There are currently an increasing number of so called key economic releases and market indicators that are showing a marked improvement in trends from where they were only a couple of months ago. We can, for example, confidently state that the severe liquidity crunch that almost froze the economy roughly a year ago (triggered by Lehman's collapse) is a thing of the past. The oft used TED spread indicator (differential between risk free treasuries and libor) is now around 17 basis points which is even lower than the levels it was at in the first half of 2007, before the crisis began.
Even more interesting is the housing market which is, after all, at the center of what led to this unprecedented crisis. The most recent home price figures (see graph above) for the United States are actually indicating a recovery. In other words, if the figures are to be believed (and there is frankly no reason why we shouldn't) we are witnessing a recovery which means that the deceleration and bottoming out phases that were mentioned in previous blogs have already occurred! It is indeed very encouraging news if we are to take the figures at face value. If we dwell a bit deeper, however, a completely different picture emerges. More specifically, the role that the government has played in stabilizing the economy has arguably been as unprecedented as the scale of the crisis itself, all one has to do is take a closer look at the figures:
-80% of the new mortgage loans this year benefitted from some form of government support
-the government now effectively owns Fannie and Freddie and their combined $5.4 trillion in loan portfolios
-the Fed has purchased $836 billion of mortgage backed securities issued by Fannie, Freddie and Ginnie, pushing down mortgage rates guaranteed by the firms
- it also buys up to $30 billion in mortgage securities every week
-the government is on track to purchasing $1.5 trillion in mortgage debt and $300 billion in treasuries
With the massive and ongoing injection of capital into the markets it is no wonder that the housing market has more than stabilized. The caveat, however, is that it is happening thanks to the government intervention and, just like with the analogy of an ICU patient hooked to a ventilator, if the government withdraws its support, the housing price freefall will most probably resume.
I am making this point to highlight the fact that one should not just rely on figures to get a reading on the health of the economy. The rebound in its current form is unsustainable as the government coffers are not unlimited and come at a cost which seems to be rising every day.
