Mann at Work

Dec 10 2007 12:28PM | Permalink | Email this | Comments (2) |
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In the wake of the subprime mortgage crisis, many are calling the U.S. economy a house of cards on the verge of toppling. In a conversation with CanaData economist Alex Carrick, however, I was reminded that every economy risks collapse, but in general, because everyone has a vested interest in keeping the cards upright, a crash is unlikely.

Worry over the subprime crisis and the possibility of recession prompted the White House to announce a plan last week to help struggling subprime mortgage borrowers keep their homes in the wake of escalating mortgage rates.

While the plan calls for a five-year interest rate freeze, there are two catches. The plan is voluntary for mortgage lenders and only those homeowners not currently in arrears are eligible to participate. Borrowers who were coaxed into borrowing against the equity in their homes by “teaser” rates and lax credit terms and have since fallen behind on their mortgages will not see any relief.

The announcement does not force mortgage lenders to offer interest-relief to borrowers either, but the Federal government is promising to take regulatory steps to make the mortgage industry “more transparent, reliable, and fair.”

But do moves such as this one — and all of the anxiety currently building over the state of the economy — risk making recession a “self-fulfilling prophecy”? It could.

According to Mr. Carrick, even though the U.S. economy still has a lot of momentum, doom-and-gloom news on the financial front risks pushing the U.S. economy into recession, even though employment numbers are strong, the stock markets are down only slightly and consumer confidence has been only mildly affected by all of the hand-wringing.

(For more about Mr. Carrick’s take on the avoidability of a U.S. recession, check out this article “Recession in the U.S. is Avoidable”.)

In an article entitled “What halts home price deflation? Fear of losing a bargain” Mr. Carrick foresees the housing market stabilizing in 2008, as does the National Association of Realtors. This outlook means that the housing market should no longer be a drag on the U.S. economy as 2008 progresses.

If the Fed lowers its federal funds rate by 25 or 50 basis points in January and the holiday shopping season turns out to be a healthy one, then it’s safe to say that rumors of the “death” of the economy are highly exaggerated.