by Calculated Risk on 4/03/2009 12:08:00 PM

From Federal Reserve Chairman Ben Bernanke: The Federal Reserve's Balance Sheet. In this speech Bernanke discusses the recent Fed initiatives in terms of the impact on the balance sheet.

One key question is how all of this will be unwound. Here are some excerpts from Bernanke's speech:

In pursuing our strategy, which I have called "credit easing," we have also taken care to design our programs so that they can be unwound as markets and the economy revive. In particular, these activities must not constrain the exercise of monetary policy as needed to meet our congressional mandate to foster maximum sustainable employment and stable prices.
...
The large volume of reserve balances outstanding must be monitored carefully, as--if not carefully managed--they could complicate the Fed's task of raising short-term interest rates when the economy begins to recover or if inflation expectations were to begin to move higher. We have a number of tools we can use to reduce bank reserves or increase short-term interest rates when that becomes necessary. First, many of our lending programs extend credit primarily on a short-term basis and thus could be wound down relatively quickly. In addition, since the lending rates in these programs are typically set above the rates that prevail in normal market conditions, borrower demand for these facilities should wane as conditions improve. Second, the Federal Reserve can conduct reverse repurchase agreements against its long-term securities holdings to drain bank reserves or, if necessary, it could choose to sell some of its securities. Of course, for any given level of the federal funds rate, an unwinding of lending facilities or a sale of securities would constitute a de facto tightening of policy, and so would have to be carefully considered in that light by the FOMC. Third, some reserves can be soaked up by the Treasury's Supplementary Financing Program. Fourth, in October of last year, the Federal Reserve received long-sought authority to pay interest on the reserve balances of depository institutions. Raising the interest rate paid on reserves will encourage depository institutions to hold reserves with the Fed, rather than lending them into the federal funds market at a rate below the rate paid on reserves. Thus, the interest rate paid on reserves will tend to set a floor on the federal funds rate.

Not that we have to worry about unwinding any time soon.

by Calculated Risk on 3/25/2009 01:11:00 PM

From San Francisco Fed President Janet Yellen: The Uncertain Economic Outlook and the Policy Responses.

Dr. Yellen does an excellent job of describing the economy (pretty grim comments!), but I'd like to focus on just a short section:

With the caveat that my forecast is subject to exceptional uncertainty in the present environment, my best guess is similar to that of most forecasters, who expect to see moderately positive real GDP growth rates beginning later this year or early in 2010, followed by a gradual recovery.

However, I am well aware that my views are strikingly more optimistic than those I hear from the vast majority of my business contacts. They tend to see conditions as dire and getting worse. In fact, many of them can’t believe I would even suggest what they see as such a patently rosy scenario! So why is it that so many of us who prepare forecasts seem to be more optimistic than many others? I think there are several reasons. First, as forecasters, we distinguish between growth rates and levels. It’s true that the Blue Chip consensus shows moderate positive growth rates in output in the second half of this year. But even so, the level of the unemployment rate would still rise throughout 2009 and into 2010. So, in this sense, the worst of the recession is not expected to occur until next year. And, even by the end of 2011, I would expect the unemployment rate to be above its full-employment level. So I wouldn’t call this a particularly rosy scenario.

Second, it takes less than many people think for real GDP growth rates to turn positive. Just the elimination of drags on growth can do it. For example, residential construction has been declining for several years, subtracting about 1 percentage point from real GDP growth. Even if this spending were only to stabilize at today’s very low levels—not a robust performance at all—a 1 percentage point subtraction from growth would convert into a zero, boosting overall growth by 1 percentage point. A decline in the pace of inventory liquidation is another factor that could contribute to a pickup in growth. Inventory liquidation over the last few months has been unusually severe, especially in motor vehicles—a typical recession pattern. All it would take is a reduction in the pace of liquidation—not outright inventory building—to raise the GDP growth rate. In addition, pent-up demand for autos, durable goods, or even housing could emerge and boost demand for these items once their stocks have declined to low enough levels.
emphasis added

This is a very important point for forecasters - to distinguish between growth rates and levels. Even if the economy "bottoms" in the 2nd half of this year, it will be at a very low level compared to the last few years, and the recovery will probably be very sluggish. This means unemployment will continue to rise in 2010 - and it will still feel like a recession to many people.

by Calculated Risk on 3/20/2009 11:30:00 AM

UPDATE: Here is the transcript of Bernanke's speech.

