“It’s not that banks lack liquidity,” says Ely, “It is the credit quality of borrowers. There's a lot of lender uncertainty out there in terms of downside risk. The credit outlook for next few years is not that good."
Ely says there are another two to three years of adjustment in prices, before a bottom has been reached. If so, that has profound ramifications for homeowners and lenders.
Time To Form A Bottom
So far, no brave--or optimistic soul--is ready to call the bottom. But more uncertainly brings more inactivity--and more uncertainty--which feeds into the overall economic slowdown.
Money manager James Awad says the Fed should cut rates another half a point to 2.50 percent next week and “make it loud and clear” the rate cutting is finished.
Awad thinks that will help start the process of setting a bottom. There may be another round of pain and panic, but it will trigger asset re-evaluation and bring in the buyers, the likes of Warren Buffett, Wilbur Ross and JPMorganChase,, which just happened to be there for Bear Stearns.
“The market has to stop squealing and let the process work itself out,” says Awad, chairman of WP Stewart Asset Management.
Others say the Fed simply can’t do that and has to be prepared to keep cutting, even it real interest rates become temporarily negative--something the Fed’s January FOMC signaled it was prepared to do and which it has done during other recessions.
Of course, there’s a growing consensus that while this recession may be your cyclical downturn, the credit crunch is a one-of-a-kind crisis, far more ominous that the balance sheet problems associated with the 1990-1991 recession, which followed a lending mess called the savings and loan crisis.
“The Fed by itself cannot get us out of this,” says the Economic Policy Institute’s research director, John Irons, who is among a growing group pushing for a variety of fiscal measures to complement monetary policy.
That’s what makes the Fed’s most recent mortgage market move so telling, even if somewhat limited.
Bernanke has also taken the somewhat unusual step of backing plans to help troubled mortgage holders along with a batch of proposals to tighter regulations on lending that he unveiled hours after the Bear Stearns bailout Friday.
For all the second-guessing and criticism Bernanke has been subject to, there’s a grudging but growing approval of his handling of the recession-credit-crunch dynamo. He’s doing both the expected and the unexpected, and the latter of the two is what has distinguished Fed bosses over the years.
That said, it may nevertheless be a fight Bernanke can’t win--and that may actually be a good thing.
“Let the bubble burst, let prices go back to the right level,” says Mitchell of the Cato Institute. “Once it happens everyone will have greater certainty. Banks will know what their loans are worth. Homeowners would know what their loans are worth.”