| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

Home 
 
 News
 Irish
 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 International
 Property
 Innovation
 
 Analysis/Comment
 
 Asia Economy

RSS FEED


How to use our RSS feed

Follow Finfacts on Twitter

 
Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.

Welcome

Finfacts is Ireland's leading business information site and you are in its business news section.

Links

Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax - Income/Corporate

Global News

Bloomberg News

CNN Money

Cnet Tech News

Newspapers

Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News

 

Feedback

 

Content Management by interactivetools.com.

Analysis/Comment Last Updated: Oct 24, 2011 - 7:04 AM


Dr. Peter Morici: The Fed is out of tricks to jump start US housing and economy
By Professor Peter Morici
Oct 24, 2011 - 1:42 AM

Email this article
 Printer friendly page

Dr. Peter Morici:Federal Reserve officials are flailing about for new tools - - for example, more quantitative easing or a better communications strategy—to jump start the US economy. Sadly, the Fed has few arrows left in its quill, most are crooked, and Mr. Bernanke appears to not know where the target is.

The legend on Wall Street is the economy remains dormant because depressed housing values prevent homeowners from refinancing their mortgages to free up disposable income and boost consumer spending.

From November 2008 to this past June, the Fed suppressed mortgage rates and helped put a floor under housing prices by purchasing mortgage backed securities and long-term Treasuries. More recently, under Operation Twist, it has sold short-term Treasuries to purchase long-term Treasuries - - a maneuver aimed at accomplishing similarly low mortgage rates.

Still, sales of existing and new homes sales remain depressed, and most of the modest increase in residential construction is in multiunit housing. Young Americans are more frequently renting rather than taking the plunge into home ownership, and many older Americans can’t sell their homes for what they paid.

During the boom years, thanks to “creative mortgages” that encouraged individuals to speculate in real estate, more homes were built than were needed, and the resulting oversupply will take years to work off.  

The pace of foreclosures and number of homes banks place on the market will pick up through 2012, because banks are working through the legal morass created by robo foreclosures. Though banks face civil penalties or an expensive settlement with the States’ Attorneys General, most homeowners not able to make payments will have to move out and their homes will hit the market. This extra supply, realtors’ hype notwithstanding, will keep housing values depressed for at least the next two years. 

A second recession could drive down values, already off about 31% since their July 2006 peak, another 10 to 20%.

Considering the risks, renting and postponing homeownership makes sense for young people not blessed with Wall Street or high tech jobs, and not working in cities like New York and Washington where the housing recession has passed in upscale neighborhoods.
 
For most young people, it would only be rational to invest in a home if they could obtain a mortgage at zero or negative interest rates.

Currently, the rate on five-year adjustable rate mortgages is about 3.2%.  If the Fed could get the investors who buy Fannie and Freddie bonds to accept interest rates of minus 3%, then young folks could be offered mortgages with appropriately negative interest rates. To accomplish that feat, the Fed would have to buy all those bonds itself -- that’s right the Fed would finance all federally guaranteed mortgages and write off  3% a year. I can just hear Ron Paul now.

For these reasons, with or without cheerleading from the Fed, a housing recovery is not going to lead economy out of its current funk.

The US economy does suffer from too little demand, and another popular myth is that this is also caused by households saving too much. Although the personal savings rate did jump from 2.4% in 2007 to 6.2%, just before the recovery began in mid 2009, it is now down to 4.5%. 

The net impact on aggregate demand of the 2.1 percentage point increase in the savings rate is about $275bn - - this pales by comparison to the $550bn drain on demand imposed by the trade deficit.

Moreover, Americans can only get along without saving a reasonable amount if they expect their government to borrow, forever, large amounts from foreign sources to finance their retirements. Greece has demonstrated how well that model works.

Nope. To jump start the economy, the trade deficit - - which is almost entirely the deficits with China and on oil - - must be addressed. That requires confronting China’s undervalued currency and mercantilism, and finally developing America’s abundant oil and gas resources. 

Mr. Bernanke is not permitted to communicate those facts, because those issues are the purview of the Treasury and Energy Secretaries. But don’t look for help from those gentlemen, because their boss “knows” taxing millionaires is the answer.

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm

Related Articles
Related Articles


© Copyright 2011 by Finfacts.com

Top of Page

Analysis/Comment
Latest Headlines
Disastrous 44-year War on Drugs and ignoring the evidence
HSBC & Tax Evasion: France/ Belgium issued criminal charges; UK/ Ireland nothing
Analysis: Germany world's top surplus economy; UK tops deficit ranks
Facts do not always change minds - can even entrench misinformed
Finfacts changes from 2015
Facts of 2014: Guinness not Irish; 110 people own 35% of Russia's wealth
In defence of dissent and Ireland's nattering nabobs of negativism
Dreams of European Growth: France and Italy facing pre-euro economic problems
Globalization's new normal needs permanent underclass - Part 1
MH17 and Gaza: who is responsible?
Israel vs Palestine: Colonization set for major expansion
Aviva Ireland's 'fund' runs dry and life cover to die for
We wish Martin Shanahan - new IDA Ireland chief - well but...
Ireland as an Organised Hypocrisy is in lots of company
Dr Peter Morici: Friday’s US jobs report won’t alter Fed plans to raise interest rates
Own Goal: Could FIFA have picked worse World Cup hosts?
Ireland: Spin and spending will not save bewildered Coalition
Irish Government parties set for 2-year vote buying spending spree
European Parliament: Vote No. 1 for Diarmuid O'Flynn in Ireland South
Dr Peter Morici: US April jobs report may show 215,000 added in April
Dr Peter Morici: Hardly time to call Obamacare a success
Celtic Tiger RIP: Change in conservative Ireland six years after crash
Dr Peter Morici: Five things to know about the Fed’s obsession with inflation
In age of acronym/ Google, Trinity to rebrand as 'Trinity College, the University of Dublin’
Hoeness case part of ‘painful’ change for Swiss bankers
Dr Peter Morici: The Cold War was only on vacation
Dr Peter Morici: US economy drags on Obama's approval ratings; Don’t look for changes in Washington
Dr Peter Morici: Bitcoin debacle shatters the myth of virtual money
Dr Peter Morici: US Tax Reform: Eliminate the income tax and IRS altogether
Wealth threatens the simple life in Gstaad, Switzerland
Irish journalists get cash payouts over 'homophobic' defamation claim
Irish academics get lavish pension top-ups as private pensions struggle
Dr Peter Morici: Inequality is President Obama’s highest priority, but solutions are naive
The Finfacts Troika: Better times ahead and a hangover to forget?
Dr Peter Morici: Volcker Rule arrives with the hidden jewel in Dodd-Frank financial reforms
Ireland's toothless fiscal watchdog threatens to bark
Analysis: Germany's current account surplus - - Part 2
The end of western affluence?
Bono's hypocrisy on Africa, corporate tax avoidance in Ireland
France like Ireland is run for the benefit of the old