Federal Reserve Chairman Ben Bernanke will speak at Noon ET on "The Financial Crisis and Community Banking", at the Independent Community Bankers of America’s convention in Phoenix, AZ.

I expect CNBC to cover this ...

Here is the CNBC feed.

by Calculated Risk on 3/15/2009 07:48:00 PM

Fed Chairman Ben Bernanke was interviewed on 60 Minutes tonight.

Here is a picture of Bernanke from his college days ... his forecasting skills weren't much better then (Ok, slightly edited!)

From CBS 60 Minutes: Ben Bernanke's Greatest Challenge

"Mr. Chairman, I'm gonna start with a question that everyone wants me to ask: when does this end?" 60 Minutes correspondent Scott Pelley asked Bernanke.

"It depends a lot on the financial system," he replied. "The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time."

The transcript is available at 60 minutes.

Here is the interview:

by Calculated Risk on 3/06/2009 01:06:00 PM

This seems like a break in the ranks ...

From Kansas City Fed President Thomas Hoenig: Too Big has Failed

We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions. ... We have been quick to provide liquidity and public capital, but we have not defined a consistent plan and not addressed the basic shortcomings and, in some cases, the insolvent position of these institutions.

We understandably would prefer not to "nationalize" these businesses, but in reacting as we are, we nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.

Update: More excerpts (ht Josh):

[T]here are several lessons we can draw from these past experiences.

• First, the losses in the financial system won’t go away – they will only fester and increase while impeding our chances for a recovery.

• Second, we must take a consistent, timely, and specific approach to major institutions and their problems if we are to reduce market uncertainty and bring in private investors and market funding.

• Third, if institutions -- no matter what their size -- have lost market confidence and can’t survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses, and begin the process of restoring them to private ownership.
emphasis added

That is a call for temporary nationalization.

How would nationalization work?

How should we structure this resolution process? While a number of details would need to be worked out, let me provide a broad outline of how it might be done. First, public authorities would be directed to declare any financial institution insolvent whenever its capital level falls too low to support its ongoing operations and the claims against it, or whenever the market loses confidence in the firm and refuses to provide funding and capital. This directive should be clearly stated and consistently adhered to for all financial institutions that are part of the intermediation process or payments system. ...

Next, public authorities should use receivership, conservatorship or “bridge bank” powers to take over the failing institution and continue its operations under new management. Following what we have done with banks, a receiver would then take out all or a portion of the bad assets and either sell the remaining operations to one or more sound financial institutions or arrange for the operations to continue on a bridge basis under new management and professional oversight. In the case of larger institutions with complex operations, such bridge operations would need to continue until a plan can be carried out for cleaning up and restructuring the firm and then reprivatizing it. Shareholders would be forced to bear the full risk of the positions they have taken and suffer the resulting losses.

And Hoenig concludes:

While hardly painless and with much complexity itself, this approach to addressing “too big to fail” strikes me as constructive and as having a proven track record. Moreover, the current path is beset by ad hoc decision making and the potential for much political interference, including efforts to force problem institutions to lend if they accept public funds; operate under other imposed controls; and limit management pay, bonuses and severance. If an institution’s management has failed the test of the marketplace, these managers should be replaced. They should not be given public funds and then micro-managed, as we are now doing under TARP, with a set of political strings attached. Many are now beginning to criticize the idea of public authorities taking over large institutions on the grounds that we would be “nationalizing” our financial system. I believe that this is a misnomer, as we are taking a temporary step that is aimed at cleaning up a limited number of failed institutions and returning them to private ownership as soon as possible. This is something that the banking agencies have done many times before with smaller institutions and, in selected cases, with very large institutions. In many ways, it is also similar to what is typically done in a bankruptcy court, but with an emphasis on ensuring a continuity of services. In contrast, what we have been doing so far is every bit a process that results in a protracted nationalization of “too big to fail” institutions.

