Ever since the recovery began in 2009, a weak housing market has held back the U.S. economy. The first rebound in home prices was lackluster and after only a year was followed by another dip. But the recent upturn in home prices looks like the real thing. One clear sign of a turning point: In March, homeownership hit a 17-year low, while the 12-month gain in home prices was the biggest in seven years. Those two extremes suggest that the market has hit bottom. The people who are least well financed have been squeezed out, while demand is growing among people who can afford to pay higher home prices. If that trend continues – and there are good reasons to believe it will – a substantial burden will be lifted from the U.S. economy. The great surprise since the recession ended has been the weakness of the economic rebound, which has been particularly clear in the housing market. After falling 31% from 2006 to 2009, home prices rose almost 5% over the following year. But that recovery faltered, and during the next 20 months prices fell to a new low. Then the current recovery began, and barring another recession, all the evidence indicates that it will be sustainable: In the first quarter, home prices were higher (compared with a year earlier) in 133 of 150 metropolitan areas, according to the National Association of Realtors. On a national basis, the median home price gained 11.3%, the biggest yearly gain since 2005. (MORE: The Housing Mirage) The glut of homes for sale has diminished, down almost 17% compared with the previous year. In addition, the number of foreclosures in April (including bank repossessions and scheduled auctions) was 23% lower than a year earlier. Mortgage applications were up 7% in the most recent week, helped by low mortgage rates. Refinancings, which typically improve homeowners’ finances, have been generally rising in recent months and reached their highest level since December. And a Fannie Mae survey of consumer expectations for housing found that a majority of those surveyed in
Tag Archives: federal reserve
Viewpoint: Ben Bernanke, Enabler of America’s Fiscal Dysfunction
Federal Reserve chairman Ben Bernanke doesn’t get much respect. PIMCO’s Bill Gross, who oversees some of the country’s biggest bond portfolios, has warned that Bernanke risks rousing inflationary dragons. NYU professor Nouriel Roubini, who correctly anticipated the 2008 financial crisis, has argued that Bernanke’s policies are failing to help the economy and are instead fueling a stock market bubble that will end in a financial crisis. Even experts who are sympathetic have been cutting at times. New York Times columnist Paul Krugman has acknowledged that the Fed chairman is a fine economist. But his long-running disputes with Bernanke – known in some quarters as the Battle of the Beards – have included charges that Bernanke was assimilated by the Fed Borg, a reference to Star Trek’s collective alien intelligence that overwhelms individuality and personal will. Renowned investor and business magnate Warren Buffett has described Bernanke as “a gutsy guy,” but he has also criticized the Fed’s policies as brutal toward retirees, who depend on interest payments from their investments. Indeed, Bernanke himself acknowledged as much in a 2011 press conference: ”We are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people. They have costs for savers. We have complaints from banks that their net interest margins are affected by low interest rates. Pension funds will be affected if low interest rates for a protracted period require them to make larger contributions. So we are aware of those concerns, and we take them very seriously. I think the response is, though, that there is a greater good here, which is the health and recovery of the U.S. economy.” (MORE: How Silicon Valley is Hollowing out the Economy) It’s understandable that a public official would feel obliged to do whatever is best for the country at any given moment. If the lack of sound long-term fiscal policies is holding back growth, then up to a point the Fed can justify pumping large quantities of money into the banking system as additional stimulus. But there is a limit. In the long run, excessive money creation may engender
Safe Bet? Central Banks Suddenly Start Buying Stocks
Fed up with low bond yields, the most conservative investors on the planet have begun to load up on stocks. Retirees? No, I’m talking about the world’s central bankers. Nearly one in four central bankers say their institution owns stocks or plan to own stocks in the near future, according to a Bloomberg report. The Bank of Japan plans to more than double its stock position, according the report, which cites a Central Banking Publications and Royal Bank of Scotland survey. The Bank of Israel bought stocks for the first time last year. And both the Swiss National Bank and Czech National Bank have boosted stock ownership to at least 10% of reserves. This move into stocks is highly unusual. Central bankers are famously risk-averse. Previous surveys in this series didn’t even ask about stocks. Central banks tend to hold reserves in government bonds, which are easy to buy and sell. (They use reserves to manage their national currencies.) But with yields having fallen below the rate of inflation, holding bonds devalues