[Marxism] Wall Street buoyed by indications govt will foot bill for lenders' mortgage crisise
ffeldman at bellatlantic.net
Fri Nov 30 20:39:02 MST 2007
December 1, 2007
Despite Market Upturn, an Uncertain Economy
By PETER S. GOODMAN
As Wall Street rallied this week, it seemed that investors were taking
comfort in the notion that the economy has become so imperiled by the
crumbling housing market that it is forcing the government to finally mount
an aggressive rescue effort.
Investors found reassurance yesterday in talk that the White House is
brokering a deal with banks that could diminish a looming tidal wave of home
foreclosures. Soothing words from the Federal Reserve earlier this week
revived the hope that more interest rate cuts are on the way, drowning
nervousness in a din of buying.
"The market now feels comfortable that the Fed has come to appreciate the
severity of the situation," said Robert Barbera, chief economist at the
brokerage and advisory firm ITG. "The bad news gives you the blessing of
lower interest rates."
But even as investors took heart in palpable signs that the government is
preparing to dole out more medicine for the ailing economy, a number of
economists cautioned that the pain itself is still unfolding, with its
ultimate magnitude far from known.
Signs point to a slowdown in the creation of jobs and investments by
companies. Consumers are clutching their wallets more tightly. Banks are
denying loans to many businesses, unwilling to bet scarce capital in a time
of risk and uncertainty. A glut of unsold homes keeps prices falling and the
construction industry in distress.
And even the sharp fall in the price of oil, which offered the comfort that
higher energy costs may be easing, reflects a broader fear that global
economic activity may slow as growth falters in the United States.
Looming large over the landscape is uncertainty about the size of losses
still confronting banks and other financial institutions as they reckon with
bad mortgages along with credit card debts, auto loans and the complex
detritus of an era of loose money now over.
"It's a sucker's rally," said Nouriel Roubini, a former Treasury official
who runs an economic consultancy, RGE Monitor. "The market is essentially
hoping the Fed can rescue the economy. But they are discounting the
onslaught of really lousy economic news."
The price of oil, which only last week threatened to break through $100 a
barrel, closed yesterday at $88.71, completing its steepest weekly plunge in
the last two years. Cheaper oil brunts the threat of inflation, adding to
the sense that the Fed has room to take interest rates lower without
worrying about setting off an upward price spiral.
But the lower price also reflects the view among investors who now expect a
substantial American economic slowdown, which would ease the pressure of the
rising demand for energy.
"The market is realizing how much of a train wreck the economy is right
now," said John Kilduff, an energy analyst at MF Global in New York.
There are plenty of reasons, of course, to count on the economy's inherent
countervailing forces to ultimately help restore the economy to health.
Lower interest rates should indeed spur more economic activity. A falling
dollar has helped spur American exports and curb imports, helping to narrow
the trade deficit. And if the banks really do sign on to the deal the Bush
administration is pushing to keep lower rates in place for subprime
mortgages, that should keep a lot of people from losing their homes.
Yet many of the forces gnawing at the economy remain in place, and actually
appear to be intensifying. The trajectory was reinforced by data released
yesterday, which showed that Americans now have less money in their pockets
and are less inclined to spend.
Personal income grew at a seasonally adjusted rate of 0.2 percent in October
compared to the previous month, the Commerce Department reported. That was
only half the rate of the expected increase. Consumption grew by a paltry
0.2 percent, the department reported, dropping from the 0.3 percent increase
registered in September. Construction spending plummeted at double the
Perhaps more ominously, a government report released yesterday suggested
that the number of jobs created in the spring was far smaller than
The report found that personal income from wages and salaries grew at only
1.6 percent from April to June, far less than the 4.5 percent that the
government previously reported.
Next week, the market will digest more data that is expected to help tell
whether the economy is heading for a substantial slowdown, with the prospect
of a recession no longer a remote worry. One indicator now being watched as
closely as any is the job market, which has been weakening for months.
The economy generally needs about 125,000 new nonfarm jobs each month to
absorb newcomers entering the labor force and employ those who have lost
work, said Mark Zandi, chief economist at Moody's Economy.com. In 2006, the
economy was still creating about 200,000 positions per month, according to
the Bureau of Labor Statistics. But in the first 10 months of this year, the
number slipped to 125,000.
On Friday, the government is to disclose how many nonfarm jobs were created
in November. Mr. Zandi and many economists expect the number to fall to
"That will erode confidence in the economy," he said. "It becomes
self-reinforcing, and the economy will slide into recession."
If the economy does land in recession, "that would mean we're going to lose
a million jobs over a two-year period," predicted Alan D. Levenson, chief
economist at T. Rowe Price Associates in Baltimore. Whether the economy can
avoid that fate, Mr. Levenson suggested, may ride on whether the words of
comfort the market heard this week turn out to be sincere.
The Fed has to drop rates enough to break the financial logjam and encourage
businesses and households to borrow and spend anew. The White House has to
deliver a deal that really will prevent millions of families from losing
their homes, he said.
"If the president puts his seal on it, that would tell me the grownups are
in charge," Mr. Levenson said. "If the Fed gets it, and they are not going
to be nickel and diming, and they recognize that these are really serious
problems, and there's a credit crunch, that's good. But the Fed has to
deliver on these expectations."
Floyd Norris and Jad Mouawad contributed reporting.
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