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Recession ahead?

A

Anonymous

Guest
"WASHINGTON — Wall Street's woes are raising the risk that the U.S. economy could sink into recession late this year or early next year.

Although few economic analysts put the odds of recession at better than 50 percent, most are now upping their probabilities.

"We've lowered our 2008 growth forecast to 1.5 percent, down from 2.3 percent previously and 1.8 percent in 2007. We now expect a consumer recession, for the first time in 17 years," said a revised forecast issued Thursday by Merrill Lynch.

Whether Wall Street’s turmoil brings a sharp slowdown or a full-blown recession depends on three inter-related variables: how quickly banks resume lending to businesses and home buyers; whether the recession in the housing sector bottoms out or deepens; and whether falling home prices and a lack of lending combine to hit the consumer’s ability to spend.

“What we’re going through now is unlike anything we’ve seen before. All financial crises have their unique characteristic — this one is characterized by a seizing-up in the home-mortgage market,” said Lyle Gramley, a former governor of the Federal Reserve System in the 1980s who's now with the Stanford Group, a consulting firm.

He puts the odds of recession at 50 percent.

Gramley was referring to the spate of bankruptcies by companies that issued home loans to risky borrowers — and increasingly companies that gave loans to credit-worthy homeowners.

The nation’s biggest mortgage lender, Countrywide Financials, tried to stave off bankruptcy Thursday by tapping an $11.5 billion line of credit. It was viewed as a last-ditch effort to stay solvent as investors flee anything with the word “mortgage” attached. That's making it hard for even creditworthy people to finance a home purchase.

“The volatility in today’s market is making it extremely difficult to qualify borrowers for mortgage loans. And the news about Countrywide’s woes doesn’t make the picture any brighter,” said Dawn Holly, a mortgage broker in Columbia, Md. She said that lenders have basically stopped underwriting all but the safest of home loans.

The credit crunch isn't confined to homebuyers. Banks, threatened by the risk that their loans are endangered by the spreading crisis, are withholding new loans even from sound businesses.

Gramley’s concerned that there aren’t good measures right now of how much lenders are pulling back. “None of us knows for sure how much credit availability has declined, but to be sure it is substantial,” he said.

If banks don’t extend credit, businesses can’t borrow to grow. Nor can they issue bonds to finance expansion, since investors are fleeing virtually all forms of risk. If businesses don’t grow, they don’t hire. If this trend goes on very long, eventually it will turn today’s strong job numbers — unemployment is only at 4.6 percent — much weaker.

Another way that Wall Street's woes affect Main Street is that falling stock prices mean declining wealth. As Americans lose wealth in their investments and home prices continue to erode, they're likely to reduce spending, which drives the economy.

“Consumer spending depends on wealth, because if wealth contracts or asset prices fall, it undermines the growth of retail sales and other consumption … and that’s two thirds of GDP (gross domestic product),” said Joel Prakken, chairman of Macroeconomic Advisers LLC, an economic forecasting firm in St. Louis, Mo.

There's no question that stock prices are sliding; Thursday marked one of the wildest rides on Wall Street in years. The Dow Jones Industrial Average was down by 343 points at one point before rallying near the close of trading to end down just 15.69 points, or 0.12 percent. Even so, the Dow's down almost 1,200 points since its peak on July 19 at 14,000. Everyone with a 401(k) is probably watching its value decline.

Prakken doesn’t offer a probability for recession, partly because Wall Street's volatility makes any long-term projection difficult. But he expects economic growth to start slipping in October. He cited falling stock prices and the spreading credit crunch for both businesses and homebuyers as signs of a coming slowdown.

“We associate all those with downward revisions of the forecasts,” he said. “It’s just incredibly difficult to make these calls. The volatility is incredible.”

The lack of firm data about how bad lending conditions are leaves most analysts scratching their heads, worried but uncertain whether a recession is coming.

