our readers: We originally published the following commentary on
February 24, 2009. It lays out Joe's suggested five-step plan toward
recovery. We are now more than a year forward and we have yet to begin
step one, though there are some rumblings regarding a debate on mortgage
doesn't matter what you do or say
Just forget the things that you've been told
We can't do it any other way
Everybody's got to rock and roll.
I'm a firm believer in the "KISS" methodology: Keep It Simple, Stupid.
So, when I think about the overall economy and the mess we are in, a
simple solution naturally pops into mind. I haven't been able to
discredit it, so I must share it with you. Please tell me if I go off
Step 1: Determine what to do with Fannie Mae and Freddie Mac.
Without diving into actual solutions, several decisions must be made.
Unfortunately, Congress is dragging its feet as it does not want to kill
these cash cows, if at all possible, and every viable solution seems to
include doing so.
Step 2: Other large private institutions will determine how they fit
into the new mortgage market.
If you were the CEO of a Wells Fargo or a Bank of America and woke up
tomorrow with an undeniable desire to reenter the mortgage market in
force, you would not do so. Why? Because Fannie and Freddie make up
about 45 percent of the total market and until Congress points them in a
general direction, you will not step out in front. Fannie and Freddie
must take the lead, but other large institutions will surely follow as
there are tremendous fees to be made in this $13 trillion market.
Step 3: Housing prices will stabilize.
With a functioning mortgage market providing loans to qualified
borrowers in reasonable terms, home purchases will rise and home prices
will stabilize. Without a functioning mortgage market, home prices will
never stabilize at levels that require leveraged purchases.
Step 4: Consumer confidence will return.
Once home prices feel solid and perhaps even poised to rise at a
reasonable pace, consumers will return to the shopping malls and the
velocity of money will increase. This is the ultimate goal of all the
government bailout and stimulus programs today: to encourage consumers
to consume and investors to invest. Which brings us to the final step.
Step 5: Corporate profits rise, increasing investor confidence.
Completing this step will turn the current vicious cycle back into a
virtuous cycle. As consumers consume and profits rise, institutional
investors will begin putting idle funds to work in order to capture
excess returns that have been so elusive up to now. The desire to earn
excess returns is still out there, it's the opportunities that do not
I do not believe any one of these steps can occur without the previous,
which means the first step towards recovery is deciding how Fannie and
Freddie will fit into the new mortgage market. Congress has yet to have
any serious debate and Patrick Lawler, Chief Economist for Fannie and
Freddie's regulator, recently said it could be up to a year before this
issue is put to bed.
Let's hope step one isn't really a year away!
Retail sales rose 1.6 percent in March, after a revised increase of 0.5
percent in February, the biggest gain in four months. Excluding auto
sales, retail activity posted a gain of 0.6 percent.
The consumer price index edged up 0.1 percent in March from the previous
month. Excluding food and energy, the core gauge was flat for the
month. On a year-over-year basis, CPI was up 2.3 percent, although core
CPI increased modestly at 1.1 percent over the previous year.
Confidence among U.S. consumers unexpectedly fell in April to the lowest
level in five months. The University of Michigan preliminary index
dropped to 69.5 from a reading of 73.6 in March, due, in part, to slow
job recovery and health care legislation.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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