CNN reports that The White House lowered its forecast for economic growth next year with rising unemployment, the housing market slump, and a credit crunch weighing on economic activity.

Inflation, however, should improve. The White House expects consumer prices to increase by 2.1 percent next year, a moderation from a previous forecast of a 2.5 percent rise.

Just yesterday, the federal reserve hinted that interest rates may be lowered again in the near future due to the economic slowdown. How would a rate cut affect inflation, which is supposedly under control?

The big worry for economists is that consumers and businesses will cut back on spending and investing, sending the economic growth into a tailspin. Spending by consumers and businesses is the lifeblood of the country’s economic activity.

Consumer spending certainly gets a boost from available credit, so let’s hope that someone can figure out a way to extend more credit to consumers and businesses and save our economy from recession. If you have any ideas as to what this next innovative scheme technique will be, please let us know what that will be so we can get in on the action and make a little money.

Kool-Aid, Economy | No Comments »

After a well needed break, the KoolAidMan is back! During the time off, he’s been disconnected from the markets and the media, however upon returning it seems that not much has changed. Housing values haven’t rebounded yet, and the markets are still jittery.

Instead of linking to a top story about home values dropping again, we found a nice piece at Marketwatch reminding us of some old expressions that are very applicable to the realtors, home buyers, sellers, and lenders who sparked this mess that we’re in.

What goes up must come down. One reason people did this is that home prices were rising faster than personal incomes for a number of years, but that could not go on forever, as we know now.

We know now, and we could have known this back when the mania was at its prime. Most people involved chose to ignore reality and decided to speculate instead. We’re going to guess that there’s a handful of people who knew this and were able to cash out while they could, but there are millions of handfuls of people who are left holding the bag right now.

You can’t make a silk purse from a sow’s ear (or kiss a frog and turn it into a prince). These securities were based on loans of questionable quality that, when bundled together, somehow were blessed with AAA ratings by the debt-rating agencies.

There is no such thing as a free lunch. It boggles the mind how many money managers, investors and just about everyone else thought these securities could be rated almost as high as supersafe U.S. Treasurys — without any added risk. No wonder people from all corners of the planet, from sophisticated hedge funds and banks to the proverbial man or woman on the street, put chunks of money into these mortgage-backed issues.

We’ll be listening for any news on investigations into the ratings agencies as this mess unfolds. It’s difficult to predict what will happen because there are so many things going on behind the scenes that average Joe Investor doesn’t know, but we’re not in the game of making predictions here. We’d rather drink our Kool-Aid and believe that everything is OK!

Stay tuned, for later this week we’ll be covering holiday retail sales and consumer spending. We’re sure to see some interesting statistics in the coming days!

Financial Market, Investing, Economy, Stock Market, Real Estate | No Comments »

Marketwatch has an article that highlights some things going on with California’s economy that suggest the state may be in recession.

“California seems to be sliding into recession,” wrote Jan Hatzius, chief economist for Goldman Sachs, in a research note earlier this week. Hatzius based his appraisal on the sharp increase in the unemployment rate in the state from 4.7% in November 2006 to 5.6% in September 2007.

How many of those newly unemployed recently lost jobs that were related to housing? That includes mortgage lending, real estate appraisal, real estate agents, and construction. Of those newly unemployed, how many have massive mortgages themselves and instead of saving any profit they earned over the past few years spent it on shiny toys and lavish vacations?

“California is in for at least another year of economic doldrums,” said UCLA economist Ryan Ratcliff in his latest forecast published in September. But California will not sink into a recession unless a second source of weakness develops, or the housing market worsens more than expected, Ratcliff said.

Ah, here we have another economic expert predicting that things will turn around in a year. Pay attention to the last part of what he said - the part about everything being OK as long as the housing market doesn’t worsen more than expected. How much more of a downturn is expected? With mortgage lending standards tightening every day, major banks writing off massive amounts in losses, and home [asking] prices still astronomically higher than what typical buyers can support, it’s difficult to see how things can get get better any time soon.

The state of California isn’t taking any chances. Gov. Arnold Schwarzenegger has ordered state agencies to plan for a 10% cutback in their budgets for next year, figuring that tax receipts could fall significantly along with home prices.

Again, real estate seems to be the problem again. With lower transaction prices, and current owners likely to argue for lower value assessments, the state is expecting lower tax revenue and is acting to reduce budgets to avoid problems. Is 10% enough to be safe?

A few years ago and up until a few months ago, this was predicted by many bloggers and independent authors, yet they were dismissed by the experts as being overly negative doom-and-gloomers. Did they know something the experts did not? Key fundamentals were ignored and instead the Kool-Aid was going around.

Kool-Aid, Economy, Real Estate | 1 Comment »

According to Yahoo News, Federal Reserve Chairman Ben Bernanke said economic problems, including the severe housing slump, will cause business growth to slow in the months ahead.

Bernanke said he and his colleagues believe economic activity will “slow noticeably in the fourth quarter” compared to the 3.9 percent pace of the third quarter.

“Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction begin to wane,” Bernanke told the JEC.

Many economists believe the economy’s maximum point of danger of falling into a recession will occur in the early part of next year. A variety of problems from the steepest housing downturn in more than two decades to a severe credit crunch, surging oil prices and a falling dollar have roiled Wall Street in recent days, triggering big plunges in stock prices.

I guess the first step is to acknowledge that there is a problem.

Bernanke said the Fed plans to issue a proposal by the end of the year that would create new standards and rules for all lenders that issue subprime loans, mortgages offered to borrowers with weak credit histories.

What will these new standards and rules do the housing market? Is a set of rules really necessary? The free market will determine the rules for lending, as we’re seeing now.

Economy, Real Estate | No Comments »