... [S]ome are now claiming that public authorities do not have the expertise and capacity to take over and run a “too big to fail” institution. They contend that such takeovers would destroy a firm’s inherent value, give talented employees a reason to leave, cause further financial panic and require many years for the restructuring process. We should ask, though, why would anyone assume we are better off leaving an institution under the control of failing managers, dealing with the large volume of “toxic” assets they created and coping with a raft of politically imposed controls that would be placed on their operations? In contrast, a firm resolution process could be placed under the oversight of independent regulatory agencies whenever possible and ideally would be funded through a combination of Treasury and financial industry funds. Furthermore, the experience of the banking agencies in dealing with significant failures indicates that financial regulators are capable of bringing in qualified management and specialized expertise to restore failing institutions to sound health. This rebuilding process thus provides a means of restoring value to an institution, while creating the type of stable environment necessary to maintain and attract talented employees. Regulatory agencies also have a proven track record in handling large volumes of problem assets – a record that helps to ensure that resolutions are handled in a way that best protects public funds. Finally, I would argue that creating a framework that can handle the failure of institutions of any size will restore an important element of market discipline to our financial system, limit moral hazard concerns, and assure the fairness of treatment from the smallest to the largest organizations that that is the hallmark of our economic system.

This strikes me as a break in the ranks, and although Hoenig is speaking for himself (not the Fed), this might indicate a change in direction.

by Calculated Risk on 3/04/2009 08:04:00 PM

From Atlanta Fed President Dennis Lockhart: On Real Estate and Other Risks to the Economic Outlook A few excerpts. First on the rental market:

I should also comment on the weakening multifamily residential real estate picture. No two rental markets are exactly alike. But to generalize, those markets trending the worst probably share one or more characteristics. They had excessive condo construction or condo conversion activity. Such markets are seeing unsold units return as rentals. They had very high home price appreciation in the years 2004—07 with large amounts of speculative house construction activity. Today, in several markets, houses compete with apartments as rentals. And they have been experiencing high and rising foreclosure rates.

Although Lockhart mentioned that houses are competing with apartments as rentals, he doesn't mention that this is happening for two reasons: 1) homeowners who can't sell their homes (or are "waiting for a better market") are renting their homes, and 2) many REOs are being purchased by cash flow investors as rentals helping to increase rental supply and push down rents.

And on Commercial real estate (CRE):

While historically smaller than residential real estate, commercial real estate (or nonresidential structures) accounts for a not-insignificant portion of the American economy—at least 4 percent of GDP directly and perhaps more, depending on estimates. ...

There are currently some $2.5 trillion of commercial property loans on the balance sheets of financial institutions and in commercial mortgage-backed securities (CMBS) markets. In contrast, residential mortgage debt amounts to about $11 trillion.

Some 25 percent of commercial real estate debt is securitized, compared with 60 percent of outstanding home mortgage debt. The volume of CMBS has more than doubled since 2003, a bit faster than the growth of overall commercial real estate debt.

This is good data. Although the CRE bust will be significant, it will not be as large an impact as the residential bust.

There are several subsectors of commercial real estate: retail, office, hotel, and industrial. All are facing problems.

There is a growing imbalance of retail space for several reasons. A lot of new retail space was added in areas that saw a high level of home construction, much of which has not been absorbed.

This imbalance is aggravated by general weakness in the retail industry. Established retail centers are seeing rising vacancy rates. When an anchor tenant leaves a shopping center, or overall occupancy falls below a threshold level, other tenants are often free to cancel their leases. Industry data indicate that abandoned retail store expansions and store closings have reached levels not seen since the recession and real estate slump of 1991–92.

The hotel subsector is facing excess supply in the face of soft demand. Occupancy rates declined about 8 percentage points in the fourth quarter of 2008, according to industry sources. Summer tourism was hurt by high gas prices, and now business travel is declining as companies scale back in a weak economy.

Also, with the decline in the economy and rising unemployment, office and industrial vacancies have been rising. In virtually all segments of commercial real estate, there is downward pressure on property values because of new construction coming on stream—construction started before the recession fully set in—coupled with the effects of the economic downturn.

Interestingly, the only property type currently withstanding downward pressures is warehouse. This seems to be, perversely, at least partly because of the back-up of inventories resulting from weak consumer spending and adverse retail and manufacturing conditions.

