by Calculated Risk on 12/06/2011 09:47:00 PM

From Alejandro Lazo at the LA Times: California and Nevada join forces in mortgage probe

An alliance by California and Nevada to jointly investigate misconduct and fraud in the mortgage business further divides efforts by the nation's attorneys general to bring the home-lending industry to account for improper foreclosure practices.
...
The agreement to work together, announced in Los Angeles on Tuesday by California Atty. Gen. Kamala D. Harris and Nevada Atty Gen. Catherine Cortez Masto, comes a week after Massachusetts said it was suing the nation's five largest mortgage servicers over alleged foreclosure illegalities. The moves escalate pressure on the nation's biggest financial institutions already in high-level negotiations with a coalition of state attorneys general over their alleged abuses.

It is appearing less and less likely that there will be a settlement any time soon ...

by Calculated Risk on 12/06/2011 05:49:00 PM

CR Note: The following is a long discussion by Tom Lawler of the recent Fed paper looking at the role of real estate "investors" (really speculators) during the housing bubble. Lawler cautions about drawing quick conclusions from the graphs.

First, a quote from Lawler in 2005:

“The investor share of the purchase market has increased dramatically, to levels not seen since at least the late 1980’s. The investor share increase has been concentrated in MSAs with exceptionally rapid home price growth”

“(C)onditions in many parts of the country mirror past conditions that preceded regional housing ‘busts’.”
Tom Lawler, NAHB Spring Construction Conference, May 25, 2005

People were warned! (In April 2005, I wrote Housing: Speculation is the Key)

From economist Tom Lawler:

In a relatively recent Federal Reserve Bank of New York “Staff Report” entitled “Real Estate Investors, the Leverage Cycle, and the Housing Crisis,” FRB of NY economists Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw utilize data from the FRBNY’s Consumer Credit Panel (CCP) data set of US individuals with credit files to attempt to document the role of mortgage-financed purchases of real estate by “investors” in last decade’s housing boom and bust. Here is a summary. Here is the abstract:

“We explore a mostly undocumented but important dimension of the housing market crisis: the role played by real estate investors. Using unique credit-report data, we document large increases in the share of purchases, and subsequently delinquencies, by real estate investors. In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default. Our findings have important implications for policies designed to address the consequences and recurrence of housing market bubbles.”

In re the data, here’s an excerpt from the report.

“We can use this information (in the datset) to separate mortgage borrowers based on how many distinct first-lien mortgage accounts appear on their credit reports. Since each property can secure at most a single first-lien mortgage, the number of such mortgages on a borrower’s credit report is a reliable, non-self reported, indicator of the minimum number of properties a given individual has borrowed against.24 This kind of information about individual borrowers is not available in loan-level data sets and thus the FRBNY CCP data provide a unique perspective into important questions about who is originating new mortgages at any point in time, as well as their subsequent behavior.”

Folks who read the paper should read it carefully, as a “quick read” can lead to a bit of confusion on what some of the data and charts mean. E.g., there are charts on investor shares of new purchase mortgage borrowing that a “quick” reader might conclude represent estimates of the shares of mortgage-financed purchases FOR investment by non-owners as opposed to estimates of the share of mortgage-financed purchases BY folks who own more than one property with a mortgage (i.e., BY investors), even if the a GIVEN purchase by an “investor” happens to be for his/her primary residence. (By and For mean very different things!)

Similarly, there are charts showing the share of first-lien mortgages outstanding owed BY “investors,” which the casual reader might incorrectly conclude represent the share of mortgages outstanding on non-owner-occupied properties owned FOR investment, as opposed to the share of first-lien mortgages owed by folks who happen to own more than one mortgage-financed property, one of which is likely to the be the real estate investor’s primary residence! (Many real-estate “investors” actually live in a home with a mortgage!

E.g., here is a chart from the report showing the “investor share” of new purchase-mortgage borrowing.

Click on graph for larger image.

(Shares are, I believe, shares of purchases by folks with “x” number of first-lien mortgages on their credit reports)

A casual reader might look at this chart and say, “holy crap,” in 2006 the share of mortgage-financed purchases FOR investment (or vacation homes) was almost 35%!

