Analysis: Washington running out of economic options
Tom Raum
AP
Federal Reserve Chairman Ben Bernanke, shown here testifying before the House Financial Services Committee on Wednesday, warned that the U.S. economy faces "numerous difficulties," that the outlook for inflation is unclear and that "financial markets and institutions remain under considerable stress."
WASHINGTON — The nation's leaders are running out of answers to America's economic crisis.
The Federal Reserve has no more practical room to push interest rates lower; there's only so much taxpayer money for shoring up housing, and if depositors lose confidence there's little officials can do to stop a run on banks.
President Bush, speaking from a White House podium, and Federal Reserve Chairman Ben Bernanke, in testimony to a congressional committee, sought on Tuesday to soothe jittery markets and reassure Americans that the U.S. financial system remains basically sound despite the current turmoil.
But they both tempered their remarks with warnings and expressions of uncertainty.
Bernanke warned that the U.S. economy faces "numerous difficulties," that the outlook for inflation is unclear and that "financial markets and institutions remain under considerable stress."
Bush told a news conference: "The president doesn't have a magic wand." He was answering a question about soaring fuel prices but his remarks seemed to sum up the government's overall predicament.
After years of seeming tame, inflation is again on the rise, led by higher food and fuel costs. But the Fed, which usually fights inflation by boosting interest rates, finds itself unable to use that weapon any more - it already has pushed rates down to 2 percent from 5.25 percent in response to the housing crisis - without threatening to undermine an economy that is either in recession or growing anemically.
With soaring budget deficits, swollen from the costs of wars in Iraq and Afghanistan and increased spending on homeland security, there's only so much taxpayer money for bailing out failing financial institutions.
Stocks are in a bear market, and shares of banks and other financial companies have been pounded.
"I fear that we're sitting on a financial powder keg," Bernanke was told by Sen. Richard C. Shelby of Alabama, senior Republican on the Banking Committee.
Mortgage giants Fannie Mae and Freddie Mac hold or guarantee about half the home mortgages in the United States. Their stocks have lost about 80 percent of their value over the past year. Over the weekend, the two were thrown a lifeline by the Treasury Department and the Fed. But if investor jitters prevent them from being able to sell bonds to finance new mortgages, it could have far-reaching economic consequences.
And the risk of runs on banks is still present, although minimized by federal deposit insurance on accounts up to $100,000 and by other federal safeguards.
Regulators seized IndyMac, a large California-based savings and loan bank, this month after hundreds of depositors lined up to withdraw funds at branches. The bank reopened Monday under federal control.
Bush counseled calmness. "I happened to witness a bank run in Midland, Texas, one time. I'll never forget the guy standing in the bank lobby saying, your deposits are good. We got you insured. You don't have to worry about it if you got less than $100,000 in the bank. The problem was, people didn't hear. And there's a ... nervousness. My hope is, is that people take a deep breath and realize that their deposits are protected by our government."
But nearly $1 billion of IndyMac's approximately $19 billion in deposits was uninsured, according to the Federal Deposit Insurance Corp.
The administration unveiled a U.S. rescue plan for Fannie Mae and Freddie Mac, but it has not put a pricetag on it. Treasury Secretary Henry Paulson said the administration did not intend to nationalize the companies and wanted to preserve their shareholder-owned structure. Still, he said a regulatory overhaul was needed.
Congress is also working on legislation that would modernize the Federal Housing Administration and create a new regulator and tighter controls for Fannie Mae and Freddie Mac.
If the government wound up taking over the two companies, it would have to assume more than $5 trillion in mortgage debt that the two companies now either own or back. That would add to a federal debt fast approaching the $10 trillion mark.
Bernanke defended the Fed's decision to help rescue Bear Stearns as well as Fannie and Freddie. If problems aren't contained, they can ripple throughout the economy, hurting everyone, he said. "Financial stability is critical to economic stability."
David Jones, an economist at DMJ Advisors and a longtime Fed watcher, said Bernanke's testimony suggested that the Fed's "emphasis has shifted to financial stability," perhaps signaling that it will leave interest rates unchanged until late 2008.