This gives me an excuse, in the next post, to update the graphs of office, mall and hotel investment based on the revisions to Q4 GDP.

by Calculated Risk on 2/25/2009 11:48:00 AM

Fed Chairman Ben Bernanke is testifying before the House Financial Services Committee today.

UPDATE: Here is the CNBC feed (opens in new window).

From Gregg Robb at MarketWatch: Bernanke tells Congress Fed knows what it is doing

"We're not making it up," Bernanke told the House Financial Services panel.

"We're working along a program that has been applied in various contexts," he said. "We're not completely in the dark."

I'm not making this up.

by Calculated Risk on 2/24/2009 10:20:00 AM

From Fed Chairman Ben Bernanke: Semiannual Monetary Policy Report to the Congress

In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half. The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of 8-1/2 percent to 8-3/4 percent. Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent. FOMC participants marked down their projections for overall inflation in 2009 to a central tendency of 1/4 percent to 1 percent, reflecting expected weakness in commodity prices and the disinflationary effects of significant economic slack. The projections for core inflation also were marked down, to a central tendency bracketing 1 percent. Both overall and core inflation are expected to remain low over the next two years.

This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.
emphasis added

by Calculated Risk on 2/19/2009 01:23:00 PM

Excerpts from a speech by Altanta Fed President Dennis (edit) Lockhart today:

[T]he economic outlook is not indefinitely bad. Most forecasts, my own included, see catalysts for the start of modest recovery in the second half of the year.

I think almost everyone agrees with the "not indefinitely bad" comment. But I'm interested in what Lockhart sees as "catalysts for recovery":

With production falling—and expected to decline significantly more this quarter—I expect some reduction of excess business inventories, putting producers in a position to expand output as spending returns.

Right now it appears inventory levels are too high. In the Philly Fed economic outlook report today, they asked a special question about inventory levels:

In special questions this month, firms were asked about their current inventory situation. Nearly 44 percent of the firms indicated that their inventories were too high and were expected to decrease during the first quarter; 67 percent said their customers' inventory plans had also decreased.

So Lockhart might be correct, but it is too early to tell if producers will reduce inventory enough in the first half of 2009 to expand output in the second half of the year.

There are signs lower mortgage interest rates are helping housing markets on the margin. The January pending sales number was up, and there has been a spurt in refinancing activity. If historically low mortgage rates can be sustained over the coming months, I expect more buyers will be drawn into the market.

Actually the most recent pending home sales number was for December and the reason it showed an increase was because of more activity in areas with significant foreclosures.

Several factors should lift consumer spending as the year progresses. These factors include the dramatic fall in energy prices, greater stability in the housing market, and improving consumer confidence.

This is very possible, but I don't see evidence of this yet.

I should mention that last week the U.S. Census Bureau reported an unexpected increase in retail sales during January. I would like to see further confirmation of the underlying strength hinted at in this report, but on its face, the pickup in consumer spending is encouraging.

This is just one month of data and could be related to gift cards, so I wouldn't read much into that small increase.

Also contributing to the upturn seen in the consensus outlook are the large and targeted fiscal, credit, and monetary policies of the government and the Federal Reserve ... The intent of these aggressive and unprecedented policy actions is to support spending and fix the dysfunction in credit markets that has so severely constrained the economy’s natural forces of growth.

Indeed, we have seen modest, but hopeful, signs that financial markets are improving. A key element in the improved economic environment expected in the latter half of the year is that financial institutions will find more stable footing and begin to provide greater support to business expansion and consumer spending.

I think we can start looking for some rays of sunshine, but I don't see anything yet.

by Calculated Risk on 2/18/2009 02:06:00 PM

Fed Chairman Ben Bernanke spoke today: Federal Reserve Policies to Ease Credit and Their Implications for the Fed's Balance Sheet. Bernanke made a comment that could be interpreted as inflation targeting:

Later today, with the release of the minutes of the most recent FOMC meeting, we will be making an additional significant enhancement in Federal Reserve communications: To supplement the current economic projections by governors and Reserve Bank presidents for the next three years, we will also publish their projections of the longer-term values (at a horizon of, for example, five to six years) of output growth, unemployment, and inflation, under the assumptions of appropriate monetary policy and the absence of new shocks to the economy. These longer-term projections will inform the public of the Committee participants' estimates of the rate of growth of output and the unemployment rate that appear to be sustainable in the long run in the United States, taking into account important influences such as the trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors. The longer-term projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress--that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability.

