From what I can see, the financial markets and policymakers appear to be in denial of the severe problems that a decline in housing prices can pose.
Michael Connolly at the Wall Street Journal writes in an e-mail bulletin:
The U.S. Federal Reserve historically has had two major economic functions: maintaining financial stability is one; controlling inflation while preventing recession is the other. To Alan Greenspan, chairman of the Fed from 1987 to 2006, market confidence was so intertwined with economic prospects that the two were often inseparable.
When Ben Bernanke was nominated to head the U.S. Federal Reserve in 2005, he promised to “maintain continuity with the policies and policy strategies established during the Greenspan years.” But, as Greg Ip reports, in handling his first financial crisis, Mr. Bernanke shows signs of a clear break with Mr. Greenspan. Mr. Bernanke distinguishes between the two functions.
That shift is important to understanding why Mr. Bernanke hasn’t cut the Fed’s main interest rate, and it could alter investor perceptions of the way theBernanke Fed will function. But if Mr. Bernanke eventually cuts the federal-funds rate, as markets anticipate, the contrast with Mr. Greenspan will fade and some may criticize Mr. Bernanke for moving slowly. Mr. Bernanke will elaborate on the outlook Friday at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming.
But inflation, to what little extent it exists in the present economy, can be attributed not to financing rates or even economists’ favorite scapegoat, labor costs, but energy costs, which affect transportation costs for everything else, including labor. Nearly a year ago, when an “impending US-led economic slowdown” was feared, oil prices also dropped. Gasoline prices “recovered” from that drop, as they apparently are again, but are now, in most places around the United States, lower than they were a year ago.
Katherine Conrad at the San Jose Mercury-News writes:
The stock market rallied today, with the Dow Jones industrial average gaining almost 250 points, as investors searched for bargains after Tuesday’s tumble.
Emboldened by the expectation that the Fed will cut interest rates on or before Sept. 18, buyers were also heartened by strong signs from oil and tech companies. The Associated Press calculated that the Dow rose 247.44, or 1.90 percent, to 13,293.44, near its highs of the session.
The Dow fell 280 points Tuesday.
Still, the housing sector remains weak. AP reported that mortgage-application volume, refinance volume and purchase volume all fell about 4 percent during the week ended Aug. 24 compared with the prior week, according to the Mortgage Bankers Association’s weekly application survey.
It is, I guess, old news, now, that weakness in the housing sector undermines the ability of many consumers to finance the spending that has reportedly kept the US economy afloat through two major recessions. If we thus imagine the economy like the old television cartoon, George of the Jungle, swinging from vine to vine–much like many people struggling to get by–with the adage to “Watch out for that tree!” we see the question not so much as a tree obstructing George’s progress, but the absence of a next vine to grasp.