their reserves. So they have begun diversifying into other assets, chasing higher returns. This is not unlike the dilemma facing many retirees and other individual investors: Holding ultra-safe interest-bearing investments is wise past a certain age; yet when yields are lower than the inflation rate, this strategy erodes buying power and undermines long-term financial security. For this reason, many retirees have been seeking higher yields with dividend-paying stocks and even moving into high-yield, high-risk corporate bonds. (MORE: A Nation of Renters: Should We Be Worried That Fewer Americans Own Homes?) Central banks, of course, have a much bigger margin for error than your typical retiree. Their time horizon is eternity and they can print more money if they must, though the consequences of doing so are best avoided. Still, central banks moving into stocks offers some comfort to retirees pushed in the same direction. Everyone must adjust to this new normal. The U.S. Federal Reserve does not appear to have joined in the stock-buying trend. The Fed is not permitted to
The Real Significance of the Bitcoin Boom (and Bust)
The volatile rise and fall of Bitcoins has prompted lots of stories explaining why the online virtual currency is a classic bubble. Many compare it with Tulipmania in 17th Century Holland, where the prices of rare tulip bulbs soared to absurd heights and then crashed, ruining the speculative investors who had bought them. But the Bitcoin phenomenon is more than a bubble. It says something important about the current and future state of the global economy. The scale of the recent boom and bust has been staggering indeed. At the start of the year, a Bitcoin was worth $13.51. Earlier this week, it traded as high as $266. And on Thursday, it plummeted to less than $100, as one of the exchanges where Bitcoins are traded closed temporarily. This would be comparable to the exchange rate for the British pound soaring from $1.62 (where it was on Jan. 1) to $31.90 and then falling back to $12. Such monumental appreciation and volatility is clearly the result of speculation – people buying the online currency just because they think its value will rise, not because they want to use it to purchase goods and services. But Bitcoins’ gains are not the result of speculation alone. They partly reflect the fact that the Bitcoin system is much better designed than previous online currencies. And more significantly, the runup also reflects anxiety about the safety of the global banking system and the stability of major international currencies. (MORE: No Money, No Problems: Canada Considers Completely Digital Currency) The technicalities of the Bitcoin system are complex, but to make this online currency more successful than previous versions, the designers overcame two key challenges. First, to prevent counterfeiting, they attached a history of transactions to each currency unit – but allowed users to keep their transactions nearly anonymous. Counterfeiting is hard because fake Bitcoins would need an authenticated history to pass muster. Second, they strictly controlled the supply of Bitcoins outstanding — thereby saving it from the disastrous fate of, for example, the paper currency known as assignats
Fed Divided Over When to End Stimulus
WASHINGTON — Federal Reserve policymakers are divided over when to end extraordinary measures intended to encourage more borrowing and spending to help stimulate the U.S. economy, according to minutes of the Fed’s last meeting released Wednesday. The minutes of the Fed’s March 19-20 meeting were released at 9 a.m. EDT — five hours earlier than planned — after the Fed inadvertently sent them a day earlier to congressional staffers and lobbyists. The report showed that a few members want to end “relatively soon” a program that is spending $85 billion a month to purchases bonds. Those members say the costs likely outweigh the benefits. A few others saw the risks as increasing quickly and said the purchases would likely need to be reduced “before long.” Many members said an improved job market could lead them to slow purchases within a few months, and a few said economic conditions would likely justify continuing the program until late this year. (MORE: Obama’s Budget Would Cap Tax-Advantaged Savings) Despite the division over when to end the program, the minutes indicated that many of the Fed’s members want to see sustained improvement in the job market — from a wide range of economic indicators — before making any decision to reduce the pace of purchases. After the March meeting, the Fed said the economy had strengthened but that it still needed its efforts to help lower high unemployment. In addition to continuing the bond purchases, the Fed stuck by its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. The economy had added an average of 220,000 jobs a month from November through February, including 268,000 jobs in February — the last report available when the Fed met in March. But a weak March employment report is likely to make policymakers even more supportive of keeping the measures in place for the foreseeable future. Employers added just 88,000 net jobs last month, the fewest in nine months. The unemployment rate dropped to a four-year low of
Is the Global Economy Slowly Falling Apart?