And here is the "inflation target" from the Fed:

1.7 to 2.0 percent inflation, as measured by the price index for personal consumption expenditures (PCE).

Most participants judged that a longer-run PCE inflation rate of 2 percent would be consistent with the dual mandate; others indicated that 1-1/2 or 1-3/4 percent inflation would be appropriate.

This seems to move the Fed closer to an official inflation target, and the Fed is probably hoping this will increase inflation expectations (since deflation is the current primary concern).

by Calculated Risk on 1/15/2009 04:49:00 PM

From San Francisco Fed President Janet Yellen: The Outlook for 2009: Economic Turmoil and Policy Responses. A few excerpts:

Economic weakness is evident in every sector of the economy. ... With respect to wealth, the combined impact of falling equity and house prices has been staggering. Household wealth has declined by an estimated $10 trillion. ... Not surprisingly, consumer confidence is at a 30-year low and the personal saving rate is on the rise, as people try to rebuild their wealth and provide a cushion against the possibility of job loss. ...

Business spending is also feeling the crunch, as firms face weak demand for their products, a higher cost of capital, and restricted credit. ...

Nonresidential construction, surprisingly enough, has continued to show some growth up to this point, but this is not likely to last much longer. I’m hearing talk about substantial cutbacks on new projects and planned capital improvements on existing buildings for two all-too-familiar reasons—demand is falling as the economy weakens and financing is hard to get. In particular, the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up. Banks and other traditional lenders have also become less willing to extend funding.

... Housing starts have plummeted, falling to nearly one-half of their year-ago level, and it is hard to see when they will bottom out, since inventories of unsold new and existing homes remain at high levels relative to sales. Indeed, the possibility of ongoing contraction in this sector is intensified by the economic downturn, the loss in jobs, and the reduced availability of mortgage credit. ...

The ongoing decline in house prices is a source of particular concern not only because of its impact on consumer spending, but also because it contributes importantly to delinquencies and foreclosures ... [S]ome of the earliest and sharpest price declines nationwide occurred in parts of California and other western states, such as Arizona and Nevada. Foreclosure rates in these states are well above their historic highs dating back at least to the late 1970s, and home prices in the largest metro areas are down by as much as 35 to 40 percent from their 2006 peak. Unfortunately, futures contracts for house prices suggest that further declines are likely this year and next.

Many state and local governments have been dragged into the financial mess. The downturns in the housing markets and the economy have bitten into tax collections at the same time that the financial market turmoil has made it harder to issue bonds. These problems are particularly acute in California. ... The latest projection is for a deficit of about $40 billion that will accumulate over the current and next fiscal year. This is a huge shortfall relative to annual revenue of $100 billion, and the actions needed to overcome it are only likely to add to the recession in the state.

... Economic growth in the rest of the world, particularly in Europe and Japan, has weakened sharply for a number of reasons, including spillovers from the U.S. recession and from the financial meltdown that now has spread globally. ... [I]t now looks likely that the data will show worldwide recession in late 2008 and early 2009, with a more severe and long-lasting contraction in many industrial countries.
emphasis added

Global recession. House prices declining "this year and next". "Substantial cutbacks" in non-residential investment. And on and on ... these Fed speeches are grim and depressing.

by Calculated Risk on 1/04/2009 02:09:00 PM

From San Francisco Fed President Janet Yellen: Comments on "The Revival of Fiscal Policy"

I agree with [Martin Feldstein] that the current downturn is likely to be far longer and deeper than the "garden-variety" recession in which GDP bounces back quickly. As Marty points out, a defining characteristic of this downturn is its cause. Typically, recessions occur when monetary policy is tightened to subdue the inflationary pressures that emerge during a boom. This time, the cause was the eruption of a severe financial crisis. Cross-country evidence suggests that, following such an event, GDP remains subdued for an extended period.2 And consistent with this evidence, many forecasters expect this to be one of the longest and deepest recessions since the Great Depression. Indeed, the crisis is ongoing. Risk-aversion in financial markets remains exceptionally high; deleveraging is widespread; the markets for most private asset-backed securities are dysfunctional; financial institutions, both large and small, have failed; and the economic downturn is causing delinquencies to rise, threatening further financial distress; households and businesses face an ongoing credit crunch; and housing and financial wealth has plunged. Marty points out, and I agree, that the likely impact on consumer spending of the decline in wealth thus far—one of a number of factors weighing on this sector—is, on its own, quite substantial. And house prices are continuing to slide.

