Wednesday, 26 November 2008

Fed throws more money at markets as economy looks worse

The Fed's ever-increasing participation in financial markets shows no sign of slowing. From Bloomberg on Tuesday:

The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

That should be good news for markets. How much it helps the real economy remains to be seen.

Tuesday's economic data were not encouraging. Again from Bloomberg:

The decline in U.S. house prices accelerated in September and the economy shrank in the third quarter at a faster pace than first estimated as the grip of the credit crunch tightened.

The S&P/Case-Shiller home-price index fell 17.4 percent from a year earlier. The Commerce Department said gross domestic product dropped an annual 0.5 percent as household spending slid the most since 1980. While consumer confidence rose this month, the Conference Board’s gauge remained near the lowest on record.

Elsewhere, Germany confirmed it is in recession. Bloomberg reports:

Germany’s economy, Europe’s largest, fell into recession in the third quarter after a global credit crunch and the euro’s gain to a record stifled foreign demand.

Gross domestic product declined a seasonally adjusted 0.5 percent from the previous quarter, when it dropped 0.4 percent, the Federal Statistics Office in Wiesbaden said today, matching an estimate from Nov. 13. Exports fell 0.4 percent. With imports rising 3.8 percent, net trade dragged down growth for the first time since a year earlier.

And the outlook for the Japanese economy is worsening. From Bloomberg:

The Bank of Japan downgraded its assessment of the economy for the first time in three months, saying growth is becoming “increasingly sluggish.”

“The increased sluggishness in Japan’s economic activity will likely persist over the next several quarters as the slowdown in overseas economies becomes more evident,” the central bank said in a report in Tokyo today. Exports have been falling because of the yen’s advance and slower global growth, and the declines will continue, the bank said.

Not to be outdone, the OECD is painting the economic outlook in stark terms. Bloomberg reports:

The world’s largest economies need further interest-rate reductions and tax cuts to limit the impact of the worst recession since the early 1980s, the Organization for Economic Cooperation and Development said.

“In normal times, monetary rather than fiscal policy would be the instrument of choice for macroeconomic stabilization,” the Paris-based organization said in a report today. “But these are not normal times.”

The U.S., Japanese, U.K. and euro-area economies will all shrink next year as the global financial crisis takes its toll on the broader economy, according to the OECD. While policy action has limited a “period of panic,” the economic uncertainties are “exceptionally large” and growth will recover only gradually from the second half of 2009.

The OECD also cut its forecast for global growth in 2009. The economy of the organization’s 30 members will contract 0.4 percent in 2009 after expanding 1.4 percent this year. Earlier this month, it predicted a 0.3 percent contraction next year.

1 comment:

Peter Van Schaik said...

We are witnessing a major over reaction to the current economic crisis. Recent posts from my website:

November 25, 2008

We expect Christmas sales to be sluggish but still a bit better than most analysts are forecasting. Deep discounts will help move merchandise but do little to plump profits. Consumers are going to try to cut back some on their spending but old habits are tough to break and the bargains will be too good for most of us to refuse.

- Van Schaik

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October 22, 2008

On July 16th we wrote "Financial, stock and commodity markets are really nothing more than an endless series of over reactions to previous over reactions." Now we are about to witness another type of over reaction: Additional economic stimulus packages are being proposed by Congress. The experts who couldn't see the recession coming until we were in the middle of it are now screaming the end is near if we don't throw billions upon billions into the economy. They were wrong before and they are wrong now. This recession will run its course and come to an end with or without additional stimulus spending, bailout bundles, or rescue packages. As we said before, it is important to keep interest rates low and reserves high. It is important to resist slashing spending by the federal government. Sending additional checks to those with the lowest incomes won't hurt a lot and will reap additional benefits as the money is spent but sending tax money to those in the higher income brackets at this point is foolish and counterproductive in the longer run.

- Van Schaik
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We originally forecast this recession in April of 2007. We called for a collapse of oil and commodity prices in July of 2008. We now think most of our economic problems are going to be postponed due to over reactions of monetary and fiscal policy. We'll survive this recession in relatively decent shape but we will face another recession as monetary policy quickly reverses to halt the inflation we will face as we emerge from this downturn.

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