One Half Of One Percent

THE BE YOUR OWN ECONOMIST ® BLOG Today the Fed announced (http://www.federalreserve.gov/newsevents/press/monetary/20080130a.htm)a one half of one percent reduction in the federal funds rate. The text of the Fed’s press release follows: “The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent. “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets. “The Committee expects inflation to moderate in coming quarters, but it will be Continue reading

Keep Hope Alive

THE BE YOUR OWN ECONOMIST ® BLOG The residential-real-estate industry has placed a lot of hope in the president’s proposal to reduce mortgage interest rates on jumbo loans by raising the dollar limits on the mortgages that Fannie Mae and Freddie Mac may acquire. In its January 24 press release (http://www.realtor.org/press_room/news_releases/2008/ehs_jan08_existing_home_sales_down.html) the National Association of Realtors (NAR) said: “NAR projects the higher loan limit would increase annual home sales by nearly 350,000, reduce foreclosures by 140,000 to 210,000, and increase economic activity by $44 billion.” NAR issued that press release to announce: “Existing-home sales – including single-family, townhomes, condominiums and Continue reading

We’ll See – Part Two

THE BE YOUR OWN ECONOMIST ® BLOG Yesterday’s blog discussed the tax-rebate portion of the economic stimulus package. But there’s another part to the package – designed to boost the sinking residential-real-estate market. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) make markets in mortgages. Once upon a time, banks made mortgage loans and held those mortgages in their portfolios. The federal government created Fannie and Freddie to allow mortgage originators to sell their mortgages and collect a fee for their services, thereby replenishing the originators capital and allowing the originator to Continue reading

Bear Trap?

THE BE YOUR OWN ECONOMIST ® BLOG Wall Street bounced back today. The S&P 500 rose almost 30 points and the Dow climbed by nearly 300. A good day, indeed, especially after so much doom and gloom. Does this mean the worst is behind us? Probably not. Market volatility has been high over the past year, and sharp down days will follow today’s upside. If we are in a bear market, investors should avoid being trapped by temporary saw-tooth patterns that provide temporary respites. It’s the trend that counts. An article in today’s Wall Street Journal (http://online.wsj.com/article/SB120104941530008299.html?mod=todays_us_page_one), ominously titled, “Stocks Continue reading

Panic City

THE BE YOUR OWN ECONOMIST ® BLOG Today the Fed reduced the federal funds rate by 3/4% (http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm) and justified its actions with the following statement: “The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent. “The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a Continue reading

Who’s To Blame?

THE BE YOUR OWN ECONOMIST ® BLOG The Federal Reserve and the Bush administration are clear: They fear recession and have recommended the monetary (lower interest rate) and fiscal (tax rebate) policies designed to deal with that fear. But, no matter how swiftly they act, it’s doubtful that they can forestall recession. That cake is baked. Why? Because the magnitude of the problem is far greater than the scope of the proposed remedies. In addition, acknowledging the extent of the problem exposes the Federal Reserve’s role in generating that problem. To understand, recall the dot.com boom of the late 1990s. Continue reading

Fed Throws In The Towel

THE BE YOUR OWN ECONOMIST ® BLOG Today’s lead New York Times article (http://www.nytimes.com/2008/01/17/business/17cnd-fed.html?_r=1&hp&oref=slogin) carried the headline “Fed Chief Backs Quick Action to Aid Economy,” and the first sentence said , “Ben S. Bernanke, the Federal Reserve chairman, told Congress on Thursday that he favored quick passage of an economic stimulus package in combination with the Fed’s own measures to support economic growth.” That’s a clear sign of where the Fed thinks the economy is heading: South. Concerns regarding inflation, while they may be present, no longer drive policy. The Fed wants a full-court press to deal with the recession Continue reading

Another Nail

THE BE YOUR OWN ECONOMIST ® BLOG Eight times per year the Federal Reserve publishes an anecdotal summary of economic activity known as the Beige Book. Today’s report (http://www.federalreserve.gov/fomc/beigebook/2008/20080116/default.htm) began as follows: “Reports from the twelve Federal Reserve Districts suggest that economic activity increased modestly during the survey period of mid-November through December, but at a slower pace compared with the previous survey period. …. “Most reports on retail activity indicated subdued holiday spending and further weakness in auto sales. However, most reports on tourism spending were positive. Residential real estate conditions continued to be quite weak in all Districts. Continue reading

Another Nail In The Coffin

THE BE YOUR OWN ECONOMIST ® BLOG This morning’s Bureaus of the Census news releases on retail sales (http://www.census.gov/svsd/www/marts_current.html) made a bad situation look worse. Census reported that retail sales fell 0.4% in December. Many optimists had pointed to the consumer as the economy’s last show of strength. If consumption sinks, too, what’s left? © 2008 Michael B. Lehmann

This Time It IS Different

THE BE YOUR OWN ECONOMIST ® BLOG The last two business cycles (the dot.com bubble and now the real-estate bubble) generated observations that “This time it’s different.” That is, there would be no recession despite the heady boom. In the late 1990s the New Economy advocates suggested that growing productivity guaranteed blue skies forever, and more recently some analysts have expressed faith in a soft landing because of consumer expenditures’ strength. But the mood has turned gloomy very quickly. Yesterday’s New York Times (http://www.nytimes.com/2008/01/13/business/13econ.html?_r=1&scp=1&sq=no+quick+fix+to+downturn&oref=slogin) ran a front-page news analysis headlined “No Quick Fix To Downturn,” and today’s Times carried a Continue reading