For a long time now I have learned not to listen to all of the financial talking heads on the weekend business shows. Unfortunately these shows are popular so many people listen to the so called expertise offered there.
Following the market implosion due to the subprime mess and the subsequent recovery based on the Federal Reserve Board dropping the discount rate on Friday August 17, many so called experts lauded the Fed for its actions and concluded that a crisis was averted and the market had bottomed. But how so? Basically what the Fed did was infuse low cost loans into the system. Wasn’t that the cause of the problem in the first place?
A contributor to our Web page at the time compared what Federal Reserve Board Chairman Ben Bernanke did to rolling into a bar at closing time and offering a little hair of the dog instead of allowing everyone to face the consequences of a night of over-indulgence. As most of us know, this only puts off the inevitable hangover.
Today the Conference Board reported that the Consumer Confidence Index fell to 105.0 in August from 111.9 in July. Confidence is at its lowest level since last August. It also represented the sharpest decline since September 2005 following Hurricane Katrina.
Today the Conference Board reported that the Consumer Confidence Index fell to 105.0 in August from 111.9 in July. Confidence is at its lowest level since last August. It also represented the sharpest decline since September 2005 following Hurricane Katrina.
But that was not the only bad economic news. The S&P/Case-Shiller U.S. National Home Price Index for the second quarter of 2007 dropped 0.9% from Q1 2007 and dropped 3.2% from Q2 2006. The year on year decline in the index in Q2 2007 represents its worst period in the 20-year history of the index. The news comes on the heals of Monday’s weaker existing home sales number. Inventories of existing homes for sale in July grew to a nearly 16-year high of 9.2 months. This is significant in that the root cause of recent economic weakness is coming from the housing sector.
Subprime loans allowed the housing bubble to sail along by offering mortgages to people with questionable credit and allowing consumers spending to sail along as well, as people used equity in their home to finance spending. By bundling Subprime loans into investable securities, lenders could continue the cycle.
The Conference Board noted that despite the weakening market conditions lowering consumer confidence this month, index levels suggest further economic growth in the months ahead. Perhaps they are right but what is disturbing is how so called experts can simply say the crisis—which caused several hedge funds to lose all or nearly all of its capital and force central banks across two continents to infuse the markets with hundreds of billions of dollars or euros to avert a liquidity meltdown—is over and everyone can go back to normal.
Remember these are the experts who scoffed at the notion of a housing bubble and then declared that housing market “softness” was over before any of the recent subprime problems surfaced.
The Fed action may have averted a more serious liquidity crisis for the time being but it did not address the underlying problem. We may have simply delayed a more serious shake out.
[...] subprime crisis back in the summer of 2007 we have noted the many efforts of the Federal Reserve to prop up the struggling banking industry. And when the whole house of cards blew up on Sept. 15, 2008 we have [...]