We have been saying for some time that the economy will remain weak. The frantic efforts of the federal authorities indicate that they agree. Although the media has been parsing every word of this week's FOMC statement in minute detail, here, without the spin, is all you need to know as quoted directly from the statement.
"Household spending...remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit. Businesses are still cutting back on fixed investment and staffing...economic activity is likely to remain weak for a time...In these circumstances the Federal Reserve will continue to employ a wide range of tools to promote economic recovery...The committee...continues to anticipate that economic conditions...are likely to warrant EXCEPTIONALLY low levels of the federal funds rate for an EXTENDED period." (Caps are ours). Is that the statement of a group that believes the economy is recovering? We think not.
Furthermore that is not all the government is doing. We have previously mentioned the increased activity of the Federal Housing Administration (FHA) in essentially taking over the private sector's role in insuring risky mortgages at extremely low down payments to those who could not otherwise afford to buy a house. As described in yesterday's Wall Street Journal, the agency now expects defaults on 24% of all loans insured in 2007 and 20% of those backed in 2008. Based on these numbers the value of the FHA's reserves is projected to fall below the federally required mandate, raising the future possibility of taxpayer bailout.
The Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) also remains highly active in backing securitized loans issued by private borrowers. This week issuers sold about $6 billion of bonds backed by consumer loans. According to Deutsche Bank, various issuers have sold $122.5 billion of asset-backed securities this year, mostly for securitized auto loans and credit card debt. Reports indicate that the Fed is also about to approve the first sale of commercial-mortgage-backed securities (CMBS) through TALF, an indication of how worried the regulators are about the coming crisis in commercial real estate. The private market for CMBS has disappeared, so once again the authorities are stepping in, putting taxpayers at risk.
In addition Congress has just passed a bill extending and adding to the homebuyers' tax credit. The bill, which will be signed by the President, is yet another indication that the so-called housing recovery cannot stand on its own, a view that we have been espousing for some months. We also note that Fanny Mae will now rent homes to those who cannot afford their mortgage payments.
All of these programs and policies plus many others indicate a complete lack of confidence in a self-sustaining economic recovery and perhaps even a hint of desperation. It is also a direct contradiction of the belief by investors in a V-shaped economic recovery as reflected in the stock market's action since March. In our view investors will soon begin to seriously question both the artificiality of the recovery and the negative implications of the enormous debt being built up in a desperate attempt to keep the economy from collapsing.
