Filed under: Good news, Economic data, Housing, Recession
The compelling question following the Fed’s action, in conjunction with the world’s other, major central banks, is whether it will work. Will it be enough to get the U.S. economy moving again?
And as is so often the case in economics, the answer depends on three unknown factors, a pair of economists told BloggingStocks Tuesday. (In an initial review, the market appeared to signal its approval of the Fed’s action, with investors sending the Dow 300 points higher to 12,156 in late Tuesday afternoon trading. )
New Fed tool: TSLF
First, the Fed’s new Term Securities Lending Facility should convince bank dealers that liquidity should not be an issue, economist David H. Wang stated Tuesday. “No bank or bond dealer should fear that they won’t be able to find financing. That should improve bond market liquidity,” Wang stated. In addition, the Fed’s willingness to swap U.S. Treasuries for mortgage-backed securities (MBS) should restore some trust — but by no means total trust — to the MBS market and help market participants price these securities, he stated. The Fed’s accepting private mortgage debt collateral talks directly to where the market is stressed the most, Wang stated. However, if MBS’s are not pricing and trading, that would indicate continued concerns about liquidity, he said.
Second, the Fed’s action should encourage banks to lend, economist Glen Langan said Tuesday. The Fed has indicated that the new 28-day, $200 billion TSLF will be extended and increased, if market conditions warrant it. That does not mean banks will begin lending at very low interest rates to everyone, but if they lend to viable businesses that need credit to expand, or to potential home buyers capable of paying a mortgage, the Fed will have achieved another major objective, Langan said. Conversely, if borrowers in good standing cannot obtain credit, that would indicate to the Fed that additional TSLF funds or other liquidity measures may be needed.
The third, international demand, Wang and Langan agreed, remains the biggest hurdle, mainly because its status is unknown. If international demand remains adequate — for example, Brazil’s demand for Caterpillar’s (NYSE: CAT) agriculture machines and farming equipment — U.S.-based multinational corporations will now have both a source of credit in place to expand their businesses, and, equally significant, customers to generate that increased revenue.
U.S. consumers’ contribution
And what about the U.S. consumer? Langan said that, of course, “the U.S. consumer will play a role,” but it remains to be seen how much domestic demand can contribute to the early stages of the economic recovery. Record mortgage debt, a 10-year pattern of overconsumption, and stagnate wage growth in certain workforce segments advocates that U.S. consumers might not be able to generate adequate demand. “I’ve stated throughout this process the one saving grace for the U.S. economy might be U.S. exports, and that might still be the case,” Langan said.
And what about workforce additions? I.E. consumption from new workers joining the workforce, presumably with money to spend? Wang said that assumes sustained, adequate job growth in the quarters ahead, Q2-Q4 2008 — something that may not occur until 2009.
Take the long way home
Equally important, both Wang and Langan noted that it will take many quarters and years for the United States to fully recovery from the subprime mortgage and related asset default crisis. The Fed’s actions are aimed at getting credit markets functioning well immediately, and the TSLF’s stimulus should start to work its way into the system very soon. Nevertheless, the housing sector still has to work-off a big 10-month supply, and banks have to replace non-performing mortgages with new, performing assets. That suggests a slow, gradual recovery, Wang said. “But if the growth is sustainable and sound fundamentally, it will be well worth it and the Fed will have succeeded,” he added.
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