Bailing out the engine of U.S. economic growth

Bloomberg reports that President George W. Bush will outline a number of recommendations and policy changes today aimed at helping subprime borrowers avoid foreclosure.

Bush will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates, according to an administration official, who spoke on condition of anonymity.

Tighter credit and higher borrowing costs threaten the housing market, which has been an engine of U.S. economic growth. Democrats in Congress and the party's presidential candidates have criticized Bush for not taking action to prevent the spread of foreclosures.

"The Federal Reserve's interest-rate reductions alone can't fix the problem,'' Peter Meister, an economist at BHF Bank AG in Frankfurt, said in a telephone interview. He called the Bush plan "positive'' both for "the people concerned and the economy as a whole.''

The change would affect borrowers who are at least 90 days behind in payments and let them stay in their homes, the administration official said. Bush, in a statement in the White House Rose Garden, also will back proposals to provide tax relief for homeowners who refinance.
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Among the plans Bush will announce is a joint initiative of the Treasury and Housing and Urban Development departments to identify people who are at risk of defaulting on their mortgages, the official said.

Bush wants the government to work with lenders, insurers and others to develop more favorable loan products for those borrowers, the administration official said.

See Bill Gross' recent commentary where the FHA proposal was floated a week or so ago and Paul Kasriel's critique of that proposal.

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Lots of saliva, no food yet

You get a different feel for the news while on the road - such is the case with all the Bernanke-talk of late. It seems that everyone is asking the same question - elected officials, USAToday, CNN, etc. - when is the Fed going to cut short-term interest rates?

After eighteen years with former Fed chief Alan Greenspan at the helm, it seems that lower rates are a near-Pavlovian response to market turmoil, as explained in this Wall Street Journal story($).

When Ben Bernanke was nominated to head the Federal Reserve in 2005, he promised to "maintain continuity with the policies and policy strategies established during the Greenspan years." But in handling his first financial crisis, Mr. Bernanke shows signs of a break with Alan Greenspan, the Fed's chairman from 1987 to 2006.

That shift is important in understanding why Mr. Bernanke hasn't cut the Fed's main interest rate yet, and it could alter investors' expectations of how the Bernanke Fed will function.
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Mr. Bernanke may yet have to cut rates. But the longer he waits, the more likely he can break investors of the assumption that market convulsions lead to interest-rate cuts. There is evidence he is succeeding. On Aug. 16, with stocks plunging and debt markets in disarray, money manager Bridgewater Associates wrote in its widely read daily commentary: "Credit in the economy is shutting down, and the Fed needs to ease now."

By this past Tuesday, with markets having settled down, the same firm wrote: "If we were in the Fed's shoes, we certainly wouldn't be in a hurry to 'save the system' until there was more evidence that the system needed saving."

Those participating in the accompanying poll seem to like what they see so far:


In the end, current perceptions may matter little - in due time, the housing market will likely force the new Fed chairman's hand.

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Either the "Bernanke Put" or this?

Unfortunately for Fed chairman Ben Bernanke, in a matter of weeks or months he may have little choice other than to follow the "Greenspan Put" with one of his own.

Thanks to reader Paul E. for sending this image. The source is unknown - if anyone deserves proper credit, I'd be happy to provide a link. If this is your handiwork Paul, then, well done.

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Boats backing up?

Enroute north yesterday near Roseburg, Oregeon, we went past one of the manufacturing facilities for Bayliner, a maker of recreational boats.

Having no idea whether or not this is normal (it certainly didn't look normal) this is being passed along in the event that anyone else might have some insight.

Out in front of the large buildings where standard Bayliners from 22 to 30 feet have been built since 1989 were dozens and dozens and dozens of what appeared to be shrink wrapped finished boats just sitting there, not looking like they were set to go anywhere any time soon.

According to the company's website, at this facility they do "complete construction, from starting molds to the finished product", employing a total of 320 workers.

Maybe this is normal, but it sure looked like the boats were backing up.

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Tracing out two figure eights

We are off on a trip that will trace out two oddly shaped figure eights across the continental United States over the next three weeks - hopefully gasoline prices will go no higher.

New material will appear here from time to time - how much and with what frequency is anybody's guess at this point.

The highlight of our trip will be a stop at the Federal Reserve's Economic Symposium at Jackson Hole, Wyoming where the nation's cental bankers meet once a year for a huge group therapy session.

Our invitation seems to be lost in the mail somehow...

Oh well, if they won't let us in we'll just go camping at Yellowstone.

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Might the economy benefit from a cold shower?

This story from The Economist asks the question that former Fed chairman Alan Greenspan probably never asked. Whether or not Ben Bernanke wonders about this from time to time is an intriguing thought.

Does America need a recession?
THE late Rudi Dornbusch, an economist at the Massachusetts Institute of Technology, once remarked: “None of the post-war expansions died of old age. They were all murdered by the Fed.” Every recession since 1945, with the exception of the one in 2001, was preceded by a sharp rise in inflation that forced the central bank to raise interest rates. But today's Federal Reserve is no serial killer. It seems keener on blood transfusions than on bloodletting.

When the Fed cut its discount rate on August 17th, it admitted for the first time that the credit crunch could hurt the economy. The markets are betting it will soon cut its main federal funds rate. Economists are arguing vigorously about how much damage falling house prices and the subprime mortgage crisis will do. But there is one question that is rarely asked: even if a downturn is in the offing, should the Fed try to prevent it?
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Many of America's current financial troubles can be blamed on the mildness of the 2001 recession after the dotcom bubble burst. After its longest unbroken expansion in history, GDP did not even fall for two consecutive quarters, the traditional definition of a recession. It is popularly argued that the tameness of the downturn was the benign result of the American economy's increased flexibility, better inventory control and the Fed's firmer grip on inflation. But the economy also received the biggest monetary and fiscal boost in its history.
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This does not mean that the Fed should follow the advice of Andrew Mellon, the treasury secretary, after the 1929 crash: “liquidate labour, liquidate stocks, liquidate the farmers, and liquidate real estate...It will purge the rottenness out of the system.” America's output fell by 30% as the Fed sat on its hands. As a scholar of the Great Depression, Ben Bernanke, the Fed's chairman, will not make that mistake. Central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether.

Of course, even if a recession were in America's long-term economic interest, it would be political suicide. A central banker who mentioned the idea might soon be out of a job. But that should not stop undiplomatic economists asking whether a recession once in a while might actually be a good thing.

It would take a super-human will for Ben Bernanke to not try to prevent a recession with an election bearing down on these United States. The interesting question will be how he responds to a weakening economy if inflation is still above the Fed's comfort zone.

Don't be surprised to hear renewed talk of re-jiggering the Consumer Price Index - some new calculations are said to knock a full point off of the headline number, something that may be quite helpful in the months ahead.

ooo

This week's cartoon:

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