Our view:
The last phase of the Bernanke-Geithner recovery plan is now in full swing. Using surprisingly aggressive perhaps desperate monetary policies, the Fed and the U.S. Treasury has pumped in over a Trillion Dollars in the stagnant markets. The results are for all to see. The Dow Jones has climbed over 30% since its March low and the Standard & Poor’s 500 index has shot up by an amazing 38 %. Prices of commodities also took a jump with both Oil and Gold spiralling upwards and the 10 year U.S. Treasury Bond yield rates recovered from 2.5 % to a 3 % plus yield.
The Fed – Treasury theory says that by injecting excess liquidity the Banks will have funds for Stock Market operations. This will enable volume trading, which in turn will help stock prices rise. While markets are buoyant the 19 big toxic Banks would be able to swap the housing mortgage CDS derivatives amongst themselves at higher prices. This, says celebrated Bloomberg analyst Jonathon Weil of Enron exposure fame, will ensure that auditors are not able to pin down the toxic derivatives, as instruments which are due for revaluation. In case the derivatives are not swapped at higher prices the market value which has been consistently far below the Book values for the past one year would normally have to be considered. This would further increase the losses of the Banks and devastate the markets.
Freddie and Fannie the two major housing Banks that caused the Banking Crisis in September 2008 have already reported whopping losses of $ 23.9 Billion and $ 25.2 Billion respectively in the last Quarter of 2008. Fannie again lost $ 23.2 Billion in Q1 that resulted in requesting additional bailout funds of $ 19 Billion from the Treasury to help eliminate the firm’s net worth deficit. Saddled with the bulk of toxic assets, these Banks, now indirectly controlled by the U.S. Treasury, are a source of permanent headache unless the value of these housing mortgages rise.
That is not going to happen in a hurry through normal stock market operations as there are no real buyers for the toxic assets despite the very lucrative TARP subsidies. As a result of this the only solution is an Inter Bank CDS swap in which one Bank buys the mortgage securities of another at higher prices and sells its own CDS to a third Bank in the loop. This is a massive operation that may take weeks or even months during which the markets must stay up to ensure that the swap is done with a buoyant market at higher prices.
As per the Fed-Treasury plan with the rise in stock prices the real investors may return. Such behaviour will propel the demand and help the stock markets to rise further. This eventually will bring in more demand and investor injected liquidity back that may also energise the dead as a dodo housing markets. In case demand in the housing sector rise and the markets revive, the prices of the toxic assets will automatically rise making them marketable, and the troubled Banks will become healthy as they will no longer be holding securities that can’t be sold.
This in brief is the wishful thinking for economic revival chalked out by Mr Bernanke and Mr Geithner which they hope will revive the markets and the economy by the end of 2009. Whether they will be able to pull of this massive CDS swap operation and protect the 19 Banks , revive the securities market and rejuvenate the dormant housing prices only time will tell. We are putting forth some of the latest not so rosy opinion from experts round the world for you to see.
Greg Ghodsi, senior vice president at Raymond James was reported by Forbes as stating "It is taking longer to get the recovery needed for new-home builders. People at the end of last year were saying that they could see a recovery in the end of 2009, beginning of 2010, but now many more people are thinking it'll likely be 2011 or so," Ghodsi says. “Before this new-house market can see any kind of real change, foreclosed property needs to be purchased so the new-home building market can grow.”
Benjamin Graham the legendary founder of financial analysis and the author of the best selling intelligent investor would be a worried man seeing the stocks climb from dirt to dizzy heights without the basic fundamentals performing opined Wall Street Journal columnist Jason Zwig.
Matt Lloyd, chief investment strategist at Advisors Asset Management anticipates four to six years of the real estate market flushing prices to try to get them back to realistic rates.
Bloomberg analyst Kathleen M. Howley reported that the chief economists of Freddie and Fannie had declared that the slump in the U.S. housing market that caused median value of homes to decline 24 % since 2006 may further fall next month without prospects of rebounding for another year. The housing price and demand recovery will not start before the end of 2010 as per their opinion
According to a survey done by Bloomberg of 56 top economic analysts the U.S. economy will once again shrink during the current year and see a very nominal growth of around 1.9% in the year 2010. Mathematically interpreting it can be seen that to come back to 2007 levels, the U.S. economy will take a full 5 years which shows that the recession this time around is no V shaped wonder. Whether Mr Bernanke and Mr Geithner would be able to get the Banks to pull off the CDS swaps repeatedly for the next three years till the markets revive on its own is to be seen. The investors around the world may expect a roller coaster during this period hoping that a another disastrous downslide does not take place.
In this blog from “ecology to economy” we deal with discussing sustainable practices in economy and ecology .
We could be wrong. Tell us if we are & why? We encourage diverse opinion even if it is from commercially interested groups opposed to our thinking
It is amazing to me that we can't talk about ecology without having to talk about the economy. It is also interesting to note how all things and people are so interrelated. In middle America we are depressed, not recessed. We receive our property valuations and compare them to our overpriced mortgages. We then go to our jobs and wait in anxiety for the pink slips. And those of us who serve others wring our hands wondering how to cover the gaps between making it and hanging on by the skin of our teeth. For most of us, we don't care why this has happened, we just want it to be fixed. For some of us, knowing why it happens gives insight into how to start fixing it. Regardless, it has to be fixed and won't until we demand that it happen, locally, nationally and internationally. Thanks for sharing your insight, I will be back to read more. Thanks for letting this middle American know that our pain is being shared.
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