That would be an incorrect interpretation. Rather, the above chart represents an estimate of the share of mortgage-financed purchases BY individuals who had a mortgage on more than one property. That is a non-trivial distinction.

E.g., if a person who had a mortgage on his/her primary residence AND who had a mortgage on a different property (such as a vacation home) used a mortgage to finance the purchase of his/her new primary residence, that transaction would count as an “investor purchase” by the authors’ definition (a purchase BY an investor, not necessarily FOR investment).

Ah! Now inquiring minds probably want to know how the authors deal with folks who moved, but either (1) who moved before selling their previous primary residence and who carried two mortgages for a period of time; or (2) who, because of “reporting delays” on credit reports, were “shown” as carrying two mortgages when in fact they were not. Here’s how the authors attempt to deal with that.

“We observe borrowers’ credit reports on the final day of each quarter. Because there can be delays in credit reporting such that a mortgage that has been paid off may stay on the credit report for a period of time, we use the data’s panel structure to correct for these delays. Throughout this section of our analysis investor status is determined based on the maximum number of first mortgages that appear in both of the two most recent quarters. Thus we can be more confident that each first-lien we consider is in fact associated with a unique property.”

I did confirm with the authors that if I financed the purchase of our current residence in July 2007, but did not sell my previous residence until a year later (and if it had a mortgage), that I would have been classified as a “2 first mortgages” holder for the intervening period. Similarly, if I had a mortgage on our beach house as well, for a brief period I would have been classified as a “3 first mortgages” holder, and after the sale of our previous primary residence I’d be back down to a “2 first mortgages” holder. (In real life I don’t have any mortgages).

Similarly, consider another chart from the report.

Investor share of number of first mortgages outstanding

Again, a “casual” reader might look at this chart and conclude that in the first quarter of 2008 the “share” of non-owner-occupied first mortgages outstanding was almost 25%. That would be incorrect.

The authors, by the way, are not meaning to confuse. One just needs to read the report carefully.

E.g., in the above chart it seems reasonable to conclude that for most borrowers with 2 first mortgages, one is a mortgage on their primary residence. The same is probably true for the 3- and 4+- holders. That would lead one to conclude (Q&D) that in the first quarter of 2008 the % of non-owner-occupied first mortgages outstanding was more like half what is shown above¹.

¹ Hope Now estimates that non-owner-occupied share of residential first-lien mortgages outstanding at the end of September was 9.4%, but that figure is likely understated.

A final chart I’m going to show from the paper is one that estimates the “investor” share of seriously-delinquent mortgages.

Investor share of 90% DPD first mortgage balances

One of the intriguing and important issues raised in the “conclusions” section of the paper relates to a question many folks, including myself, would like answered: what % of properties backing seriously delinquent loans are actually occupied by the owner of the property? The authors believe that the CCP data suggest that the % may be significantly greater than many folks believe, though, as noted above, the data aren’t “conclusive.” E.g., Hope Now estimates that at the end of September the % of residential first-lien loans 60+ days delinquent that were non-owner-occupied properties was 11.5%,, though its 60+ numbers don’t include loans in the foreclosure process. Unfortunately, I can’t for sure tell from the above chart what the RIGHT % is – but it makes a difference both in terms of how effective mod programs targeted at owner-occupied homes will be in terms of addressing the TOTAL delinquency/foreclosure issue, AND in terms of the wisdom of foreclosure moratoria/delays/etc. E.g., for vacant properties with delinquent loans, or properties with delinquent loans that are being rented out but not adequately maintained, it probably makes sense from a policy perspective to ACCELERATE the foreclosure process!

All in all, the paper is quite interesting and does shed some new light about the role real estate “investors” played in the housing boom/bust, and it is worth reading. The paper also shows some “investor” shares for “bubble” states that are quite illuminating.

