Monday, March 24, 2008

Is US recession drifting towards 1929's......period?

Well Friends,
I read an article somewhere and I am pasting some excerpts here.

Great Depression questions resurface amid current economic conditions, just as they have during other downturns
Fears resurface amid latest turmoil, as they have during previous downturns, but parallels are few and regulation has changed

Dysfunctional capital markets, frantic central banks, stressed-out consumers, fear and uncertainty—all are alarming echoes of the global economic cataclysm of the 1930s.Which raises the inevitable question: Could another Great Depression be lurking over the horizon?TV news programs show grainy footage of Depression-era bankers as reporters tick off grim economic statistics. The Federal Reserve invokes powers it hasn't used since the 1930s. Critics of President Bush's economic policies are emboldened to use the H-word: Hoover.
On the surface, there are disquieting parallels between economic conditions in the early 1930s and those of today. There is the popping of enormous asset bubbles: stocks then, housing now. And, as in the Great Depression, the financial system is in disarray. It was symbolized back then by the failure of thousands of banks, mostly small, local outfits—2,300 in 1931 alone.The parallel today is the crippling of onetime giants such as Bear Stearns Cos., Countrywide Financial Corp. and Ameriquest Mortgage Co.Many economists believe the U.S. will find it almost impossible to avert a recession, if one has not started already. Housing remains mired in a deep slump. The Commerce Department reported last week that new residential building permits nationwide plummeted 36.5 percent in February from a year earlier.Then, like now, stock prices were highly volatile. The Standard & Poor's 500 index, which fell more than 56 percent from 1928 through 1940,nevertheless recorded four up years in that span, including a 46.5 percent gain in 1933.The shadow of the '30s looms over every economic downturn or crisis, no matter how modest. Pundits were quick to invoke the Depression as a cautionary model during the stock market crash of 1987, the bailout of the giant hedge fund Long-Term Capital Management in 1998 and the dot-com meltdown of 2000 and 2001.But there are vast differences between the 1930s and today. U.S. unemployment reached 25 percent during the Depression; last month, it was reported at 4.8 percent. The international industrial economy was a shambles in the '30s. Today, it is coming off a global boom."I've been asked many times whether we will have another Great Depression," said David M. Kennedy, a Stanford University history professor and the author of "Freedom From Fear," a Pulitzer Prize-winning history of the Depression and World War II. "My standard answer is that we won't have that one again. I'd be surprised to have one of that seriousness and duration. But that doesn't mean we wouldn't have a catastrophe we haven't seen before."Nothing demonstrates that as vividly as the Fed's orchestration of the takeover of Bear Stearns by JPMorgan Chase & Co. The deal staved off a possible bankruptcy, which the central bank feared might traumatize financial systems worldwide.The resolution drew a stark contrast with the Fed's role in the 1930 collapse of the Bank of the United States, a New York institution largely serving Jewish immigrants. The failure was then the largest in U.S. history, and the Fed's inability to arrange a rescue by Wall Street banks, including J.P. Morgan & Co., the predecessor to the "white knight" in the Bear Stearns case, caused a cataclysmic loss of confidence in the entire national banking system. That fueled a panic that historians regard as a key cause of the Depression.The Fed's relative powerlessness in 1930 led directly to New Deal reforms that vastly expanded its authority. Some of the agency's new powers, such as its ability to lend directly to brokers and investment banks, were seldom or never used until the current crisis.
Fed Chairman Ben Bernanke, an expert in the central bank's Depression-era history, is also knowledgeable about the instruments at its disposal in a crisis.In a 2002 speech, when he was a member of the central bank's board of governors under Alan Greenspan, he outlined a number of drastic steps the Fed could take in extreme conditions and still remain within its legal authority.Among them were buying up foreign government debt to influence dollar exchange rates, and even lending, if indirectly, against private assets.
The subject of Bernanke's speech was how to combat deflation, a broad decline in consumer prices that is not currently a problem on the Fed's agenda. Still, the powers he described could apply in a wide range of dire scenarios.
There are also limits to what monetary policy, the Fed's responsibility, can achieve on its own to forestall a drastic economic downturn. The Franklin D. Roosevelt administration not only reformed the Fed but also experimented with stimulative fiscal policy, such as unemployment relief.
New Deal programs aimed at staving off a wave of home foreclosures might be especially relevant today. Among the most important was the Home Owners Loan Corp., or HOLC, which is one of several models for homeowner relief being considered by Congress.HOLC took over 1 million mortgages in default starting in 1933, worked to keep the owners in their homes and made new loans to strapped mortgage holders. When the agency was finally liquidated in 1951, it even returned a small profit to the U.S. Treasury.