And Dr. Yellen argues a fiscal stimulus package is needed:

If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now. Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation—a very grim outcome. Such stagnation would intensify financial market strains, exacerbating the problems that triggered the downturn. It's worth pulling out all the stops to ensure those outcomes don't occur.

by Calculated Risk on 12/04/2008 02:43:00 PM

From Fed Chairman Ben Bernanke: Housing, Mortgage Markets, and Foreclosures

Home sales and single-family housing starts held unusually steady through the 2001 recession and then rose dramatically over the subsequent four years. National indexes of home prices accelerated significantly over that period, with prices in some metropolitan areas more than doubling over the first half of the decade. One unfortunate consequence of the rapid increases in house prices was that providers of mortgage credit came to view their loans as well-secured by the rising values of their collateral and thus paid less attention to borrowers' ability to repay.

However, no real or financial asset can provide an above-normal market return indefinitely, and houses are no exception. When home-price appreciation began to slow in many areas, the consequences of weak underwriting, such as little or no documentation and low required down payments, became apparent. Delinquency rates for subprime mortgages--especially those with adjustable interest rates--began to climb steeply around the middle of 2006. When house prices were rising, higher-risk borrowers who were struggling to make their payments could refinance into more-affordable mortgages. But refinancing became increasingly difficult as many of these households found that they had accumulated little, if any, housing equity. Moreover, lenders tightened standards on higher-risk mortgages as secondary markets for those loans ceased to function.
...
As house prices have declined, many borrowers now find themselves "under water" on their mortgages--perhaps as many as 15 to 20 percent by some estimates. In addition, as the economy has slowed and unemployment has risen, more households are finding it difficult to make their mortgage payments. About 4-1/2 percent of all first-lien mortgages are now more than 90 days past due or in foreclosure, and one in ten near-prime mortgages in alt-A pools and more than one in five subprime mortgages are seriously delinquent. Lenders appear to be on track to initiate 2-1/4 million foreclosures in 2008, up from an average annual pace of less than 1 million during the pre-crisis period.

Predictably, home sales and construction have plummeted. Sales of new homes and starts of single-family houses are now running at about one-third of their peak levels in the middle part of this decade. Sales of existing homes, including foreclosure sales, are now about two-thirds of their earlier peak. Notwithstanding the sharp adjustment in construction, inventories of unsold new homes, though down in absolute terms, are close to their record high when measured relative to monthly sales, suggesting that residential construction is likely to remain soft in the near term.

"Predictably"? ROFLOL. Hey, hoocoodanode?

Most of the speech focuses on foreclosure prevention, and I'll get to that later.

by Calculated Risk on 12/01/2008 02:58:00 PM

From Bloomberg: Bernanke Says Fed May Buy Treasuries to Aid Economy

“Although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest-rate policies to support the economy is obviously limited,” Bernanke said in prepared remarks to the Austin Chamber of Commerce.

One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”

Here is Bernanke's speech: Federal Reserve Policies in the Financial Crisis

by Calculated Risk on 11/18/2008 09:31:00 AM

From Federal Reserve Chairman Ben Bernanke's Testimony to Congress: Troubled Asset Relief Program and the Federal Reserve's liquidity facilities

There are some signs that credit markets, while still quite strained, are improving. Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market. Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks. The ongoing capital injections under the TARP are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage, two critical first steps toward restarting flows of new credit. However, overall, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October. There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.

by Calculated Risk on 11/06/2008 07:18:00 PM

"[Policymakers] should be steady when financial market participants are fearful, and fearful when markets appear steady."
Governor Kevin Warsh, Nov 6, 2008

Yes, the Fed was not properly fearful when markets appeared steady. As Paul Volcker said in Feb 2005:

"Under the placid surface, at least the way I see it, there are really disturbing trends: huge imbalances, disequilibria, risks – call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot."

Too bad the policymakers didn't listen then.

