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Economic Turnaround Will Take Time

Major stimulus measures won't take effect overnight, analysts say

By Mark Huffman
ConsumerAffairs.com

October 9, 2008

Personal Finance • Americans Tap Savings to Cope with Economy • Economists' Panel Sees Prolonged Recession • Getting A Small Business Loan in Bad Economic Times • Jobless Rate Spikes in October • Monthly Job Cuts Hit Five-Year High • Business Economists See More Signs of Recession • What's Ahead For the Economy? • Consumer Confidence Plunges to Record Low • Bankers See Recovery in Second Half of 2009 • Autumn Has Long History as Financial Disaster Season • Finding a Job Takes Longer in Slow Economy • Baby Boomers Scramble to Reassess Future • What's Your Recession Game Plan? • Study Finds Racial Disparity in Retirement Savings • New York Threatens to Prosecute AIG for Fraud • Inflation Not a Factor in September • Retirement Postponed for More Americans • Economic Worry Supplants Terrorism Fear • Wall Street Leaders Missing In Action • Doctors Worry About These Stressful Times • Financial Meltdown Takes Toll on Consumer Confidence • Economic Turnaround Will Take Time • Retirement Plans Hammered in Credit Squeeze • Fed Takes Another Step to Bolster Credit Market • Economists Offer Plan for Stabilizing House Prices • House Passes Bailout Bill; Bush Signs Into Law • Senate Expected to Pass Bailout Bill • FDIC Seeks Increase in Deposit Coverage • Voter Anger Rattles Congress; Bailout Fails • Congress Agrees On Compromise Bailout Bill • Somber Washington Prepares for Bailout • Deal Or No Deal: What The Bailout Means To You • FDIC May Need Additional Funds if Banks Keep Failing • Which Type of Money Market Account Is Right for You? • How Does The Banking Crisis Affect You? • Lehman Files Largest Bankruptcy in U.S. History • Why Individual Investors Shouldn't Buy Individual Stocks • Bear Stearns to Pay $28 Million to FTC for Abusive Lending Practices • When Should You Sell Exchange Traded Funds? • Has the Bear Market Hit Bottom Yet? • How Do You Survive a Bear Market? --- • More Personal Finance News

Franklin Roosevelt famously said "we have nothing to fear but fear itself." People have been dusting off that Depression-era chestnut lately as bank woes have dried up credit and stock prices have gone into a nosedive. The fear is palpable.

But a growing number of economists and financial analysts have counseled consumers to take a deep breath. Yes, things appear dire, but unlike in 1929, the U.S. Government has taken active steps to deal with the crisis. Given time, they say, they could well yield positive results.

The Emergency Economic Stabilization Act of 2008, the so-called bailout bill, may provide a market for those "toxic" mortgage-backed securities that are dragging down banks, helping to unclog the credit pipeline.

However, the measure's major impact was designed to be psychological. It was supposed to signal to the markets that the government was aware of the problem and totally committed to solving it. But the Congressional response was hardly reassuring, and when the pork-laden legislation finally became law, the stock market plunged. The initial benefit of the "shock and awe" measure was lost.

But over time, as the government slowly weeds through these securities and the real estate that back them up, trillions of dollars in securities that currently have no value may regain some value. The government may make an eventual profit on their sale, or better still, other banks might decide they are worth more than what the government will pay and buy them instead. The end result is that money will start flowing again. But it isn't going to happen next week or next month.

Although it didn't receive nearly as much press coverage, the $300 billion Housing and Economic Recovery Act of 2008 may provide more immediate relief for struggling homeowners than the recently signed $700 billion economic bailout.

Signed into law in July, the recovery act created the "Hope For Homeowners" or H4H program. Section 1402, which went into effect Oct. 1, 2008. The program allows troubled mortgage holders to avoid foreclosure by refinancing into smaller, more affordable, Federal Housing Administration (FHA)-backed mortgages, provided they give Uncle Sam a piece of the equity-growth action, and provided the lender voluntarily agrees to the deal by writing down loan balances.

Section 1403, effective when the law was signed, mandates that mortgage servicers modify loans for certain homeowners to help them avoid foreclosure. The goal is to prevent future foreclosures, accomplishing two goals. Homeowners don't lose their homes, and fewer mortgage-backed securities go bad.

"I think the modification portion is more important than the FHA deal because the FHA deal is a voluntary program and no one is forcing them to do it. Lenders are not going to write down the balance to 90 percent of the current value, as is required for Section 1402 action," said Gibran Nicholas, chairman of the CMPS Institute, a private organization created to certify mortgage bankers and brokers who counsel consumers on mortgage and real estate equity management, as well as home loans.

On October 7, the Federal Reserve announced creation of the Commercial Paper Funding Facility. The new facility will purchase commercial bonds, pumping much needed liquidity into the financial system. Banks still appear fearful to make loans, but as the fear subsides, there will be mountains of cash for them to lend.

The step is designed to address a principle concern of the unfolding credit crises--the fact that businesses are unable to borrow short-term funds to finance their operations. Without access to that cash, companies will be forced to layoff workers and suspend operations, eventually shutting down the entire economy.

Despite all these steps, the market has yet to react in a positive way. However, that doesn't mean it won't eventually. Steve Santani, a market analyst for the business cable channel CNBC, compares the financial markets to a baby with colic.

"No matter what you do to make him feel better, the baby keeps crying, and he just has to cry for awhile," he said.

In the meantime, personal finance experts advise consumers to cut their expenses, payoff as much debt as they can, and prepare to ride out a recession that could last well into next year.

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