There are some things that could be done, but they may not be politically viable.
Democrats in Congress want to pass a second economic stimulus package, but it is being resisted by Bush and many congressional Republicans.
House Speaker Nancy Pelosi has urged Bush to release oil from the government's Strategic Petroleum Reserve to knock down gasoline prices. Bush repeatedly has rejected such calls to use oil from the reserve, which holds about 702 million barrels of oil - enough to replace imports for two months. The crude oil is stored in caverns in Louisiana and Texas. Recently, Bush reluctantly agreed to halt shipments of about 70,000 barrels of oil a day into the reserve after Congress directed him to do so.
In any event, voters don't seem to have much confidence in either Bush or Congress.
The approval rating of Congress is down to a new low of just 18 percent from 23 percent last month, according to a new AP-Ipsos poll. Bush's approval is at 28 percent, about even with the 29 percent rating last month.
Only 16 percent of those surveyed thought the country was moving in the right direction, a new low as well, although statistically the same as last month's 17 percent.
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Ron_Godzilla (anonymous) says...
Thank you for leaving us with a crumbling economy George Bush. I was delighted to hear that come November the good people of San Francisco will be voting to name a sewage treatment plant after him. Such a befitting tribute.
July 20, 2008 at 12:34 a.m. ( permalink | suggest removal )
Paul (anonymous) says...
Naming a sewage plant in CA for George Bush is only appropriate .. !
July 20, 2008 at 8:02 a.m. ( permalink | suggest removal )
petehend (anonymous) says...
The obvious answer-----Lets turn the economy over to Obama---a man with no work experience whatsoever----a man educated in Indonesian and Hawaiin schools---no military expeience---a man whose entire worklife experience consists of little more than "community organizing" in the Southside Chcago welfare state.
Obama---The greatest flim flam man of the 21st century--how did he EVER get this far ???
July 20, 2008 at 8:48 a.m. ( permalink | suggest removal )
Pols101 (anonymous) says...
Yep, it's a heck of a mess! We need to get a-hold of the oil speculation. We have got to stop it to help control fuel prices. If we can get oil back to around $80 a barrel, the ship will right itself. Then we have to do all we can to produce as many alternatives as possible. We have got to drill, process oil shale, liquid coal, ethanol, and bio-diesel. That is not the complete answer, but it will get us through until we can do better and almost completely stop using fossil fuels for energy. It is time to raise interest rates .25 points. We have no choice. The banks that are going to fail are going to. They should have been more careful when they were giving those "no income required" loans. I doubt we have the leadership or will ever have the leadership to do it. Plan B, buy all the gold and ammunition that you can get your hands on!
July 20, 2008 at 10:22 a.m. ( permalink | suggest removal )
whome (anonymous) says...
Please, people, the reason the US economy sucks is not because oil is $130/bbl. It's the other way around. The reason oil is at $130/bbl is that because the US economy sucks. Ask yourself what would the price of gasoline be if the US Dollar had not depreciated 45% in the last four years. Then ask why has the dollar depreciated so much? Put on a seatbelt, this going to be a bumpy ride...
BTW, if you're the Fed: do you keep the interest rates low to try to save the housing market (which is going to crash anyways) and avoid a recession? Or do you raise interest rates, which is going to kill all borrowers, especially mortgages, to try to defend the dollar?
July 20, 2008 at 11:43 a.m. ( permalink | suggest removal )
Pols101 (anonymous) says...
Whome,
The energy problem is worldwide. Do you think it is OK to keep depending on all of these unreliable sources of oil from our enemies? It is a paradox and strengthening the dollar will only slightly lower the oil value per dollar. Soon, it may be only 60 euros per barrel. Oil prices have been driven by speculation in the United States market. There is another paradox, the US market is driving the price of oil so high and the contributing to the weakness of the dollar. Even a high-schooler in economics knows it. People can't pay their house payments if they can't afford to pay for the trip to work.
July 20, 2008 at 11:59 a.m. ( permalink | suggest removal )
buff_o_rilla (anonymous) says...
