09/13/2007

Our Economy

Pick up any national newspaper or watch television news for five minutes and you will see various economic experts forecasting doom and gloom for our nation’s economy. It seems that good economic news just doesn’t grab the headlines any more. Let’s explore a few key issues dominating the economic headlines today.

The media’s culprit for a downward spiral in our economy is the housing market. Headlines report increasing default and foreclosure rates in the sub-prime market. Why does this surprise anyone? In a booming real estate market, mortgage shops pop up everywhere creating exotic mortgage products that are sold to borrowers who ultimately cannot afford the payments. These mortgage shops are transaction oriented. They get paid a fee for finding, processing, and closing the loans, but they don’t hold the paper for the mortgages that adjust to higher rates later. In other words, they assume no risk in the deals. They call it selling the American dream. I call it greed.

The mortgage investors that buy the exotic mortgage paper in the secondary market start experiencing spiking default rates that result in losses when the borrowers cannot afford to pay any longer. The drop in these companies’ earnings forecasts on Wall Street sounds the alarm to stock investors and the financial markets experience a massive sell-off. The financial markets scream for relief from tighter liquidity and shrinking interest margins in the credit world. Complaints get to Congress and pleas go out to Fed chairman Bernanke to reduce rates and bail our economy out of its downward spiral. Why does this surprise anyone? During the Greenspan era, it became commonplace for the Fed to reduce rates to bolster a sinking economy. They call it a proven technique used in monetary policy that will heal our economic wounds. I call it a band-aid.

Now we have bad reports on labor statistics. The jobless rate across the nation is increasing. Why does this surprise anyone? When the home building industry suffers, it affects many areas of the workforce including laborers, contractors, suppliers, developers, mortgage companies and investment houses. They call it an economic cycle. I call it self-imposed punishment.

It’s easier to treat the symptoms of a sluggish economy than it is to find a cure for it. Let’s work together to make good things happen in our jobs and communities that yield positive results for our local economy.

09/17/2007

Will Rate Cuts Help?

As I write this column on Monday, September 17th, all eyes and ears are on the Fed for Tuesday’s meeting to contemplate rate adjustments. Some economists predict a 100% chance that the Fed will cut rates by a quarter point, while others are predicting the cut will be by a half point. If the Fed does cut rates once or initiates a series of rate cuts, what will the impact be and when will consumers benefit from it? Let’s discuss the potential impact rate cuts can have and isolate a few economic conditions that might bring unexpected results.

Using 1998 as a reference point, the Fed cut rates that year and the financial markets dramatically responded in the fourth quarter with nearly a 20% increase. Speculators today remember that year and almost expect the Fed to step in to bail the financial markets out of their current tumultuous and unstable state. But the cause of the instability in 1998 was attributed to economic problems in the Asian markets and a huge default on debt by the Russians. Neither of these causes hit home with American consumers and consumer confidence and spending reacted quickly to the Fed’s rate cuts to bolster our economy.

The current economic conditions are hitting much closer to home for many Americans. Our ailing economy is being blamed on a bad housing market. Many of us are directly affected by this and many creditors have tightened their purse strings on approving new loans to help off-set the losses being experienced from defaults on mortgage loans. Add the higher price of gasoline to the picture and you can begin to see how our downward-spiraling economy hits all of us in the wallet. There is more skepticism about what rate cuts will really do for us now, as opposed to the scenario in 1998. Consumer confidence is tough to calibrate, but when it hits down-home America in housing and fuel costs, it has a more profound affect than the unstable Asian markets and the Russian debt default of 1998.

So will rate cuts really help us today? My answer is yes and no. It will help over time, but immediate impact will be minimal. It took over two years to create the black hole our economy is navigating, and it will at least take a few months to begin to see any significant improvements. Let’s hope for the best.

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09/13/2007

Our Economy

Pick up any national newspaper or watch television news for five minutes and you will see various economic experts forecasting doom and gloom for our nation’s economy. It seems that good economic news just doesn’t grab the headlines any more. Let’s explore a few key issues dominating the economic headlines today.

The media’s culprit for a downward spiral in our economy is the housing market. Headlines report increasing default and foreclosure rates in the sub-prime market. Why does this surprise anyone? In a booming real estate market, mortgage shops pop up everywhere creating exotic mortgage products that are sold to borrowers who ultimately cannot afford the payments. These mortgage shops are transaction oriented. They get paid a fee for finding, processing, and closing the loans, but they don’t hold the paper for the mortgages that adjust to higher rates later. In other words, they assume no risk in the deals. They call it selling the American dream. I call it greed.

The mortgage investors that buy the exotic mortgage paper in the secondary market start experiencing spiking default rates that result in losses when the borrowers cannot afford to pay any longer. The drop in these companies’ earnings forecasts on Wall Street sounds the alarm to stock investors and the financial markets experience a massive sell-off. The financial markets scream for relief from tighter liquidity and shrinking interest margins in the credit world. Complaints get to Congress and pleas go out to Fed chairman Bernanke to reduce rates and bail our economy out of its downward spiral. Why does this surprise anyone? During the Greenspan era, it became commonplace for the Fed to reduce rates to bolster a sinking economy. They call it a proven technique used in monetary policy that will heal our economic wounds. I call it a band-aid.

Now we have bad reports on labor statistics. The jobless rate across the nation is increasing. Why does this surprise anyone? When the home building industry suffers, it affects many areas of the workforce including laborers, contractors, suppliers, developers, mortgage companies and investment houses. They call it an economic cycle. I call it self-imposed punishment.

It’s easier to treat the symptoms of a sluggish economy than it is to find a cure for it. Let’s work together to make good things happen in our jobs and communities that yield positive results for our local economy.

09/17/2007

Will Rate Cuts Help?

As I write this column on Monday, September 17th, all eyes and ears are on the Fed for Tuesday’s meeting to contemplate rate adjustments. Some economists predict a 100% chance that the Fed will cut rates by a quarter point, while others are predicting the cut will be by a half point. If the Fed does cut rates once or initiates a series of rate cuts, what will the impact be and when will consumers benefit from it? Let’s discuss the potential impact rate cuts can have and isolate a few economic conditions that might bring unexpected results.

Using 1998 as a reference point, the Fed cut rates that year and the financial markets dramatically responded in the fourth quarter with nearly a 20% increase. Speculators today remember that year and almost expect the Fed to step in to bail the financial markets out of their current tumultuous and unstable state. But the cause of the instability in 1998 was attributed to economic problems in the Asian markets and a huge default on debt by the Russians. Neither of these causes hit home with American consumers and consumer confidence and spending reacted quickly to the Fed’s rate cuts to bolster our economy.

The current economic conditions are hitting much closer to home for many Americans. Our ailing economy is being blamed on a bad housing market. Many of us are directly affected by this and many creditors have tightened their purse strings on approving new loans to help off-set the losses being experienced from defaults on mortgage loans. Add the higher price of gasoline to the picture and you can begin to see how our downward-spiraling economy hits all of us in the wallet. There is more skepticism about what rate cuts will really do for us now, as opposed to the scenario in 1998. Consumer confidence is tough to calibrate, but when it hits down-home America in housing and fuel costs, it has a more profound affect than the unstable Asian markets and the Russian debt default of 1998.

So will rate cuts really help us today? My answer is yes and no. It will help over time, but immediate impact will be minimal. It took over two years to create the black hole our economy is navigating, and it will at least take a few months to begin to see any significant improvements. Let’s hope for the best.

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