“I think it’s very hard to tell, and I think it’s less than 50 percent likely. But there’s no good data to support one argument or the other,” said Irwin M. Stelzer, director of economic policy studies at the Hudson Institute, a conservative think tank in Washington, D.C."

http://www.mcclatchydc.com/homepage/story/18997.html
 

Steve

Well-known member
“I think it’s very hard to tell, and I think it’s less than 50 percent likely.

Might rain tomorrow,..might not..(and I was called chiken little)???

yes there are dips...bumps...and out-right jarring things happening in the economy...but when so-called experts are that wishy-washy..why should we take them seriously...I say invest with your brain...not their hype...
 

Cal

Well-known member
Steve said:
“I think it’s very hard to tell, and I think it’s less than 50 percent likely.

Might rain tomorrow,..might not..(and I was called chiken little)???

yes there are dips...bumps...and out-right jarring things happening in the economy...but when so-called experts are that wishy-washy..why should we take them seriously...I say invest with your brain...not their hype...
Yes, but....sort of smacks of the same glee that Disagreeable used to post bad news from Iraq IMO.
 
A

Anonymous

Guest
Did the US Corporate World sell out America for their own greed :???: Has the Governments free-trade at all cost policy sold us (the US) down the drain :???:

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This financial crisis isn't over yet
By Liam Halligan
Last Updated: 12:01am BST 19/08/2007



This weekend marks a pivotal moment in the history of Western capitalism.

The melt-down of America's high-risk mortgage market now threatens the most serious financial crisis since global share prices collapsed back in 1987.


Yes, stocks rallied on Wall Street on Friday. And, yes, after the selling spasm of last week, that was a huge relief. But no one knows what will happen when the markets open tomorrow.

Share prices in New York and London remain 10 per cent down on their June peak. In just a few weeks, UK investors have lost £120 billion and there could be much worse to come.

Yet the implications of this August panic go way beyond the price gyrations and fortunes lost, important though they are.

The Western world has got itself into a mess, and is now squandering its long-standing role as the bedrock of global finance. Our financial system is so bloated and unstable that the lives of ordinary citizens - even those with no direct financial market exposure - are at risk of being undermined.

That has been true of previous panics, going back to the Wall Street crash of 1929 and even the South Sea Bubble.

The significance of the current episode becomes clear, though, when compared to the "Russia-Asia crisis" that began 10 years ago last month. Back then, an innocuous event - the devaluation of the Thai baht - triggered a sell-off across "emerging markets", the fast-developing economies of Asia and Eastern Europe. That, in turn, sparked the collapse of Long Term Capital Management, a prestigious US hedge fund, eventually causing a serious global slump.

For years afterwards, Western investors fretted about "contagion": the idea that if investments in dodgy Eastern assets went wrong, the financial fall-out could "infect" the rest of the world. But now, just a decade on from the Asia crisis, it's not "contagion" from the East the world is worried about, but "contagion" from the USA. Far from supporting the global economy, as it has done for more than a century, the US is now in danger of dragging the rest of us down.

This is certainly a crisis with "made in America" stamped on it. In the aftermath of 9/11, the US Federal Reserve slashed interest rates, unleashing a wave of cheap money across the globe.


From 2002 onwards, American mortgage lenders rode that wave, extending "sub-prime" loans to millions of US borrowers with bad credit-ratings. Spurred on by hefty commissions, and a load of bunkum about "building dreams", US mortgage companies became reckless, diluting their credit checks. An on-line cottage industry prospered, providing false references for mortgage applicants. Yet, as America's economy surged, the authorities turned a blind eye. And in a few short years, US sub-prime lending ballooned by the equivalent of £700 billion - around a fifth of all mortgage lending.

Earlier this year, though, US house prices started falling. Sub-prime lending had created a building boom, which in turn caused a property glut.

