Talk Back

These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

The improvement in bank lending is crucial in fostering a healthy and sustainable economic recovery. A simple correlation between the growth in real GDP and real bank lending is close to 70%, with GDP typically leading the latter by a couple of quarters.

The sluggish bottoming out in real bank-lending growth following the business cycle trough in the second quarter of 2009 seems comparable to the 1990-91 episode; however, the extent of the recent contraction mirrors the 1973-75 period.

The dynamics of bank lending are extremely complicated, especially following a negative financial-led adjustment. Loose monetary policy per se does not necessarily promote bank lending. Capital availability and the regulatory environment could actually play a bigger role in influencing lending.

Both supply and demand conditions affect the extent of bank lending. A healthy recovery in lending requires an increase in the willingness of banks to extend credit combined with strong demand for loans.

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These are the personal views of Lena Komileva, group chief economist overseeing market economic research at Tullett Prebon:

In the end it was the disappointing Federal Reserve Bank of Philadelphia survey and U.S. Dept. of Labor’s jobless claims figures that provided the trigger for a fresh downgrade in investor risk sentiment and appetite for yield in an otherwise peaceful holiday week.

The Philadelphia Fed survey is the most volatile of regional surveys and carries the weakest correlation with the nationwide trend, so the fundamental implications should not be overstated.

Still, the July decline sends an important signal for the health of the economy as it reflects a universal picture of deteriorating corporate sentiment that is driven not by ultra-low Fed funds rates and the strong earnings-driven liquidity reserve accumulated through the past two years’ deleveraging, but by companies’ desire to protect capital and cash-flows in an environment of restrictive credit, local government austerity and future economic uncertainty.

In the survey detail, the Philadelphia Fed purchasing managers’ index manufacturing fell into contraction territory, at -7.7 in August, down from +5.1 in July, for the first time since July 2009 (-8.9). Core growth components sent out universally bearish signals as new business flows, shipments and backlogs all fell and firms slashed inventories and employment.

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A reader comments on the housing market and economy in the U.S.:

Our country is facing a wonderful opportunity to stabilize the housing market and to return the U.S. economy back onto a growth pattern.

In fall 2008, I sent a Talk Back comment on my solution to stabilizing the U.S. housing market’s precipitous decline, which Dow Jones Newswires graciously ran. Generally it suggested a simple but effective way to stabilize home prices and, in turn, the U.S. economy by converting most current outstanding primary-residence mortgages to a 15-, 23- or 30-year mortgage at a rate of 4 1/4%, 4 1/2% or 4 7/8%, respectively, at the mortgagor’s option.

Additionally all of these mortgages would have a covenant attached that would allow every one of them to be assumable once, meaning that the outstanding mortgage balance and its terms could be transferred from the current owner of a property to a new qualified buyer. The logic for attaching the assumption clause was that by making the mortgages assumable the home-finance system becomes impregnated with mortgage funding that for the next several years could significantly replace the collapsed private-issuance mortgage-backed securities market and could compensate for the unwillingness of banks to originate and retain loans for their own balance sheets.

It simply enables the already-provided and -lent funds to remain in the market independent of the MBS market and banks’ willingness to participate.

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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The Bush tax cuts were a huge success, and failing to extend them for all Americans–not just families earning less than $250,000, as President Barack Obama proposes–would be a terrible mistake.

Contrary to current White House propaganda, President George W. Bush achieved a lot of growth prior to the financial crisis, and lower taxes for all helped. The Bush prosperity was the byproduct of several multidecade policy trends that freed markets and empowered individuals to innovate and create wealth.

Freer trade championed by presidents since John F. Kennedy, and deregulation (begun by Jimmy Carter with the airlines) were critical to this trend. Also key was reducing excessively high tax rates on upper-income Americans, initiated by Ronald Reagan, somewhat interrupted by Bill Clinton, and reinstated by Bush.

Economists recognize highly productive people, if taxed punitively, create less wealth in the U.S. through arcane tax planning or simply move investments offshore. Higher taxes for high-income families would raise rates on fully half of the income earned by proprietorships and leave those small and medium-sized business with less to invest in creating new jobs.