Amusingly, the paper cites the amazingly bad paper by the clueless economists Himelberg, Mayer, and Sinai from 2005 (FRBNY Staff Report) entitled “Assessing High Home Prices: Bubbles, Fundamentals, and Misperceptions,” where the authors not only displayed a complete lack of knowledge of mortgage data sources, but who also DID NOT MENTION subprime, alt-A, low/no documentation mortgages, real-estate investor behavior. In a shocking but refreshing “mea culpa” piece on the FRBNY’s blog site entitled “Failure to Forecast the Great Recession,” Simon Potter not only documents the poor performance of the FRBNY’s economic projections, but also notes that FRBNY research (1) “misunderstood” the housing boom (citing the embarrassing HMS paper, as well as the silly 2004 McCarthy and Peach paper), and (2) there was “a lack of analysis of the rapid growth of new mortgage finance.” (See The Failure to Forecast the Great Recession)

While it now appears that “occupancy fraud” was distressingly common during the real-estate boom (one wonders, by the way, why mortgage originators didn’t check credit reports to see if a buyer claiming that he/she was going to purchase a home for his/her primary residence had more than one first mortgage outstanding!), there was still evidence that the non-owner-occupied share of mortgage-financed purchases was rising during the housing boom based on “accurately” reported occupancy purposes. E.g., here are some data from HMDA.

[This data was] taken from various annual articles from the Federal Reserve Bulletin on the HMDA data. I don’t know for sure what the 2000 and beyond data were “revised.”

Data from the old LoanPerformance “prime conventional conforming” database, which was not loan level but which had aggregate stats for PCC loans, also showed rising investor shares, especially in “bubble” markets. [The next] chart [is] from a presentation I made at the NAHB Fall Construction Forecast Conference in October, 2007.

“Second” refers to second homes such as vacation homes, while “investor” refers to investment (rental income) properties.

At the NAHB Spring Construction Conference on May 25th, 2005 I noted (using this data source) to support my statement that “(t)he investor share of the purchase market has increased dramatically, to levels not seen since at least the late 1980’s. The investor share increase has been concentrated in MSAs with exceptionally rapid home price growth.”

The National Association of Realtors “Investment and Vacation Home Buyers also suggested a big increase in buying of properties “for investment” in the middle of last decade. Unfortunately I only have data back to 2003, and I should note that I’ve never been able to “reconcile” this data to either the NAR’s Profile of Home Buyers and Sellers (which is based almost but not completely on a survey of principal-residence buyers) or to other sources).

According to this survey, 68% of buyers of “investment” properties used a mortgage to finance the purchase in 2006, compared to just 39% in 2010. While I can’t find the shares for earlier years, the NAR’s “Profile of Second Home Owners” published in 2006 suggested that about 76% of folks who purchased an investment property from 2003 to 2005 used a mortgage to finance the purchase.

This is all a long-winded way of saying that despite what appears to have been a decent amount of “lying” on mortgage applications on a borrower’s intended use of his/her home purchase, there was still a significant amount of evidence available DURING the housing bubble that the share of mortgage-financed purchases by investors was rising SIGNIFICANTLY, and was rising exceptionally rapidly in the “most bubbly” of areas.

There was also, of course, LOTS of data on the rise in the subprime share of the mortgage market, the rise in the low/no doc share of the mortgage market, the rise in piggyback financing and low/no down payment purchases, the rise in interest-only/pay-option mortgages, etc.

CR Note: This was from economist Tom Lawler.

by Calculated Risk on 12/06/2011 03:04:00 PM

From the Financial Times: EU talks on doubling financial firewall. The story suggests negotiators are considering allowing the EFSF to continue even after the €500bn European Stability Mechanism (ESM) takes effect next July.

Under the plans being considered, the ESM is unlikely to have its headline €500bn from the start, now envisioned for July. But leveraging up the existing EFSF, which could raise its disposable resources to about €600bn, and adding new IMF and ESM resources could create the so-called “bazooka” effect leaders have been searching for.
excerpt with permission

Also there are discussions about the ECB lending money via the IMF (see FT Alphaville).

Will this bring private investors back into the European sovereign bond markets? And this doesn't address Germany's large current account surplus (and the current account deficits of other countries).

Meanwhile bond yields are much lower than 2 weeks ago ... the Italian 2 year yield is down to 5.59%, and the 10 year yield is down to 5.87%. Both were above 7% not long ago.

The Spanish 2 year yield is down to 4.01%, and the 10 year yield was down to 5.21%. The ten year was at 6.7% on November 24th.

