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Are the Fed's Moves Working?
Tweet Share on Facebook March 17, 2008 CommentMichael Darda of MKM Partners sees some reasons for optimism (boldface mine):
After a set of extraordinary actions this weekend, several measures of credit risk have improved. The 10-year swap spread, which has been on the leading edge of this crisis, collapsed to 64.75 bps this morning from more than 90 bps on March 6; mortgage spreads also have decreased to 189 bps today from 237 bps on March 6. The TED spread remains wide at 164 bps, but this owes entirely to the collapse in the three-month Treasury bill rate to 65 bps this morning (now 91 bps), the lowest since 1958. Stock prices have been all over the roadmap during today's session, not surprising given the still high level of uncertainty among financial market participants. In any event, the incipient improvement in leading credit market indicators suggests that the Fed's extraordinary measures over the last few weeks are beginning to have an impact.
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Bush's Optimism Irks Wall Street
Tweet Share on Facebook March 17, 2008 Comment"There will be ups and downs" may go down with "Brownie, you're doing a heck of a job" as turns of phrase that President Bush regrets having made. The former, part of a speech the president gave at the Economic Club of New York last Friday, might seem to many to somewhat understate the problems that the American economy currently faces—problems severe enough to force dramatic action by the Federal Reserve.
I can tell you that the investment pros I've chatted with thought the speech was a disaster—way too glib. In particular, the president seems to be placing far too much hope in the fiscal stimulus package to boost the economy. What do the money guys want? An intervention in support of the dollar would be nice, as would a homeowner bailout—I mean, "rescue."
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Uncle Sam Nears a Massive Banking, Housing Bailout
Tweet Share on Facebook March 14, 2008 Comment (33)Of course, the irony of today's Federal Reserve bailout of investment bank Bear Stearns is that the firm has a reputation as being among the most free-market loving on Wall Street—and that's saying something about a company located smack in the middle in America's financial capital. But just as there are no atheists in foxholes, there are no libertarians during financial crises, at least not if it's their dough at stake. And while there are plenty of economists out there who are advocating a hands-off approach to the credit crisis and housing implosion—echoing Andrew Mellon's infamous advocacy of "liquidate...liquidate...liquidate"—they will be disappointed. Uncle Sam will probably continue to intervene during this financial turmoil.
And not just the Fed. More and more, it looks as though Congress, followed by a reluctant White House, will move ever more boldly to stop the hemorrhaging in housing and unfreeze the credit markets. Richard Bove, banking analyst at Punk Ziegel, says in a note this morning that it's "more certain than ever" that there will be a housing bailout to stop the increasing rate of foreclosures and the continuing drop in home prices. And political analyst Alec Phillips of Goldman Sachs says that he sees "a high likelihood that some type of housing measure is enacted this year." Most of the legislative energy seems to be swirling around a plan put forward by Democratic Rep. Barney Frank. The plan, as outlined by Bove:
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Obama vs. McCain on Taxes
Tweet Share on Facebook March 14, 2008 Comment (2)Barack Obama slammed John McCain yesterday on his support of the 2001 and 2003 Bush tax cuts, measures he originally voted against: "He made a decision to reverse himself on that.... That was how, I guess, you got your ticket punched to be the Republican nominee. But he was right then, and he's wrong now."
On the same day Obama made that criticism, Senate Democrats in Congress voted to let half the Bush tax cuts expire in 2010 while House Democrats voted to let them all disappear.
My take: Isn't Obama basically guilty of somewhat the same thing he's charging McCain with? Obama has been against the 2001 and 2003 tax cuts, yet now he says he would keep roughly half of them. Obama is also apparently saying that it would have been better had middle- and lower-income Americans received no tax relief from the 2001 and 2003 cuts, since it also meant tax relief for upper-income folks. Can't McCain say, "If Barack Obama'sview had won out, the average American—not the rich, mind you—would have paid a trillion dollars in higher taxes since 2001, and now his Democratic friends in the House want to get rid of the tax cuts and credits you have enjoyed since then." The tax issue will be a biggie in the fall.
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4 Signs We Are Not in a Recession
Tweet Share on Facebook March 13, 2008 Comment (9)I know we are supposed to be in a recession since Warren Buffett said so, but the data refuse to fully cooperate:
1) Jobless claims remain stubbornly low. Initial claims in the week ending March 8 were unchanged at 353,000, while the four-week average edged down to 358,500 from 359,750.
2) Consumers keep spending. Yes, core retail sales slipped 0.2 percent in February, but the gain in January was nudged up to 0.6 percent from 0.4 percent. The econ team at Global Insight thus concludes that "real consumption spending, therefore, is still expected to eke out a slight gain in the first quarter of 2008."
3) The economy keeps growing. The computer model at Macroeconomic Advisers, a well-respected outfit, is forecasting first-quarter growth of 1 percent. That's not great, but it's not a recession.
4) Another model, created by Tim Kane, chief labor economist for the Republicans on the Joint Economic Committee, has found that the unemployment rate is about the best economic forecasting variable out there. And based on that, Kane's model says there is roughly a 15 percent chance of a recession.