Many of the low "teaser" rates on sub-prime loans then began to expire. As borrowing costs spiralled, more and more Americans sank under their debts. Defaults rose and repossessed homes hit the market, driving prices even lower, so cash-strapped borrowers could no longer remortgage their way out of trouble. Little wonder a quarter of US sub-prime mortgages are now expected to end in tears.

While all this sub-prime lending was going on, investment banks in New York and the City of London got busy, slicing the debt into tranches, then rolling it up into collateralised debt obligations - or CDOs - which they sold on like bonds. That's why this credit boom is different: because global investors, including banks and pension funds, lapped up hundreds of billions of dollars worth of American CDOs.

Because they were "made in the US", there was little chance of default, it was reasoned.

That nonsense has now been painfully exposed. The mighty Bear Stearns has revealed serious CDO problems in two of its massive hedge funds.

French bank BNP Paribas admits CDO "contagion" has led to disastrous sub-prime losses.

Reports of other finance houses in trouble have surfaced in Japan, Australia, the Netherlands, and the UK, too. The catalyst for last week's sell-off was probably speculation that Countrywide, America's biggest mortgage lender, could go bust because of sub-prime defaults.

CDOs are complex and highly opaque. There is no central record of who owns what, which is why investors are now so sceptical of banks and financial stocks.

That has sparked a broader reassessment of risk, causing other stocks to suffer in the teeth of a credit crunch. A lot now depends on the market's reaction to the Federal Reserve's decision on Friday to cut the US discount rate, the price at which it lends to banks in distress. The immediate response, of course, was a partial recovery.

But what if the Fed cut rates because it knows something the markets don't? What if a major US bank really is in trouble? Even if America now implements the "nuclear option" of a sudden cut in the "Fed funds" rate - the equivalent of our base rate - that may not help very much. Hundreds of US mortgage lenders, thousands of house-builders, and millions of Americans have already gone bust.

For them, rate cuts will be too late.

That's why this is a "real economy" problem, not just a financial problem.

America will suffer as a result of the current turmoil, and could even go into recession, which will harm the rest of the world.

Weaker equity and credit markets in the UK will certainly undermine our corporate investment. British jobs that would have been created, or saved, now won't be because of the US sub-prime fiasco.

Around 8 per cent of UK mortgage lending is sub-prime - much less than in America, but still high enough that regulators are "concerned".

Mortgage arrears are rising quite sharply, albeit from a low base. As long as house prices stay firm, most borrowers should keep their heads above water. But if, over the coming weeks, share prices continue sliding, then all bets are off. Financial services generate a third of our national income. By driving house prices in London and the South-East, they underpin the broader property market. So a sustained period of CDO-induced City gloom could yet derail the UK economy, too.

But the long-term importance of current events goes way beyond the latest turn of the global economic cycle, despite the massive human impact that has.

Just consider the contrast between the major Western economies right now and the "emerging giants" of the East. After a decade of super-charged growth, China has the world's biggest trade surplus and the largest haul of foreign exchange reserves: $1.3 trillion. Russia, on its knees just a decade ago, has the world's third biggest reserves.

America, meanwhile, has fewer dollar reserves than India, Singapore and Brazil and the largest trade deficit on the planet. The UK has the world's third largest trade deficit.

The fact is, the increasingly indebted Western world - with America at its core - is now far more vulnerable to financial melt-down than some of the nations we used to deride.

The leading Asian economies, not just China and India but Indonesia, South Korea and Thailand too, are better placed to deal with a global crisis than many of their Western counterparts.


In some ways, that is good news. After all, even if the US economy does now hit the skids, the rest of the world, including the UK, won't necessarily catch a cold.