My View:
If 1 million houses default were there in 1930's, while comparing the population, then in 1930's and now in 2008 in USA......then we can assume that 10 lacs housing loan defaults can be considered very very big.....While we compare this with the recent housing default crisis, it seems to me very very less then what happened in 1930's.
Hence I feel what Shankar Shrama spoke about the 1929 type scenario again visiting looks pity difficult to arrive....
I think Ben Branake is the BEST person at the helm of affairs and I am confident he will be able to aver the recession situation and bringing the US economy to a Slow down or on the brink of a longterm slow down.....I think US market should rally from the second half....means from June onwards.......

6 comments:

  1. Dear nakul,

    An excellent post. Both the parts. The excerpt from the specialist and your take at the end.
    It gives a good solid perspective on the powers of the FED, the expertise of the man on the helm of affairs, and the quantum of the housing defaults.

    It would be nice if you would post it on MMB also, for the friends who have followed your calls on scrips and markets.

    Saw an interview of : Rajiv Lall of IDFC on CNBC today; I rarely watch CNBC, so was lucky to catch him.
    He described the conservative approach of the company and the exapansion into the four buisness verticals that make the returns of IDFC stable and de-risked.
    Very simply said with clarity.

    Are there any breakthroughs on thex job front.
    I wish you the very best always.

    Warm Regards KM

    ReplyDelete
  2. Hi KM,
    I tried to post this article at MMB but failed as the space is for only 5000 words and hence it can't be pasted in full.....

    ReplyDelete
  3. Dear nakul

    Thanks for writing. The solution to transcedd the 5000 word barrier is simpe.
    Please post the article in 2 /3
    parts.
    Same heading : write part one, part two, part three as FIRST line
    and make seperate posts.
    This is done routinely on MMB.

    I still think it is an excellent post that must be shared with mroe
    people. The more the people benefit from the time and effort you invest, the better.

    Warm regards as always KM

    ReplyDelete
  4. IMPORTANT

    Dear nakul,

    Can I post this message on your behalf on MMB.
    I think some more voices are needed there. Please reply.

    Warm regards as always KM

    ReplyDelete
  5. Hi KM,
    I think you have not visited my page at MMB....I have already posted there in 2 parts.......Just check it.....

    ReplyDelete
  6. Record: 1 million homes in foreclosure
    Nearly 3 million behind on mortgages in 4th quarter
    By Greg Farrell and Noelle Knox
    USA TODAY

    A record number of U.S. homes were facing foreclosure at the end of last year, the Mortgage Bankers Association said Thursday, a trend that's expected to continue until late this year as more subprime borrowers fall behind on their payments.

    Nearly 3 million homeowners, 6.3%, were behind on their mortgages in the fourth quarter of last year, and more than 1 million more borrowers — a record 2% of all loans — were in foreclosure. The key drivers of the increase were in California and Florida, which together accounted for about 30% of the new foreclosures.

    Nationwide, more homeowners with spotty credit slipped behind on their monthly payments. About one in three borrowers with subprime adjustable-rate loans were in default or foreclosure at the end of last year.

    "We don't expect to see a peak in delinquency rates and foreclosures until mid- to late 2008," says Doug Duncan, MBA chief economist.

    One bright spot, Duncan says, is that the default and foreclosure rates in Michigan, the worst in the nation, and in Ohio appeared to have leveled off.

    Though the Federal Reserve's aggressive interest rate cuts in the past two months have kept the foreclosure rate from soaring even higher, the MBA says, weak economic conditions and falling home values in many areas will continue to cause more homeowners to default and lose their properties.

    Borrowers are considered "delinquent" once they miss one monthly mortgage payment. The foreclosure process usually doesn't start until a homeowner is 90 days past due.

    Data on January foreclosures compiled by RealtyTrac support the MBA's view, says Rick Sharga of RealtyTrac. "Our best estimate is we won't see foreclosure rates start to fall off until the end of the year."

    An estimated 1.8 million subprime ARMs are expected to have their first payment reset this year and next. Many are projected to reset to higher rates in May or June, Sharga says, and could default in the third quarter, leading to a spasm of foreclosures in the last three months of 2008.

    "Until they work their way through the system," he says, "we don't see any way that foreclosure levels will decrease."

    The Homeownership Preservation Foundation, which runs a toll-free hotline service to counsel borrowers who are having trouble paying mortgages ( 888-995-HOPE ), says call volume soared from 27,000 in November to 94,000 in December last year. In January, the foundation fielded 82,000 calls; in February, the number was 92,000.

    http://www.usatoday.com/printedition/money/20080307/1b_foreclosures07.art.htm

    ReplyDelete