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Why the Economy Refuses to Recover



October 26, 2012 – Comments (2)

Up to a point, Helicopter Ben is correct (not to mention the Oracle of Omaha): the housing market is a big drag on the economy. Sadly, setting interest rates at 0% has not helped. Plus, there are other reasons.



Both TMF and Bloomberg, among others, have covered this. See, MegaBanks are being forced to buy back all the junk home mortgages they wrote during the Go-Go years, and this is costing them $10s billions. In order to prevent from having to do this ever again, they are now writing mortgages only for those with platinum credit scores and sure things. The rest of you, let them eat cake.



Pushing down % to record lows (say 3%) will encourage the housing market, but only if people are feeling good about the future and banks are issuing mortgage paper. Neither is true right now, so the % is largely irrelevant, no matter how low Helicopter Ben brings down the %.



The full title of this pernicious law is: “Dodd-Frank Wall Street Reform and Consumer Protection Act”. The PDF I downloaded had 848 pages, and the relevant portion is on p. 761-837: TITLE XIV - MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT.

The minutiae here is rather astonishing:

--if the borrower defaults, the bank might be liable for not doing do-diligence

--bank cannot charge more than specified: fees, escrow, assesments, etc.

--limits on forclosures

--other specific limits on bank behavoir



Many of us Fools are pretty sure that QE1-3 is sure to ignite inflation, so recommendations for GLD and so forth are legion. However, this is not on the horizon because all of dollars being printed 24 x 7 by Helicopter Ben is simply being put on ice on deposit at the Fed, so the MegaBanks can use it to satisfy Tier 1 capital reserve requirements. A similar situation exists in the EU. Until this cash moves, neither will our economies.



Consumers are reducing debt, and increasing savings, at least up to a point. They have learned their lesson, and are doing the proverbial preparations for a rainy day. However, since 2/3 of the economy is consumer spending, this also suppresses GDP growth.



In the end, I get the feeling that if we go over this thing, the effects will not be nearly so pernicious as is commonly thought. However, it is the uncertainty about an eventual resolution or not that is causing business and consumers to be gun-shy. Confidence needs to exist before the spending starts.



My apologies: I do not have one. All I have to offer is my gut feeling: despite reports that housing and manufacturing outlooks are improving, I do not get the feeling that prosperity is just around the corner.  

2 Comments – Post Your Own

#1) On October 26, 2012 at 7:51 PM, constructive (99.97) wrote:

"In the end, I get the feeling that if we go over this thing, the effects will not be nearly so pernicious as is commonly thought."

Possible, but it's rare that OMB estimates are too pessimistic.

And of course, if we jump off it (which we probably won't), there will be no way of telling how much of the ensuing recession is from the cliff and how much was going to happen anyway.

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#2) On October 26, 2012 at 11:17 PM, awallejr (35.47) wrote:

Well I disagree.  I post mainly to offset certain arguments.  Whether people agree with me or not is up to them. 

The real estate market IS improving.  Loans CAN BE HAD provided you can prove your income instead of just saying what it is.  QE3 is NOT inflationary since the exit strategy is straight forward. The cash gets retired as the loans get repaid.  Low interest rates helps people retire debt quicker.

I personally think there is a pent up demand out there just waiting to see how the politics plays out.

Fiscal cliff was and is a contrivance.  Remains to be seen how the Republican Norquistites continue to respond.  The election results will dictate that.

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