Recession Discussed At Jackson Hole, WY

Sep 2nd, 2007 @ 8:41 AM by Alden Smith

At a retreat at Jackson Hole, WY, many of this country’s most prominent economic professors have warned that the troubles in the housing market could lead this nation into a full blown recession.

Martin Feldstein, president of the National Bureau of Economics, states that “lower interest rates now would help”.  Feldstein feels that a cut of up to 100 basic points might be needed to undo the effects of lower consumer spending and declining home prices.

What to Expect From the Feds

Ben Bernanke, also attending the Symposium at Jackson Hole, said the Fed would not rescue investors from self-inflicted losses.  President Bush echoes these sentiments, but has been considering putting in place legislation that will help some of the many homeowners that are threatened with foreclosure by opening up FHA guidelines to allow more people to sigh up.  This would put these unfortunates in the position to have a guaranteed loan from the FHA, thus forestalling foreclosure. Bush can expect opposition from the Democratic Senate on these issues.  It appears no real plan is in place.

William O’Donnell, strategist at UBS (NYSE:UBS) does not feel that this solution is going to make things better.  Quoting Mr. O’Donnell, the plan “will play well in the popular press but do little to save the economy from the spreading damage from the housing recession”.

News from the Market

Bush’s plan brought a little relief to the market.  Countrywide Financial (NYSE:CFC) saw prices rise 8.2%, and Lehman Brothers, the large underwriter of bonds that are backed by home loans, rose 3.7%.  In the housing sector, Lone Star Funds, which has recently tried to back out of the acquisition of Accredited Home Lenders (NASDAQ:LEND) is expected to now buy the badly bashed sub-prime lender at a reduced price.  This drove shares of Accredited up 39.3% in pre-market trading.  Both NASDAQ, S&P 500 and the DOW showed gain.

Throwing Out the Baby with the Bathwater

Feldstein, who was also in line for the Fed Chairman position gained by Bernanke, feels that this little effort will not fix the threatening issue of recession.  He feels that the three biggest challenges to the market are the areas of declining home prices, the sub-prime crisis and the weakening home equity situation.  All this adds up to what Feldstein feels “The multiplier effect of home price declines and declines in consumer spending could push the economy into recession.”

Feldstein also feels that there is a moral hazard if the central bank bails out reckless investors and speculators.  He feels these people are the ones that have gotten this country into the state it is currently in, and thinks that bailing them out would only lead to more rash speculation in the future. However, he also feels not doing something could lead to further dilemma. “It would be a mistake to permit a serious market downturn just to avoid helping those market participants,” he said.

Between a Rock and a Hard Place

This puts the market and people who are struggling in a position that will only hurt many as it continues.  Homes will be lost, and the general economy will suffer, regardless of what the Fed does.  Speculators should take their lumps as a matter of course.  Certainly, there is no guarantee in the market. The government should not be expected to bail out people who have made wrong decisions by betting on something as shaky as the sub-prime market.  It also stands to reason that the failure of lending institutions and hedge funds will only hurt the economy.  What is needed is a government stand that eliminates the pitfalls of the sub-prime market.  Steps need to be taken against predatory lenders who promise the moon.  And the country should learn from this…