CNN reports that the Federal Reserve is “ready to take ’substantive additional action’ to cut interest rates in order to support lagging economy“.

We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said in prepared remarks before the Women in Housing and Finance and Exchequer Club in Washington, D.C.

However, some economists suggested that rate cuts may be too late to stop a recession.

While lower rates might provide some stimulus to the economy, they’re certainly not going to help the value of the US dollar. Didn’t ridiculously low rates get us into this mess in the first place? Let’s hope Wall Street uses this as an opportunity to lessen the pain. The cheap money just might keep the economy running on fumes for a little while longer as long as loose lending doesn’t return.

Low rates could potentially help turn things around by allowing any borrowers (individuals or businesses) to refinance their current debts and reduce payments, allowing debts to be paid off. But doesn’t our financial system (and many banker/broker commissions) depend on the continuous creation of new debt? Our economy is heavily dependent on debt - without the ability to obtain credit, most people can’t buy their shiny toys. As long as the Federal Reserve does everything in its power to ensure consumers can borrow money to spend our economy will remain healthy.

At some point down the road the debt needs to be paid back, and that could be a concern. There’s a possibility that a large number of consumers are way over their heads in debt, beyond anything we’ve seen before.

Bernanke also warned that the economic outlook for 2008 is not so good:

“Downside risks to growth have become more pronounced. Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets,” Bernanke said.

“In addition, a number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008,” he added.

It seems like somebody forgot to drink their Kool-Aid today.

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CNN (among nearly all mainstream media outlets) is reporting that investors are bracing for a tough week as the nation’s biggest banks are releasing quarterly earnings reports.

“It’s not going to be a pretty sight,” said Frank Barkocy, director of research at the investment advisory firm Mendon Capital Advisors in New York, which owns shares of a number of large banks including Bank of America and Washington Mutual.

Of the five banks and brokers scheduled to report results next week, three are expected to post a fourth-quarter loss - Merrill Lynch (MER, Fortune 500), Citigroup (C, Fortune 500) and Washington Mutual (WM, Fortune 500). JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) are expected to report a decline in quarterly earnings.

Once this is over, can we put the problems behind us? Or are we just seeing the tip of the iceberg?

One area of concern among analysts covering mortgage-focused banks like Washington Mutual and Wells Fargo is how these companies’ commercial real estate portfolios are holding up, an area that some suspect could be the next trouble spot in the credit markets.

“If it does happen, that’s another whole leg down for these banks,” said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., regarding the possibility of a commercial real estate slump.

“If it does happen”? “Possibility of a commercial real estate slump”? We recall reading not too long ago that office vacancy rates were already increasing, indicating a ’slump’ is underway.

Financial Market, Kool-Aid, Economy, Stock Market | No Comments »

Forbes reports that US Treasury Secretary Henry Paulson said there’s no simple answer to the housing crisis.

“By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy,” Paulson said in excerpts of his speech released by Treasury. “However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years.”

On top of that, there’s some talk at CNN that Wall Street is calling for the Fed to lower interest rates again.

The government reported December employment figures on Friday. Only 18,000 jobs were added to the nation’s payrolls while economists were predicting job growth of 70,000. What’s more, the unemployment rate was expected to come in at 4.8 percent, up from 4.7 percent in November.

As a result of these gloomy numbers, expectations for a half-point rate cut grew Friday morning. According to futures listed on the Chicago Board of Trade, investors are pricing in a 84 percent chance that the Fed will lower the federal funds rates by 50 basis points, to 3.75 percent, at the conclusion of its two-day meeting on January 30.

It seems there’s no simple answer to any of the issues our economy is facing. In other news, Marketwatch is reporting that Anheuser Busch shipments to wholesalers are up 2%. With all the turmoil in the stock market and housing market, are people drinking their worries away? That’s a simple (although temporary) solution!

Interest Rates, Financial Market, Kool-Aid, Economy, Stock Market | 1 Comment »

The Motley Fool has a lengthy but excellent article showing us where the future of the US economy may be headed.

Despite a number of hiccups this year, the stock market is still just a rock’s throw from another all-time high.

But we’re coming up on a bend in the yellow brick road, and going ’round it could cause the party lights to go dark quickly. That could change everything about the way we and future Americans live. Sound scary? It is.

What now? Many of us would like to believe Uncle Bernanke will bail us out by slashing interest rates and bringing back the good old days. Right?

Kind of — and that’s where the massive economic debacle begins, my friends. Those same spend-happy consumers raised in the go-go 1990s — they’re still alive and kicking, and you better believe they still love to spend.

Despite some of the negative news we’ve been hearing about for the past few months with regards to banks writing off losses, real estate values going down, and a slowdown in economic activity, it appears that consumers still continue to spend. A visit to your nearest mall or retail shopping center, even before the ‘holiday spending season,’ would provide some evidence to support this. It’s still very early in the cycle for most people to see what is going on, but in the coming months and years there will be plenty of statistical data to paint a clearer picture of what is really happening.

I think you can see the predicament we face: One part of our economy demands lower interest rates to bail out the housing debacle, and foreign investors who finance our massive spending habits demand higher interest rates to forestall the dollar’s demise.

What’s a central banker to do?

Special thanks to Scott S. for bringing this article to our attention

Credit, Kool-Aid, Economy | 1 Comment »