First, employment is still falling sharply in the US and other economies. Indeed, in advanced economies, the unemployment rate will be above 10% by 2010. This will be bad news for consumption and the size of bank losses.
Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not really started, because private losses and debts of households, financial institutions, and even corporations are not being reduced, but rather socialized and put on government balance sheets. Lack of deleveraging will limit the ability of banks to lend, households to spend, and firms to invest.
Third, in countries running current-account deficits, consumers need to cut spending and save much more for many years. Shopped out, savings-less, and debt-burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt-service ratios, and falling incomes and employment.
Fourth, the financial system – despite the policy backstop – is severely damaged. Most of the shadow banking system has disappeared, and traditional commercial banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalized. So the credit crunch will not ease quickly.
Fifth, weak profitability, owing to high debts and default risk, low economic – and thus revenue – growth, and persistent deflationary pressure on companies’ margins, will continue to constrain firms’ willingness to produce, hire workers, and invest.
Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.
Seventh, monetization of fiscal deficits is not inflationary in the short run, whereas slack product and labor markets imply massive deflationary forces. But if central banks don’t find a clear exit strategy from policies that double or triple the monetary base, eventually either goods-price inflation or another dangerous asset and credit bubble (or both) will ensue. Some recent rises in the prices of equities, commodities, and other risky assets is clearly liquidity-driven.
Eighth, some emerging-market economies with weaker economic fundamentals may not be able to avoid a severe financial crisis, despite massive IMF support.
Finally, the reduction of global imbalances implies that the current-account deficits of profligate economies (the US and other Anglo-Saxon countries) will narrow the current-account surpluses of over-saving countries (China and other emerging markets, Germany, and Japan). But if domestic demand does not grow fast enough in surplus countries, the resulting lack of global demand relative to supply – or, equivalently, the excess of global savings relative to investment spending – will lead to a weaker recovery in global growth, with most economies growing far more slowly than their potential.
From where I’m sitting right now, I have access only to experience and anecdotal evidence – that being said, I worked for mortgage brokers during the begging of the end (2006-2007), and currently work in retail banking.
It is understandible that low interest rates on lending coupled with depressed home values would lead to an uptick in home purchases. My big concern is that I suspect a majority of new mortgages from the past few months are backed-up by FHA programs and other federal ‘stimulus’ incentives.
The problem this presents is that a lot of us younger people who are moving into our first homes are unlikely to have plunked down the 20% we should have for a down payment. We are even less likely to have a comfortable 20-30% debt-to-income ratio once our shiny new mortgage payments enter the mix (I’d guess more like 40%-60%).
The result is that a new generation of homeowners who should be coming out of this recession as hard-nosed savers who fear debt like the plague have been goaded into spending more than they should on homes they can’t afford and don’t have much equity in…sound familiar?
The myth of homeownership as a driver of wealth is one of the problems with our current economy. When the government has to offer tax incentives (and now stimulus incentives) to convince people to buy homes, it should say something about the real market for homes. I won’t belabor the point here, but for the average American home ownership is a money pit once you account for taxes, maintenance, insurance, etc. Did anyone here with a mortgage care to look at the discounted present value of your note (as disclosed by law in the documents you signed)? I’d bet good money your home wasn’t worth that much even at the peak of the boom.
Sure, you can make money on arbitrage in housing, as with any other asset. But the bubbles are rare and dangerous. I’d much rather see a slow recovery that *isn’t* driven by consumer debt, than a quick one that repeats more of the mistakes of the past.