Fed's license to print money
Posted
Nov 26 2008, 05:48 AM
by
Bernhard Warner and Matthew Yeomans
Rating:
Will the latest round of bailout bucks—$800 billion promised Tuesday by the Treasury and the Federal Reserve—finally do the trick to resuscitate credit markets and slow the shrinking of the economy? Or, is Washington, D.C., just needlessly throwing money at a problem too big to fix with taxpayer's cash? On the pages of the New York Times, Washington Post, and Wall Street Journal this morning, economists and market pundits of all stripes are debating the latest stimulus plans designed to finance consumer loans and push down mortgage rates.
According to the NYT's calculation, the latest bailout brings the federal government's tab this year alone to a staggering level. The feds are now on the hook for "$7.8 trillion in direct and indirect financial obligations"—that's equal to "about half the size of the nation’s entire economy and far eclipses the $700 billion that Congress authorized for the Treasury’s financial rescue plan," the newspaper writes.
This latest measure is really dividing economists. "We are sort of spitting in the wind," a chief economist at MKM Partners LP in Greenwich, Conn., told Bloomberg. "Banks won’t be throwing a lot of loans out there when they fear—rationally—those loans may not be paid back."
The WSJ sees it differently. The Fed's moves set off a chain reaction in the lending markets on Tuesday with "rates on 30-year fixed-rate mortgages dropp[ing] by roughly half a percentage point to about 5.5% for borrowers with good credit scores and substantial equity in their homes," the newspaper reports. The flip side: no stimulus plan, no matter how big, is likely to help those with bad credit get refinancing. Still, mortgage rates are expected to finally drop and stay down with the latest move, accomplishing something the Fed has been unable to influence through interest rate cuts, the Washington Post writes. It's no secret why: "The Fed is effectively printing money and funneling it to home buyers," the newspaper explains.
The timing of the latest stimulus package is no coincidence. Home prices fell again in the third quarter, according to CNNMoney, citing the closely watched S&P Case-Shiller Home Price national index. House prices recorded a 16.6 percent decline in the latest quarter, a record plunge.
It's not surprising that the worse things get in the U.S., the more pain is felt overseas. As demand from abroad slows, Chinese factories are shutting down, putting the brakes on growth. "Economists are forecasting that after growing nearly 12 percent last year, China’s economy could slow to 5.5 percent in the fourth quarter of this year—a stunning retreat for a country accustomed to boom times," the NYT writes. The World Bank says China's economy will grow this year by 9.4 percent, revised downward from a previous 9.8 percent growth estimate, according to the WSJ.
The European outlook is looking increasingly grim as well. On Wednesday, the European Central Bank was admitting what many private economists have been saying all along: It appears that the Euro Zone economy will contract further in 2009, Reuters reports. To pull the region out of its funk, the continent's biggest economies today are being urged to consider an emergency $170 billion stimulus plan that includes tax cuts and targeted investment, the BBC writes. There's just one hitch: in order for it to work effectively every country in the EU zone (or at least all the significant economies) have to sign up for the plan—no small feat in the always-squabbling trading bloc. Markets across Europe were down in early trading.
You know retail spending is depressed when customers won't shop online. Business Week reports on "what's shaping up to be the first Scrooge-like Christmas for online retailing since the category first took off a decade ago." E-commerce sales, excluding travel, fell 4 percent from Nov. 1 to Nov. 23, to $8.2 billion, online-measurement firm ComScore reports. There is one silver lining online. Atlantic Records "has reached a milestone that no other major record label has hit: more than half of its music sales in the United States are now from digital products, like downloads on iTunes and ring tones for cellphones," the NYT reports.
And note those online travel figures—it turns out travel companies are slashing prices to get Americans moving over the holiday period. One telling reason? "For the first time in six years, Thanksgiving travel is expected to decline," says the NYT citing AAA figures. Even a Thanksgiving Day parade can't brighten Macy's disposition. The retail giant, which made a big consolidation bet by buying May Co. for $11.5 billion in 2005, has "lost $30 million in the first nine month this year on a 4.3% decline in sales," the WSJ reports.
Over to the doldrums of commercial real estate now and news that a $1.5 billion fund whose key investor was Texas billionaire H. Ross Perot has been forced to liquidate. Perot's woes point to larger problems for property investors. "Other hedge funds and money-management firms that invested in real-estate debt face the potential for more margin calls," writes the WSJ.
If yet another tale of real estate fallout is not exactly surprising, how about the case of the bankers who turned down $27 million in pay? The NYT reports on three very contrite UBS execs, including Marcel Ospel, the former chairman of the board at the Swiss bank, who have decided to forgo compensation after the bank reported nearly $50 billion in losses. "They’ve clearly been shamed into doing that," one financial industry observer tells the NYT.
And finally, yes, the global financial downturn is pretty depressing, but not as worrying as the troubles we face over climate change. That's the finding from a new 12-country survey that includes the United States, France, Germany, the U.K., and developing nations such as China, Brazil, and India. The study was carried out by the HSBC Climate Partnership. The Guardian reports: "despite the looming prospect of a deep global recession, 43% of the 12,000 respondents of the survey chose climate change ahead of the global economy when asked about their current concerns. Worldwide, 77% of respondents wanted to see their governments cutting carbon by their fair share or more, in order to allow developing countries to grow their economies."
This post was written by Bernhard Warner and Matthew Yeomans of The Big Money.
