Posted by Michael A. Kamperman on August 31, 2010
The minutes from the Fed meeting show that no one on the Fed is worried that deflation is a significant near-term risk. No one. Some see disinflation while others still see inflation as the mostly likely outcome, but no one is forecasting deflation. In fact they are forecasting moderate growth for 2011, despite the fact the stimulus will run off in 2011 and there doesn’t appear to be a replacement stimulus bill on the horizon. The Fed is way way way behind the curve again, ala summer 2007. Deflation has already taken hold in the U.S. Deflation is a function of either over-supply or declining demand. Demand has withered for most items, most notably housing. With the expiration of the homebuyers tax credits sales of homes have plunged. How hard is it to foresee housing will remain a drag on the economy? Wages are falling substantially for those fortunate enough to replace lost jobs. What has held up the incomes of many households up until now are unemployment benefits and 401(k) plan withdrawls. Congress is not likely to extend unemployment benefits for individuals beyond 99 weeks. The large scale shedding of workers began roughly 99 weeks ago right after Lehman Brothers was turned away by the Treasury and forced to file for an unprepared bankruptcy. How hard is it to foresee household personal incomes are in trouble going forward?
The question the Fed should be concerned with is not whether the economy will fall into deflation, the question they should be debating is how soon and how forcefully do they need to act to prevent it. Like cancer, it may be too late to cure it if you wait for it to be obvious to see. Look at how Japan has struggled to shake off deflation despite near zero interest rates. Look at how the U.S. failed to shake off deflation prior to the onset of World War II. Frankly, the Fed simply doesn’t know how soon they should act, nor how forcefully. Shocking considering Bernanke is supposed to be the world’s deflation expert.
The Fed knows its only remaining weopon is printing money, which puts a bad taste in the mouths of most avowed inflation hawks. But as inflation hawk St. Louis Fed President Bullard has said, the data is coming in on the low side for inflation, not the high side. And, while he doesn’t see deflation as a probability he wants an orderly framework for how the Fed will decide when to print and how much to print. Shouldn’t this conversation have occurred under Greenspan or Volcker and shouldn’t the Fed have a manual on just what to do in this situation? The reason they don’t is the concept of deflation has seemed inconceivable to smug modern day economists who grew up in the post World War II era. This is the reason all of our econometric models only contain post World War II data. With fiscal policy frozen in Washington the only operational weopon left is monetary policy. I’m know we have waited too long to pull the trigger. So do all the 99ers. There is no doubt the Fed will print more money. The open question is do they have the guts necessary to print the trillions needed?
Posted by Michael A. Kamperman on August 24, 2010
Existing Home Sales plunged 27% in July to the lowest level since 1995. True, demand was borrowed from the future by the tax credits. But in 1995 mortgages rates were on the way up, not down. Not down to the lowest level in my adult lifetime and most likely your adult lifetime too. And let’s not forget home prices are back to early 2000 levels. Lower prices and lower interest rates cannot stimulate macro demand for housing. The reason is simple. We built enough single family homes for 70% of the population, yet only about 64% of the population is traditionally positioned for home ownership. Young people in their 20′s looking to build a career with a resume are better off mobile than tied down. People whose finances are poor don’t need the added costs of home ownership. Now, combine overbuilding market inventory with high unemployment, tight mortgage credit despite the heroic efforts of the FHA, and the deflationary psychology that prices could continue l0wer rather than higher and you have a broken market for homes.
The Obama Economic Team has failed to come up with a strategy to revive the housing market. The market has become addicted to tax credits. The mortgage modification efforts have been a woeful failure with almost half of the participants re-defaulting, and most inquirers failing to qualify. If your current on your mortgage you get no help. It is time for out-of-the-box-solutions. To change the direction of housing the Obama Administration needs a plan that addresses supply, credit, and psychology.
To rebalance supply we need to demolsish houses. We should end the cash for caulkers program and offer people who live in run down houses a chance to upgrade to a beautiful foreclosure on favorable terms. Then we should demolish the homes they left behind. If a bank is sitting on a run down foreclosure, then it should demolish it. The solution is not to talk people who shouldn’t own a home into one, that will only push more problems down the road. The solution is to lower the vacany rate and rebalance supply and demand. Credit is easy. Simply offer to refinance every current mortgage for 4% without an appraisal, a new title policy, or income verification. If their current they are getting the cash from somewhere to pay and we would be lowring their payments. Salvage the salvagable rather than trying to salvage those who simply cannot afford the house. Everyone marvels at the Chinese economy, yet over half of the apartments in Beijing and Shanghai are vacant and owned by investors who believe in real estate. In China they are building all sorts of things they don’t currently need. Psychology will return in America when we see more people bidding for homes than homes available for sale, and when their are no more foreclosures or short sales in the neighborhood dragging pricing down.
