Federal Reserve & Interest Rates

In a sign that the bleeding may have finally stopped in the financial system, both Citigroup and Bank of America stated this week that the first 2 months of the year were profitable for them.  Both companies were the recipient of massive government intervention with hundreds of billions in capital and guarantees.

While this is definitely a positive sign for the market, it still hasn’t been that long since AIG’s reported it’s record loss for last quarter.  It appears as if the two banks will not require any additional government funding at this time and hopefully the they will be able to stay in the black, but with the housing market still in flux, no one can say for certain how the rest of the year will shape up.

Most of the financial sector is still fairly tight with their capital and lending activity has yet to return to normal.  While Citi and BOA may be ought of any immediate danger for the time being, the FDIC’s extensive troubled banks list is still a major cause for concern.

Unfortunately, there are going to be quite a few bank failures in the next few years, after all not all institutions are in the “too big” to fail category.  For the time being, with their ”stress” tests, the Treasury is basically reviewing which banks are worth saving and which are too far gone.

There is still some money left over from the second half of TARP, as well as a placeholder in this year’s budget for an additional $250 billion of capital, but the general feeling is, that this will still be inadequate to return credit markets to normal.  This doesn’t even factor in how the rest of world’s banking systems are faring and for other governments that don’t have the kind of resources that our’s is throwing into the problem.

As large as our economy is, it is much more interconnected to the rest of the world than it was in the past, the lack of availability for foreign capital will hinder any possible recovery in this country.  So while the announcements of Citi and BOA should not be mistaken for the start of a recovery, many parties would be happy if this signaled that the worst may finally be over.

On Friday, the Labor Department released it’s February jobs report and confirmed what many economists were expecting, a worsening employment picture.  The economy has lost jobs now in every month since the recession began in December of 2007.

Nonfarm payroll employment continued to fall sharply in February (-651,000), and the unemployment rate rose from 7.6 to 8.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  Payroll employment has declined by 2.6 million in the past 4 months.  In February, job losses were large and widespread across nearly all major industry sectors. 

The recession is quickly spreading through all sectors of the economy and at this point even the new $787 billion stimulus package, that is estimated will create up to 3 million jobs in the next few years, seems woefully inadequate to cope with the torrent of job losses that has occurred in the last 4 months.  With no sign of recovery anytime soon, the rate of job losses isn’t expected to slow and many people are wondering how long it will be until the unemployment rate hits double figures. 

The situation would have been much worse if the government hadn’t intervened in the near collapse of the auto industry.  Economists have estimated that a collapse of the auto industry would have cost the economy a minimum of a million jobs in the first few months alone and possibly up to a million more in the other industries that depended on it for revenue.

The financial system is still on shaky ground and the housing situation looks equally as bleak.  With a lack of confidence in the economy, Americans have cut back on spending sharply and the effect is being felt across many industries.

We saw spending buoyed last year once the stimulus checks went out and the same will likely be the case this year.  However, the economy is worse off than it was last year and many economist believe it will have a smaller impact even though the stimulus checks will be larger this year.

With the economy shrinking and unemployment on the rise, we might see another wave of mortgage defaults in the near future.  Unemployment is a huge concern right now as job cuts are being announced across many sectors.

Housing prices have yet to stabilize and supply is far outstripping demand as more and more homes are seized in foreclosure.  We are also seeing a jump in the number of people falling behind in mortgage payments.

It’s going to be very painful in the short term, it’s going to take quite some time for the stimulus package to work it’s way through the economy.  While it’s estimated it will create up to 3 million jobs in the next few years, it’s what the government does to prevent short term job losses which might be more important.

There is no way the government can let the auto makers fail, the amount of money they need is chump change compared to what would be needed to create the jobs lost from such a cataclysmic event.  A $750 billion stimulus package to create 3 million jobs or a $15-30 billion loan to auto makers to prevent a million or more job losses, it’s not even close.

The dream of owning a home has already become a nightmare for millions of Americans and it could become that for millions more if home prices keep falling and people who lose jobs lose their ability to support their mortgage.  It’s a big problem because that will in turn lead to more losses for the financial sector and we’ve already seen how much the government has spent on that.

The government needs to do more to stimulate the housing market so that the at least the bleeding will stop.  Right now nobody knows how much more losses these financial institutions will incur in the upcoming quarters as the housing market continues to implode.