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Economic Outlook: Stimulus Package & Housing Bailout Update

Economic Outlook: Stimulus Package & Housing Bailout Update

The Administration’s economic stimulus package and housing support initiatives have been rolled out in recent weeks. Details on both plans continue to unfold, even as some Americans have been angered by elements of the housing bill which tend to lend favor to many who may have been "in over their heads" from the day they purchased their homes. Here is a press release from the World Bank which may put things in perspective for all of us:

Sunday March 8, 4:33 pm ET NEW YORK (AP) -- The World Bank predicts the global economy will shrink this year for the first time since World War II, and sees trade at its lowest point in 80 years. The World Bank also said Sunday the growing global financial crisis will create a multibillion-dollar financing shortfall for poor and developing nations. A group of 129 countries face a shortfall of $270 to $700 billion this year, the World Bank says.

It warns international financial institutions will not be able to cover even the low end of that estimate.
The bank said only one-quarter of the vulnerable countries will be able to ease the impact of the economic downturn through job creation or "safety net" programs. (Emphasis added by author)

That's the bad news.

The good news is that the USA is in the one-quarter of the nations expected to be able to "ease the impact..." as the World Bank sees it. Having worked on a number of World Bank projects, primarily in developing nations, I believe their perspective to be accurate. The recession continues to deepen as unemployment continues to rise and housing values continue to fall. The purpose of the bulk of the stimulus package is to slow the growth of the unemployment rate, while at the same time supporting housing values by helping people to either hold their jobs or find new ones. Employment is the critical element of the entire stimulus package.

The housing support bill recognizes that the employment picture is bleak and that a turnaround is not imminent. Therefore, in short, this bill seeks to aid people who are losing their homes as a result of losing their jobs. The theory is that if we are able to stem the rash of foreclosures, we will stabilize housing prices. Therefore, since even those fortunate enough to keep their jobs and meet their financial obligations have been impacted by the plunge in real estate prices, they too will benefit if the real estate market is stabilized.

There are two parts to the real estate support initiative: a private lender program and a government backed lender program.

One program is aimed at 4 to 5 million homeowners struggling with loans owned or guaranteed by the government agencies of Fannie Mae or Freddie Mac. The focus will be to help them refinance their mortgages through the two institutions. A separate program would potentially help 3 to 4 million homeowners by allowing them to modify their mortgages. The result will be lower interest rates and lower monthly payments, if they work through any participating lender. Under this plan, the lender would voluntarily lower the rate, and the government would provide subsidies to the lender.

The generally accepted barometer for business confidence, stock market averages, have continued to suffer losses and set new 12 year lows over recent sessions. This is disturbing to watch, especially if your personal investments or retirement fund accounts are allocated to equities in any proportion. However, there is a positive side to this story as well. The market action over recent days has indicated a slowdown in the rate of decline. In addition, a couple of corporate mergers in the pharmaceutical and chemical industries have displayed confidence on the part executives in two key market sectors. While the driver in such mergers is to improve economies of scale and to capitalize on the overall synergies brought to play by their combination, such deals are rarely done without an eye to improving revenues and the bottom line.

As more and more companies begin to realize the positive effects of some downsizing and better control of costs, the net improvement in productivity will provide the basis for renewed business confidence. In turn, renewed confidence will bring improved demand for products, rehiring of laid off or fired employees, and eventually the stabilization of housing prices as the risk of foreclosures dissipates with each job added back to our labor pool.

©Patrick J. Catania 2009
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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