to compensate homeowners for the wealth losses resulting from declining house prices and to prevent the impending recession remains to be seen. But, whatever happens, the party is over.

[Brandan Kraft]

Nobody is going to mortgage a house again unless they can put 20% down, verify employment (for 5+ years at same company) and have spotless credit!

[Brandan Kraft]

Great commentary - Asking Too Much From the Fed

[Robert R. Higby]

The dollar keeps falling against the Euro at the rate of a penny a week! How long will this continue?

[Brandan Kraft]

I wonder if it's an attempt to move european manufacturing over here...

[Brandan Kraft]

Asian markets plunge after Wall Street pullback and as dollar falls to 12-year low vs yen

[Brandan Kraft]

Most Economists Say Recession Has Arrived as Outlook Darkens

The economists also expressed growing concerns that a 2008 recession could be worse than both the 2001 and 1990-91 downturns. They put the odds of a deeper downturn at an average 48%, up from 39% in the previous survey. Mark Nielson of MacroEcon Global Advisors said that "we recognize the previous two recessions were mild and, if a recession does occur, it is likely to be slightly worse than the previous two."

Amid the concerns about the economy, respondents expect more action from the government and the Federal Reserve. Some 63% said the use of public money to deal with the housing crisis is now likely or certain, while on average they expect the Fed to lower its benchmark federal-funds rate to 2% by June from the current 3%.

....

One thing is clear: The darkening economic outlook has made Ben Bernanke's job less secure, especially with a new president about to enter the White House. The economists gave the Fed chairman just a 59% chance of being reappointed in 2010. "If a Democrat is elected he won't be reappointed, and [presumptive Republican presidential nominee John] McCain may opt for another, too," said David Resler of Nomura Securities. "The problems occurred on his watch," added Ram Bhagavatula of Combinatorics Capital.

[Brandan Kraft]

The Fed's worst nightmare

Ugly retail sales and a somber forecast from CFOs point to recession, but rising oil and gold prices and a weak dollar show inflation. What's Ben Bernanke to do?

Gold hit $1,000 an ounce for the first time ever Thursday morning. Oil is slouching towards $111 a barrel. And the dollar hit a 12-year low against the yen and a new record low against the euro. Can you say inflation?

....

Actually, it's worse than mere inflation. The combination of rising commodity prices and the weakening growth forecast for the economy has people worried about 1970s style stagflation. I hope Bernanke can dig up a pair of old bell bottom pants. Do the hustle!

"Clearly, the Fed needs to switch to Plan B," noted Duke professor Campbell R. Harvey in a release about the CFO survey.

But what is Plan B exactly? It's difficult to figure out just what the Fed can do other than let the credit markets and housing markets work themselves out, and hope the actions the central bank has already taken stimulate the economy at some point.

A couple days ago on Glenn Beck, the economist said the recession would be worse than the 70s....

[Brandan Kraft]

I think Bernanke inherited a steaming pile of dog doo doo from the treasonous Greenspan!

[Brandan Kraft]

Zuckerman Says U.S. Economy May Face `Perfect Storm'

March 12 (Bloomberg) -- Mortimer Zuckerman, co-founder of Boston Properties Inc., the largest U.S. office real estate investment trust, said the U.S. economy is in a recession and there's no sign of a recovery.

``We are looking at the worst set of macroeconomic conditions since the Great Depression,'' Zuckerman said in an interview with Bloomberg Television. ``I don't know where the bottom is. The federal government's going to have to do a lot more to contain what I think is the potential of a perfect storm.''

...


``The most dangerous part in my judgment is what is going on in the housing world, where we're now running foreclosures at the rate of 2 million a year, where 9 million homes, according to the government, just slightly under 9 million homes, have either no equity in them or negative equity,'' he said.

[Brandan Kraft]

Sell stocks while the selling's good

Central banks and corporate leaders are locked in the battle of their lives this month as they join in efforts to head off the worst credit crisis in at least four decades, pulling every monetary and fiscal trick in the book -- and inventing some mutant new ones.

Yet veteran observers are swiftly coming to the conclusion that attempts to regain world financial stability could be doomed due to a stunning crash of commercial-debt financing and lack of trusted leadership, and believe private investors should take advantage of any rallies to purge their portfolios of most stocks and nongovernment bonds.

Yes, you heard me: On a rebound toward the 1,350-to-1,400 level of the S&P 500 Index ($INX), consider exiting shares of all but the strongest, most creditworthy companies. This bear market is likely not ending soon, the recent 400-point jump in the Dow Jones industrials ($INDU) notwithstanding.

