Busted: Bankers and The Global Economy

February 29, 2008

Fed Admits Truth after the Fact

Up until the end of December, the Fed was loathe to publicly admit any flaws in the economy:

The economic situation has become “distinctly less favorable” since July.
Strains in financial markets became evident late last summer.
Pressures on bank capital and the continued poor functioning of markets led to tighter credit conditions for many households and businesses.

Now that the Fed is on the admission bandwagon, it paints the following picture:

The growth of real gross domestic product (GDP) has since slowed sharply since the third quarter of last year.
Labor market conditions have similarly softened, but moved up somewhat.
Continuing contraction of the U.S. housing market
Increasingly lax lending standards, particularly in the sub-prime market, raised the effective demand for housing, pushing up prices and stimulating construction activity
As the housing market began to turn down, the slump in sub-prime mortgage originations, and general tightening of credit conditions has served to increase the severity of the downturn.
Weaker house prices in turn have contributed to the deterioration in the performance of mortgage-related securities and reduced the availability of mortgage credit

What the Fed is doing publicly:

Work with financial institutions, public officials, and community groups around the country to help homeowners avoid foreclosures
To pursue prudent loan workouts and support the development of streamlined, systematic approaches to expedite the loan modification process
Work toward finalizing new rules under the Truth in Lending Act
Reviewing potentially unfair and deceptive practices by issuers of credit cards and new rules
Using the Board’s authority under the Federal Trade Commission Act, to issue proposed rules for credit card issuers

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