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Saturday, September 01, 2007

Jackson Hole: Quotes on Housing

by Calculated Risk on 9/01/2007 08:37:00 PM

Here are some articles and quotes from the Jackson Hole conference.

Professor John Taylor (of the Taylor rule fame) blames the housing bubble on the Fed. From Reuters: Ultra-low Fed rates stoked housing boom: Taylor (hat tip Kevin)

In rare public criticism of Alan Greenspan, former U.S. Undersecretary for International Affairs John Taylor said on Saturday that ultra-low Federal Reserve interest rates had stoked the U.S. housing boom and subsequent bust.
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"A higher federal funds path would have avoided much of the housing boom," Taylor said, drawing on a model he designed to simulate housing activity if the Fed had raised rates instead of aggressively easing borrowing costs.
And Reuters quotes economist Martin Feldstein: U.S. at risk of recession from housing (hat tip risk capital)
The weak housing market could topple the country into a full-blown recession and the Federal Reserve should slash interest rates aggressively, one of the country's most prominent economists warned on Saturday.
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Feldstein, who was one of the front-runners for the top job at the Fed until Bernanke was picked for the post, saw three challenges to U.S. growth from housing: declining home prices; the subprime mortgage crisis; and weakening home equity withdrawal and refinancing.

Those three problems "point to a potentially serious decline in aggregate demand," he said. "The multiplier effect of home price declines and declines in consumer spending could push the economy into recession."
And from MarketWatch: View from Jackson Hole is hazy and gloomy (hat tip FFDIC)
David Hale, an economist and a regular at the Jackson Hole conference, called the current environment "a crisis of information."
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Mickey Levy, chief economist at Bank of America Corp. pointed out that the tone of the Jackson Hole conference was one of "uncertainty with risks to the downside."

"I am virtually certain [the Fed] will ease on Sept. 18," Levy said, adding that the move would be enough to keep the economy from going into recession.

But the risks of a recession are clearly higher than they were only one month ago, economists said.

Hatzius agreed there was a "significant risk" of recession, putting the odds at one in three. In addition, the economist said that the Fed would have more data by the time of its next meeting on Oct. 30 and 31, and that future moves would depend on the outlook.
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Gramley, the former Fed governor, said that the odds of a recession are somewhere between 33% to 50%. "This is a severe problem which will have to be dealt with," he said.

The Economist: Heading for the rocks

by Calculated Risk on 9/01/2007 05:45:00 PM

The Economist has a free special report 'on the turmoil in the world's financial markets': Heading for the rocks (hat tip Mike)

The tremors in financial markets have gone far beyond their beginnings in the US subprime mortgage sector, and indeed far beyond the borders of the US. The full impact on the markets, and the repercussions on the global economy, remain unclear, but we can sketch out three broad scenarios:

• Scenario 1. The Economist Intelligence Unit’s central forecast, to which we attach a probability of 60%, sees the impact being contained by timely monetary policy action, with only a modest effect on the global economy.

• Scenario 2. Our main risk scenario, with a 30% probability, envisages the US falling into recession, with substantial fallout in the rest of the world.

• Scenario 3. Should the US enter recession, another, darker scenario arises: that corrective action fails, and severe economic repercussions cascade from the US into the world economy with devastating effect. We attach only a 10% probability to this outcome, but the potential impact is so severe that it warrants careful consideration.

Since scenario 1 informs our regular output and Scenario 3 has a low probability, the bulk of the report focuses on scenario 2.
The full special report is here.

Dear Investor

by Tanta on 9/01/2007 12:43:00 PM

This is funny. Via Barry.

Discuss.

Saturday Rock Blogging

by Tanta on 9/01/2007 07:46:00 AM

Oh, man. Tanta's rockitorializing again.

Deal with it.

The thing I like best about the following video is how it provides a compelling visual metaphor for the hearts and minds of those who wish to convince themselves that business cycles are a secular morality play in which the Elect are rewarded and the Damned punished, and "we" is a meaningless pronoun because the only valid point of view is "I." In a time of war, no less.

The lyrics, of course, need no particular exegesis. At certain historical moments there is something quite aesthetically sufficient and necessary about stark and unsubtle metaphor.

Translation: yes, apparently we do sometimes need to be beaten over the head with it.

And it's still a great song, after all these years. There is a legend that the composer came up with the main rhythm while working on a piano with partially broken action. You find the music that a failing instrument will play. And then you play it.

CR, my friend, crank it up. After the week we've had, we deserve something with a better beat. Dance, dance, but try not to step on the cat. That's my motto and I'm sticking to it.


UCLA's Leamer: Some housing prices may decline 40%

by Calculated Risk on 9/01/2007 02:19:00 AM

From Bloomberg: Fed Gets `F' for Failures on Housing, Leamer Says

Federal Reserve policy makers underestimated the role that housing plays in triggering recessions and merit an `F' grade for their failure, said Ed Leamer, director of an economic forecasting group at UCLA.
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Housing is vulnerable to ``persistent'' trends that, once under way, are difficult to restrain, Leamer wrote. The Fed ought to have raised interest rates more aggressively to head off the ``bubble'' in home prices that grew from 2003 to 2005 and should have lowered rates by now, he said.
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Leamer said in an interview today at Jackson Hole that some former ``hot markets,'' such as pockets of California, may see declines of 30 percent to 40 percent.
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He added that there's ``very little possibility that a rate cut would make much of a difference'' at this point. ``Once the wave has peaked and is crashing, there is not much that can be done to quiet the waters.''
Leamer still thinks a recession is unlikely.