Both barrels of the heavy policy guns — fiscal and monetary policy — are now aimed at the slowdown. The president and the Congress have worked out a stimulus package that will pump some $150 billion into the U.S. economy by early or midsummer.
Americans families and single persons will then have some more money, either to spend (as the sponsors of the program hope), or with which to pay down some of their credit card balances.
Meanwhile, back at the Federal Reserve Board’s offices, officials are watching to see whether their recent interest rate cuts totaling 1.25 percent, when combined with the stimulus, will put the economy back on a growth path.
Now at 3 percent, the Fed funds rate was a much higher 5.25 percent only a few months ago. Chairman Ben Bernanke, who on Friday reached the halfway point in his four-year term, is surely hoping that by the time he is up for reappointment, his rate cuts will have had their intended effect, and the new president will follow tradition and reappoint him.
The Fed chairman still believes that “downside risks to growth remain,” though he seems to think the economy will avoid a recession. Some economists — confirming that theirs is the dismal science (if a science at all) — are computing that the new 3 percent Fed funds rate is consistent with an annual growth rate of a mere 1 percent, hardly something to cheer about.
Fortunately, the Fed has not exhausted its weapons: It can always deploy Alan Greenspan’s 1 percent solution — the level to which he reduced rates in a crisis. And nothing is to stop the president and Congress from increasing the stimulus package.
But, for now, it is probably best to suffer through a few bad months and wait for the rate cuts and stimulus to take effect. Doug Elmendorf, an economist at the Brookings Institution, says that both moves “are going to look smart.” Just not tomorrow.
Attention remains focused on the housing market, where sales continue to fall. As do prices, and at an accelerating rate. They are now almost 8 percent lower than a year ago, and are down in 17 of the 20 cities for which decent data are available.
Well-informed Washington sources tell me it is unrealistic to expect a comeback in the housing market before 2010, so little relief is in sight for home builders trying to seduce buyers with “free” swimming pools, finished basements, and a Mercedes-Benz in the garage.
But mortgage rates seem to be headed down, which might, just might, put a bit of a spring into the steps of potential homebuyers as they savor the bargains available.
Combined with an increase in the level of qualifying mortgages that Fannie Mae and Freddie Mac can finance, these rate drops mean that mortgage money is more readily available than in recent months. And lower rates mean that the much-feared resets of some so-called teaser rates in adjustable rate mortgages won’t bite as deeply into the pockets of subprime borrowers.
Not that foreclosures are not a problem. They are. But keep in mind that somewhere between 25 percent and 33 percent of these foreclosures in the hardest-hit states are of homes that are not occupied by their owners: It is speculative buyers of for-rent properties who are taking some of the hit.
Fortunately, there is more to the U.S. economy than the much-reported housing market. According to Brian Westbury, chief economist of First Trust Portfolios, housing accounts for only 4.5 percent of gross domestic product. And if the losses from subprime mortgages come to $100 billion, as Bernanke is guessing will be the case, that loss would account for only 0.1 percent of the assets of U.S. households and non-farm financial corporations.
Perhaps even more important is the restoration of some semblance of normality to credit markets. Commercial paper issuance is rising from its credit crunch levels. Warren Buffett and others seem ready to pump capital into the bond-insurance market, as do several banks.
Sovereign wealth funds are eager to take advantage of bargain prices and pour more billions into U.S. banks with write-off-ridden balance sheets. All in all, economists at Goldman Sachs are telling clients that “money markets [are] back to a more normal situation.”
None of this should be taken to mean that Goldilocks has returned to center stage. But some economists are saying that she is putting on a new coat of makeup in anticipation of a re-entry onto center stage sometime later this year.
Examiner columnist Irwin Stelzer is a senior fellow and director of The Hudson’s Institute’s Center for Economic Policy.
