The Coming Recession

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Biggest threat to economy...

Subprime, debt still largest economic threat: poll
Mon Mar 3, `08 WASHINGTON - The combined punch of subprime mortgage defaults and heavy debt remains the biggest risk to the health of the U.S. economy, a panel of business economists said on Monday.

"NABE members are increasingly concerned over the short-term risks associated with subprime mortgages and other forms of indebtedness, while they continue to cast a wary eye on inflation," said Ellen Hughes-Cromwick, president of the National Association for Business Economists. The conclusion was based on a survey of 259 members conducted between February 1-15 and updates a poll conducted in August.

Of the members polled for the NABE semiannual Economic Policy Survey, 52 percent said the combined threat of subprime mortgage defaults and heavy debt was their No. 1 concern, up from 32 percent in August. Inflation was a distant third at 10 percent in March, up from 6 percent, the survey showed. Only 9 percent of the members polled said terrorism was now their top concern, compared with 20 percent in August.

"Fewer respondents support monetary and fiscal policies being implemented to address the credit situation, with more than one-third saying current monetary policy is too stimulative," said Hughes-Cromwick. Just 48 percent judged monetary policy to be "about right," a drop from 72 percent in August and 81 percent in March 2007. Two-thirds of those surveyed expect short-term interest rates to decline over the next six months, with about half of those respondents expecting a cut between 25 basis points and 50 basis points, NABE said.

The Federal Reserve has aggressively cut the benchmark federal funds interest rate, bringing it down to 3 percent from 5.25 percent in mid-September to bolster the economy against the housing downturn and credit squeeze. The most frequently cited concerns about lower interest rates are the threat of inflation and the sense that lower rates might "bail out investors who should have known better," NABE said.

Source

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New recession worry: Bank failures
March 3 2008: Construction loan problems threaten spike in smaller bank failures and add to worry over credit crunch.

As if the economy wasn't already fighting enough strong headwinds, the risk of capital shortfalls and outright failure of the nation's banks is rising. The Federal Deposit Insurance Corp., the federal agency that backs bank deposits, last week reported the biggest jump in "problem institutions" it has seen since the savings and loan crisis of the late 1980s. While the extent of the problem is still low by historic standards, it identified 76 banks as in trouble - a 52% increase from a year ago. FDIC Commissioner Sheila Bair among regulators set to testify Tuesday at a Senate Banking Committee hearing on the state of the banking industry.

Experts say the 76 banks now under scrutiny are likely only a small part of the problems now looming over the banking sector. Jaret Seiberg, the financial services analyst for policy research firm Stanford Group, said it appears that regulators are expecting about 200 bank failures in the coming year or two. If that occurs, it could rival the flood of bank failures seen during the S&L crisis. In 1989, the nation saw a post-Depression era record of 206 bank failures.

And Seiberg says even more than 200 troubled banks are likely to be purchased before they reach the point of failure. "Many of these banks are highly dependent on construction lending, and that's the area of lending that is likely to come under the most stress," he said. The FDIC stresses that not all those banks will fail. In fact in 2007 only three banks failed, even though 50 were on the watch list at the end of the previous year. So far this year, one bank - Douglass National Bank in Kansas City, Mo. - has failed.

Still, the head of the FDIC is looking to hire 25 staffers to deal with an anticipated increase in failures, a move that would increase its staff by 11%. Among those it hopes to hire are recent retirees who worked through the S&L crisis. The banks most at risk for failure are generally smaller ones, not the huge global banks hit by billions in writedowns from subprime mortgage problems. Smaller banks are big players in the business of construction loans made to homebuilders - loans that were backed by new homes now worth a fraction of the original estimated value.

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What's to debate??...

Fed officials debate recession risk
March 4 2008: Dallas Fed President Fisher argues inflation greatest threat to economy, while Fed Governor Mishkin says recession risks are greater than central bank's forecast.

Two members of the Federal Reserve's rate-setting body gave conflicting speeches Tuesday as to whether rising inflation or a recession is the greater risk for the economy. Inflation risk greater Dallas Federal Reserve President Richard Fisher said Tuesday he believes inflation is a greater threat, saying he would accept a slowdown of the U.S. economy in order to keep price pressures in check. The remarks suggest that Fisher, a so-called inflation hawk, will keep pushing his Fed colleagues to stop cutting rates.