The Belgian 10 year yield is at 4.3% (down from 5.86% on Nov 24th), and the French 10 year yield is at 3.24% (down from 3.72% on Nov 23rd).

by Calculated Risk on 12/06/2011 01:38:00 PM

There was a Bloomberg article last week that I ignored (it appeared inaccurate to me).

Fed Chairman Ben Bernanke has responded today. This includes a staff memo. (Click on the link for the entire memo).

A excerpt:

[O]ne article incorrectly asserted that banks "reaped an estimated $13 billion of income by taking advantage of the Fed's below-market rates." Most of the Federal Reserve's lending facilities were priced at a penalty over normal market rates so that borrowers had economic incentives to exit the facilities as market conditions normalized, and the rates that the Federal Reserve charged on its lending programs did not provide a subsidy to borrowers.

My comment: This is the Federal Reserve doing exactly what it should during a financial crisis: lending freely at a penalty rate on good collateral. Walter Bagehot wrote about this in Lombard Street (1873):

If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security—on what is then commonly pledged and easily convertible—the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.

I've criticized the Fed, sometimes harshly, and especially about the lack of regulatory oversight during the housing bubble. But this is the Fed acting as lender of last resort and I think this criticism was both inaccurate and way off base.

by Calculated Risk on 12/06/2011 10:29:00 AM

Notes: This CoreLogic Home Price Index report is for October. The Case-Shiller index released last week was for September. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average of August, September and October (October weighted the most) and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic® October Home Price Index Shows Third Consecutive Month-Over-Month Decline

CoreLogic ...today released its October Home Price Index (HPI®) which shows that home prices in the U.S. decreased 1.3 percent on a month-over-month basis, the third consecutive monthly decline. According to the CoreLogic HPI, national home prices, including distressed sales, also declined by 3.9 percent on a year-over-year basis in October 2011 compared to October 2010. ... Excluding distressed sales, year-over-year prices declined by 0.5 percent in October 2011 compared to October 2010 and by 2.1* percent in September 2011 compared to September 2010. Distressed sales include short sales and real estate owned (REO) transactions.

“Home prices continue to decline in response to the weak demand for housing. While many housing statistics are basically moving sideways, prices continue to correct for a supply and demand imbalance. Looking forward, our forecasts indicate flat growth through 2013,” said Mark Fleming, chief economist for CoreLogic.

Click on graph for larger image.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index was down 1.3% in October, and is down 3.9% over the last year.

The index is off 32.0% from the peak - and up just 2.5% from the March 2011 low.

Some of this decrease is seasonal (the CoreLogic index is NSA). Month-to-month prices changes will probably remain negative through February or March 2012 - the normal seasonal pattern. It is likely that there will be new post-bubble lows for this index in early 2012.
All House Price Graphs

by Calculated Risk on 12/06/2011 08:58:00 AM

Another update: I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory. Tom Lawler mentioned this back in June (Tom also discussed how the NAR estimates existing home inventory - they don't aggregate data from local boards!)

In the near future, the NAR is expected to release revisions for their existing home sales and inventory numbers for the last few years. The sales and inventory revisions will be down (the NAR has pre-announced this).

Using the deptofnumbers.com for monthly inventory (54 metro areas), it appears inventory will be below the December 2005 levels this month. Unfortunately the deptofnumbers only started tracking inventory in April 2006.

Click on graph for larger image.

This graph shows the NAR estimate of existing home inventory through October (left axis) and an adjusted inventory using the HousingTracker.net data for the last few years.

HousingTracker is reporting that inventory in the 54 metro area is down 17.5% from the same week in 2010. If this adjustment is close, existing home inventory is now below the levels of late 2005 - and that is when inventory started rising sharply.

This is just "visible inventory" (inventory listed for sales). There is a large percentage of distressed inventory, and various categories of "shadow inventory" too, but visible inventory has clearly declined in many areas.