Here are few excepts from Fed Governor Kevin Warsh's speech: The Promise and Peril of the New Financial Architecture

There are some notable signs of improvement. Short-term funding spreads are retreating from extremely elevated levels. Funding maturities are being extended beyond the very near term. Money market funds and commercial paper markets are showing signs of stabilization. And credit default swap spreads of banking institutions are narrowing significantly.

Nonetheless, financial markets overall remain strained. Risk spreads remain quite high and lending standards appear strict. Indications of economic activity in the United States have turned decidedly negative. The economy contracted slightly in the third quarter, and the recent data on sales and production suggest that the fourth quarter will be weak.

Still, the depth and duration of this period of weak economic activity remain highly uncertain.

And on the causes of the credit crisis, Warsh argues it is not just housing and definitely not contained:

Many observers maintain that the boom and bust in the housing market are the root cause of the current turmoil. No doubt housing-related losses are negatively affecting household wealth and spending. Moreover, the weakness in housing markets and uncertainty about its path have caused financial institution balance sheets to deteriorate. This situation has further accelerated the deleveraging process and tightened credit conditions for businesses and households.

When liquidity pulled back dramatically in August 2007, housing suffered mightily. ...

While housing may well have been the trigger for the onset of the broader financial turmoil, I have long believed it is not the fundamental cause. Indeed, recent financial market developments strongly indicate that housing, as an asset class, does not stand alone. Indeed, the problems associated with housing finance reveal broader failings, including inadequate market discipline, excessive reliance on credit ratings, and poor credit and liquidity risk-management practices by many financial firms.

During the past several months, this domestic housing-centric diagnosis has also been subjected to a natural experiment. Among U.S. financial institutions, asset quality concerns are no longer confined to the mortgage sector. At the same time, non-U.S. financial institutions--including some with relatively modest exposures to the United States or their own domestic housing markets--appear to be suffering substantial losses. Equity prices of European banks declined more on average during 2008 year-to-date than their U.S. counterparts. Moreover, economic weakness among our advanced foreign trading partners is increasingly evident, even among economies with more modest exposures to the housing sector.

... I would advance the following: We are witnessing a fundamental reassessment of the value of virtually every asset everywhere in the world.
emphasis added

by Calculated Risk on 10/30/2008 03:57:00 PM

From San Francisco Fed President Dr. Janet Yellen: The Mortgage Meltdown, Financial Markets, and the Economy. Excerpt on the economic outlook:

[R]ecent data on the economy have been deeply worrisome. Data released this morning reveal that the economy contracted slightly in the third quarter. For the fourth quarter, it appears likely that the economy is contracting significantly. Mainly for this reason, inflationary risks have diminished greatly.
...
For consumers, the credit crunch is one of several negative factors accounting for the decline in spending in recent months. Consumer credit is costlier and harder to get: loan rates are up, loan terms are tougher, and increasing numbers of borrowers are being turned away entirely. This explains, in part, the exceptional weakness we have seen in auto sales. In addition, of course, employment has now declined for nine months in a row, and personal income, in inflation-adjusted terms, is virtually unchanged since April. Furthermore, household wealth is substantially lower as house prices have continued to fall and the stock market has declined sharply.

Business spending, too, is feeling the crunch in the form of a higher cost of capital and restricted access to credit. ... Some of our business contacts report that bank lines of credit are more difficult to negotiate, and many indicate that they have become cautious in managing liquidity, in committing to capital spending projects that can be deferred, and even in extending credit to customers and other
counterparties. Nonresidential construction also is headed lower largely because of the financial crisis; the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up.
...
Until recently, weakness in domestic final demand was offset by a major boost from exporting goods and services to our trading partners. Unfortunately, economic growth in the rest of the world has slowed noticeably. ... As a result, exports will not provide as much of an impetus to growth as they did earlier in the year.
emphasis
added

"It appears likely that the economy is contracting significantly". Strong words from a Fed president. Q4 is going to be ugly.

by Calculated Risk on 10/15/2008 06:03:00 PM

Here are a few comments from the Q&A. The official stance of the Fed has been to ignore asset bubbles - others have argued that the Fed must consider asset prices as part of monetary policy. This has been an area of significant research in recent years for obvious reasons.

