The Biggest Stimulus Won’t Come from Obama – Randall Forsyth, Barron’s
THE BIGGEST STIMULUS to the economy in the next 12 months won’t come from the Obama administration’s vaunted fiscal plans but from the rather arcane operations of the Federal Reserve.
David Greenlaw, chief fixed-income economist at Morgan Stanley, estimates that mortgage refinancings will put nearly twice as much money in the pockets of U.S. consumers as the fiscal stimulus over the next 12 months.
Meanwhile, the slowing of the wealth losses of Americans will also be a major swing factor over the next year, he estimates.
The rebound in prices of equities and corporate and municipal bonds, along with the deceleration in house-price declines, owe much to the Fed’s massive provision of liquidity, along with the federal government’s efforts to shore up the financial system.
But incomes will continue to fall as employment declines, albeit at a slightly slower rate. Net-net, various factors affecting consumers’ spending power should be slightly in the black in the next 12 months, a reversal from the deep negative over the last year, according to the Morgan Stanley economist’s projections.
In assessing the consumer, Greenlaw estimates that job losses drained some $250 billion from consumers’ wallets over the past 12 months. Even more severe was the drop of $400 billion from the loss of wealth from the decimation of securities and property values.
The decline in energy prices was equal to a $150 billion boost to consumers’ purchasing power, according to Greenlaw’s sums. But that didn’t come close to offsetting the hit to their income from job losses or drop in wealth.
That helps demonstrate the silliness of the notion that falling energy and commodity prices would rescue the economy last year when that deflation was the result of the same credit collapse that produced massive job cuts and wealth losses.
Be that as it may, Greenlaw estimates mortgage refinancings and tax refunds kicked in $25 billion each in the last 12 months. Unemployment benefits provided consumers an additional $60 billion. Bottom line: he reckons the net effect of all these factors was a $390 billion loss of spending power for U.S. consumers in the past 12 months.
Looking ahead, the economist forecasts job losses will drain $175 billion from consumers’ purchasing power while wealth losses will deduct $80 billion over the next 12 months. The latter is based on the assumptions stock prices will be flat while house prices drop another 10%.
Unemployment benefits will add $75 billion over the next 12 months while fiscal stimulus will provide $65 billion, according to Greenlaw’s estimates.
But mortgage refinancings will nearly equal impact of those fiscal boosts, totaling some $125 billion of increased purchasing power, according to his projections. That’s based on relatively conservative assumptions about who can actually take advantage of the decline in conforming mortgage rates, from an average of over 6% to the high 4% range.
Significantly, Greenlaw is not assuming that homeowners with all sorts of wacky, aggressive subprime loans are suddenly going to get safe, conforming, Ozzie-and- Harriet-style fixed-rate mortgages. He assumes many of the latter cohort will be able to take advantage of current, historically low fixed rates. But not everybody, given the stringent terms being imposed by lenders these days, as evidenced in the Fed’s most recent loan-officer survey.
Greenlaw says this boost to consumers is consistent with the Fed’s objectives in bringing down mortgage rates via its program to purchase Treasury and agency obligations and mortgage-backed securities.
A boost to consumers?
The Biggest Stimulus Won’t Come from Obama – Randall Forsyth, Barron’s
THE BIGGEST STIMULUS to the economy in the next 12 months won’t come from the Obama administration’s vaunted fiscal plans but from the rather arcane operations of the Federal Reserve.
David Greenlaw, chief fixed-income economist at Morgan Stanley, estimates that mortgage refinancings will put nearly twice as much money in the pockets of U.S. consumers as the fiscal stimulus over the next 12 months.
Meanwhile, the slowing of the wealth losses of Americans will also be a major swing factor over the next year, he estimates.
The rebound in prices of equities and corporate and municipal bonds, along with the deceleration in house-price declines, owe much to the Fed’s massive provision of liquidity, along with the federal government’s efforts to shore up the financial system.
But incomes will continue to fall as employment declines, albeit at a slightly slower rate. Net-net, various factors affecting consumers’ spending power should be slightly in the black in the next 12 months, a reversal from the deep negative over the last year, according to the Morgan Stanley economist’s projections.
In assessing the consumer, Greenlaw estimates that job losses drained some $250 billion from consumers’ wallets over the past 12 months. Even more severe was the drop of $400 billion from the loss of wealth from the decimation of securities and property values.
The decline in energy prices was equal to a $150 billion boost to consumers’ purchasing power, according to Greenlaw’s sums. But that didn’t come close to offsetting the hit to their income from job losses or drop in wealth.
That helps demonstrate the silliness of the notion that falling energy and commodity prices would rescue the economy last year when that deflation was the result of the same credit collapse that produced massive job cuts and wealth losses.
Be that as it may, Greenlaw estimates mortgage refinancings and tax refunds kicked in $25 billion each in the last 12 months. Unemployment benefits provided consumers an additional $60 billion. Bottom line: he reckons the net effect of all these factors was a $390 billion loss of spending power for U.S. consumers in the past 12 months.
Looking ahead, the economist forecasts job losses will drain $175 billion from consumers’ purchasing power while wealth losses will deduct $80 billion over the next 12 months. The latter is based on the assumptions stock prices will be flat while house prices drop another 10%.
Unemployment benefits will add $75 billion over the next 12 months while fiscal stimulus will provide $65 billion, according to Greenlaw’s estimates.
But mortgage refinancings will nearly equal impact of those fiscal boosts, totaling some $125 billion of increased purchasing power, according to his projections. That’s based on relatively conservative assumptions about who can actually take advantage of the decline in conforming mortgage rates, from an average of over 6% to the high 4% range.
Significantly, Greenlaw is not assuming that homeowners with all sorts of wacky, aggressive subprime loans are suddenly going to get safe, conforming, Ozzie-and- Harriet-style fixed-rate mortgages. He assumes many of the latter cohort will be able to take advantage of current, historically low fixed rates. But not everybody, given the stringent terms being imposed by lenders these days, as evidenced in the Fed’s most recent loan-officer survey.
Greenlaw says this boost to consumers is consistent with the Fed’s objectives in bringing down mortgage rates via its program to purchase Treasury and agency obligations and mortgage-backed securities.