But Frederic Mishkin, a Fed governor and a close ally of Fed Chairman Ben Bernanke, argued in a speech to the National Association for Business Economics that the risks are so great that the economy will not be able to meet even the Fed's modest forecast, which essentially calls for little or no growth in the first half of the year. He argued price pressures remain in check and that the threat from inflation should wane in upcoming years. The Fed made a 0.75 percentage point rate cut at an emergency meeting Jan. 21, and another half-point cut at the conclusion of the Jan. 29-30 meeting. Fisher, who joined the Federal Open Market Committee for the two-day meeting, was the sole vote against that cut.

The FOMC is next set to meet March 18, and investors are widely expecting another half-point cut at that meeting. In remarks prepared for a speech in London, Fisher said that he's upset by talk that recent Fed rate cuts represent an "easy money" policy by the U.S. central bank. "Talk of 'cheap money' makes my skin crawl," he said in his prepared remarks. "The words imply a debased currency and inflation and the harsh medicine that inevitably must be administered to purge it."

"So you should not be surprised that I consider the perception that the Fed is pursuing a cheap-money strategy, should it take root, to be a paramount risk to the long-term welfare of the U.S. economy," he added.

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Looks like everything hittin' us at once...

The Next Crisis: Credit Card Debt?
March 6, 2008 - It's Not Just Mortgages That Americans Are Struggling With These Days

The subprime mortgage mess may be grabbing the headlines, but the rapid growth of personal debt from mortgages, credit cards and other loans is part of a far larger problem facing millions of Americans. "There's been an explosion of credit card debt," Dean Starkman, a senior business reporter at the Columbia Journalism Review told ABC News. "In the late '60s it was $10 billion adjusted for inflation. Today, it's $900 billion."

"Something like a third of all households have credit card debt over $10,000." Exit polling during Tuesday's primaries revealed a stark fact. Almost eight out of 10 Democratic voters in Ohio said they are worried about their family's finances, and about four in 10 are "very" worried about them.

The American Bankruptcy Institute reports personal bankruptcy filings in February rose more than 15 percent compared with January. "What's amazing about the rise in bankruptcy filings are that they've gone up in the face of rules that make filing for bankruptcy almost impossible for many Americans," said personal financial consultant Gary Shatsky.

How did so many Americans get into trouble with debt even before the current economic slowdown? "Almost anybody can get a credit card, and it can be exchanged for almost anything," said psychology professor Stuart Vyse of Connecticut College, who has written the new book "Going Broke: Why Americans Can't Hold On To Their Money."

More ABC News: The Next Crisis: Credit Card Debt?

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Kinda hard to sweep it under the rug any longer...

JPMorgan says nation is in a recession
March 7, 2008: The investment bank's chief U.S. economist says the country is in a 'short' recession that started in January.

The U.S. economy is two months into a recession, according to a research note released Friday by JPMorgan Chase & Co. JPMorgan anticipates the current recession remaining short, unless there is an "abrupt change in corporate behavior."

In a short recession, the bottom occurs at about five months, Thomas Lee an analyst with JPMorgan wrote in a research note. Lee said during typical "short" recessions, equity markets gain about 12% in the year following the bottom. Lee said if the recession lasts more than 12 months, stocks are likely to have additional downside. Only eight of the 22 recessions since 1900 have lasted longer than a year, Lee added.

JPMorgan originally estimated the Standard & Poor's 500 index would rise to 1,590 during the year. It also did not predict a recession, instead saying the economy would face a period of "slow growth." With the revision in the economic outlook to a recession, JPMorgan now estimates the S&P 500 will bottom out in May before rising toward 1,450 by the end of the year. The S&P 500 fell 11 points to 1,293 in afternoon trading.

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Bush: 'Economy has slowed'
March 7, 2008: But the president says the long-term outlook is good due to the stimulus plan enacted by Congress.

President Bush said Friday that "it's clear our economy has slowed," hours after a government report showed a decline in payrolls for the second straight month. But he said the long-term outlook is good, with a stimulus package enacted last month by Congress providing support for the economy. "I know this is a difficult time for our economy," the president said. "But we recognized the problem early and we provided the economy with a booster shot."

