johnnymk

http://www.bloomberg.com/apps/news?p...&refer=germany

Sept. 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's pledge to stop the credit-market rout from wrecking the economy failed to quell concern at the Fed's Wyoming summer retreat that the U.S. is heading for recession.

``I came to Jackson Hole thinking there would be no recession, but I'm leaving thinking we could well have one,'' said Susan Wachter, a professor at the University of Pennsylvania's Wharton School, who co-wrote the first academic paper presented at the conference.

This year's theme -- Bernanke said organizers had ``outdone themselves'' with a relevant topic -- was housing and monetary policy, eliciting forecasts of sliding home prices and criticism the Fed should have done more. Martin Feldstein of Harvard University warned of a ``very serious downturn'' and called on policy makers to cut interest rates by 1 percentage point.

The normally academic tone of the Kansas City Fed's symposium was replaced this year by concern that the sudden increase in the cost of credit to people and companies will hurt spending and investment. Consumer confidence dropped by the most in two years in August, the Conference Board reported on Aug. 28.

``There are no optimists in the crowd here,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York and a former head of domestic research at the New York Fed. ``There's a pretty strong consensus that this has gotten a lot more serious.''

As officials and professors debated lessons from the housing slump, New York Fed President Timothy Geithner and Governor Randall Kroszner were spotted on their mobile phones. Geithner is the central bank's liaison to Wall Street, while Kroszner heads the Fed board's banking supervision committee.

`Very Serious'

``The economy could suffer a very serious downturn,'' Feldstein, president of the National Bureau of Economic Research in Cambridge, Massachusetts, told the conference. The NBER dates American economic cycles. The last recession was from March to November 2001.

Bernanke, dressed in a dark grey suit that stood out from the typical dress of polo shirts, jeans and khakis at the Grand Tetons gathering, said in the opening speech that the Fed will ``act as needed'' to protect the expansion.

That didn't assuage critics such as Edward Leamer, the head of an economic forecasting group at the University of California at Los Angeles. He wrote in one of the conference papers that the Fed merited an `F' for failing to prevent the housing bubble and then not reducing rates as it burst.

`Lesser of Two Evils'

Feldstein called for ``a major reduction now in the federal funds rate, possibly by as much as'' 1 percentage point from the current level of 5.25 percent. While that may push up inflation, it's the ``lesser of two evils,'' he said in a Sept. 1 speech.

Fed policy makers next meet on Sept. 18. While central banks pumped $350 billion in emergency funds into money markets last month, signs of stress continue.

Commercial paper, a short-term financing tool, declined by $244.1 billion, or 11 percent, in the three weeks to Aug. 29, the most in at least seven years, Fed data show. Three-month Treasury bill yields had their biggest drop since 2001 in August as investors sought safety in government debt.

Delinquencies on subprime mortgages, the origin of the turmoil, are likely to climb further as variable-rate loans reset higher, Bernanke said.

Even so, ``global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans,'' he said. That's because of difficulties in setting prices for complex securities and concerns that housing will hold back economic growth, the Fed chief said.

`Gloomy as I'

``I rather expected that I would come out and find that people weren't quite as gloomy as I was, and I didn't find that,'' said former Fed Governor Lyle Gramley, now a senior economic adviser at Stanford Group Co. in Washington. ``So it confirmed my own concerns about the economy.''

Attendees nevertheless sounded confident that the global economy, which has relied on the U.S. to drive growth for much of the past decade, is strong enough to cope with the slowdown.

In China, where the economy expanded at the fastest pace in more than 12 years in the second quarter, manufacturing unexpectedly quickened in August. While business confidence in Germany, Europe's largest economy, fell last month, it was still better than most economists had forecast.

``The world economy is still very robust and growth is much more evenly spread than it was a few years ago,'' Otmar Issing, former chief economist at the European Central Bank, said in an interview.

That was little comfort to most at the conference as they debated the impact of the housing recession on consumer spending, in between hikes along trails near Yellowstone Park.

Yale University professor Robert Shiller said house prices in some U.S. cities may fall by as much as half, while Leamer predicted declines in some areas of 30 percent to 40 percent. Feldstein saw the chance of a ``substantial decline'' in spending because consumers won't be able to borrow as much against the value of their homes.

zippyjuan

I still do not see a recession yet. Mortgage lending is but a small part of the financial markets. Consumers have already adjusted their expectations of a slower housing market and lenders have also adjusted their policies.

I would agree that the housing market has been an important part of economic growth in the last few years- people buying homes and the things they need to fill them up with. Consumer spending was up in July (twice as much as expected) and that is the major engine of the overall economy and the Dow has been rising pretty steadily since the Fed made their one- day infusion of cash so investors are also optimistic about furure earnings and hence the economy.

A few compaines or individuals may be facing difficulties based on decisions they made on the subprime lending market (both as borrowers and lenders/ investors) but I am not seeing that much panic in the rest of the market right now.

A secondary question is will the Fed make any moves based on political considerations? It was not unheard of in the past for the Fed to try to give a boost to the economy to aid the reelection of members of a given political party. If the economy is poor, there is more of a tendency of voters to want somebody else in charge. Granted Bush cannot be reelected president and Iraq is a bigger issue in most voter's minds.

__________________
I add new pictures to my photo gallery pretty regularly. You can see them here if you are interested: http://www.pbase.com/jeffryz