As the International Monetary Fund says, China, India and Russia between them will account for more than half of global growth next year. It's staggering to think, though, that when sentiments improve and investors' appetites eventually return, there could well be a "flight to quality" - but away from the West and towards the economic powerhouses of tomorrow.

http://www.telegraph.co.uk/opinion/main.jhtml;jsessionid=IZD1PJ4JZFPHTQFIQMFSFF4AVCBQ0IV0?xml=/opinion/2007/08/19/do1903.xml
 

MoGal

Well-known member
Nawww.... this is that "soft" landing they've been forecasting (I think they must have been jumping up and down on a feather bed while writing it as that is the only soft landing as everyone else will be forced off the roof).

http://www.wsws.org/articles/2007/aug2007/hous-a22.shtml
Foreclosures soar, layoffs mount in US mortgage industry crisis
By Joe Kay
22 August 2007
Use this version to print | Send this link by email | Email the author

The US housing market showed further signs of deterioration on Tuesday with the release of a report showing a sharp 9 percent increase in foreclosure filings from June to July. World financial markets have been rocked in recent weeks by a credit crisis with origins in the US home mortgage market.

The report came a day after Capital One Financial Corp, a major US bank, announced it was shutting down a mortgage branch of the company, laying off 1,900 employees. Tens of thousands of financial services jobs have been eliminated this year as a consequence of problems in the mortgage markets.

According to Realtytrac.com, a foreclosure research and marketing firm, there were a total of 179,599 foreclosure filings in July—including default notices, auction sale notices and bank repossessions. This was a 93 percent increase over the same figure one year ago. Foreclosure filings have been rising for over a year, although they fell seven percent in June.

Foreclosures are heavily concentrated in a number of states in which shifts in the housing market have been particularly devastating for working people. California, Florida, Michigan, Ohio, and Georgia accounted for over half of the total number of foreclosures in July. California’s foreclosure activity is up 289 percent from July 2006, and six California cities were among the top ten urban centers with the highest foreclosure rates in the country.

Michigan residents continue to be devastated by the attack on jobs and wages in the auto industry. According to Realtytrac.com, “Detroit posted a 70 percent month-over-month increase in foreclosure activity in July, pushing the city’s foreclosure rate to one foreclosure filing for every 97 households—more than seven times the national average and the highest among 200 metro areas tracked.” Michigan as a whole had the third highest foreclosure rate in the country—one out of 320 homes.

Nevada had the highest rate of foreclosure, with one out of every 199 homes (or 0.5 percent) foreclosed in July. Because it is a relatively less-populated state, however, Nevada did not rank among the top states for total foreclosures. Georgia had the second highest rate, with one out of ever 299 homes foreclosed, a 75 percent increase over June.

The rise in foreclosures is bound up with the deflation in home prices, as struggling homeowners are no longer able to refinance their mortgages to meet monthly payments. The maturing of adjustable rate mortgages has also led to a sharp increase in housing bills for many homeowners in recent months.

A separate report from the Office of Thrift Supervision (OTS), part of the federal Department of the Treasury, reported difficulties in the savings and loan banking sector, which is heavily involved in home lending. Troubled assets, defined as loans that are at least 90 days past due, have increased by 50 percent over the past year, to $14.2 billion. According to an AP report, “That’s the highest level of troubled loans at the OTS since 1993, with most of the problems in home mortgages, OTS officials said.”

Meanwhile, Capital One Financial said it would shut down its GreenPoint mortgage arm. The unit of the bank specialized in “jumbo” loans—those over $417,000—and so-called “Alt-A” loans—loans to individuals who cannot fully document income or assets.

Capital One, whose main area of operations is credit cards, acquired GreenPoint when it bought up North Fork Bankcorp in 2005. North Fork paid $6.3 billion for GreenPoint in 2004. In a sign of the sharp downturn in the housing market, Capital One announced that it would take an after-tax charge of $860 million associated with the closure.

Unlike subprime loans, jumbo loans are generally made to individuals with good credit histories. However, their large size means that they are ineligible for repurchase by the government-backed mortgages agencies Fannie Mae and Freddie Mac.

Problems in the jumbo loan market reflect in part the over-extension of many homebuyers as housing prices have soared in recent years. While such mortgages were once generally used to purchase luxury homes, in recent years even modest residences in states like California cost more than the $417,000 minimum that defines a “jumbo” loan. Unable to afford the large monthly payments, buyers have been forced into foreclosure.