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These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

The release of the advance second-quarter real GDP growth of 2.4% was in-line with our expectations. But the composition of much weaker consumer spending and greater inventory build per se implies softer growth prospects in the third-quarter. Consequently, we bumped down our third-quarter growth forecast to 2.2%, but maintained our 2010 growth outlook of 2.9%.

The GDP release last Friday also incorporates the usual benchmark revisions to the data. Real GDP growth in the prior three years was revised down by 0.8%-point in total, mainly as a result of weaker consumer spending (-0.6%-point). Although the contribution from inventory change was revised up marginally (0.1%-point), the other categories of demand generally added less to or subtracted more from GDP growth.

In line with a flatter recovery path, our 2011 growth projection–primarily resulting from a softer first-half 2011 backdrop–has been tweaked lower to 2.7% from 2.8% previously.

Even though the recent U.S. economic data releases have undershot consensus expectations on balance, financial-market indicators have actually improved some since the end of June.

Indeed, U.S. investment-grade and high-yield risk spreads have tightened since late June and early July. Similarly, U.S. equity index implied volatility has also eased compared to a month ago.

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By Michael Casey

A DOW JONES NEWSWIRES COLUMN

NEW YORK (Dow Jones)–With the global economy caught in a giant debt trap, some pundits are thinking about a radical new world financial order.

The way things are headed, some say, the International Monetary Fund could evolve into a de facto global central bank, armed with its own currency for doling out loans to advanced and emerging economies alike. It’s a politically unrealistic idea over the medium term, but the force of history behind a shifting world power balance could eventually overwhelm such obstacles.

The Catch-22 for the advanced economies of Europe, the U.S. and Japan is that to bring down their excessive future liabilities and placate nervous bond markets, they must slash spending even though this would undermine the global recovery and possibly worsen their debt ratios. Having borrowed to bail out indebted businesses and consumers, governments have reached the end of the line.

There is no one to help them out–not with the IMF organized as it is.

For now, advanced countries don’t need outside help. Despite the massive debt outstanding, markets continue to finance the governments of the U.S., Japan, Germany and the U.K at super low rates. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Washington in the Obama era seems bent on imposing “solutions” that not only fail to solve Americans’ problems, but make us poorer in the bargain.

In a direct attack on Wall Street, the president and his ally, Sen. Blanche Lincoln (D., Ark.), are bent on imposing the “Volcker rule,” which would prohibit banks from making speculative investments with their own funds, and on requiring banks to divest their derivatives trading desks, or at least put them in a separate subsidiary owned by a parent holding company. Five major banks–Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley–do 90% of U.S. derivatives trading.

This may ultimately make banking less stable, while forcing a good deal of securities trading out of New York to offshore locations.

The recent credit crisis was caused by: 1) banks (small and large) writing shoddy mortgages, and 2) inadequately backed derivatives, called swaps, that insured the mortgage-backed securities that financed those loans.

Money was lent to homeowners who simply did not have the ability to repay their debts–and instead relied on a continuous cycle of refinancing, borrowing more and more as housing prices rose. Continue reading…

   By Bradley Davis
   A DOW JONES NEWSWIRES COLUMN 

NEW YORK (Dow Jones)–With the euro marching higher since hitting last week its lowest level since 2006, some investors wonder whether the common currency has put its worst days behind it.

Don’t bet on it, most say.

The common currency posted strong gains Tuesday, advancing around 1% on the dollar, even as euro-zone data sharply missed expectations and yields of government bonds tied to some fiscally stressed countries ticked higher.

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These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Greece is insolvent. No austerity or new taxes will pay its debts.

Like a homeowner owing four times income, belt tightening and a longer repayment period are not enough. Either, the house is sold to clear the debt or the bank takes back the house.

Greek bondholders don’t have that choice–they can’t repossess the Parthenon.

Greece is a sovereign country, and either it will be the recipient of endless German largess–an unlikely scenario–or European creditors, banks among them, will take a loss.

Now, the International Monetary Fund bluntly warns Spain, to avoid becoming the next Greece, that it must radically overhaul labor laws, pensions and consolidate banks–that’s tough for a sovereign that doesn’t print money in the midst of a market panic.

Germany and European banks can’t take that hit.

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