Posted by Michael A. Kamperman on August 19, 2010
With weekly jobless claims climbing back to the 500k level, the time has come for President Obama to convene a Jobs Summit. Mysteriously jobs continue not to be the primary focus of the Whitehouse. The strategy of kicking the can down the road hoping for a natural recovery in the economy has failed. But who should be invited to the Summit? Any citizen in America who wants to share an idea should be invited. The Summit should start out as a series of smaller regional Summits. Then, those presenting credible ideas should be invited to the Washington Summit. Let economists, CEOs, Congressman, and anyone else who wants to contribute ideas attend a regional Summit, and if they have a credible idea, then invite them to the Washington Summit. The reason for this concept is to decentralize the voices our President and Congresional leaders hear from. The advisers they currently have have taken us nowhere. There are plenty of good ideas, but unless someone is connected their voice is never heard in Washington.
For example, Bill Gross is getting a lot of credit for coming forward with a proposal to use Fannie Mae to refinance any current mortgage already guaranteed by the government without an appraisal. This is a great idea and it will help stabilize the housing market and put diposable income into the hands of numerous consumers. The only thing is the idea has been out there for well over a year. On page 105 of How America Can Escape the New Great Depression it says “Fannie Mae should also refinance any mortgage in good standing without an appraisal.” The book was published in March of 2009. Imagine where things might be if the idea were implemented back then. What other idea is out there that can’t get through the filters?
The Summit should be televised and hosted by the President and the Congressional leadership. The American people should see and here these ideas. Some ideas will rise to the top and gain broad-based support. The politicians will not control the ideas presented and will have difficulty spinning them. There should be a bi-partisan agreement between Democrats and Republicans that no idea will be dead on arrival just because it involves cutting or increasing taxes or spending. The objective of the Summit is to get something positive done as opposed to the usual Washington grid-lock where two sides shout at each other and accomplish little. Make no mistake, in a depression grid-lock is a bad thing. I’ll throw out another idea right now. Starting in 2014, let’s place a tarrif on all products made outside the U.S. if the employees do not receive health care. It is crazy to let countries like China ship products into America made by workers who are on their own for healthcare when the corresponding American competitor is required to provide health-care. It’s just crazy for us not to insist on a level playing field.
Posted by Michael A. Kamperman on August 10, 2010
Well that was quick. The Fed looked for an exit strategy in April and returned to printing money by August. Make no mistake the Fed just adopted St. Louis Fed President James Bullard’s strategy of targeting the balance sheet and rasing or lowering the quantity of quantitative easing based on the forthcoming data. Bullard is an economic hero. He provided a plan. Like a lion willing to lay down with a lamb he walked to the other side of the aisle and and said I am a self-avowed inflation hawk , but I see deflation as the risk and I am willing to do the un-thinkable and monetize the debt. Now, the ball is in the politicians court. How many Democrats are willing to step up and say we should not only not raise taxes, but during a major economic downturn we should lower them. How many Republicans are willing to stand up and say we should not only not cut spending, but during a major economic downturn we should raise spending to create jobs. It is time for President Obama to step forward and lead. We need another stimulus plan and the progressive liberals need to back off letting the Bush tax cuts expire.
The Fed effectively has said the TARP wasn’t enough. The Stimulus Plan wasn’t enough. Our previous quantitative easing program of $1.5 trillion wasn’t enough. The tax credit for homes and clunkers wasn’t enough. The economy remains in the ditch and it will take heavy lifting to get it out. The Fed has signalled they have the will. But the Fed cannot do it alone. We must have permanent fiscal stimulus to create an environment of confidence. The best ideas are to lower the eligibility for Social Security and Medicare to 60 and to have the Federal Government take over all Medicaid spending from the states.
What the Fed has done is they have said don’t worry about the deficit or the debt, because we can monetize it and control it. That is the advantage of owing all of your debt in your own currency. Japan owes its debt in yen. Will the Bank of Japan follow the Fed? Probably not until the policy proves successful. Great Britain owes its debt in pounds. Will the Bank of England follow the Fed. Yes, in a heart beat. The countries in the euro owe all of their debts in euros. Will the ECB follow the Fed. Eventually, once there is a massive mutiny against the austerity crowd and they run Trichet out of town on a rail. We have a global problem and we need a global solution. The Bullard led Fed is showing the way.