Bush said the effects of the stimulus package are "just starting to kick in" and that the plan will "put money into the hands of American workers and businesses." Earlier in the day, Bush's chief economic adviser Edward Lazear said that the nation's economy could contract in the current quarter. But he added that, "we expect that the economy will get stronger, primarily in the third quarter." The statements come after the Labor Department said employers made their deepest cut in staffing in almost five years during February, highlighting concerns that a recession is imminent.

Senate Majority Leader Harry Reid, D-Nev., said in remarks made on the Senate floor that Americans are "burdened by an economy that is spiraling downward every day." Reid noted that Bush does not think the economy is headed for a recession, but argues that the facts prove otherwise. "This morning, all signs point in that direction," Reid said. "But regardless of what label we use, there is no doubt whatsoever that the American people are suffering."

Meanwhile, oil prices spiked to a record high above $106 a barrel Friday, raising concerns that higher gas prices will hurt consumers and increase inflation. On Wall Street, stocks fell to their lowest level in nearly 18 months as recession fears continued to spook investors.

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Economic Catch-22...

Economy's Enemy: Credit, or Oil?
Saturday, Mar. 08, 2008 — Preoccupied the last few months with shrinking credit and a slumping economy, Wall Street has all but ignored the relentless rise in oil prices that has taken a barrel of crude to a once-unthinkable $106.

But the market may not be able to look the other way much longer — especially when consumers, already hurting from the soaring cost of gasoline, find themselves paying even more to fill their tanks come spring. "Investors are just getting used to higher oil prices in what has really been a stealth rally," said Peter Dunay, chief investment strategist with Meridian Equity Partners. He said lofty oil prices "should be getting lots of attention" by Wall Street. But, investors have instead been distracted by a nearly endless stream of bad news about the economy — from banks taking steep write-downs for soured mortgages to the loss of tens of thousands of jobs.

To be sure, there is a lot for Wall Street to worry about these days. Major stock indexes have slid by double digits since the start of the year as economists fear the economy might already be in a recession. And, the summer's subprime mortgage collapse continues to threaten financial institutions around the world. Although there certainly were many days last year that Wall Street tumbled in response to the punishing march in oil prices, the advance toward $100 a barrel at 2007's end and the surpassing of that milestone this year might actually have been welcomed by some investors. Institutions have been piling into crude — along with other commodities — to flee not just sagging stocks but also the flailing U.S. dollar.

The greenback's fall against other major currencies has helped drive buying across commodities as investors overseas view dollar-denominated assets as relatively cheap. Meanwhile, big institutional investors have used hard assets like oil as a hedge against inflation. On Friday, oil prices jumped to a new record above $106 on the New York Mercantile Exchange. At the pump, gas prices are 68 cents higher than a year ago, and within a nickel of last May's record price of $3.227 a gallon. And they can only go higher as the summer driving season, which always sends gas climbing, arrives.

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Something to think about...

Studies: Iraq costs US $12B per month
Sun Mar 9, `08 - The flow of blood may be ebbing, but the flood of money into the Iraq war is steadily rising, new analyses show. In 2008, its sixth year, the war will cost approximately $12 billion a month, triple the "burn" rate of its earliest years, Nobel Prize-winning economist Joseph E. Stiglitz and co-author Linda J. Bilmes report in a new book.

Beyond 2008, working with "best-case" and "realistic-moderate" scenarios, they project the Iraq and Afghan wars, including long-term U.S. military occupations of those countries, will cost the U.S. budget between $1.7 trillion and $2.7 trillion — or more — by 2017. Interest on money borrowed to pay those costs could alone add $816 billion to that bottom line, they say. The nonpartisan Congressional Budget Office (CBO) has done its own projections and comes in lower, forecasting a cumulative cost by 2017 of $1.2 trillion to $1.7 trillion for the two wars, with Iraq generally accounting for three-quarters of the costs.

Variations in such estimates stem from the sliding scales of assumptions, scenarios and budget items that are counted. But whatever the estimate, the cost will be huge, the auditors of the Government Accountability Office say. In a Jan. 30 report to Congress, the GAO observed that the U.S. will be committing "significant" future resources to the wars, "requiring decision makers to consider difficult trade-offs as the nation faces an increasing long-range fiscal challenge."