Here are some comments from Greenspan in 2002 after the stock bubble:

If the bursting of an asset bubble creates economic dislocation, then preventing bubbles might seem an attractive goal. But whether incipient bubbles can be detected in real time and whether, once detected, they can be defused without inadvertently precipitating still greater adverse consequences for the economy remain in doubt.
...
If the postmortem of recent monetary policy shows that the results of addressing the bubble only after it bursts are unsatisfactory, we would be left with less-appealing choices for the future. In that case, finding ways to identify bubbles and to contain their progress would be desirable, though history cautions that prospects for success appear slim.
Alan Greenspan, Issues for Monetary Policy, December 19, 2002

I don't think significant asset bubbles are really that hard to identify.

Here are Bernanke's comments from Bloomberg: Bernanke Weighs Limiting Consolidation, Asset Bubbles (hat tip James)

Federal Reserve Chairman Ben S. Bernanke said the central bank will consider discarding its long- standing aversion to interfering with asset-price bubbles and warned that the banking business may be concentrated in too few companies.

Officials should review how supervision and interest rates can minimize the ``dangerous phenomenon'' of bubbles in housing, stocks and other assets that risk bringing the financial system and economy down with them when they burst, Bernanke said.

``There is no doubt that as we emerge from the current crisis that we are all going to look very hard at that issue and what can be done about it,'' he told the Economic Club of New York in his broadest remarks on future regulatory changes since the credit crisis deepened last month.

by Calculated Risk on 10/15/2008 12:19:00 PM

From Fed Chairman Ben Bernanke: Stabilizing the Financial Markets and the Economy. Excerpt on the economy:

Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away. Economic activity had been decelerating even before the recent intensification of the crisis. The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment, and the labor market. Credit markets will take some time to unfreeze. And with the economies of our trading partners slowing, our export sales, which have been a source of strength, very probably will slow as well. These restraining influences on economic activity, however, will be offset somewhat by the favorable effects of lower prices for oil and other commodities on household purchasing power. Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.
emphasis added

Bernanke is looking for longer term improvement - the next few quarters will be ugly for sure.

by Calculated Risk on 10/14/2008 11:31:00 PM

From San Francisco Fed President Janet Yellen: The Financial System and the Economy. Here are Dr. Yellen's comments on the economy:

The recent flow of economic data suggests that the economy was weaker than expected in the third quarter, probably showing essentially no growth at all. Growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely. Indeed, the U.S. economy appears to be in a recession.
...
By now, virtually every major sector of the economy has been hit by the financial shock. I’ll start with consumer spending, where the news has not been good. Employment has now declined for nine months in a row, and personal income, in inflation-adjusted terms, is virtually unchanged since April. Household wealth is substantially lower as house prices have continued to slide and the stock market has declined sharply. On top of this, consumer credit is costlier and harder to get: loan rates are up, loan terms are tougher, and increasing numbers of borrowers are being turned away entirely. Even before the extraordinary deterioration in financial market conditions over the past few weeks, the evidence was accumulating that consumer spending had weakened. In real terms, consumer spending was flat or contracted in recent months.
...
Business spending, too, is feeling the crunch, as firms face weak final demand for their products, a higher cost of capital, and restricted credit. ... We’ve even begun to see some signs of a slowdown for the previously very strong IT industry across the country and in the Bay Area in particular. ... A tech slowdown could intensify with the fall-off in consumer spending, and the weakening in business spending could come into play since the financial industry is a heavy user of both IT equipment and software.
...
Nonresidential construction is another sector that has been affected by the financial crisis, in part because the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up. ... With financing unavailable, I’m hearing talk about substantial cutbacks on new projects and planned capital improvements on existing buildings.
...
Until recently, we have received a major boost from exporting goods and services to our trading partners. Unfortunately, the news on foreign demand has also turned weaker. Economic growth in the rest of the world, particularly in Europe and Japan, has slowed for a number of reasons, including spillovers from the U.S. slowdown, and most importantly, the financial meltdown that now has intensified substantially in Europe and elsewhere. ... As a result, exports will not provide as much of an impetus to growth as they did earlier in the year.
emphasis added

That is pretty much a clean sweep. All sectors are now slowing or in recession (except possibly government spending).