Part of a Federal Reserve chairman’s job description is to be positive. Can you imagine the effect a panic-stained comment from Bernanke on the market?
Perhaps that’s why neither Bernanke nor Greenspan openly admitted the sub-prime mortgage debacle until it was too late. Even in 2007, Mr. Bernanke stated that the Fed “does not expect significant spillovers from the subprime market to the rest of the economy.”
As of recent, the tone has changed a bit. Even Mr. Bernanke has admitted to serious problems albeit in a subtle way. Below are some excerpts from the most recent Fed meeting along with out-of-the-box explanations.
“The staff did make modest downward adjustments to its projections for real GDP growth in response to unfavorable news on housing activity, unexpectedly weak spending by state and local governments, and a substantial reduction in the estimated level of household income in the second half of 2009.”
GDP was lowered from its initial projection once again. Real estate remains the troubled sector and housing income is not recovering. Private sector spending remains muted.
Much has been written about strategic mortgage defaults lately. Bank of American is fielding more than 125,000 calls a day from people seeking mortgage help. Hundreds of thousands haven’t made a mortgage payment in more than a year.
That is hundreds of thousands of home-owners who decided that they won’t pay the mortgage on an underwater home. The only way banks (KBE) could motivate mortgage holders is to reduce the loan principal. If banks were to do just that, they’d have to report some $500 billion in losses, so they don’t.
Meanwhile, the banks can successfully hide a big black hole, called shadow inventory while home-owners spend their mortgage money on the new iPad or flat screen TV. How does that affect GDP?
“Real disposable personal income in January was virtually unchanged from a year earlier and would have been even lower in the absence of a substantial rise in federal transfer payments to households.”