Bernanke Backs Quick Fiscal Stimulus

MoneyNews
Friday, Jan. 18, 2008 WASHINGTON -- The chairman of the Federal Reserve on Thursday threw his weight behind proposals for near-term actions to stimulate economic growth to ward off an election-year recession, but warned such a plan could do more harm than good unless put together quickly.

Fed chief Ben Bernanke told the House Budget Committee that the U.S. central bank was not forecasting recession, but he repeated it was ready to act aggressively to prop up growth. He said a fiscal package could be effective if used in concert with interest-rate cuts.

Bernanke's comments, which lent impetus to efforts on Capitol Hill to assemble a package of stimulus steps, also reinforced a view in financial markets that a half-percentage point rate reduction will come at the end of the month.

"Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary actions alone," Bernanke said.

Other Fed officials, speaking at other locations, said they were worried enough about the economy to back further cuts in interest rates. The central bank has already lowered benchmark rates by 1 percentage point to 4.25 percent since mid-September.

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Roach: ‘U.S. Homes Should Fall 30 Percent’

Friday, Jan. 11, 2008 11:19 a.m. EST Voracious, spendthrift consumers in the United States have driven the global economy out of balance, and only a massive repricing of U.S assets – including up to a 30 percent decline in home values – can fix it.

That’s the view of Stephen Roach, chairman of Morgan Stanley Asia, writing in the Financial Times this week.

"America’s current account deficit is due more to bubbles in asset prices than to a misaligned dollar,” Roach wrote in an editorial. "A resolution will require more of a correction in asset prices than a further depreciation of the dollar.”

A weakening U.S. dollar might help, but it won’t solve the real problem – a huge trade imbalance financed by a huge spending binge by American consumers.

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Gross: $250 Billion in Credit Losses Will Slam Economy

Wednesday, Jan. 9, 2008 8:51 a.m. EST Bond guru Bill Gross says credit-default swaps, a derivative used to insure against the risk companies won't pay debts, could cause losses of $250 billion this year, helping send the U.S. economy into a recession.

The Pimco chairman also sees economic growth as low as 0.75% for 2008 and a housing price slide of up to another 10%.

Assuming default rates on corporate bonds reach historical averages of about 1.25 percent, $500 billion of credit-default swap contracts will be triggered, causing losses of $250 billion to sellers of the derivatives after accounting for the recovery value of the securities, Gross told investors in his monthly note. Goldman Sachs estimates that mortgage related losses of $200-$400 billion alone might lead to a pullback of $2 trillion of aggregate lending, Gross wrote.

"Add to that my $250 billion loss estimate from CDS, as well as prospective losses in commercial real estate and credit cards in 2008 and you have a recipe for a contraction in credit leading to a recession,” he wrote.

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A Glimmer of Light for Subprime Loans

John Browne
Wednesday, Jan. 9, 2008 To most institutions and individuals, the outlook for subprime mortgages could not look more bleak.

Indeed, with today's news of record default rates, many observers see subprime as an all consuming black hole!

And yet, some people are said to be buying collateralized debt obligations (CDOs) containing subprime mortgages, at very deep discounts, usually undisclosed.

So what glimmer of future profit do they see? Let me offer some thoughts.

I see three dim rays of light that could one day allow some profit to be squeezed from CDOs.

They are: CDO re-packaging, substantially lower interest rates, and government aid. Let's examine each in turn. more....

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Bernanke's Bluntness Assures a Big Cut

Thursday, Jan. 10, 2008 3:50 p.m. EST CHICAGO -- Weeks ahead of a key policy-setting meeting, Federal Reserve Chairman Ben Bernanke Thursday left little doubt the central bank will slash interest rates to bolster the sagging economy.

Speaking in Washington, Bernanke was unexpectedly blunt about the U.S. economy's worsening outlook, while adding that the Fed is "not currently" forecasting a recession.

He assured markets that the Fed stands ready to take "substantive additional action as needed" to support growth and would "act in a decisive and timely manner."

"Bernanke's comments will be regarded as unequivocally dovish," said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.

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Shiller Sends Shivers into Real Estate

John Browne
Thursday, Jan. 3, 2008 Last week I was interviewed, together with the housing expert Robert Shiller, a Yale professor, on CNBC's Larry Kudlow show.

Shiller showed how home prices in 10 major metropolitan areas were down by 6.7 percent, year-on-year, in October (more than experts' estimates and down by 1.4 percent compared to September).

The shrill cries of Wall Street "cheerleaders" floundered to a whimper as they tried vainly to degrade Shiller's findings and show evidence against a real estate collapse that is becoming increasingly obvious.

Contrary to the claims of the "cheerleaders," the broader index of 20 metropolitan areas was just as bad, with a fall of 6.1 percent.

Professor Shiller also commented ominously that, "to see as bad a fall as this, you would have to go back to 1940!" more...

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Delinquencies on Consumer Loans at 7-Yr. High

MoneyNews
Thursday, Jan. 3, 2008 WASHINGTON -- Late payments on a cluster of consumer loans, including those for autos, home improvement and certain home equity loans, climbed in the summer to their highest point since the country's last recession in 2001.

The American Bankers Association reported Thursday that the delinquency rate on a composite of consumer loans increased to 2.44 percent in the July-to-September quarter. That was up sharply from 2.27 percent in the previous quarter and was the highest late-payment rate since the second quarter of 2001, when the economy was suffering through a recession.

Payments are considered delinquent if they are 30 or more days past due. The survey is based on information supplied by more than 300 banks nationwide.

Late payments on credit cards, meanwhile, dipped during summer.

The delinquency rate on credit cards dropped to 4.18 percent in the third quarter, down from 4.39 percent in the second quarter. more...

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