Gospodarka USA obecnie (maj 2011). Gdzie zmierzamy czyli nie wesoła perspektywa przyszłości giełd papierow wartościowych

               The US economy at present

Despite all aforementioned unprecedented means, the US economy is far from a good shape. There are many drags on US recovery - among them the depressed housing market, unemployment and trillions of dollars in American wealth that evaporated due to the recession.

As far as the first issue is concerned, the last data of inflation-adjusted median home prices in the USA (published on April 23rd 2011) paints a gloomy picture. Chart below shows that the inflation-adjusted median home price is currently 38% off its 2005 top. This is tantamount to $100,000 lost in value of the average American’s home .[1]

Summing up lost in home values, retirement funds, and wages an average family of four is today poorer by $143,319 than in 2005.[2]

When it comes to unemployment, data from Bureau of Labor Statistic, last readings oscillate around 9% and they are close to the highest numbers during the last 50 years.[3] Worth mentioning is the fact that unemployment rose dramatically during the last 4 years, when the government implemented all possible means to improve the US economy.

The stock market, a pillar of strength to the US economy, has risen from its minimum of 2008 more than 100%. On May 13, 2011, S&P 500 was 1348,65 but it is still lower than both at the peak of Internet Mania in 2000 and the housing bubble in 2008.[4]  

2.                  Conclusions. The US economy and its prospects

The situation in the USA is bad. The level of the unemployment is persisting, companies are confining their investments, home prices are falling and Americans are complaining about decreasing standard of living. It takes place despite the government’s effort to invigorate the economy and the stock market maintaining its highest level since 2008 crash.

The US policymakers have already practically used up all possible means to stimulate the stock market and the economy. The US public debt has doubled since 2000 as the government borrowed money to struggle with the ailing economy and at present it is closing to $14,5 trillion, 97,75%  of the US GDP.[5] The White House projected deficit will hit $1.6 trillion this fiscal year and would be on similar levels during the next years[6]. Referring to the mounting US debt, on April 14, 2011, rating agency S&P downgraded the prospect of U.S. economy and warned that if some measures to reduce the debt are not be undertaken, further downgrades will follow.[7] As a result, it is unrealistic to expect stimulating the economy by fiscal policy beyond projects already assumed. This kind of thinking is presented by many, among them the famous American financial manager, co-founder one of the world's largest mutual funds manager Bill Gross. He expressed his point of view as follows: "There is really no way out of this trap and this conundrum at this point."[8]

As far as monetary policy is concerned, the Fed cannot maintain the current interest rates ad infinitum, especially with inflationary  pressure from rising prices of commodities and food. According to report from the Labor Department issued on  12^th May 2011, the key inflation measure, the Consumer Price Index, rose 3.2% over the last 12 months. It was the greatest 12-month rise since October 2008.[9]

Considering the further course of event in the stock market it is not difficult to note that the situation do not look well., the Fed’s “easy money” only to a small extent has been used for an improvement in companies’ condition and for creation of new jobs, instead having been directed towards speculation in the stock market, metals, oil and food (mining and oil companies benefited greatly from rising commodities prices), creating a new bubble. With P/E being already at the historically very high level further rise in stocks would lead to extreme overvaluation of the stock market, characteristic for bubbles, that would burst sooner or later. Additionally, the further increase would hurt the economy itself (higher prices of metals and oil are expected to negatively influence  performances of all companies apart from aforementioned and the consumers, who have already started to complain about high prices of gasoline and food. Costly gasoline and food would contribute to lowering standard of living of Americans and to them reducing spending on durable goods and this process - by feedback - would hurt companies’ earnings and increase unemployment, creating a kind of “vicious circle”. This kind of thinking is presented by Federal Reserve Governor Elizabeth Duke, who on Ma 24, 2011 said that  costly gasoline hurting consumers:

The financial crisis and the slow recovery from it has obviously had a dramatic impact on the financial decisions made by American families. Many now have fewer financial resources and limited options. (…) Many families, particularly those with low-to-moderate incomes, are actually facing the decision between buying gas to drive long distances to work and paying their mortgage.[10]

On the other side, immediate fall in the stock market means less money in American’s wallets and would produce the identical  effect.

