Market Effects

wondering WHY sales have been slower than normal ?

You shouldn't be wondering.It will get worse before it gets better.

Smart sellers will take heed and adjust accordingly.

~~

Bernanke Says Housing to Remain `Drag' on U.S. Growth
By Craig Torres and Scott Lanman

Oct. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the housing slump will be a ``significant drag'' on U.S. growth into next year, though evidence of a broader impact on spending is limited.

``The Federal Reserve will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability,'' Bernanke said in a speech to the Economic Club of New York today.

Credit markets have improved, he added, while a full recovery will take time ``and we may well see some setbacks.''

Bernanke's speech, his first on the economy since August, comes as investors pared expectations for an interest-rate cut this month. Retail sales increased in September and jobs and wages picked up, suggesting consumers are weathering the worst housing slump since 1991 and reduced access to credit.

The Fed chief, as Vice Chairman Donald Kohn did two weeks ago, pointed out risks to both growth and inflation, declining to steer investors on whether he favors lower borrowing costs.
``He was not giving away anything about what the Fed was going to do at the next meeting,'' said Robert Hormats, vice chairman of Goldman Sachs International, who attended the dinner.
The dollar and Treasuries were little changed in Asian trading after Bernanke's remarks. The U.S. currency was at $1.4202 per euro at 9:16 a.m. in Tokyo and 10-year Treasury notes yielded 4.68 percent.

Rate Cut

The Federal Open Market Committee lowered its benchmark rate by a half point to 4.75 percent on Sept. 18, the first cut in four years, to protect the U.S. from sinking into a recession sparked by fallout from the housing-market collapse.

``The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain,'' Bernanke said today. ``It remains too early to assess the extent to which household and business spending will be affected'' by the housing recession.

Answering questions after his speech, Bernanke said while central banks can't be ``indifferent'' to exchange rates, data show the effect of a falling dollar on prices is ``relatively small.''

Bernanke's speech described the events leading up to the Fed's discount rate cut in August and half-point cut in the benchmark lending rate Sept. 18, and the thinking behind policy makers' actions. The September reduction exceeded most economists' forecasts.

Managing Risk

``Risk management considerations also played a role in the decision, given the possibility that the housing correction and tighter credit could presage broader weakening in economic conditions that would be difficult to arrest,'' he said.

In response to a question by Henry Kaufman, the former Salomon Brothers Inc. economist who now runs a New York firm bearing his name, Bernanke said investment firms ``need to be as transparent as possible'' about how they value their assets.

``This current financial stress is not likely to disappear overnight; partly it is an information problem,'' Bernanke said. ``It is going to take a while for investors to appropriately value these assets.''

Kaufman asked Bernanke what market and economic information he would need for more effective policy making.

`Damn Things'

``I would like to know what those damn things are worth,'' Bernanke joked, referring to the products that investors have shunned in the credit rout. ``

This episode has revealed a weakness in structured credit products,'' namely the difficulty in coming up with valuations in periods of stress.

The economy's performance so far this year ``has been reasonably good,'' and evidence ``has been limited'' that the housing recession is hurting household spending, Bernanke said.

At the same time, there are signs that the job market is ``cooling,'' and Fed policy makers will be watching household and business spending along with payroll and income changes, he said.

Bernanke said the risks of a larger cut in rates last month seemed acceptable because inflation figures were ``favorable'' in recent months.

He also said that the FOMC ``was prepared to reverse the policy easing if inflation pressures proved stronger than expected.''

Kohn earlier this month said policy makers must be ``nimble'' in setting interest rates given the risks of both slower U.S. economic growth and faster inflation.

Mortgage Rates

Since the September cut, the gap in interest rates between jumbo mortgages of more than $417,000 and loans of that amount or less have declined to 0.64 of a percentage point, from about a full percentage point a month ago.

Still, ``conditions in mortgage markets remain difficult,'' Bernanke said.

He warned that subprime mortgage delinquencies ``are expected to rise further'' due to lax underwriting standards in 2005 and 2006, interest-rate resets, and lower home values.

Improving credit markets and robust economic data have convinced investors that the U.S. central bank may stay on the sidelines when officials conclude their monetary policy meeting Oct. 31.

The market for U.S. commercial paper expanded for a second straight week during the period ended Oct. 10 as investors regained their appetite for short-term debt. Corporate bond sales this year are nearing $1 trillion.

Futures contracts on the Chicago Board of Trade indicate a 32 percent chance the central bank will cut the overnight lending rate between banks a quarter-percentage point at its Oct. 31 meeting, compared with 48 percent odds a week ago.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Economic Drag

Paulson, Bernanke gloomier on economy
by William Neikirk

Earlier this year, the U.S. Treasury and the Federal Reserve downplayed the risk of the housing correction to the U.S. economy. But this is no longer true. Economic decline, a credit crunch, home foreclosures, financial market turmoil and fear among investors are enough to tease out true candor.

Both Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke have joined the chorus of Americans who view the housing correction's dangerous financial tentacles as a real and present economic danger.

Paulson, forsaking his cheerleading economic role, said in a speech today that "despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

Only a day earlier, the Treasury chief had helped arrange the creation of a private-bank fund of as much as $200 billion to prevent a rapid decline in mortgage-backed assets that have been virtually impossible for their holders to unload. With this move, Paulson hoped to restore credit markets to health and smash a credit crunch in business lending. Big banks went along.

In his speech today, he called on Congress to take a number of steps to help Americans who are threatened with foreclosure on homes purchased with risky loans. And, he said, "we also need to make some changes in our laws and rules in order to prevent some of the excesses and the abuses of the last few years from housing again."

He added: "The ongoing housing correction is not ending as quickly as it might have appeared late last year. And now it looks like it will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet."

How long is "some time yet?" Your guess is as good as the next person's.
Bernake gave a speech Monday that gave a clue. "The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," he said.

What does "early next year" mean? Most people would probably say anytime from March through April.

But Bernanke added a caveat.

He said it is "too early" to assess how much consumer and business spending will be hurt by the housing correction and the related credit crunch. The Fed chairman appears to be preparing us for the possibility that the "significant drag" on growth could last much longer.

In concluding his remarks, he had some sobering thoughts.

"This has been a challenging period. Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks."

He said investors "have not yet fully regained confidence in their ability to accurately price certain types of securities," obviously meaning mortgage-backed securities.

"The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain."