Author`s name Alex Naumov

US economy looks 'rosy' despite obvious recession

The first thing GOP presidential candidate Fred Thompson said yesterday in the first debate he attended, held in the state with the nation's highest unemployment rate, is that the U.S. economy is strong and will be for the next decade.

Despite polls showing that two-thirds of Americans believe the nation is in a recession or churning toward one, Mr. Thompson said things look "rosy" for at least 10 years.

"I think there is no reason to believe that we're headed for a recession," Mr. Thompson said in a nationally televised afternoon debate with eight other GOP contenders.

Yesterday's event in Michigan was the eighth GOP presidential debate and Mr. Thompson's debut elicited a jab from former Massachusetts governor Mitt Romney, who referred to Mr. Thompson's recent television role.

"This is a lot like Law and Order, Senator. It has a huge cast. The series seems to go on forever and Fred Thompson shows up at the end," Mr. Romney joked.

Mr. Thompson closed the debate by saying, "I've enjoyed watching the fellows [in previous debates]. I've got to admit it was getting a little boring without me."

Despite his late entry and some campaign-trail gaffes, a nationwide Gallup Poll completed Thursday through Sunday showed Mr. Thompson in second place among Republican contenders with the support of 20 per cent of GOP voters surveyed. Former New York mayor Rudy Giuliani led with 32 per cent. Arizona Senator John McCain was third at 16 per cent. No other candidate was in double figures, and Mr. Romney's 9 per cent was just two points better than ex-Arkansas governor Mike Huckabee, reports.

As Pravda.Ru previously reported the key questions are how the American economy is going to perform and how far the Fed will (or must) go with its rate cuts.

There are some crucial signs that there is a thaw in progress. First, if, as seems likely, the mortgage and CDO portfolios of investment banks are not in such bad shape as feared, credit markets could see a quick turnaround, the evidence of which was already there last week in the easing of LIBOR spreads on Fed Funds.

Second, US stock markets rose for days in a row, suggesting ‘big’ and ‘smart’ money sees value even in these dog days. Also, the results of some investment banks, including the big daddy of them all, Goldman Sachs, were better than expected.

Falling house prices are destructive of wealth, but, if confined to the sub-prime sector, may not have widespread adverse effects on the economy. A quick bounce back would, therefore, not surprise and the Fed may not have to go as deep and prolonged in its cuts.

Reflecting, perhaps, the renewed confidence of market players, yields on 10 year Treasuries actually shot up no less than about 30 bps immediately after the rate cut. The explanation that it was inflation fear in a rate-softening environment does not convince as the CPI data has been far from threatening in the last several months.

Did Mr Bernanke and his colleagues put their heart and soul into the rate cut or were they stampeded into it? One must wait for their post-retirement memoirs for an answer, but on this occasion it seems they thought the risk calculus clearly favoured slashing rates.

Andrew Jakabovics, Associate Director Economic Mobility Program told in the interview to Pravda.Ru that “the cut in the federal fund rate is likely to help the segment of American homeowners who have adjustable rate mortgages (ARMs) that are indexed to treasuries or to the Prime rate. Americans who are most at risk of losing their homes to foreclosure, however, are those borrowers with subprime ARMs.

Three-quarters of those borrowers have loans that are indexed to the London Interbank Offered Rate (LIBOR), which is higher today than a month or a year ago, are unaffected by the Fed's actions. While there may be some loosening of the credit crunch and increased liquidity for banks and other investors holding mortgages, it is by no means clear that the rate cut will translate into new mortgage lending activity”.

Source: agencies

Prepared by Alexander Timoshik

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