It seems that the policy of the government, assuming as the main pillar of the economy domestic consumption, which as foundations has had the mounting debt and the rising speculatively stock market, has failed. This policy has created a huge imbalance for the last two decades that now seems to have been reaching boundaries of its possibilities. Chasing for performance and electoral votes the US government allowed to diverge the real economy – the place where GDP is created with using work, capital and knowledge -  and the financial market, where economic processes are  mirrored. Unfortunately, assets created here are barely “written” pledges to return borrowed money with a margin and as such are based not on tangible assets but human’s imagination, that has no limits. According to data from the World Federation of Exchanges since 1990 up to then the value of all stocks market in the world has increased from 15% to 70% GDP.[11]  To put it simply, the stock market departed from the real economy, soaring into sky and giving owners’ assets obligations impossible to fulfill. It looks like preventing the USA from a huge crisis would be a great challenge to policymakers for the nearest future.

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[1] http://allstarcharts.com/wp-content/uploads/2011/04/INFLATION-adjusted-Housing-Prices.jpg

[2] http://w3.newsmax.com/a/aftershock4/?promo_code=BE24-1

[3] http://data.bls.gov/pdq/SurveyOutputServlet

[4] http://finance.yahoo.com/q/bc?s=^GSPC&t=my&l=on&z=l&q=l&c=

[5] http://www.usdebtclock.org/ (data on May 13, 2011-05-13)

[6] http://www.moneynews.com/Headline/us-economy-Pimco-bill/2011/03/08/id/388738

[7]http://www.stock-market-today.cc/financial-news/S--amp--P-degrades-the-prospect-of-U-S--economy.html

[8]http://www.moneynews.com/Headline/us-economy-Pimco-bill/2011/03/08/id/388738

[9] http://money.cnn.com/2011/05/13/news/economy/cpi_inflation/index.htm?iid=HP_River

[10]http://finance.yahoo.com/news/Feds-Duke-says-costly-rb-3161401084.html?x=0&sec=topStories&pos=4&asset=&ccode=

[11] http://seekingalpha.com/article/199294-world-stock-market-value-reaches-20-month-high

Bąbel na rynku nieruchomości 2008, reperkusje oraz walka z nimi

     “Housing bubble”. “Easy money” as the main cause of subprime mortgage crisis. The 2008 stock market crash. The Troubled Asset Relief Program as a remedy for the crisis

However, the tactics of easy money finally begin to exert an effect  on the economy,  although unintended (that fact was proved only six years later).  With interest rates hovering near historic lows (the average 30-year mortgage rate for all US regions ranged from 5% to 5.02%, with the exception of the West where it averaged 4.91%.)[1], it was no wonder that Americans rushed into the decision to invest in what seemed like the safest bet: their homes. Credit into the housing market was pumping by the Federal National Mortgage Association (known as Fannie Mae)[2] and the Federal Home Loan Mortgage Corporation Federal Home Loan Mortgage Corporation, (known as Freddie Mac)[3], privately owned but government-sponsored organization that used private capital to buy home mortgages as a means to help lower housing costs. The low interest rates prompted an activity and jobs for builders and real estate brokers and other specialists (among them mortgage brokers), feeding consumer spending.

The housing market started to thrive. Pearl Kamer, chief economist of the Long Island Association on September 12, 2003 referring to the low interest rates, wrote: It had an enormous impact on housing and increased consumer spending. (…) It contributed directly to employment”.[4]

A similar opinion expressed Carolyn Weber, president of Re/Max of New York in Garden City:

It was the most aggressive real estate market I saw in 34 years(…) We had more transactions and business than we ever did before. We opened 10 new offices on Long Island alone.[5]

The housing boom has the additional effect – exploiting decreases in interest rates, homeowners refinanced their mortgages to consolidate debt. Saving by that on installment  gave them “additional” money, that could be spent on consumption. With new spending and - as an effect - the rising economy, home prices also began to increase, particularly since investing in home market was then considered safer than in the stock market. From 2001 to 2006 The S&P/Case Shiller U.S. National Home Price Index almost doubled its value, forming a new bubble.[6]

Meanwhile, with home prices continuing to soar and the remarkable run of real estate, some banks lowered the minimum credit score necessary to obtain a home loan or increased the percentage of income that would be spent on a mortgage. Others went so far as to introduce loans that required no proof of income at all. It were so-called “subprime loans”,  referring to borrowers that were not “prime” so they might be less likely to repay a loan. According to Creditor Web, subprime borrowers would be classified as subprime because of (among others): “Bad credit or lack of a credit history, low income or poor debt to income ratios, Large loans relative to the securing property”.[7]

Even though lenders were warned against easing loan restrictions, they did not stop these practices. Many people were eager to invest money in real estate and lenders wanted to earn as much money as possible. With home prices increasing steadily, loans for buying homes seemed to be a safe undertaking. Borrowers who failed to pay back the bank, were sued to court which ordered the property to be sold. (The process was called ‘foreclosure’) A bank would sold a property at public auction for even higher price.