In a statement announcing the move, Capital One indicated that it saw broad worries in the mortgage industry extending beyond the subprime market. “[R]ecent and continuing development in the mortgage markets reduce the long-term outlook for profitability in the business, as the company expects markets for prime, non-conforming mortgage products are likely to remain challenged for the foreseeable future.”

In an internal memo, Capital One CEO Richard Fairbank said the closure was the result of “an unprecedented set of market circumstances.”

The layoffs at Capital One are only the latest in a spate of job cuts at US financial service companies, according to a report issued by consulting firm Challenger, Gray & Christmas on Tuesday.

Challenger reported that already in 2007 there have been 87,962 job cuts in financial services, 75 percent more than in all of 2006. The number of layoffs has been escalating in recent months, with nearly one quarter announced in the first three weeks of August alone.

Challenger found that 35,830 of the job cuts were tied to the housing market. In addition, real estate firms have announced 1,950 job cuts, and construction firms 19,670, so far this year. The total for these two sectors is more than twice the number for 2006.

In an interview with news agency Reuters, Challenger CEO John Challenger gave a sense of the magnitude of the shift. “Many companies expected the mortgage situation to implode; they’ve just been wondering when the bubble would burst,” he said. “But many are stopping on a dime, shutting down operations. Companies are not surprised by what’s happening, but the reality of the situation and the speed with which it occurred is shocking.”

In addition to Capital One, major job cuts have been announced at Bear Stearns, First Magnus Financial Corp, and Countrywide Financial Corp.

Troubles at Countrywide, the nation’s largest mortgage lender in terms of volume, have been particularly worrisome for investors. In an ominous sign for the banking system, depositors lined up in many cities on Monday morning to check on deposits and withdraw money from the institution’s banks, after hearing of the company’s financial troubles.

Late on Monday, Countrywide announced that it had cut 500 jobs at one of its lending divisions that specializes in Alt-A loans.

In an effort to maintain confidence in its operations, Countrywide took out advertisements seeking to assure consumers that all is well at the company. Last week, the company reported that it had reached the limit of its $11.5 billion credit line, and there has been speculation that it could go bankrupt, or might be bought up by outside investors, including billionaire Warren Buffett’s company, Berkshire Hathaway.

A series of other actions this week indicate a housing market that is in deep crisis:

* Thornburg Mortgage, which specializes in jumbo loans, announced on Monday that it had been forced to swallow a $930 million loss in order to unload top-rated mortgage securities to avoid a cash crisis. The company had been frozen out of an important lending market after having its credit rating downgraded.

* San Francisco-based Luminent Mortgage Capital Inc., a real estate investment trust, said on Monday that it would allow Arco Capital to buy a 51 percent share in the company at a deep discount in order to obtain necessary cash. The company is suffering from a spate of housing mortgage default notices.

* Bank of America moved Toll Brothers, a luxury homebuilder, to a “sell” rating. Many of Toll Brothers buyers use jumbo loans. Bank of America analyst Daniel Oppenheim said that demand for new homes will likely fall by 35 percent this year.

The problems in the US housing market have set off a broader credit crunch, as investors fear the souring of loans to individuals and businesses. In a sign of extreme nervousness among investors, the yield on short-term US Treasury bonds on Monday saw their biggest drop since the late 1980s. Yields fall as investors buy the Treasury bonds, which are considered to be one of the most secure forms of investment.

The flight to treasury bonds came as investors dumped holdings in other assets, including corporate debt and securities related to jumbo mortgages.

See Also:
Credit crisis claims another bank
[20 August 2007]
Fed moves to halt market meltdown
[18 August 2007]
Wild gyrations on world markets
[17 August 2007]
Worldwide panic compels central banks to intervene
[13 August 2007]

Posted under the fair use act.
 
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