1 / 24

Chicago Association of Realtors Member Outreach October 2008

Chicago Association of Realtors Member Outreach October 2008. From uncertainty to certainty: a recession is upon us. The Fed has taken extreme measures to prevent collapse of financial markets

birch
Download Presentation

Chicago Association of Realtors Member Outreach October 2008

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chicago Association of Realtors Member Outreach October 2008

  2. From uncertainty to certainty: a recession is upon us • The Fed has taken extreme measures to prevent collapse of financial markets • They have been successful in preventing catastrophe, but not preventing a recession (not that they can stop a recession!) • Credit quality and availability, real estate, oil prices, and creation of new jobs have been the center of attention throughout

  3. GDP plods along, but just you wait

  4. Let’s look for a turning point • Business cycle analysts use four important indicators in addition to GDP to determine the business cycle turning points: • Industrial production • Labor markets, mainly jobs created • Retail sales • Personal Income

  5. Industrial production: down

  6. Payrolls: down

  7. Retail sales: down

  8. Personal income: not too bad

  9. Consumer sentiment: way, way down

  10. Housing is a disaster: everything moving in the wrong direction! • Construction: Down • Prices: Down • Sales: Down • Permits: Down • Foreclosures: Up • Inventories: Up

  11. The bail out: some basics, as of today at least • The initial idea: stop the weakness in the financial markets from taking the rest of the economy with it • The key word is restore: • Restore liquidity • Restore confidence • Restore common economic sense

  12. The sources of the problem set up a house of cards • Subprime mortgages • Alt-A mortgages • Fannie and Freddie lose their minds + market assumes an implicit government guarantee • Credit Default Swaps: insuring loss with no sense of the risk of these promises • A housing bubble (we now know in retrospect)

  13. What brought the house of cards down? • The housing bubble burst • Without rising house prices, many mortgages that may have survived went bad • The holders had to mark the assets to market, which took firms that are cash-flow solvent to insolvent, or at least cautious • Banks, holding all the bad paper, stop lending: hold the dollars to back up bad loans, worry about counter-party risk

  14. Lending stops: how do we know? • TED (Treasury versus LIBOR), and LIBOR versus OIS (Overnight index swaps) moved from a few basis points to 300-400 basis points; thank goodness the spreads are falling • This reflects the level of counter-party risk – you will not lend if you worry that the other side of the loan will default, even if it is a bank

  15. So what to do? The Fed • Initially the Fed stepped in through its role of lender of last resort • The role was expanded well beyond banks, and it involved collateral that would normally not be accepted • Now moved into the commercial paper market • Moves were bold, necessary, and stopped a total collapse, but they were not yet enough

  16. So what to do? The Treasury • Initial plan was to buy up the bad mortgage paper, removing it from the banks’ balance sheets  frees up the money to be loaned • Now the government will inject capital directly by buying preferred shares, recapitalizing the banks and freeing up money to be lent

  17. Role for bank insurance • European countries began to expand dramatically their promise to insure bank deposits • The FDIC followed by raising the limit to $250,000; more may be necessary • FDIC has been given unlimited borrowing power at the Treasury in the case of disaster

  18. Do many hate everything that was done? You bet! • Currently: the US government owns an insurance company, will own banks, will set up a terrible moral hazard problem, and there are no guarantees that banks will lend to boot • Then why do it? The alternative would be worse

  19. What should happen • Credit will begin to flow between banks, and then to the deserving public • This will hasten the reduction in the excess inventory in housing • Equity markets may stabilize, allow banks to get capital from private sources • Both will raise household wealth, which can help stimulate the economy

  20. View from the top • As Bernanke said Monday, the damage has been done; we are in for a two- to three-quarter recession • He recommends a second stimulus package by congress that should be targeted, efficient, well timed, and that has no long-term negative effects

  21. Two bright spots: those working are productive

  22. The other bright spot: oil prices – works like a tax cut

  23. Sources of data and contact information • Mike Miller: mmiller@depaul.edu Data Sources: • Bureau of Economic Analysis: bea.gov • Bureau of Labor Statistics: bls.gov • Federal Reserve Beige Book: http://www.federalreserve.gov/fomc/beigebook/2008/20080903/default.htm • FRED: http://research.stlouisfed.org/fred2/

  24. Recommended reading • The testimony on Monday by Fed Chairman Ben Bernanke is an excellent summary of the current situation and future outlook for financial markets and the economy: http://www.federalreserve.gov/newsevents/testimony/bernanke20081020a.htm

More Related