One of the things I love about blogs is how readily you can put together different sources of information to reinforce a central theme. Case in point: the housing bubble. I’ve blogged about it before, but with the Fed’s rate cut yesterday it’s getting some more attention.
First off, there’s a link (midway through one of Atrios’s excellent posts on the subject) to this chart, showing that the number of subprime borrowers who can expect rate adjustments on their mortgages will peak next spring.
That puts Dean Baker’s prognosis into perspective:
The lesson from the 2001 experience is that cutting interest rates is not necessarily a very effective tool in counteracting the impact of a collapsing asset bubble. My guess is that rate cuts will provide even less effective stimulus now than they did in 2001, primarily because they will not reverse the decline in house prices and the wave of defaults and foreclosures that will follow. In any case, it would have been helpful to note the failure of the Fed’s last effort to prevent a collapsing asset bubble from causing a recession in discussions of the impact of this latest rate cut.
The overwhelming media theme from yesterday’s rate cut was the response in stock prices. But, as Baker writes, a similar jump in 2001 couldn’t prevent a recession. Stock prices are an incredible tool to use when gauging the health of the economy, but they’re only one of many, many indicators. As Atrios notes in his post, new construction has dropped as well:
Builders in the U.S. began work on the fewest homes in 12 years in August, raising the risk the real-estate recession will spread to other parts of the economy.
The 2.6 percent decline to a lower-than-forecast annual rate of 1.331 million followed July’s 1.367 million, the Commerce Department said today in Washington. Building permits dropped 5.9 percent to a 1.307 million pace, also the lowest since 1995.
The housing slump may deepen after borrowing costs rose and lenders shut off access to credit, causing growth to slow even more, economists said. Federal Reserve policy makers yesterday lowered the benchmark rate by a half point to prevent a broader economic slowdown.
Is this just the beginning? Baker seems to think so.
UPDATE: 9/20/07 4:15 p.m. â€” Speaking of that rate cut:
The Wachovia Economics Group, part of the Charlotte, N.C.-based national bank Wachovia, warned investors Wednesday that â€œthe damage being done to the housing market is more severe than the recent numbers suggest.â€
In a special report, Wachovia economists said Fed Chairman Ben Bernanke and five Fed governors met earlier this month with heads of the nationâ€™s major home builders and may have gotten a peek at sales and cancellation data.
â€œWe believe those data showed a significant deterioration in home sales, which may be evident in next weekâ€™s new and existing home sales reports,â€ the report said, predicting a drop in new and existing home sales of 10 percent or more for August. â€œSuch a drop raises the risks that we will see more spillover into related consumer spending and housing-related services than was earlier anticipated.â€
Via Kevin Drum, who asks some pointed questions regarding this development:
Obviously, a big rate cut has some substantive effects on the economy (and on equity prices in particular), which is why the stock market rallied and everyone was so happy. But there’s a flip side, isn’t there? If the Fed cuts rates more than expected, doesn’t that also mean that the Fed is more worried than everyone thought it was? And isn’t it possible, as in the case of the housing figures mentioned in the Wachovia report, that this is because they know some bad news the rest of us don’t? Shouldn’t that worry us?
I don’t know. Should it?