That jump in share prices: Start of a recovery from a market bottom, or a “dead cat bounce” typical of bear markets? That drop in oil prices: the end of successive increases, or a pause before we head to $200 oil?
Fed Chairman Ben Bernanke’s semiannual report to Congress last week was one of the gloomiest he has ever put before politicians struggling to decide what to do next. Here was a Fed chairman who has deployed every weapon at his command, and manufactured new ones in his fight to right the economy, and is not certain he has succeeded.
But it just might be that Bernanke, with an assist from Treasury Secretary Hank Paulson, has been more successful than he dares dream, and that the panic that has dominated media reports has been contained.
Not that we will soon see the boom times that investors and homeowners remember so fondly.
But it is possible — not certain, but possible — that the woes that have beset the housing and financial sectors, and the damage inflicted on consumers by rising petrol prices, are about to be contained and mitigated.
At minimum, given that good economic news has been as scarce as favorable media reports on the McCain campaign, it is worth considering what has prompted the International Monetary fund to raise its forecast for growth in the United States in the second half of the year.
Start with housing.
I won’t bore you with a repeat of the bad news.
But sales of existing homes seem to have stabilized this year at an annual rate of close to five million units, and inventories of new single-family homes are down 21 percent from their 2006 peak. And, as Barron’s points out in an article run under the title, “Home Prices Are About To Bottom,” Chip Case — the Case of the Case-Shiller Index — believes that homes are now more affordable and that, barring a recession, home prices “may well stabilize” and begin to recover by year end. Barron’s Jonathan Laing concludes that “the scary dive in home prices soon will be over.”
Improvements in housing would, of course, translate into improvements in the banking sector. Merrill Lynch announced that it is increasing its excess liquidity pool to record levels, and raising $4.5 billion by selling off its 20 percent stake in Bloomberg; several investment houses reported earnings that, although off from last year, beat the market’s expectations; Citigroup and Bank of America reported better-than-expected results; and shares in Fannie Mae and Freddie Mac have recovered some of the huge ground lost recently.
It was the precipitous drop in the shares of Freddie (a client) and Fannie, which between them finance half the mortgages in the United States, that shook investors.
Through all the turmoil these enterprises continued doing what the government wants them to do, and their former enemies, the president and Paulson only recently prayed they would continue doing — keep mortgage money flowing.
True, to offset some of the panic caused by declines in their share prices, Paulson and Bernanke decided to make explicit the implicit message always sent to investors in Freddie and Fannie — these enterprises are too important to the economy to be allowed to fail.
Nothing new there. So this month both were able to borrow money at attractive rates, and will write perhaps $50 billion in new mortgages. In fact, Fannie announced it is unlikely to need government aid and Freddie filed with the Securities and Exchange Commission in preparation for an eventual move to raise new capital.
Finally, there is oil, a market notoriously difficult to predict. But it does seem that the higher prices are destroying demand at a more rapid rate than economists anticipated, which might, just might, hold back further price increases, or sustain last week’s downturn in crude prices.
Perhaps most important, the flexible American economy so far — and the “so far” is important — seems to be doing better than the troubled housing and financial sectors. Even Bernanke expects “Growth … to pick up gradually over the next two years.” Imports are adding perhaps a full point to gross domestic product, offsetting all or most of the housing-related decline.
There is, then, light at the end of the tunnel. Let’s hope it’s a glimmer of hope rather than the onrushing train that Larry Lindsey, President Bush’s former economic adviser and one of the nation’s best forecasters, sees in his crystal ball.
