Policy Engaged
By: Dr. Charles Lieberman
Date: 3/23/2009
Policymakers appear to be well engaged in improving the credit markets and the economy, far more so than any time since the credit crisis started more than two years ago. This is promising. The Fed has been very active, while Treasury will finally unveil its program to take toxic assets off the balance sheets of banks. Critics will carp at the cost, whether there are better ways to accomplish the same ends, and whether private firms, such as hedge funds, will profit unduly. It is easy to be a critic. The acid test is whether conditions improve. Much has already been accomplished in the credit markets. Expect more progress from the latest efforts (and still more initiatives if the latest efforts provide less benefit than expected).
Mortgage rates are one clear area where policymakers can already claim some success. Interest rates on 30-year fixed conforming mortgages are down to 5% without points and as little as 4-3/4% in some regions. Jumbo rates have fallen, but still remain high. Housing affordability is at record highs. Corporate bond yields have also come down and bond issuance has been strong since early January. Most firms are reducing leverage or paying off credit lines, commercial paper and maturing debt or beefing up cash positions. As financing risk falls, firms will be able to return to managing their business and growth prospects, instead of focusing on their financing needs.
The health of the banks remains crucial to restoring confidence in the financial system, so Treasury's program deserves close scrutiny. Many "toxic assets" are still paying interest, although it is hard to determine their value in illiquid markets. Financial firms do not wish to sell off these assets if the market prices are below what the firms expect to realize by holding them. But, buyers won't buy unless they can get a bargain. This conundrum has contributed to the illiquidity of the market. How Treasury hopes to break this logjam will determine if the market's fears about these assets is warranted. Clarity is needed.
Economic data suggest that the economy might be doing a bit better. Retail sales have stopped falling and housing starts astonished most everyone by rising unexpectedly. This increase is being hastily dismissed as an aberration. However, it could also be that the recession is bottoming out. The truth will become obvious within a few months when we enjoy the full benefit of hindsight. In the meantime, it remains comforting that policymakers are moving aggressively to improve economic conditions. Sooner or later, they will succeed. Download this article in PDF Format
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