6
OTTAWA — U.S. Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke's $700-billion (U.S.) bailout of Wall Street could stop the bleeding, but their nation's economy remains seriously wounded and is at least a year away from a healthy recovery.
By agreeing to purchase the toxic assets no one else will buy, the U.S. government stands a chance of coaxing banks to resume lending to each other by erasing the risk counterparties are exposed to with subprime mortgages.
Now Mr. Paulson and Mr. Bernanke have to contend with an economy that most economists say is contracting for the first time since 1991. Home prices are tumbling amid a glut of houses, suggesting personal wealth will continue to decline, curbing the purchasing power of the consumers who drive global economic growth.
"The housing situation has to rectify itself," said Brad Setser, a fellow at the Council on Foreign Relations and a former Treasury economist. "We are spending $700-billion to avoid a catastrophic outcome. The dynamics that were pushing the economy into recession remain."
Related Articles
Mr. Paulson presented Congressional leaders with a three-page proposal over the weekend, and urged that the measures be passed "clean and quick."
Although scant on detail, the plan would give the Treasury broad powers to buy distressed assets from financial institutions under legislated cover from lawsuits. The legislated cap on U.S. debt would rise to $11.3-trillion from $10.6-trillion.
"It pains me tremendously to have the American taxpayer put in this position, but it is better than the alternative," Mr. Paulson said yesterday on U.S. television.
Global stock markets went on a two-day rally at the end of last week on only a hint that President George W. Bush was readying a massive bailout, reversing substantial losses sparked by the demise of investment banks Lehman Brothers Holdings Inc. and Merrill Lynch & Co., and insurer American International Group Inc.'s takeover by the Fed.
One of the reasons Mr. Paulson gave for the bailout was to reverse the decline in the U.S. housing market.
Home ownership rates soared to record levels amid the subprime-mortgage craze, a boon for contractors in the U.S., forestry companies in Canada and appliance makers in Asia.
But too many loans were given to people who couldn't afford the payments.
Foreclosures are setting records, and the U.S. is now in the middle of the worst housing slump since the 1930s.
Mr. Paulson's fund to purchase troubled assets could help ease credit costs, which could in turn lower mortgage rates. Taking control of thousands of mortgages might also allow the government to set more favourable terms, keeping people in their homes.
Still, the biggest problem facing the housing market is the sheer number of homes on the market.
There are almost 4 million unsold existing single family homes on the market in the U.S., the most since at least 1982, according to the Chicago-based National Association of Realtors.
It would take almost a year to fill those homes at the current pace of sales, compared with almost five months in September, 2005, according to the association.
Not surprisingly, with home values falling, it's diminishing most consumers biggest source of wealth. At best, Mr. Paulson's program will stabilize home prices sooner than would have happened otherwise. But there is still a ways to go.
"I would like to think this slows the descent of home prices," said Mark Chandler, a fixed income strategist at RBC Dominion Securities in Toronto. "This won't lead to any short-term resolution."
With files from Bloomberg News
***
U.S. housing watch
18.8%Amount U.S. home values have fallen since July, 2006.
58%Increase in mortgage applications last week from their low the week of Aug. 15.
1 in 416
U.S. households that got a default notice in August.
Bloomberg, S&P/Case-Shiller Home Price Index, Mortgage Bankers Association, RealtyTrac Inc.