It’s conventional wisdom that the U.S. economy is steadily recovering from the recession, even if progress is slow and disappointing. But there’s also a widespread sense that long-term economic prospects are deteriorating all around the world. Young people can’t find jobs. Budgets keep being cut in both the public and the private sectors. And the projected increase in debt over the next decade figures to be a huge burden for the most highly developed economies. Political systems seem unable to cope with problems that ought to be fairly easy to solve, or at least contain. As the recent crisis in Cyprus demonstrates, a minor dislocation can become a threat to the entire global financial system overnight. The U.S. is deeply troubled, too. Deficits remain enormous, and the checks and balances of the political system have turned into a logjam. In a new book, David Stockman, President Ronald Reagan’s budget director, chronicles the relentless downward spiral of America’s political and financial systems. He concludes: “The future is bleak… When the latest bubble pops, there will be nothing to stop the collapse.” This view may be extreme, but there’s hard evidence to substantiate the idea that the global economy is becoming more rickety. Although the developed world today is considerably richer overall than it was when Stockman worked in the Reagan administration, creditworthiness has been steadily declining. The global supply of AAA-rated government bonds has shrunk by more than 60% since the financial crisis began. And while dozens of big U.S. corporations had top bond ratings 30 years ago, today that group has dwindled to four – Automatic Data Processing, Exxon Mobil, Johnson & Johnson and Microsoft. How seriously should we take these bellwethers? Although there are real problems that need to be solved, the long-term picture doesn’t look entirely bleak. Four major trends will determine global economy stability in the long run: (MORE: Marx’s Revenge: How Class Struggle Is Shaping the World) Demographics. Populations develop bulges because of changing birthrates. In the most simplistic terms, a bulge of high-spirited young people correlates with
Why Derivatives May Be the Biggest Risk for the Global Economy
Four years after the U.S. recession ended, the global economy is still beset by problems. The present danger comes from Cyprus – where the sea foam once gave birth to the goddess Aphrodite but now only creates froth in panicky financial markets. The proposed bailout plan for troubled Cypriot banks would impose losses of up to 40% on the largest depositors. And that, in turn, could undermine confidence in the banks of other troubled euro zone countries. Cyprus is only the latest challenge for global financial stability, however. In the U.S., deteriorating urban finances – from Detroit to Stockton, Calif. – threaten municipal bond holders, public-sector workers, and taxpayers. In addition, a rise in long-term interest rates seems inevitable sooner or later, either because of inflation or because the Federal Reserve backs away from its easy-money policies. Higher interest rates would mean big losses for bond investors, and also for government-sponsored entities, such as Fannie Mae and Freddie Mac, that hold mortgage-backed assets. The greatest risk of all, however, may be one of the least visible – namely, the expanding, shadowy market for derivatives. These highly sophisticated investments have contributed to financial disasters from the 2008 bankruptcy of Lehman Brothers to J.P. Morgan’s 2012 trading losses in London, which totaled more than $6 billion. (MORE: The $600 Billion the IRS Can’t Collect) Basically, derivatives are financial contracts with values that are derived from the behavior of something else – interest rates, stock indexes, mortgages, commodities, or even the weather. Just as homebuyers make only a down payment when they buy a house with a mortgage, derivatives traders put down only a small amount of cash. Moreover, one derivative can be used to offset or serve as collateral for another. The result is that a massive edifice of derivatives can be supported by a relatively small amount of real money. Some derivatives, such as typical stock options, trade on exchanges. But many are simply private contracts between banks or other sophisticated investors. As a result, it’s hard to know the total
Fed Is Expected to Maintain Stimulative Programs
WASHINGTON — The Federal Reserve on Wednesday is expected to maintain its resolve to keep borrowing costs at record lows despite growing signs that the economy is strengthening. The Fed will end a two-day meeting with a policy statement and updated economic forecasts. Afterward, Chairman Ben Bernanke will hold a news conference. Most analysts think policymakers will acknowledge the economy’s improvements but leave the Fed’s stimulative policies unchanged. Bernanke has said in recent weeks that the job market, in particular, has a long way to go to full health and still needs the Fed’s extraordinary support. The unemployment rate, at 7.7 percent, remains well above the 5 percent to 6 percent range associated with a healthy economy. The Fed has said it plans to keep short-term rates at record lows at least until unemployment falls to 6.5 percent, as long as the inflation outlook remains mild. And it foresees unemployment staying above 6.5 percent until at least the end of 2015. Economists think Bernanke will take note of the economy’s gains. But most foresee no pullback in the Fed’s strategy of keeping short-term rates at record lows and of buying $85 billion a month in Treasurys and mortgage bonds to keep long-term loan rates down. (MORE: What Happens When the Fed Really Does Run Out of Ammunition?) “Even though the economy has improved, it has not improved enough to switch course,” says Diane Swonk, chief economist Mesirow Financial. “We don’t have unemployment low enough yet.” The economy slowed to an annual growth rate of just 0.1 percent in the October-December quarter, a near-stall that was due mainly to temporary factors that have largely faded. Economists think growth has rebounded in the January-March quarter to an annual rate around 2 percent or more. The most recent data support that view. Americans spent more at retailers in February despite higher Social Security taxes that shrank most workers’ paychecks. Manufacturing gained solidly in February. And employers have gone on a four-month hiring spree, adding an average of 205,000 jobs a month. In February,