Sinking into recession

Sinking into recession
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First Published: Mon, Mar 10 2008. 12 33 AM IST

Updated: Mon, Mar 10 2008. 12 33 AM IST
Financial markets deal in numbers all day every day, but Friday afternoon one new figure stood out: 63,000. That was the number of jobs lost in America last month alone, according to Friday’s non-farm payrolls. That marks the fastest fall-off in the labour market in five years and is the surest sign yet that the US is in recession... For economists, recessions have a specific definition: Two straight quarters of falling national income, which will only be confirmed much later this year… The average American is now living in an economy where the jobs market is tanking, where housing is in the middle of its worst slump in recent history… Going by the old rule that if it looks, walks and quacks like a duck then it probably is one, America is in recession and Friday afternoon marks the exact moment when the world got final proof.
When Ben Bernanke speaks...
In a speech on Tuesday, the Federal Reserve chairman, Ben Bernanke, observed that the upsurge in mortgage delinquencies is closely linked to falling prices, which have left many borrowers owing more on their houses than they are worth…
The worthy goal is to help troubled borrowers, and in so doing, avert harm to the economy and the financial system. But Bernanke’s proposals are unlikely to work, because they are based on the notion that lenders and everyone else in the mortgage chain will act voluntarily. That has been tried and has not worked... What is needed is a prod for lenders to reduce the principal balances of underwater homeowners who cannot pay. That prod is to amend the bankruptcy law so that borrowers can have their mortgages modified by the court...
Relief for borrowers
It’s much easier to identify well-intentioned housing policy proposals that might make the situation worse than to craft ones that will help… A few basic principles must guide government’s approach. The vast majority of today’s market meltdown is attributable to business decisions that grown-ups entered into voluntarily… Ideally, then, relief would focus on a relatively narrow category of Americans: Borrowers of modest means whose payment record on their current subprime loans shows that they could have handled a fixed-rate loan…but who now face foreclosure because of increases in their subprime “teaser” interest rates that are impossibly high. No aid should go to the many subprime borrowers who couldn’t even pay their teaser rates or those who used subprime financing for speculative investment.
Money and jobs
These columns have been tough on the Federal Reserve in recent years, but Friday’s action to provide more liquidity to stressed credit markets counts as a helpful step… Early Friday, the Fed announced it would increase the size of its Term Auction Facility to $100 billion, as well as initiate a series of repurchase agreements with dealers and financial institutions... The markets are nonetheless anticipating a further 50 to 100 basis point cut in the Fed funds rate at the Fed’s regular open-market meeting later this month. The February jobs report will only add to the political pressure on the Fed to do so... With overall job losses of 63,000 for the month, and 101,000 in private-sector payrolls... Those job numbers suggest that first quarter economic growth will be meager, if not negative.
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First Published: Mon, Mar 10 2008. 12 33 AM IST
More Topics: Recession | Jobs Market | Housing | Economy | Slump |