These numbers don't include the war's cost to the rest of the world. In Iraq itself, the 2003 U.S.-led invasion — with its devastating air bombardments — and the looting and arson that followed, severely damaged electricity and other utilities, the oil industry, countless factories, hospitals, schools and other underpinnings of an economy. No one has tried to calculate the economic damage done to Iraq, said spokesman Niels Buenemann of the International Monetary Fund, which closely tracks national economies. But millions of Iraqis have been left without jobs, and hundreds of thousands of professionals, managers and other middle-class citizens have fled the country.

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Who's afraid of the declining dollar?...

Experts: Don't fear the weak dollar
March 12, 2008: The dollar keeps hitting new lows against the euro. But some say this won't hurt the economy unless the greenback enters a prolonged slump.

Concerns about the weak dollar are mounting. But even as the greenback sinks to new lows against the euro and other global currencies, some experts say this is not necessarily a bad thing for the U.S. economy. The anemic dollar does pose plenty of hurdles for an economy that some argue is already in a recession. Most notably, the weak dollar is raising more fears about the very visible impact of higher inflation. Textbook economics suggest that a weaker dollar forces consumers to pay more for imported goods like toys made in China or a bottle of wine from France's Bordeaux region.

Moreover, it also drives up the cost of commodities priced in dollars. And unless you've been living under a rock lately, that's already happening across a broad range of commodities including wheat, gold and oil, which now hovers at record levels just below $110 a barrel. But the inflation fears may be a bit overblown. Late last week, Federal Reserve Governor Frederic Mishkin said in a speech that the dollar's decline only poses a limited inflation threat to the United States, arguing that there is little correlation between consumer inflation and changes in the exchange rate.

Still, there are other reasons to be fearful of a weak dollar. If it declines further, it could erode interest by international investors in buying dollar-denominated securities. Although many foreigners are still buying more U.S. securities than they are selling, there are signs that some overseas investors are slowly shifting away from assets tainted by the greenback, such as U.S. Treasurys.

According to the most recent Treasury International Capital report, a monthly reading on foreign investment flows, net foreign purchases of long-term U.S. securities were $69.1 billion in December, down from net purchases of $70.3 billion in November and $118 billion in October. If this trend continues and overseas investors actually start dumping more securities than they acquire, that could hurt the economy as a sell-off in Treasurys would lead to higher long-term bond rates. That would be a problem since longer-term bond yields have an influence on mortgage rates. Bond prices and yields move in opposite directions. "Foreigners continue to buy U.S. securities," said Jay Bryson, global economist with Wachovia. "If there was a massive exodus, you would see a major impact on Treasurys."

The economy and exports

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Fed needs to beware of inflation...

The Fed's worst nightmare
March 13, 2008: Ugly retail sales and a somber forecast from CFOs point to recession, but rising oil and gold prices and a weak dollar show inflation. What's Ben Bernanke to do?

It's days like today that will make many investors wish they stayed in bed. And they're not the only ones. Something tells me that Ben Bernanke and the rest of the Federal Reserve's policy-making committee would like to run and hide as well. Where to begin? Retail sales for February were shockingly weak, with sales falling 0.6% during the month compared to economists' forecasts of a 0.2% gain. Those numbers put dents in the argument that consumers would keep spending in the face of the housing downturn. Wall Street is also digesting some sobering results from a survey of chief financial officers released by Duke University and CFO magazine late Wednesday.

According to the survey of more than 1,000 CFOs, conducted last week, three-quarters of the respondents said the economy is either in a recession already or will hit one this year, and nearly 90% of CFOs surveyed said they didn't think the economy would rebound until late 2009. So this means the Fed should slash interest rates at its next meeting on March 18, right? After all, according to federal funds futures, investors are pricing in a 72% chance of a three-quarters of a percentage point cut. But not so fast. Gold hit $1,000 an ounce for the first time ever Thursday morning. Oil is slouching towards $111 a barrel. And the dollar hit a 12-year low against the yen and a new record low against the euro. Can you say inflation?

Actually, it's worse than mere inflation. The combination of rising commodity prices and the weakening growth forecast for the economy has people worried about 1970s style stagflation. I hope Bernanke can dig up a pair of old bell bottom pants. Do the hustle! "Clearly, the Fed needs to switch to Plan B," noted Duke professor Campbell R. Harvey in a release about the CFO survey. But what is Plan B exactly? It's difficult to figure out just what the Fed can do other than let the credit markets and housing markets work themselves out, and hope the actions the central bank has already taken stimulate the economy at some point.