In a previous post, I used this data to estimate the coming NAR downward revision for sales, see: A few comments on the expected NAR existing home sales revisions. Here is a repeat of the table:

Here is what the adjustment to the NAR sales would look like using the HousingTracker data (this is NOT the NAR adjustment):

Year	Sales, as Reported	YoY Change, as Reported	Adjustment	Sales, Adjusted	YoY Change, Adjusted
2007	5,652,000	-12.7%	-2.8%	5,495,000	-15.2%
2008	4,913,000	-13.1%	-4.5%	4,691,000	-14.6%
2009	5,156,000	4.9%	-10.0%	4,642,000	-1.0%
2010	4,908,000	-4.8%	-13.4%	4,250,000	-8.4%
20112	4,950,000	0.9%	-15.1%	4,201,000	-1.2%
1An example of adjustment, this is NOT the NAR adjustment, 2estimate for 2011

Hopefully the revisions will be released soon.

by Calculated Risk on 12/05/2011 09:43:00 PM

I've been wondering how weak the drachma and other currencies would be if there was a break up of the eurozone. The following is just a rough estimate ... but imagine how much more expensive gasoline will be in Greece?

Note: I've added FT Alphaville feeds to the sidebar. It is a must read on the European financial crisis.

From Joseph Cotterill at the Financial Times Alphaville: Post-euro currencies, charted

Along with “redenomination risk” for eurozone financial assets, this is another of those pieces of bank research that’s as interesting for being considered necessary to be written in the first place, as much as for its conclusion.

(Yes, we know it’s a dampener to talk about a euro break-up when the German and French governments are promising European unification, sweetness and light on a scale not seen since Charlemagne. But since it really is about either complete fiscal union, or this – it’s worth noting.)

Click on graph for larger image.

Once again it’s Nomura taking the plunge on covering the break-up issue. In his December 4 note, the bank’s FX analyst Jens Nordvig warned that conclusions about the value of a post-euro currencies would have to be extremely provisional:

... we want to stress up-front that these estimates are unlikely to be particularly precise. They are intended to give a sense of potential magnitudes involved over a 5-year forward time frame, after which we believe temporary transition effects should be smaller.
...
A eurozone break-up will create additional short-term risks and require new risk premia for investors. These extraordinary risk premia will vary by country depending on factors such as market volatility, liquidity conditions, as well as issues relating to capital controls, including possible taxes on capital flows. Since our analysis is focussed on equilibrium considerations over a 5-year period, we will not focus directly on these more temporary effects, although we recognize that they could be crucial in the short-term.

by Calculated Risk on 12/05/2011 06:25:00 PM

Several readers have asked me to comment on this new paper from Fed economists Haughwout, Lee, Tracy, and van der Klaauw: “Flip This House”: Investor Speculation and the Housing Bubble (ht Josh)

[W]e present new findings from our recent New York Fed study that uses unique data to suggest that real estate “investors”—borrowers who use financial leverage in the form of mortgage credit to purchase multiple residential properties—played a previously unrecognized, but very important, role. These investors likely helped push prices up during 2004-06; but when prices turned down in early 2006, they defaulted in large numbers and thereby contributed importantly to the intensity of the housing cycle’s downward leg.

It was pretty obvious that investor buying was pushing up prices in 2004 and 2005. I wrote a post in April 2005 (over six years ago!) on that subject: Housing: Speculation is the Key (Note: in that 2005 post I treated speculation as storage and showed how speculation pushes up prices during the bubble - and pushes down prices after the bubble bursts).

The Fed economists have added some data. Although I think the data suggests a significant role for speculation - especially in certain bubble areas - I think the data is a little confusing. One problem is that many move up buyers tend to buy their new home before selling their old home. So they have two mortgages while the old home is on the market. This was especially common during the bubble because move up buyers didn't want to sell until they were sure they had found something to buy. The Fed data appears to count these people as investors.

Another problem is the Fed didn't try to adjust for 2nd home owners.

But one thing is clear: investor buying did contribute to the bubble, but it wasn't the cause. But - as I noted in 2005:

Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the "bubble" bursts.

It was no surprise that investors piled in after prices really took off. But the real causes of the bubble were rapid changes in the mortgage lending industry combined with a lack of regulatory oversight. The speculators just added to the fire.

by Calculated Risk on 12/05/2011 04:18:00 PM

Another house price index ...

The LPS HPI is a repeat sales index that uses public disclosure by county recorders or loan origination data for purchase loans (if the sales price isn't disclosed).

