What will steady shaky financial system?
Two keys: Stabilize home values while keeping Wall Street calm, analysts say.
After months of wrenching upheaval in financial markets, the system hasn't self-destructed but it also hasn't stabilized.Skip to next paragraph
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What will it take?
With the nation now very likely in a recession, that's become an important question not just for bankers and policymakers, but for everyday workers and consumers.
Many signposts will mark the path forward, economists say, but they cite two crucial steps policymakers must make. First: Ensure that the current uncertainty about the value of houses is resolved, which will also help investors discover the now-uncertain value of mortgage-linked investments. Second: Prevent chaos from engulfing the financial system while that housing adjustment is taking place.
Unfortunately, the first step may take a while – many more months – and the second will continue to tax policymakers during that time.
Still, several recent signs are encouraging, including the apparent determination by Federal Reserve Chairman Ben Bernanke to move creatively and decisively when market jam-ups occur. He and his team are also lowering interest rates, including a move Tuesday that dropped the so-called federal funds rate from 3 percent to 2.25 percent.
Experts differ widely on how far advanced the current financial crisis is. Some say it could last several more years, while others say the stock market may be near bottom now.
A sure indicator, Mr. Horrigan says, will be when "vultures" – aggressive, bottom-fishing investors – start moving in to buy investments that have tanked in the hands of others. In the current crisis, those investments include packages of debt that include subprime mortgages.
"That's how crises come to an end," Horrigan says. "Someone starts buying."
This is why home prices are so important. Buying of homes or of mortgage securities can best rebound on confidence that prices are near a bottom.
"The [economic] downturn was triggered by the bursting of a housing bubble," says Jared Bernstein, an economist at the Economic Policy Institute, a left-leaning Washington think tank. "As long as home prices have a way to go, it's hard to see much light at the end of the tunnel."
He cites a forecast of home prices shared by a number of analysts: "Home prices are down 10 percent, and probably have another 10 percent to go. By that very simple measure, you could argue we are halfway through the tunnel."
A key question is if policy intervention will hasten the process – or prolong it.
The argument for intervention is that the market is in such chaos now that home prices could fall too far. A wave of foreclosures is adding to an already large inventory of homes for sale. And in a vicious cycle, the further home prices fall, the more people may default on their loans.
Some analysts say the end of the crisis will be near when Congress takes some new action to stem the foreclosure tide. This could be structured, supporters say, so that it is not a bailout for lenders or borrowers – and so that it allows home prices to fall to a new equilibrium.