Credit & Debt: Bernanke's Cautious Optimism

"What, Me Worry?"

The Federal Reserve chair made his first report to Congress today, and the general gist seems to be "Uh, things are okay, I guess":

Delivering the Fed's first economic report for 2007 to Capitol Hill, Bernanke offered a mostly upbeat assessment of the economy's outlook. Besides improvements on the inflation front, the Fed chief also cited some signs of stabilization in the ailing housing market...Even with his mostly positive assessment, Bernanke was careful to hedge his bets and pointed out risks that could upset the generally good economic outlook....On the other hand, there is the risk that a deeper than expected residential real-estate bust could yet unfold, which could hurt overall economic growth, the Fed chairman said. If that were to happen, Bernanke added, the Fed in theory might be inclined to lower rates to help bolster the economy.

I suspect Bernanke's optimism is guarded due to things like today's BusinessWeek report on the crumbling of the subprime sector:

Delinquencies and foreclosures may get worse. One out of five subprime mortgages issued in the past two years is projected to end in foreclosure, according to a study released in December by The Center for Responsible Lending, a Durham (N.C.)-based research group. The group also noted that even when home prices were rising, subprime home loans fared poorly, with as many as one in eight, or 13%, of these loans ending in foreclosure within five years of origination.

The ability of the market to absorb this kind of shock is going to be severely tempered if credit standards tighten and wages don't increase. I realize that nothing frightens Bernanke's paymasters more than the concept of workers earning decent wages, but without sufficient funds to put money down on a fixed loan, most homebuyers will resort to toxic mortgage products--except that this time, there will be fewer of those available, which will mean fewer buyers overall.

And with fewer people buying homes, the housing market will continue to stagnate, thus widening the already deep fissures in our fragile economy.

Posted at February 14, 2007 01:53 PM

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"What, Me Worry?" The Federal Reserve chair made his first report to Congress today, and the general gist seems to be "Uh, things are okay, I guess": Delivering the Fed's first economic report for 2007 to Capitol Hill, Bernanke offered a mostly upbeat assessment of the economy's outlook. Besides improvements on the inflation front, the Fed chief also cited some signs of stabilization in the ailing housing market...Even with his mostly positive assessment, Bernanke was careful to hedge his bets and pointed out risks that could upset the generally good economic outlook....On the other hand, there is the risk that a deeper than expected residential real-estate bust could yet unfold, which could hurt overall economic growth, the Fed chairman said. If that were to happen, Bernanke added, the Fed in theory might be inclined to lower rates to help bolster the economy. I suspect Bernanke's optimism is guarded due to things like today's BusinessWeek report on the crumbling of the subprime sector: Delinquencies and foreclosures may get worse. One out of five subprime mortgages issued in the past two years is projected to end in foreclosure, according to a study released in December by The Center for Responsible Lending, a Durham (N.C.)-based research group. The group also noted that even when home prices were rising, subprime home loans fared poorly, with as many as one in eight, or 13%, of these loans ending in foreclosure within five years of origination. The ability of the market to absorb this kind of shock is going to be severely tempered if credit standards tighten and wages don't increase. I realize that nothing frightens Bernanke's paymasters more than the concept of workers earning decent wages, but without sufficient funds to put money down on a fixed loan, most homebuyers will resort to toxic mortgage products--except that this time, there will be fewer of those available, which will mean fewer buyers overall. And with fewer people buying homes, the housing market will continue to stagnate, thus widening the already deep fissures in our fragile economy.