March 20, 2008 in Business

More bad news: Economic woes not over yet

Tom Raum Associated Press


The Fed has cut its key short-term interest rate six times since September, including a three-quarter point cut on Tuesday. Also, on Wednesday, the Bush administration relaxed restrictions on mortgage- finance giants Fannie Mae and Freddie Mac, allowing them to make up to $200 billion

more in loans.

WASHINGTON – Any present optimism may be premature.

The sagging economy could keep slumping, despite one-day stock market rallies, aggressive intervention by the Federal Reserve and efforts by Congress and the White House to put more money in consumers’ pockets.

Economic fundamentals are dreary and there is only so much the government can do to make things better before making things worse.

Even those applauding the recent moves by the Fed and the administration say the economy has taken hits from which it will be hard to recover.

“This is a serious combination of events, the housing slump and the credit crunch, at the same time,” said Alice Rivlin, founding director of the Congressional Budget Office and former vice chairman of the Fed.

Still, she is guardedly hopeful. “The Fed is very aggressive and imaginative and has really taken very strong action, primarily to get the credit markets functioning again. And that’s good.”

But she said it may take more action by the administration and Congress and there may be “a need to put more public money into this.”

Former Fed Chairman Alan Greenspan calls today’s financial problems “the most wrenching since the end of the second World War.”

The economy is replacing Iraq as the main worry of election-year voters. This shift has put the administration in crisis management mode and led to increasing calls to action by the presidential contenders.

The Fed has cut its key short-term rate six times since September. That includes a three-quarter percentage point reduction Tuesday, to 2.25 percent. Policymakers hinted that more cuts may be in store.

The central bank has shoveled tens of billions of dollars into credit markets. It invoked Depression-vintage authority over the weekend to engineer the fire-sale takeover of Bear Stearns to keep the 85-year old investment house from going under.

More than 130 million households soon will begin receiving rebate checks under a $168 billion economic aid plan.

On Wednesday, the administration relaxed restrictions on mortgage-finance giants Fannie Mae and Freddie Mac, allowing them to make up to $200 billion more in loans. The White House also is negotiating with Democrats, who run Congress, on plans to head off hundreds of thousands of home foreclosures.

But there are risks.

Too much government intervention, some economists suggest, may prolong the day of reckoning when housing and credit markets hit bottom, while adding hundreds of billions to the national debt, now edging closer to $10 trillion.

The more the Fed reduces rates, the more it stokes inflationary pressures with cheap money and drives down the value of the dollar.

Lower rates help on shorter-term debt, including adjustable home mortgages, home-equity lines of credit, auto loans and some credit cards. But they have provided little relief on longer-term loans sought by first-time home buyers and people refinancing mortgages. Also, they cut into the earnings of retirees and others who depend on fixed income.

Economist Robert Reich, labor secretary in the Clinton administration, likens the recent Fed steps to pumping helium into a balloon about to burst.

Across the spectrum, there is little cause for joy.

Investors remain jittery. After the Fed’s rate cut on Tuesday, stocks surged, with the Dow industrials rising over 420 points. On Wednesday, most of those gains were erased, reflecting continuing nervousness about the economy and the world’s financial system.

Stocks are down roughly 10 percent to 15 percent from their 2007 peak, typical of a recession-driven correction.

Polls show most people in the United States believe the country is already in a recession, a view backed by many economists.

Consumers are cutting back spending; employers shed 63,000 jobs in February. On Monday, the Fed reported that U.S. factories were running at their slowest pace since October 2005.

Both retail sales and industrial production fell last month. Oil prices recently hit an all-time high of $110 a barrel before easing back to about $104 a barrel Wednesday

Even those applauding moves by the Fed and the administration say the steps are helpful and ward off panic, but that the bad news is not over.

“A very severe correction is under way. House prices are plunging, stock prices are down measurably from their peak, there’s a lot of financial pain everywhere,” said Mark Zandi, chief economist at Moody’s “I think all the policymakers are trying to do is ensure that everything doesn’t come to a complete halt.”

As Bush said this week, “One thing is for certain, we’re in challenging times.”

When does the government reach the limit on what it can do to arrest this slide? “We don’t know what the limit is,” said economist Rivlin. “That isn’t a question with an answer.”

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