From LPS: LPS Home Price Index Shows 1.2 Percent Decline in September U.S. Home Prices; Early Data Suggests Further 1.1 Percent Drop in October Likely

“Home prices in September were consistent with the seasonal pattern that has been occurring since 2009,” explained Kyle Lundstedt, managing director for LPS Applied Analytics. “Each year, prices have risen in the spring, but revert in autumn to a downward trend that has not only erased the gains, but has led to an average 3.7 percent annual drop in prices to date. The partial data available for October suggests a further approximate decline of 1.1 percent. Partial data from last month proved to be a good indicator for September's performance: it showed a preliminary 1.1 percent estimated decline, compared to the 1.2 percent as shown by the full month’s data.”

The LPS HPI national average home price for transactions during September was $202,000 – a decline of 1.2 percent for the month. As in previous years, this decline follows a 0.9 percent decline during August (Figure 1).

Click on graph for larger image.

Figure 1: "Prices have fallen since autumn 2008 with brief interruptions each spring. Except for February of this year, prices have not been at the current level since January 2003."

LPS HPI average national home prices continue the downward trend begun after the market peak in June 2006, when the total value of U.S. housing inventory covered by the LPS HPI stood at $10.6 trillion. The value has declined 30.2 percent since that peak to $7.56 trillion.

During the period of most rapid price declines, from June 2007 through December 2008, the LPS HPI national average home price dropped $56,000 from $282,000, which corresponds to an average annual decline of 13.8 percent. Since December 2008, prices have fallen more slowly, interrupted by brief seasonal intervals of rising prices. During this period of more slowly declining prices, the national average price has fallen approximately $24,000 from $226,000. ... Price changes were consistent across the country during September, declining in all ZIP codes in the LPS HPI.

It appears all of the price indexes will show new post-bubble lows later this year - or early in 2012.

by Calculated Risk on 12/05/2011 01:45:00 PM

Over the weekend, the WSJ had an article about a new communication strategy at the Fed: Federal Reserve Prepares to Make Itself Perfectly Clear

Here are some related comments from Chicago Fed president Charles Evans today: A Risk Management Approach to Monetary Policy

The Fed could sharpen its forward guidance in two directions by implementing a state-contingent policy. The first part of such a policy would be to communicate that we will keep the funds rate at exceptionally low levels as long as unemployment is somewhat above its natural rate. The second part of the policy is to have an essential safeguard — that is, a commitment to pull back on accommodation if inflation rises above a particular threshold. This inflation safeguard would insure us against the risks that the supply constraints central to the structural impediments scenario are stronger than I think. Rates would remain low as long as the conditions were unmet.

Furthermore, I believe the inflation-safeguard threshold needs to be above our current 2 percent inflation objective — perhaps something like 3 percent. Now, the “3 percent inflation” number may seem shocking coming from a conservative central banker. However, as Kenneth Rogoff recently wrote in a Financial Times piece, “Any inflation above 2 percent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures.”[5] I agree wholeheartedly with Professor Rogoff.

And actually, this middle ground policy guidance is not as out-of-the box as one might think. Importantly, it is consistent with the most recent liquidity trap research, which shows that improved economic performance during a liquidity trap requires the central bank, if necessary, to allow inflation to run higher than its target for some time over the medium term. Such policies can generate the above-trend growth necessary to reduce unemployment and return overall economic activity to its productive potential. In fact, I have seen model simulation results that suggest to me that core inflation is unlikely to rise as high as 3 percent under such a policy.
...
If, as I fear, the liquidity trap scenario describes the present environment, we risk being mired in recession-like circumstances for an unacceptably long period. Indeed, each passing month of stagnation represents real economic losses that are borne by all. In addition, I worry that even when the economy does regain traction, its new potential growth path will be permanently impaired. The skills of the long-term unemployed may atrophy and incentives for workers to invest in acquiring new skills may be diminished. Similarly, businesses facing uncertain demand are less inclined to invest in new productive capacity and technologies. All of these factors may permanently lower the path of potential output.

As I said in the fall of 2010 and I repeat the message again today: I think state-contingent policies such as those I just described are a productive way to provide such necessary monetary accommodation. There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape. It is imperative to undertake action now.