Time may be the Fed's only ally

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Anti-foreclosure hotline leaves callers cold...

Mortgage relief plan falling short
13 Mar.`08 - Hope Now hotline leaves callers frustrated; ‘more work to be done’

The government’s flagship program to give struggling homeowners relief from overwhelming mortgage payments has left hundreds if not thousands of callers frustrated by long wait times, lack of follow-up and relatively minor loan modifications that have failed to help. A story last week on msnbc.com generated hundreds of e-mail responses from readers who have called the heavily promoted hotline. Almost all the callers said they encountered a variety of roadblocks in their efforts to save their homes.

Officials affiliated with the effort said in interviews that they have helped many borrowers but say there are misunderstandings about the limited scope of the program. The Hope Now Alliance, a private partnership organized by the federal government, launched in October and trumpeted repeatedly by President Bush and other top administration officials, has been criticized by members of Congress, state officials, and private credit counselors.

To date, the federal government's efforts to help the growing number of homeowners facing foreclosure have focused largely on prodding lenders to modify existing loans to more affordable levels. More than a million of these loans, written during the height of the lending boom, are scheduled to reset to interest rates that many homeowners will no longer be able to afford. But the Hope Now hotline has left many callers frustrated and without hope, judging from e-mail correspondence. Readers report difficulty getting through to hotline counselors, cursory reviews of their cases, lack of follow-up, confusion over who is eligible for help, and, for those who did reach lenders, relatively minor loan modifications that weren’t sustainable over the long term.

More Mortgage relief plan falling short - Mortgage Mess - MSNBC.com

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Granny says, "Now dey tryin' to convince us its 'good for us'??...

Recession could be best medicine
March 15, 2008: Some economists, including one Fed member, say more rate cuts could be bad for the economy. But most expect Bernanke & Co. to slash rates again Tuesday.

Two widely accepted beliefs about the upcoming Federal Reserve meeting Tuesday are that the central bank is worried about the country falling into a recession and that it will again slash interest rates sharply. But should the Fed stop worrying and love a recession?

Several economists, including one member of the Fed's policy-making committee, have argued that more rate cuts are the wrong solution to spur economic growth. Some even believe a recession might be the best answer for the economy in the long term. That's still a minority view though.

Federal funds futures on the Chicago Board of Trade show investors betting that there is a 100% chance of at least a three-quarter percentage point cut at the March 18 meeting, and a 52% chance of a full percentage point cut. Even most critics of the Fed's rate cuts concede some additional cuts are certain Tuesday, especially since a report Friday morning showed that consumer prices held steady last month.

If the Fed cuts as much as some expect, that would put its key federal funds rate at 2%, down from 5.25% when the Fed first began lowering rates six months ago. Yet, it's not clear that the Fed cuts can do much to fix what ails the U.S. economy as it undergoes a credit crunch.

Too late for rate cuts to work?

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Check your 401k plan...

What Bear Stearns' Meltdown Means to You
March 17, 2008 - Your 401(k) Funds Might Be Invested in Bear Stearns -- Now What?

Think the Bear Stearns meltdown isn't affecting you? You might want to check your investments before you answer. Large mutual funds commonly found in 401(k) plans have invested hundreds of millions in the battered bank, which is being purchased by JPMorgan Chase for $2 a share — a fraction of its price last week. As Bear Stearns stock plunged and the financial market shuddered, these funds also saw declines.

"I'm sure there are people who don't realize how badly they're impacted indirectly," said James J. Holtzman, a financial planner with Legend Financial Advisors in Pittsburgh. "Everybody's taking a hit today," he said. "It's not going to be a pretty day." The good news for many investors is that most mutual funds that do hold Bear Stearns count the company's shares as only a miniscule portion of their total holdings. The Putnam Voyager Fund, for instance, held more than 960,000 shares of Bear Stearns as of October. That's less than 1 percent of Putnam Voyager's total investments.

The Vanguard 500 Index fund held about 1.1 million Bear Stearns shares as of September. That too accounted for less than 1 percent of the fund's holdings. Both Putnam Voyager and the Vanguard 500 are among the 10 mutual funds that have the most invested in Bear Stearns. "With your general growth-oriented fund, I don't really think the situation with Bear Stearns is going to affect you that much," said Bruce Tucker, a principal at Sterling Financial Planning in Sparta, N.J.

'Buckle Your Seat Belt'