One of the parting gifts of the current administration is a rosy, upbeat assessment of the 2009 economy.
The Bush administration said the U.S. economy should emerge from its slump in the second half of the year — an optimistic forecast released days before President-elect Barack Obama inherits a recession and mammoth budget deficit.
“The actions taken by my administration in response to the financial crisis have laid the groundwork for a return to economic growth and job creation, and they are beginning to show some early results,” President George W. Bush said in a letter to Congress that accompanied the annual Economic Report of the President.
Not to delve too much into politics, but thats an incredibly disingenuous statement, isn’t it? It almost feels as though the outgoing administration is trying to accomplish two things:
- lay claim for the recovery when it happens
- set expectations higher than reasonable for the incoming administration
This is consistent with the missing ingredient in the current financial crisis: trust.
The just released Economic Report of the President provides an assessment of 2008 and the next few years. Of course, this report is being completed by the same organization and administration that completely missed the credit crunch. Do I sound cynical and bitter?
The NYT Economix blog, extracts a few salient data points.
The most telling chart for me was the tightening of lending standards. Its not about mortgage rates, its about underwriting.
Here are some highlights of the report in reference to housing – its a good overview.
In the summer of 2008, the disruptions in credit markets that began in
2007 worsened to the point that the global financial system was in crisis.
The magnitude of the crisis required an unprecedented response on the part of the Government to limit the extent of damage to the economy and restore stability to the financial system. Chapter 2 reviews the origins of the crisis, its consequences, the Government’s response, and discusses several policy challenges going forward. The key points of Chapter 2 are:
- The roots of the current global financial crisis began in the late 1990s.
A rapid increase in saving by developing countries (sometimes called the “global saving glut”) resulted in a large influx of capital to the United States and other industrialized countries, driving down the return on safe assets. The relatively low yield on safe assets likely encouraged inves- tors to look for higher yields from riskier assets, whose yields also went down. What turned out to be an underpricing of risk across a number of markets (housing, commercial real estate, and leveraged buyouts, among others) in the United States and abroad, and an uncertainty about how this risk was distributed throughout the global financial system, set the stage for subsequent financial distress.
- The influx of inexpensive capital helped finance a housing boom. House
prices appreciated rapidly earlier in this decade, and building increased to well-above historic levels. Eventually, house prices began to decline with this glut in housing supply.
- Considerable innovations in housing finance—the growth of subprime
mortgages and the expansion of the market for assets backed by mortgages—helped fuel the housing boom. Those innovations were often beneficial, helping to make home ownership more affordable and accessible, but excesses set the stage for later losses.
- The declining value of mortgage-related assets has had a disproportionate
effect on the financial sector because a large fraction of mortgage-related assets are held by banks, investment banks, and other highly levered financial institutions. The combination of leverage (the use of borrowed funds) and, in particular, a reliance on short-term funding made these institutions (both in the United States and abroad) vulnerable to large mortgage losses.
- Vulnerable institutions failed, and others nearly failed. The remaining
institutions pulled back from extending credit to each other, and inter- bank lending rates increased to unprecedented levels. The effects of the crisis were most visible in the financial sector, but the impact and consequences of the crisis are being felt by households, businesses, and governments throughout the world.
- The U.S. Government has undertaken a historic effort to address the
underlying problems behind the freeze in the credit markets. These problems, the subject of much of this chapter, are a sudden increase in the desire for liquidity, a massive reassessment of risk, and a solvency crisis for many systemically important institutions. The Government has worked to preserve the stability of the overall financial system by preventing the disorderly failures of important financial institutions; taken unprecedented action to boost liquidity in short-term funding markets; provided substantial new protections for consumers, businesses, and investors; and cooperated closely with its international partners.
- Looking forward, the global financial crisis presents several additional
challenges for the U.S. Government. Among them are the need to modernize financial regulation, unwind temporary programs in an orderly fashion, and develop long-term solutions for the government- sponsored enterprises (privately-owned, publicly-chartered entities) Fannie Mae and Freddie Mac.