Pols101,
Its not only the US market, Its the Chinese, Indian and other emerging countries coming online. The great globalization idea is coming to fruition. If you really want to lower the price of oil, Boycot anything made in china if you can (hard to do since just about everything is made there). The great idea of giving them permanent (prefered) trade status was a really bright one, Now we get to pay the price by higher oil prices, loss of high paying manufacturing jobs, A rising econimic and military power to counteract American interests. A deminished american position financialy, militarily and geopoliticaly around the world. Once again the politicians have screwed us over again!!!
July 20, 2008 at 1:27 p.m. ( permalink | suggest removal )
majorjohnson (anonymous) says...
The problem is the government to begin with. There should't even be a fannie mae or freddie mac. As far as the housing problems, the market will correct itself, painfully yes, but it will correct itself. All government can do by interfering and trying to make it painless is make it worse.
The conservatives are killing this country by being so disgustingly big government/big religion they managed to make the freaking socialists look better by comparison.
July 20, 2008 at 1:43 p.m. ( permalink | suggest removal )
Pols101 (anonymous) says...
buff, the speculation of the us market drives the price. that is why it is measured in us dollars, worldwide. Part of the speculation is that china and india will continue to drive up demand to the point that production cannot meet demand and that we are running out of oil. PLEASE, connect the dots!
July 20, 2008 at 3:19 p.m. ( permalink | suggest removal )
whome (anonymous) says...
"There is another paradox, the US market is driving the price of oil so high and the contributing to the weakness of the dollar."
"the speculation of the us market drives the price. that is why it is measured in us dollars, worldwide. "
---------------------------------------------
Pols101, you make absolutely no sense.
Please understand how floating currencies work. As sovereign funds and foreign central banks reduce their exposure to dollar-denominated assets, the value of the dollar declines. For example, if you wanted to buy a European company, you have to convert your dollars to Euros. The increased demand for euros, relative to dollars, makes the dollar decrease in value. It's simple supply and demand.
So what have now is the reverse. Foreign entities, who accept nearly a trillion of DOLLARS from us each year because of our trade deficits, no longer want to hold all of those assets in dollar denominated assets, which weakens the dollar. From the point of view of Europe, China, India, EVERYTHING priced in dollars (e.g. Anheuser-Busch) looks discounted. For example, if we have a 30% price increase in a widget, but a 40% decrease in the dollar, we don't notice it, but to the rest of the world, the item has actually decreased in price.
July 20, 2008 at 5:20 p.m. ( permalink | suggest removal )
Horratio (anonymous) says...
Give Iraq back. Transfer core troops to Afgahnastan and bring the balance home.
Bring the military home from all over the world. We don't need to be there anymore and it would save billions.
Bring congress home. All of them. Choose the next batch by lotto for a single 5 year term. Random choice congressman couldn't be any worse than the sociopaths we send there now. (OK I'm slightly tongue in cheek here but you get the idea).
Conserve gas for future generations. We waste more than anyone else. Strictly enforce a 55 mph speed limit. Offer a tax free purchase of any vehicle that gets an average of over 35 mpg (free from all sales tax, federal, state,county,city, property). Impose another 1 dollar federal tax on gasoline. Hear me out. We are by far the largest oil consumer. We are transferring our wealth to nations that hate us. Our government is in financial crisis. Wouldn't it be better to give that dollar per gallon to ourselves than OPEC/Venesualia/Russia? By taxing gas and the other measures mentioned, we will use less and actually force the price of oil so far down that within a year, the price we pay per gallon will be the same as we pay now except then our Government would get the extra dollar instead of these other people who hate us.
July 20, 2008 at 6:12 p.m. ( permalink | suggest removal )
majorjohnson (anonymous) says...
Hey horratio. who's gonna role back state, county, sales city property taxes? Gonna do that from the fed level? You're an idiot without a clue how government works. And worse than that, you get to vote. Go back to reading fairy tales.
July 21, 2008 at 12:26 a.m. ( permalink | suggest removal )
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