This assumption proved to be right while home prices were rising rapidly. Unfortunately, between 2006 and 2007 prices began to stabilize and next fell. Moreover, with inflation soaring, within the period from May 2004 to July 2006 the FED was forced to increase interest rates from 1% to 5,25%[8], what contributed to higher costs of credit and more foreclosures and as a feedback home prices got into a long-term, downward trend.

Since 1981 the mortgage industry was  financing its activities by issuing mortgage-backed securities. According to U.S. Securities and Exchange Commission:

Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization.[9]

With the housing market falling, an increasing number of borrowers stopped paying their mortgage payments foreclosures.  The decline in mortgage payments reduced the value of mortgage-backed securities, which erodes the worth of banks. This vicious cycle made a huge crisis in the whole banking sector. Policymakers did not recognize the increasingly important role played by financial institutions greatly contributing to the crisis. In a testimony before the US Congress, the Securities Exchange Commission (SEC) and Alan  Greenspan conceded their failure in effective regulation of the shadow banking system in allowing the self-regulation of Wall Street's investment banks.[10]

Consequences of the crisis were huge. According to analysis of Association of Customers of Financial Entities:

Top five US investment banks reported over $4.1 trillion in debt for fiscal year 2007 (roughly 30% the size of the U.S. economy). Lehmann Brothers went bankrupt, Bear Sterns and Merrill Lynch had to be sold off and Goldman Sachs and Morgan Stanley had to convert themselves to commercial banks (…) These losses impacted the ability of financial institutions to lend, slowing economic activity.[11]

Effects on global stock markets due to the subprime mortgage crisis was dramatic. The US economy found itself on the brink of disaster. The crisis was doomed to negatively  influence the world’s economy. In order to assuage it, the US government implemented means, that were intended to stabilize the financial system. The most important was the plan to purchase large amounts of illiquid, risky mortgage backed securities (estimated at minimum  $700 billion of commitments) from all financial institutions in needs, known as The Troubled Asset Relief Program, commonly referred to as TARP[12]. Among others were ban on short-selling of financial stocks in order to prevent them from falling further and implementing some regulatory solutions in the banking system.

However, looking for causes of the crisis, people governed the country did not find themselves guilty and did not notice the hazardous feedback between the stock market bubbles and the condition of the economy. Senate reported on the financial crisis: “The crisis was (…) the result of high risk; complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street”.[13]

In spite of efforts, between October 8, 2007 and  March 2, 2009 the US indexes crashed. The Dow Jones index fell from 14066,6 to 6627,7[14] and the index of the broad market S&P500 from 1501 to 666,6.[15] Investors in the U.S. stocks had suffered about $8 trillion in losses as their assets declined in value from $20 trillion to $12 trillion.[16] Losses in the stock markets and housing value declines put further downward pressure on consumer spending.

2.      The Fed and the government once more in action. The Economic Stimulus Act along with the American Recovery and Reinvestment Act as ways of stimulating economy. Printing new money by Quantitative Easing (QE)

As an answer to the crash, on September 18, 2007, the Fed slashed interest rates for the first time in 4 years, from 5,25% to 4.75%, signaling that more cuts could be coming. (Actually, the total number of cuts was 11 and ended on December 16, 2008, within the range between 0% zero to 0.25%.)[17]

However, as 2008 began, economic indicators further suggested an increased risk of recession, and some economists suggested that the economy may already be in one. Big banks - Citigroup and Merrill Lynch - reported huge quarterly losses this week resulting from bad mortgage investments. It became clear that without special means the US economy would derail. Federal Reserve Chairman Ben Bernanke testifying before the House Budget Committee said that quick action was needed and suggested stimulating the economy through government spending and tax incentives. He said: “To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so."[18]

The actions undertaken by policymakers and lawmakers as an answer were quick and beyond anything attempted in the last 50 years. On February 13, 2008, Congress passed law, called The Economic Stimulus Act, aimed to stimulate spending by businesses and consumers. It was intended to boost the United States economy and to avert a recession. Wikipedia gives some important facts about The Economic Stimulus Act:

The Economic Stimulus Act of 2008 (…) was an Act of Congress providing for several kinds of economic stimuli intended to boost the United States economy in 2008 and to avert a recession, or ameliorate economic conditions. (…) The law provides for tax rebates to low- and middle-income U.S. taxpayers, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac). The total cost of this bill was projected at $152 billion for 2008.[19]

