And as is so often the case in economics, the answer depends on three unknown factors, a pair of economists told BloggingStocks Tuesday. (In an initial review, the market appeared to signal its approval of the Fed's action, with investors sending the Dow 300 points higher to 12,156 in late Tuesday afternoon trading. )
New Fed tool: TSLF
First, the Fed's new Term Securities Lending Facility should convince bank dealers that liquidity should not be an issue, economist David H. Wang said Tuesday. "No bank or bond dealer should fear that they won't be able to find financing. That should improve bond market liquidity," Wang said. In addition, the Fed's willingness to swap U.S. Treasuries for mortgage-backed securities (MBS) should restore some trust -- but by no means total trust -- to the MBS market and help market participants price these securities, he said. The Fed's accepting private mortgage debt collateral speaks directly to where the market is stressed the most, Wang said. However, if MBS's are not pricing and trading, that would indicate continued concerns about liquidity, he said.
Second, the Fed's action should encourage banks to lend, economist Glen Langan said Tuesday. The Fed has indicated that the new 28-day, $200 billion TSLF will be extended and increased, if market conditions warrant it. That does not mean banks will start lending at very low interest rates to everyone, but if they lend to viable businesses that need credit to expand, or to potential home buyers capable of paying a mortgage, the Fed will have achieved another major objective, Langan said. Conversely, if borrowers in good standing cannot obtain credit, that would indicate to the Fed that additional TSLF funds or other liquidity measures may be needed.
The third, international demand, Wang and Langan agreed, remains the biggest hurdle, mainly because its status is unknown. If international demand remains adequate -- for example, Brazil's demand for Caterpillar's (NYSE: CAT) agriculture machines and farming equipment -- U.S.-based multinational corporations will now have both a source of credit in place to expand their businesses, and, equally significant, customers to generate that increased revenue.
U.S. consumers' contribution
And what about the U.S. consumer? Langan said that, of course, "the U.S. consumer will play a role," but it remains to be seen how much domestic demand can contribute to the early stages of the economic recovery. Record mortgage debt, a 10-year pattern of overconsumption, and stagnate wage growth in certain workforce segments suggests that U.S. consumers may not be able to generate sufficient demand. "I've said throughout this process the one saving grace for the U.S. economy may be U.S. exports, and that may still be the case," Langan said.
And what about workforce additions? I.E. consumption from new workers joining the workforce, presumably with money to spend? Wang said that assumes sustained, adequate job growth in the quarters ahead, Q2-Q4 2008 -- something that may not occur until 2009.
Take the long way home
Equally important, both Wang and Langan noted that it will take many quarters and years for the United States to fully recovery from the subprime mortgage and related asset default crisis. The Fed's actions are aimed at getting credit markets functioning well immediately, and the TSLF's stimulus should begin to work its way into the system very soon. Nevertheless, the housing sector still has to work-off a large 10-month supply, and banks have to replace non-performing mortgages with new, performing assets. That suggests a slow, gradual recovery, Wang said. "But if the growth is sustainable and sound fundamentally, it will be well worth it and the Fed will have succeeded," he added.
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Reader Comments (Page 1 of 1)
3-11-2008 @ 9:04PM
d k patel said...
is 200b enough? a good gesture, but too small in relation to total troubled assets of US banks.Similar injections of liquidity in the past six months have done nothing to allay fears that some banks will not be able to overcome their liquidity problems, unless there is substantial new capital infusion. What is Fed waiting for before dealing with individual banks specific problems? A Nortern Rock in Wall Street?
3-11-2008 @ 11:24PM
Pat Kenmir said...
Costs have gone up 200 to 300% in 3-4 years and home buyers have not had wage increases to be able to buy at these new incredible high home prices.
Is the fed going to require home sellers to lower there rediculous high selling prices? No. Nothing going to solve this crisis untill reasonable home prices occur. 98% of all home mortgages are sound. The other 2% should be left to fail and that would have corrected this market. The fed just likes to meddle in everything and now has screwed up the energy market and caused huge inflation to occur. Gas cost is going higher daily and food is also sky high. We are all doomed!
3-12-2008 @ 2:21AM
Kent said...
Fed be nimble; Fed be quick; Fed just employed another trick. Seriously though, does this plan mean that banks can swap their debts from home mortgages and other financial instruments for Treasury securities (CD's, Bonds, Bills) in order increase their liquidity to service their credit markets? Or is it a way for the Fed to avoid dropping the rate again when they know that it won't work when liquidity and interest rates are at cross-purposes when there isn't any extra cash to pass around anymore at the banks? I think this might work. Does this mean come March 28 we will see a spike in interest rates from these Treasuries. I think I'll park my cash in these Treasuries for a while until the dust settles. Unfortunately, the plan doesn't help the sub-prime home owner I wouldn't think. Japan I recall had a similar problem like ours back in the early 90's but they solved it by merging the banks. It isn't clean or fast enough nor do we want to. Holding my breath and hoping it works.
3-12-2008 @ 5:25AM
Jack H said...
How much air can you blow in to a balloon ?
Hope it's not about to pop !
4-04-2008 @ 6:44AM
Observer said...
Happy Days are Here again..... The rich get richer and the poor get poorer.. and oh that's right the Middle class is GONE !!!
4-04-2008 @ 7:50AM
B. Harrison said...
One aspect of all of this debacle is to re-informce the ABSOLUTE IMPORTANCE of MANUFACTURING in the USA..
As noted in the article, "one bright spot" would be if our exports rise! For many years now as they pushed manufacturing to the third world countries, they proclaimed that the USA didn't need "manufacturing" as a key componet of our economy . . . we were supposedly "past that 'out dated concept".
The principle of manufacturing being the back bone of any industry/society is now going to be proven by the impact of the value of "manufacturing and exporting" to our economic recovery.
It's past time for people to return to "common sense" in their business, and in their politics.
4-17-2008 @ 5:54AM
B. Harrison said...
Now that everyone has had time for "reality to sink in", and they yave averted (at least for the moement) "runs on the banks, it's time to let the chips fall where they may. As stated 98% of mortgages are sound, the troublesome 2% bad mortgages should be allowed (sic. required) to "just work out 'naturally' . . . either the lenders and mortgagees work out a mutually beneficial settlement or the houses go into foreclosure . . . if the borrowers go into bankruptcy, that is a personal problem. There should be a "natural correction" of the market.
An example is one young couple, a mortgage broker, bought ten homes, sold five before the bust, and have five that have reached the ARMS "maturity" . . . . society has no obligation (ro reason) to "bail out" such speculators (whose income hasdrompped form $140K to $30K annually). Speculators should be left to deal with their irresponsible risky investments on their own.
Capitalism dictates that risk takers absorb their losses on their own. (And a lot of speculators made a lot of money previously . . . no one is demanding that they "return their profits, are they?)