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Paulson to Wall Street: More Regulation on the Way
Tweet Share on Facebook March 13, 2008 CommentTreasury Secretary Hank Paulson, a member of the President's Working Group on Financial Markets, came out today with the panel's recommendations on how to avoid another mortgage meltdown/credit crunch. I'm not sure that when you are in the middle of a battle, it is time to deliver the after-action report. Investors might want to pay more attention to the interview President Bush gave Nightly Business Report's Susie Gharib, where he had a chance to rule out a big housing bailout but did not (boldface mine):
GHARIB: But even in addition to all of that, there's still—Americans have a lot of anxiety about the health of the economy. They see that businesses aren't hiring; consumer confidence is way down. Is your administration looking to do more on the economy? Are you working on contingency plans?
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Bailout Watch: Will Uncle Sam Pay You to Buy a House?
Tweet Share on Facebook March 13, 2008 Comment (2)So not only has Bush not ruled out a big homeowner bailout, but members of Congress are cooking up their own ideas, like giving a $15,000 tax rebate to anyone who buys a house. (Efharisto to Calculated Risk.)
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Will a Recession Sink Into Depression?
Tweet Share on Facebook March 11, 2008 CommentWhich letter of the alphabet best signifies the future direction of the economy: V (a sharp drop followed by an immediate and powerful upturn), U (a more gradual drop, followed by slow recovery, or W (a double-dip recession)? Listening to some economic bears out there, maybe L is the right letter—you know, the economy drops and stays down. Indeed, a few experts do think recession could potentially morph into depression because of the credit crunch. Standard & Poor's, in fact, just put out an economic report titled "No Depression" that counteracts some of that sort of hysteria. And the highly respected UCLA Anderson Forecast reaffirmed its prediction of no recession, much less depression. Make it sing, Reuters:
The U.S. economy will shrink in the second quarter, but avoid a recession this year as housing's drag will ease in the second half, helping normal growth return next year, according to a UCLA Anderson Forecast.... "The data don't yet add up to a recession and there is nothing here to challenge the basic story of sluggishness that we have had for two years," the forecasting unit's report said, adding: "Our no-recession forecast remains nervously intact."
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Ending Our Dollar Defeatism
Tweet Share on Facebook March 11, 2008 Comment (24)Economist David Malpass of Bear Stearns says in today's Wall Street Journal that President Bush needs to quickly declare an end to our weak-dollar policy:
Oil would cost less if the dollar were stronger, slowing the transfers to our antagonists in Venezuela, Iran and Russia.... Though many economists still support the theory of unlimited free-floating exchange rates, no weak-currency country has had a healthy economy.... Markets have labeled the U.S. a weak-currency country. That's an albatross that the president should dump. An administration decision to support a stronger dollar would be dramatic, and probably so unexpected that it would break the dollar's downward momentum, and with it the defeatism now dragging us down. If the dollar started up, the vicious cycle—dollar weakness causing economic weakness and more dollar weakness—could be reversed.... The many speculators now short-selling the dollar, or betting against the U.S. in favor of commodities and other currencies, would have to reduce their positions.... Treasury would begin working to achieve a stronger dollar, opening the possibility, anathema to dollar shorts, of a G-7 preference for a stronger dollar or even coordinated currency intervention.... In the economic confusion created by the weak-dollar policy, presidential campaigners are blaming NAFTA and free trade, not the weak-and-weaker dollar, for hard times. The president should state a preference for a stronger and stable dollar. It has a good chance of stopping the credit crunch. It's free and easy. And let's face it: Other measures aren't working.
My take: The "adverse feedback loops" created by the plunging dollar, surging price of oil, housing downturn, and credit crunch seemed to have intertwined into an economic Gordian knot, not to mention having produced an air of palpable financial panic like I have not seen in my adult life. It might just be time for Bush to play Alexander and slash the knot with a revitalized strong-dollar policy.
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NAFTA Bashing Is More Than Mere Rhetoric
Tweet Share on Facebook March 11, 2008 Comment (2)Rod Hunter, an analyst at the Hudson Institute, looks at the implications and reality of anti-NAFTA rhetoric on the campaign trail (all boldface mine):
If one of the Democrats wins the White House, he or she may find that the antitrade tirades delivered carelessly this year will, by next, have unleashed protectionist forces not easily controlled. ... Back in 2004, Ben Bernanke, then a Federal Reserve governor, looked at Bureau of Labor Statistics data stretching back a decade and pointed out that about 15 million jobs were lost and 17 million created each year—an annual net creation of nearly two million jobs. What's more, only about 2.5% of the jobs lost were a result of import competition. The vast majority of jobs lost were caused by changes in consumer tastes, domestic competition, and technology.... Rather than trying to shut the world out, however, the next administration needs to pursue the domestic reforms necessary to ensure that American workers can thrive in the knowledge economy. These include shoring up our education system, clearing obstacles to worker mobility by making health care and pensions portable, and replacing the hodgepodge of displaced-worker assistance programs with a single support, training and relocation system. The American worker, not the job, is the national asset.
