Economic Outlook

We were promised that with the stimulus bill all would be made right with the economy.  We now have actually had a 3rd stimulus under the FED´s Quatitive Easing (this is a euphamism for money printing).  The economy may be temporarily juiced for a while by the extra spending but once the money dries up (but not the debt) the economy falls back into recession.  It is clear that regaining economic competitiveness is imperative to restoring the economy.  Simply printing more money and blowing it will only create inflation.

As to housing it has to come down.  It was bid up well above the sustainable market rate thru the use of irresponsible lending, and now it has to come into line with what people can actually afford, which in this economy is not a lot.  Interestingly there are always so many cheerleaders for the housing sector.  Just a couple of years ago we were assured that prices had finally hit bottom.  But, of course they have continued to slide, and will continue their downward path until prices align with affordability.  The little that is slowing the descent is massive government support in terms of tax credits, government owned Freddie, FHA loans, and low interest rates, as well as legal processes slowing down foreclosures.  These measures only slow down foreclosures and drag out the process.  Government support will probably have to end sometime if the government ever wants to get serious about the deficit.  As to interest rates, they can effectively only go up.  We will have years more of foreclosures, and what if the government decides to scale back its housing subsidies, and interest rates rise?  The only thing that could save housing is a sudden massive economic recovery (very doubtful), or hyper inflation.  Housing prices would go up, but the real value would go down due to inflation.

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Yale’s Shiller: Chances Are ‘Substantial’ For a New Recession

Thursday, 16 Jun 2011 02:05 PM

By Forrest Jones

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Chances are ‘substantial’ that the United States is headed back into a recession, says economist, author and Yale University Professor Robert Shiller.

A weak U.S. housing market and a murky global economy indicate that the country is at a “tipping point” at the edge of a fresh economic contraction.

Even though economic models suggest the economy is on the path to recovery, the United States is in unchartered territory, which makes models less valid due to all the unknowns lurking on the horizon.

“Forecasting models would say no” on the question of whether the U.S. will face a double-dip, Shiller tells The Wall Street Journal.

“But I’m seeing signs that encourage me to worry about that.”

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Shiller, one of the architects of the S&P Case-Shiller home-price index, says the housing market may see a pickup in prices this summer, but adds he’s concerned about the long-term path the sector is taking.

“There might be a turnaround if psychology changes,” Shiller says, but “I fear that it may just continue down.”

“It just doesn’t look good.”

The Federal Reserve has pumped hundreds of billions into the economy in order to spur more robust economic growth, while interest rates stand near zero.

However, all the loose monetary policy in the world won’t help if consumer demand just isn’t there.

“When the demand isn’t there, you can lower interest rates all the way to zero and people are still not willing to spend — that’s where we are right now,” Shiller says.

Another Lehman?

Red flags continue to wave overseas.

The world is watching how Greece navigates itself out of its debt crisis, with concerns growing that the European nation will default and take European — and U.S. — banking sectors on a wild ride with it.

“Stories like this, even if it’s from a small country, can have a vivid impact,” Shiller says, adding the collapse of Greece could topple the global banking system similar to the way Lehman Brothers did in 2008.
“I don’t think it’s overblown,” Shiller says of such fears.

Home prices dropped 33 percent in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to the latest Case-Shiller report on May 31.

The decline means the sector has double-dipped back into negative territory, as the index fell below its previous post-housing-bubble low set in April 2009.

Shiller has said that U.S. housing prices could decline another 10 to 25 percent over the next five years.

“There’s no precedent for this statistically, so no way to predict,” Shiller said recently, according to Bloomberg.

With so many houses in foreclosure, prices will stay depressed, especially with unemployment at 9.1 percent and tighter lending restrictions being the norm at many financial institutions.

Other experts agree that high unemployment rates and a tough economy mean housing prices are still well on their way on a downward slope.

“With the foreclosure pipeline still full to bursting, it’s hard to see this downward pressure on prices abating,” says Paul Dales, a senior U.S. economist at Capital Economics Ltd. in Toronto, according to Bloomberg.

“I wouldn’t be surprised to see prices continue to fall this year and maybe into next year.”

Read more: Yale’s Shiller: Chances Are ‘Substantial’ For a New Recession

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