Some signs of optimism on economy
Banks raise capital; senators look at a bipartisan mortgage-rescue package.
America's web of housing and financial problems has no simple or quick fix, but one vital ingredient of progress appears to be on the rise: hope.Skip to next paragraph
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A 3.6 percent surge of the Standard & Poor's stock index, as happened Tuesday, is hardly an all-clear signal. But the fact that the rally was led by some of the bank stocks at the center of the storm does point to some lessening of fears that neither markets nor policymakers can prevent an economic slowdown from becoming a deep recession.
Among the encouraging signs:
•Banks are raising fresh capital. The investment banks UBS and Lehman Brothers moved this week to raise $19 billion by issuing new stock shares. That money represents the wherewithal for new lending and a cushion against potential losses.
•Republicans and the majority Democrats in the Senate agreed Tuesday to craft a mortgage rescue package on bipartisan grounds. The impact would be modest, but many analysts say it could provide some help to the economy's key area of weakness.
•In recent weeks, an index of home affordability has moved convincingly above average, a step that could lay the groundwork for buyers to begin to return to the housing market.
"The [stock] rally was indeed about hope. At least for one day hope trumped fear," says Ken Goldstein, an economist at the Conference Board, a business-sponsored research group in New York. "We have certainly extended a safety net of sorts to financial markets."
Don't be surprised, he says, if the stock markets continue their wild swings – with moves down as well as up.
It took a long time for the economy's credit problems to build. Businesses and families "leveraged up" with a borrowing and lending boom that went too far. The aftermath is an unwinding process that can't be accomplished overnight.
Orderly vs. chaotic adjustment
But for American households, what matters greatly is that this unwinding occur in as orderly a way as possible. If things go well, credit will still be available, banks won't fail, and the housing market will find a new equilibrium. This can't prevent a belt-tightening process that may be pushing the economy into a recession.
"Housing is very much at the center of both the economic situation and the credit situation," Federal Reserve Chairman Ben Bernanke said Wednesday on Capitol Hill, responding to questions from Congress's Joint Economic Committee.
He expressed cautious optimism, based in part on the Fed's own recent moves to cut interest rates and to extend short-term credit to banks at a time of stress.
"Our recent actions appear to have helped stabilize the situation somewhat," Mr. Bernanke said. He predicted that economic activity will strengthen later this year and return to sustainable growth in 2009, "bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions."
As he spoke, the stock market was steady, holding onto its Tuesday gains.
Still, Bernanke and others point to risks on the down side for the US economy.
Falling home prices, while helping to lure buyers to the market, mean lost wealth for millions of Americans – and the risk of large losses for banks when homes end up in foreclosure. Many fewer families can borrow against home equity like they did in recent years – a practice that buoyed consumer spending and overall economic growth.