A turning point?
The news is gloomy, but I wonder if it adds up to a turning point in containing the global credit crunch. But this is only in the sense of preventing a systemic collapse and bringing liquidity back to the markets. The global recession will get worse.
First, central banks around the world are now truly coordinating their actions. Most importantly, the European Central Bank is acting in concert with its peers around the world rather than putting out increasingly other worldy statements about fears of inflation. Deflation is the far bigger risk today with asset prices imploding than inflation.
The bailout bill has been passed. The Fed and the Treasury are supporting both money market mutal funds and commercial paper.
An anecdote: A Hispanic immigrant family here in the Twin Cities bought a home a few years ago. Like many Hispanic families, soem family members are legal and some illegal. A few have returned to Mexico, and the remaining occupant coulnd't keep up the mortgage. She called the bank, apologized, and told them she couldn't keep making the payments. The bank said we'll work with you. She said, I really don't make enough to pay the mortgage. The bank's response: No, you don't understand. We want you to stay in the house. We will work out a deal. I think the bank's have finally figured out that foreclosed homes drive down home values, which leads to more foreclosed homes, which further drives down home values, and so on. It has taken too long but my guess is that a lot more will follow the lead of Bank of America and cut down the mortgage.
In a depressing story about the current state of the home market, the Wall Street Journal has this important statistic:
On a national basis, home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%.
The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter, the median home price of about $203,000 was 1.9 times average pretax household income, according to Economy.com. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.
The housing market could start attracting buyers with numbers like that.
A financial crisis doesn't stop immediately. The recession will be deep and long, and the recovery anemic. But we may be at or near bottom when it comes to "the worst financial crisis since the great depression." Let's hope so.