I was discussing yesterday just what will happen to the bottoming out of the housing market after all the tax credits, foreclosure mitigation programs, and rock-bottom mortgage rates end.

I argued the small rush of newcomers seduced by a bottom, and the improving economy (and therefore more relaxed lending) might be enough to hold sales and prices steady.

But then I found out about the administration’s plan to use 4.2 billion of stimulus funds to buy foreclosed homes and turn them into federal subsidized housing.  By my quick calculation that’s about 40,000 houses at $100,000 each, which is about 6% of current inventory, a big enough share to support the market.

Seems like a perfect plan to me: Ensure sustained recovery, put foreclosed homes to use before they fall in disrepair, help people who did the worse through the crisis, and expand a helpful government program on the cheap.

Simon Johnson makes an excellent point:

Remember this.  If you run an expansionary fiscal policy (building bridges), I have an incentive to free ride (selling you BMWs) and not engage in a similar fiscal stimulus.  But if you run an expansionary monetary policy, your exchange rate will tend to depreciate, putting pressure on my exporters and I’ll be pushed – by BMW-type producers – towards providing a parallel monetary stimulus.

Europe will come around.  But 1 trillion to Eastern Europe and Latin America from the IMF will help a lot for now.

Lonely stimulators?

March 6, 2009

Justin Fox at Time complains that Outside the U.S. and China, there’s not all that much stimulating going on, and is concerned that “much of the money will leak overseas as we spend on imports but others don’t buy our exports”.  Here’s a sampling (% of GDP):

Spain 8.1%

China 6.9%

United States 5.5%

Japan 2.3%

Germany 1.6%

France 1.3%

Russia 1.1%

United Kingdom 0.9%

Australia 0.9%

Italy 0.3%

Brazil 0.2%

I think we should take ability to stimulate into consideration:  China has 2 trillion saved in USD-denominated assets so they’re in an excellent position.

The U.S. has the unique advantage of the dollar as reserve currency and perception of treasuries as ultimate safe harbor (other than gold), so it can borrow magnitudes more than most at a much cheaper rate without exchange rate fluctuation risks.

AC 360 a dud

March 3, 2009

I just watched Anderson Cooper 360 where for twenty minutes the discussion was whether the continuing market slide was an indication that Obama’s handling and policies were duds.

Not once did they mention that in just the last week we’ve had 2 more bank bailouts, the largest quarterly loss in history, ‘worse than expected’ home sales numbers, several dividend cuts, more mass layoffs, worst ever car sales, Warren Buffet having his worse year in 44 years career, and his declaration that “the economy will be in shambles throughout 2009”.

Each of these can easily knock the market a couple points.  If anything I’m amazed we’ve had some days with minimal losses.

No no no, according to the three guests (including a WSJ editor) the market was passing judgment on poor leadership, coming tax increases and a stimulus package that is really only “one-third stimulus”.

Perhaps they’re just regurgitating the CNBC take, with no real analysis of their own.  Or maybe the fight with ‘special interests’ is now full on.

I wonder what these guests will say when the market makes any gains:  The market loves higher capital gains taxes!!  Yeah right.