|Peter Morici is an economist and professor at the Robert H. Smith School of Business at the University of Maryland. He is a recognized expert on international economics, industrial policy and macroeconomics. Prior to joining the university, he served as director of the Office of Economics at the US International Trade Commission. |
This week, the big news may be the shoes that are yet to drop: President Bush's program to help distressed homeowners and halt the free fall in housing and subprime securities markets, and the continued carping from the Europeans about the decline in the dollar.
The critical component of President Bush's program will be what he provides to move worthy homeowners into long-term fixed rate mortgages. Freezing adjustable mortgages at teaser rates will only push the problem to the next president. What is needed is a mechanism to provide permanent financing--fixed-rate, long-term mortgages.
Details on that to come--hopefully it is more creative than the ruminations so far from the Treasury and Federal Reserve. The Treasury seems obsessed with what investment bankers do best in a pinch, short-term workouts that punt difficulties into the high grass. From Federal Reserve economists, we get lots of ideological ruminations about the need to force profligate lenders and borrowers to the gallows. President Bush is a politician--read: pragmatist--and hopefully he will require more of them, and the mortgage industry.
The Weak Dollar
The Europeans are pleading with Washington to do something about the fall of the dollar against the euro. The problem is that Washington's hands are tied by policitical correctness.
The Peoples Bank of China is destabilizing global currency markets by buying $450 billion a year in mostly U.S. dollars, but also euros and other foreign securities, to keep the yuan down and its exports up. Chinese labor is cheap but its trade surplus has more to do with the export subsidy Ben Bernanke identified in those transactions. Free traders in Washington say any U.S. action would be protectionist, when in reality China is practicing currency mercantilism.
The flip side of that has been a huge and growing U.S. non-petroleum trade deficit with China, and Americans finance that deficit by borrowing. Now world markets are jittery about the global inflationary consequences of so much U.S. paper circulating abroad and fleeing the once almighty dollar. The best substitute for the dollar is the euro.
Europeans need to take aim at China's yuan policy to solve the problem. If China insists on subsidizing U.S. and European purchases of yuan to finance its exports, the U.S. and EU governments can tax conversion of dollars and euros into yuan to ensure those exports are sold at market prices in the United States and Europe. Washington could use the revenue it gets to pay off the bonds held by the Peoples Bank of China.
| President George W. Bush is flanked by Secretary Alphonso Jackson, left, of the Department of Housing and Urban Development, and Secretary Hank Paulson of the Department of the Treasury, as he delivers a statement Thursday, Dec. 6, 2007, at the White House, on the Administration's efforts on housing. White House photo by Joyce N. Boghosian |
“The housing market is moving through a period of change,” President Bush said at a White House ceremony to launch the housing finance plan on Thursday, adding that the economy was “strong enough to weather this storm”.
US Treasury Secretary Hank Paulson, who brokered the deal, said it would “minimise the impact of the housing downturn on homeowners, neighbourhoods and the US economy”. But he conceded: “It is not a silver bullet.”
The plan is geared to assist 1.2m subprime borrowers with adjustable rate loans by fast-tracking those who can be refinanced. It offers a rate freeze for those who cannot afford an increase in their payments.
President Bush said: In recent years, innovative mortgage products have helped millions of Americans afford their own homes -- and that's good. Unfortunately, some of these products were used irresponsibly. Some lenders made loans that borrowers did not understand, especially in the sub-prime sector. Some borrowers took out loans they knew they could not afford. And to compound the problem, many mortgages are packaged into securities and sold to investors around the world. So when concerns about sub-prime loans begin to mount -- began to mount, uncertainty spread to the broader financial markets. Secretary Paulson was one of the beneficiaries of the packaging system when he headed investment bank Goldman Sachs.
The number of Americans who were behind on their mortgage payments rose to a 20-year high in the third quarter as borrowers were unable to refinance or sell their homes.
The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59%, the highest since 1986, the Mortgage Bankers Association said Thursday.
The Week Ahead: Forecasts for the Weeks of December 10 and 17
Nonfarm Payrolls - Nov 88k 188
Manufacturing Payrolls -13k -21
Unemployment Rate 4.7% 4.7
Average Work Week 33.8hrs 33.8
Hourly Earnings 0.3% 0.2
Mich Cons Sentiment - Dec (p) 73.5 76.1
Consumer Credit - Oct $4.3 b 3.7b
Week of December 10
Pending Home Sales - Oct 84.5 85.7
Wholesale Inventories - Oct 0.5% 0.8
Wholesale Sales 0.6% 1.3
Federal Funds Target 4.25 4.50
Export Prices - Nov 0.5% 0.9
Export Prices, ex agriculture 0.5
Import Prices - Nov 2.4% 1.8
Import Prices, ex petroleum 0.2 0.5
Import Prices, petroleum 2.2 6.9
Trade Balance - Oct -$57.436b -56.5
Treasury Budget - Nov -$67.0b -55.6
PPI - Nov 1.8% 0.1
PPI - Core 0.1 0.0
Retail Sales - Nov 0.5% .2
Retail Sales, ex Autos 0.5 .2
Business Inventories - Oct 0.3 0.4
Initial Jobless Claims 335K 338
CPI - Nov 0.6% 0.3
CPI - Core 0.2 0.2
Industrial Production - Nov 0.1 -0.5
Capacity Utilization 81.7 81.7
Week of December 17
Current Account – Q3 -$182.0 b -190.8
Net Foreign Purchases - Oct $35.0b 26.4 (line 19 US Treasury TIC Report)
NAHB Market Index 20 19
Housing Starts - Nov 1.185m 1.229
Building Permits 1.178 1.178
GDP - Q3 (f) 4.9 4.9
GDP Deflator 0.9 0.9
PCE 2.7 2.7
PCE Deflator 1.7 1.7
Core Deflator 1.6 1.8
Leading Indicators – Nov 0.0 -0.5%
Personal Income - Nov 0.3 0.2
Personal Spending 0.3 0.2
PCE Index 0.6 0.3
Core PCE Index 0.2 0.2
Real Personal Spending -0.4 0.0
Professor, Robert H. Smith School of Business, University of Maryland,
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