            Unfortunately, lowering interest rates and The Economic Stimulus Act failed to produce the desired effect  of growing economy. Statistics of 2008 and 2009 showed that the economy was in a recession. The US GDP fell consecutively: in the 1^st quarter of 2008 by 0,7%, in the  3^rd quarter of 2008 by 4%, in the 4^th quarter of 2008 by 6,8%, in the 1^st quarter of 2009 by 4,9%, and in the 2^nd quarter of 2009 by 0,7%.[20]

In this situation the US policymakers acknowledged that economic stimulus must be continued. On February 17th, 2009 President Obama signed the American Recovery and Reinvestment Act (also known as ‘Stimulus Package’) to improve the economy (the House passed the bill on January 28, 2009). The package contained funding for science, research and infrastructure, education, social sciences and the arts.[21]

Acknowledging that these means may be insufficient to maintain the economy on the path of growth, in March 2009 the Federal Reserve used one more financial tool - quantitative easing (QE), a highly controversial  way of stimulating economy when conventional monetary policy becomes ineffective (interest rates are so low that it’s impossible to cut them further). Quantitative easing is a method of increasing the “quantity” of money. “Financial Times Lexicon” describes the idea of QE as follows:

When interest rates are close to zero there is another way of affecting the price of money: Quantitative Easing (QE). The aim is still to bring down interest rates faced by companies and households and the most important step in QE is that the central bank creates new money for use in an economy. Only a central bank can do this because its money is accepted as payment by everybody[22]

However, some experts see the QE otherwise. For example, Cheryl Hall from Dallas News wrote: “Quantitative easing is a euphemism for creating money out of thin air. In the vernacular, we call it "printing money," even though it really has nothing to do with the U.S. Bureau of Engraving and Printing.”[23]

In late November 2008 the US Federal Reserve implemented QE. Technically, it consisted in extending the amount of money on its balance sheet  from $884 billion on August 28 to $2.1 trillion on November 28. This “additional” money was used for purchasing the US Treasury notes.

Meanwhile, some economist warned that Quantitative Easing may be dangerous for economy since creating “additional” money carries risk of higher inflation or simply hyperinflation and could destroy the value of the currency. However, the Fed paid no heed to the warnings as for it more important was the fact that the economy was not growing sufficiently and decided to renew the process of quantitative easing. In November 2010 the Fed announced that by the end of the second quarter of 2011 it would buy additional $600 billion of Treasury securities.[24]

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[1] http://www.property-investing.org/30-year-mortgage.html

[2] http://en.wikipedia.org/wiki/Fannie_Mae

[3] http://en.wikipedia.org/wiki/Freddie_Mac

[4] http://www.allbusiness.com/business-finance/business-loans-interest-rate/970020-1.html

[5] ibidem

[6] http://en.wikipedia.org/wiki/Case-Shiller_home_price_index#The_national_index

[7] http://banking.about.com/od/loans/g/subprime.htm

[8] http://www.tradingeconomics.com/united-states/interest-rate

[9] http://www.sec.gov/answers/mortgagesecurities.htm

[10]http://www.scribd.com/doc/34991160/Sub-Prime-Crisis

[11] http://www.acfglobal.com/source/3_rep_art_articales_02.html

[12]http://www.law.harvard.edu/programs/about/pifs/llm/select-papers-from-the-seminar-in-international-finance/llm-papers-2009-2010/wall.pdf

[13]http://www.housingwire.com/2011/04/13/senate-report-on-financial-crisis-rips-regulators-banks-investment-firms

[14] http://finance.yahoo.com/echarts?s=^DJI+Interactive#chart2:symbol=^dji;range=5y

[15] http://finance.yahoo.com/echarts?s=^GSPC+Interactive#symbol=^GSPC;range=5y

[16] http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

[17] http://en.wikipedia.org/wiki/Federal_funds_rate#Historical_rates

[18] http://money.cnn.com/2008/01/17/news/economy/fed_bernanke/index.htm

[19] http://en.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008

[20] http://www.tradingeconomics.com/united-states/gdp-growth

[21] http://www.washington.edu/research/gca/recovery/

[22] http://lexicon.ft.com/Term?term=quantitative-easing

[23]http://www.dallasnews.com/business/columnists/cheryl-hall/20101109-What-is-Fed-s-QE2-6107.ece

[24]http://www.creditwritedowns.com/2008/11/quantitative-easing-printig-money-like-mad-to-ward-off-deflation.html