If that sounds like a harsh judgment, or too late, it's because equity investors have been mostly shielded from the wreck that has befallen credit investors. But the firewall that has long existed between the two sides of the global financing system is burning, and it won't be long before the spreading credit panic works its full destructive power on stocks. The typical bear market of the past century has slashed stocks' value by about 30% from peak to trough, so at a current reading of minus 16% we're probably only halfway done. And analysts say the last half of a bear market is more intense, as hope gives way to terror.

I moved all of my money out of stocks into Government bonds... I think gold/oil/commodities are in a bubble that will burst soon. The dollar will stabilize after the fed raises rates (it has to)...

[Brandan Kraft]

Congress Considers $15,000 Rebate Checks For All Home Buyers

Sen Johnny Isakson Says Checks Would Entice People To Buy

He would know.

As a longtime realtor in Cobb County, Sen. Johnny Isakson has seen housing downturns before. "We had recessions in 1968, 1974, 1982, and 1991, by every measurement, this is going to be a deeper and bigger recession in residential housing. It's a significant event."

Isakson is pitching an idea to his colleagues in Congress: a $15,000 tax rebate check to anyone who agrees to buy a home. Congressional budget analysts project the program would cost $14 billion over the next few years. But Isakson said the rebate checks are well worth the hefty price tag. "If we can convince buyers to come back to the marketplace and buy these houses, then the houses aren't vacant. It's replaced by an owner-occupant, who is there making payments on a loan and helping all of the other houses around."

Senate Republican leaders have signed on to the rebate check idea. But they have to corral support from Democrats. Senate Democratic leader Harry Reid is instead pushing a foreclosure relief proposal called The Foreclosure Prevention Act of 2008, which would offer $4 billion to cities to rehab or knock down foreclosed properties. Reid's Democratic colleague Sen. Bob Casey said, "It's important that we have as much money as possible in the hands of local communities, to get it into communities, where they know how to spend those dollars and help families through this crisis."

Figures compiled for wsbtv.com by mortgage analysts with RealtyTrac show a surge in Atlanta-area foreclosures. In 2006, RealtyTrac reported 33,018 foreclosure filings in the Atlanta region. In 2007, 50,271 people were foreclosed upon.

The Senate is expected to debate both competing foreclosure proposals. Presidential candidates have also publicly announced proposals to ease the housing crisis. Sen. Hillary Clinton has proposed a temporary freeze on all home foreclosures.

THIS P*$$ES ME OFF!

[Brandan Kraft]

The next shoe to drop in housing
Rising foreclosures and big losses at Fannie Mae and Freddie Mac are making it harder for people with good credit backgrounds to get a traditional mortgage.

NEW YORK (CNNMoney.com) -- The credit crunch has finally hit the traditional mortgage market.

Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart.

Some fear this development will make it harder for people, even those with strong credit histories, to get a home loan.

"Even if you have good credit, you don't know if they are going to give you a loan or not," said Joseph Mason, a senior fellow at the Wharton School of the University of Pennsylvania.

And for those who can still get a loan, the tremors in the mortgage-backed securities market has made loans more expensive for borrowers. As the prices of mortgage-backed securities have fallen, their yields have risen, leading to higher mortgage rates.

....

Wholesale Access has estimated that all these changes mean 30% to 40% of borrowers who could have qualified for a conventional mortgage a year ago can no longer do so.

...

But now that person might have to pay a half percentage point more. With today's rates, that translates into 6.75% for a 30-year fixed-rate mortgage instead of 6.25%, or $74 more a month on a $225,000 loan, typical for her client base.

Borrowers must also put more money down, especially if they don't have stellar credit. For instance, those with down payments of less than 5% need a credit score of at least 680, said Steven Plaisance, executive vice president of Arvest Mortgage Co. in Tulsa, Ok. Previously, he could make loans to people without big down payments if they had other strong points, such as stable employment.

[Brandan Kraft]

Killer HELOCs

Quote of the Day
"Leaning on outside mortgage brokers for home-equity business was "one of the biggest mistakes we've made." -Charles Scharf, head of J.P. Morgan's retail business. Morgan says home equity loans [HELOC's] generated by outside mortgage brokers have performed worse than those generated by J.P. Morgan. (Barry Ritholtz in Seeking Alpha, Mar. 12th)

Subprime Fallout
Latest Bank Headache: Home Equity Loans. "While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage... When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt... Many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan... Delinquent home-equity loans are rising fast, representing 12.5% of all delinquent loans in Q4 at Bank of America Corp. (BAC). SNL Financial: That was up from 9.4% in Q1'07." (Barry Ritholtz in Seeking Alpha, Mar. 12th)

[Robert R. Higby]

I certainly agree with you Brandan re: Greenspan; he was the one who started the current monetarist policy in 2002 by lowering interest rates beyond reason in spite of hyper-inflation in the housing market! One cannot possibly take housing out of the inflation equation without extreme peril to sound economic policy.

