You’ve probably heard by now that former Federal Reserve Chairman Alan Greenspan was “shocked” to discover that the financial markets, left to regulate themselves, don’t.
“I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders,” Greenspan told a Congressional committee, admitting that he was “distressed” to discover that his assumptions about the behavior of financial markets were “flawed” – although presumably not nearly as distressed as the folks who have watched their investment portfolios and retirement funds evaporate over the past two months.
The former Fed chairman, whose once sterling legacy has been looking more than a little tarnished of late, also insisted that no one could have foreseen what he termed a “once-in-a-century credit tsunami.” Actually, there were a number of economists who warned that a housing bubble was forming and questioned the exotic loans and related credit instruments that were contributing to it. But those warnings were largely ignored, hence the “surprise” when the financial disaster they predicted came to pass.
We Thought You Might Actually Lend this Money
This has been a big month for surprises – mostly unwelcome ones. Lawmakers, too, professed themselves to be stunned to learn that the banks receiving some of the $700 billion in federal bail-out funds they had approved, presumably to stimulate lending, aren’t using the money to increase their lending activity after all; they’re using it, instead, to shore up their balance sheets, to pay bonuses to executives and dividends to shareholders, and to acquire weaker financial institutions.
“I hate to say I told you so,” Washington Post columnist Steven Pearlstein noted recently, but he did, in fact, predict this result. “Sprinkling money around a highly fragmented banking system when markets are panicked and everyone was scrambling to reduce leverage was always akin to shoveling sand against the tined,” Pearlstein suggested.
Legislators who backed the Troubled Assets Relief Program (TARP) have made it clear that they aren’t happy with the way banks receiving assistance are interpreting the options available to them. Banks that are using the funds “for any purpose other than lending are [violating] the terms of the [statute],” Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, said last week.
The problem is that the legislation’s intent – to stimulate the flow of credit – is not stated specifically as a requirement for banks to ease up on the lending reins. Congressman Frank, among others, has asked Paulson to “make it absolutely clear” that legislators will insist on compliance with the intent as well as the terms of the bail-out bill. Frank plans to hold two hearings this month at which, he has said, he will seek assurances from institutions receiving TARP funding that they are using it “for lending and for no other purpose.” Good luck with that, especially since Treasury officials themselves have said they wouldn’t mind seeing banks use some of the emergency funding to purchase weaker institutions.
By the Numbers
Meanwhile, back at the statistics desk, our search for good economic news continues, without much success. A few of the recent numbers:
- Consumer confidence hit an all-time low in October, not just falling but plummeting to 38 from 61.4 in September.
- Consumer spending, which did not increase at all in August, fell by 0.3 percent in September – the largest decline in four years.
- Incomes increased by an anemic 0.2 percent in September while the personal savings rate increased to 1.3 percent. The savings trend is good news for those concerned about the nation’s perpetually low savings rate, but it bodes ill for a holiday shopping season that analysts are predicting will be notably lacking in cheer for retailers.
- Bankruptcy filings by consumers and businesses increased by 13 percent in October over the September total , topping the 100,000 mark for the first time since the Bankruptcy Reform legislation tightened filing rules three years ago.
While many economists may have shared Greenspan’s surprise at the implosion of the housing and financial markets, hardly anyone seems surprised to find that the economy has slipped into a recession. “There can’t be any doubt” about that at this point, according to former Fed Chairman Paul Volcker, who predicted that the downturn will be “rather long.”
Hoping to shorten the dip and ease its impact, the Fed recently cut interest rates by another half-a-point, reducing the Fed Funds rate to 1 percent – a five-year low. The announcement of the cut by the Federal Open Market Committee cited “the intensification of financial market turmoil” and the likelihood that business and consumer spending, already contracting sharply, will tighten even more.
Homes for Sale
In the housing market, prices nationwide fell again in August as they have every month since January of 2007, according to the Standard & Poor’s/Case-Schiller Home Price Index, which calculated a 16.6 percent year-over-year drop for the 20 metropolitan areas it tracks. This was the fifth consecutive month in which all the cities reported annual price declines, pushing the aggregate decline from the market peak in July 2006 to more than 20 percent.
The “best case” forecast currently is that prices will fall by another 5 percent; less optimistic analysts think the total peak-to-trough housing price decline will hit 30 percent before the market begins to rebound, and that assumes the economic decline is mild and short. At this point, nearly 20 percent of all homeowners with outstanding mortgages have loans that exceed the current value of their homes, according to FirstAmerican Core-Logic, which estimates that the 7.5 million properties with negative equity will be joined by another 2.1 million if prices decline by another 5 percent.
On a – relatively – positive note, existing home sales increased by 5.5 percent in September, reaching an annualized rate of 5.18 million – the highest level in a year and the first year-over-year increase in three years. Foreclosures accounted for between 35 percent and 40 percent of the activity, according to the National Association of Realtors (NAR), which is predicting, or hoping, that these statistics portend the beginning of a rebound.
“The first step is for buyers to return to the marketplace,” Lawrence Yun, the NAR’s chief economist said. A recovery in home prices will follow the return of buyer confidence, he explained.
In another potentially positive sign, the inventory of existing homes for sale fell to 9.9 months, down from 10.6 months in August and the lowest ratio since February, although still far above the 5 to 6 months viewed as a stable market.
New home sales also increased a bit (1.7 percent) in September, much to the surprise of industry analysts, who were expecting another decline. But that slight rebound came before Lehman Brothers collapsed and the credit markets froze, making it more difficult for buyers willing to enter the market to obtain financing.
New home inventories have also declined, falling to 10.4 months from 11.4 months, as builders aggressively slash prices to move unsold homes. Analysts view that as a good sign and an essential precursor to a market recovery. But they also warn that pending foreclosures and the re-planting of for sale signs by owners, who had withdrawn their homes from the market, will swell inventory levels anew over the next year or two, delaying any significant recovery.
New home starts hit an 18-year low in September and permits, an indicator of future activity, fell to a nearly 27-year low. Looking at these and other market indicators, David Seiders, the chief economist for the National Association of Home Builders, doesn’t see much cause for celebration. “Housing demand remains fundamentally weak,” he told reporters recently, “and the housing contraction continues to weigh heavily n the financial markets and the overall economy.” The bottom line, in his view: “The housing downswing is not even near the bottom at this point.”
