The longest recession since the Great Depression will be over by the first quarter of 2010 say the majority of professional forecasters in a survey released by the National Association for Business Economics (NABE). About 35 out of 44 forecasters believe the economy is growing again to further the call by Federal Reserve Chairman Ben Bernanke about one month ago that the recession is most likely over.
So are Bernanke and these forecaster right? Is GDP growing again?
As I have repeatedly pointed out in this blog, the only thing that is keeping the game going for the economy at present is the fact that government spending along with Federal Reserve interference in the marketplace has created some green shoots. The consequences of this action for the short term has given us and these forecasters the mirage that “all is well.” The truth of the matter is that we are presently in the eye of the hurricane. The calm before the continuation of the economic storm.
A closer look at what NABE President Elect, Lynn Reaser had to say about the meeting of economists gives us a closer look into why they believe that the recession is over.
Lynn Reaser was interviewed by Money Talks America’s Sean Snaith in a
NABE Roundtable Discussion. In this interview she revealed a few important discussion points as to whether or not we are actually in economic recovery mode or not. If economists are mistaken about the cause, can they be trusted with Reaser’s synopsis that “The Great Recession is over?”
What Is the Root of the Problem According to Reaser?
“Housing is the root of all the problems to begin with” said Lynn Reaser in her interview with Money Talks America. But was the sub-prime lending the cause or the effect of Fed easing during the Greenspan era? If an arsonist starts a fire, is it the fuel he used to start the fire that is at fault, or the one who lights the match? In this case, it is the Fed who is at fault. All else is irrelevant except for the affects of what the Fed has done to the economy and policies implemented since the original interference.
According to Thomas Woods, author of “Meltdown;”
“Fed chairman Alan Greenspan sought to reignite the economy through a series of rate cuts… the new money and credit overwhelmingly found its way into the housing market, where artificially lax lending standards made excessive home purchases and speculation in homes seem to many Americans like good financial moves.”
Indeed, most of these economists believe, like with other recessions, that the housing and banking sectors will lead us out of the recession as prices are going to bottom this year. That’s great news right? I mean, now we can all take our money and go buy a house right? President Obama is even giving some of us $8,000 to purchase a new home. All is well!
But wait a minute…. We can’t qualify like we could before to get the house. We actually have to show proof of income now. Couple that with the fact that banks still are not lending and even though we have a good interest rate environment, it’s very difficult to get a loan these days. Just look at the Fed’s own chart of bank credit:
Consumers too are “just saying no” to buying homes. They really don’t want to take on more credit and are hesitant to commit as Sean Snaith points out to Lynn Reaser in his interview. “We just don’t know what the future holds.”
The Fed realizes that it needs the consumer to keep spending to keep their game going. Whether its outright sending us checks, Cash for Clunkers or down payments for home’s, the Fed needs the consumer to keep spending and is doing all they can to keep them doing so. But what about the other side of the coin? What about TARP funds for example? Isn’t that what’s keeping the game alive?
A Closer Look at the Banking Situation and the Economists Views of What Got Us to Where We Are Today
The purpose of the TARP approval by congress was to keep the financial system from collapsing according to some of the insiders at the time like Secretary of the Treasury Hank Paulson who thought the system would collapse without it. The money was supposed to go to purchase the toxic assets of the banks that the market had shunned according to Reaser. Instead, the TARP money was given directly to the banks to shore up their balance sheets with more liquidity.
Now however, there is an effort by the banks, in collusion with the Fed to get the public/private industry to purchase these bad assets. But there’s one problem. The Fed needs more of your money so they can offer some sort of guarantee or carrot stick to the public/private investor in these bad bank assets as they can’t be sold at their true value no can they? So now there’s talk of even a third bailout. Anyone see a pattern here?
Of course there’s the other problem of who in their right mind would even buy these assets. Maybe Iceland? (If you’re from Iceland, apologies)…
As such, there is an effort to keep confidential the companies receiving TARP funds. It’s no wonder these banks now want confidentiality. With the high number of bank failures this year and the FDIC on the brink, any TARP money, with apologies to Sarah Palin, would be just putting lipstick on a pig. But maybe the term “piggy bank” actually came from the thousands of bank failures that occurred prior to the FDIC coming to existence in 1933. And here I thought piggy banks were a place for kids to put loose change!
In a Banking Perfect World Scenario
So the pricing of these assets is what’s important for the banks to dump, erm, I mean sell so they can start lending to consumers and businesses again. But despite the best efforts on their end to shore up their financial balance sheets, 70% of the NABE economists say that consumers will be more frugal for the intermediate term as they are still traumatized by the last couple of years of financial turmoil and at the same time, worried about their own job security. Which leaves us to ponder, will businesses be growing if consumers aren’t spending?
Where the NABE Economists Are Correct
The Panel sees a 1.7 trillion deficit this year and 1.4 trillion deficit next year which could have some negative effect on the dollar. They also see problems with interest rates going higher, despite the Fed buying long term Treasuries and they’re worried about the potential of a lack of international buyers of U.S. treasuries.
Couple that with the fact that they see the Fed raising interest rates by next spring and a “jobless recovery” and I think they’ll be hard pressed to guarantee us that “The Great Recession Is Over!” There are too many pieces of the puzzle still missing in the housing and banking sector for me to agree and there’s still that $60 Trillion of unfunded liabilities looming, wars to fight, and bridges to build.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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