We had recessions in 1968, 1974, 1982, and 1991, by every measurement, this is going to be a deeper and bigger recession in residential housing. It's a significant event.

WHAT recession in 1968? There was none! How stupid does this guy think we are? Even for those of us who are over 50, we never knew anything about what a true recession was until after the Arab Oil Embargo in 1973.

It is true that the major recession in housing has already arrived in many areas; however, not in the majority of places where housing never experienced hyper-inflation (like in the St. Louis area where I live). Detroit is one of the few exceptions to that that I know of.

The issue is how long can the inflationary 'boost' can ride the train until it disintegrates into stagflation. I don't believe it will be nearly as long as in 1976-1979; that was a four year inflationary stimulus before the consequences reared their ugly head. But this time it will be much shorter.

[Brandan Kraft]

The issue is how long can the inflationary 'boost' can ride the train until it disintegrates into stagflation. I don't believe it will be nearly as long as in 1976-1979; that was a four year inflationary stimulus before the consequences reared their ugly head. But this time it will be much shorter.

Exactly - expect the brakes to start being applied this year. Probably late summer or early fall. When that happens, oil speculation will cease and we'll see cheaper prices at the pump. I hope to get back into stocks later this year - until then I'm holding tight.

The speculation on the East and West coasts were absolutely insane! Anyone could see that there was a bubble that was gonna pop....

[Brandan Kraft]

The more I think of the actions of the congress, feds in the 90s and naughties, it makes me really mad. Think about it for a minute...

Congress (and their wreckless spending) and the FED encouraged EXTREMELY easy credit to subprime people throughout the last decade. Bernanke KNOWS what he is doing (he is a brilliant economist and knows the end - inflation is MUCH better than deflation). He is printing money by the bucketloads and dumping them via helicopters. They are monetizing the debt and the people of this country that were wise and saved will see their life savings evaporate! Bernanke was forced by Greenspan to steal from the savers and give to the spenders in order to keep us out of a depression that would make us all pine for the 30s!

Bank on the dollar going down to .50 this summer!

The fed will not be able to monetize medicare and social security and congress will fail in their attempt to get away with it. There will be blood!

[Brandan Kraft]

The Buck Stops Here, with You and Me

Lawrence Kudlow came out recently with a Chicken Little article (“A Job for McCain” --- http://www.nysun.com/article/72358) about the weakness of the U.S. dollar, assigning a Land-of-Oz president McCain the task of restoring its power. The dollar is falling, America is irrecoverably in decline, and our “prestige” is on the floor, Kudlow says.

Let’s see whether all this can be sorted out with some Economics 101 basics . . . and, hopefully, without making a complete Rube Goldberg contraption of it.

If the dollar falls further down, American products (goods and services) become cheaper to foreign buyers, who then would buy American in higher volumes. Then, American enterprises will accrete more profits, part of which will be invested (I talk about taxes a few paragraphs down) in producing more, better and cheaper goods and services going to foreign markets, and the cycle will keep repeating, on and on: good for our balance of payments . . . and for our “prestige”.

Setting temporarily aside the issues of taxes and cost of energy, since the dollar would be further down, in many instances it would be more expensive for American enterprises to operate abroad than operating here, thus they would bring back to America part of their overseas business operations.

At the same time, imported products would become more expensive to Americans, who would prefer to buy domestic, thus helping to sustain those jobs brought back home. Purchases of foreign consumer products that are not a need, but mostly a want, will go down. Good for our balance of payments and, given the abundant supply of domestic products, inflation would tend to go down . . . and our...

[Robert R. Higby]

The fed will not be able to monetize medicare and social security and congress will fail in their attempt to get away with it. There will be blood!

Right! I certainly hope that one of the consequences of default will be ending the institution of the Federal Reserve and putting the government back in charge of the money supply. In addition, the government needs to own very significant reserves of oil and gold. In fact, they need to be in the oil drilling and gold mining business to have the leverage to keep the currency stable.

[Brandan Kraft]

Consumer Price Index virtually unchanged

WASHINGTON, March 14 (UPI) -- The seasonally adjusted Consumer Price Index was virtually unchanged in February, the U.S. Department of Labor reported Friday.

Following a 0.4 percent rise in January, analysts had expected a 0.3 percent rise in February but that did not occur.

The index for energy declined in February with a 1.7 percent increase in energy services offset by a 1.9 percent decline in energy commodities, the report said.

Downturns were noted in apparel and new and used cars. Healthcare costs rose modestly at 0.1 percent and food prices rose 0.4 percent.

The index for housing increased 0.2 percent, but shelter, including rent, whjch rose, and lodging, which declined, was unchanged.

The indexes for fuel oil dropped 1.5 percent, and the index for electricity dropped 0.3 percent, the report said.

The core rate also held with no change on the month.