Economic Outlook: A Fraction of a Panacea

Online, December 10, 2010 (Newswire.com) - What's good for the Christmas goose appears strangely unappealing to Washington this year in the wake of a bond purchasing program that baffles economists.

In short, the $600 billion quantitative easing program the Federal Reserve announced Nov. 3 was supposed to bring long-term interest rates down, providing a stimulus to a foundering recovery. Many have been baffled by the sudden rise in bond yields since then.

Fed Vice Chairwoman Janet Yellen said, "I don't think this is a panacea." University of San Diego economics Professor James Hamilton explained, "The effect of the (bond buying) program is small enough that it is easily swamped by the bigger news from Europe over the last month as well as the political challenges that the program seems to have run up against," The Wall Street Journal reported.

True enough, the $600 billion program that had finance ministers from four hemispheres and Republicans inside the beltway blasting the Fed, was knocked aside by the debt crisis in Europe and trampled -- the coup de grace -- by the White House shaking hands with the Republican party on a two-year extension of the George W. Bush era tax cuts.

The tax cuts were a mixed message unto themselves. Estimates put the price of the tax bill at $858 billion over 10 years. In the short term, there will be more money around to spend, but not a dime out of the billions is attached to future budget reduction.

To quote from The Wall Street Journal: "A Federal Reserve Bank of Boston study estimates that through 2012 the bond purchases will result in 700,000 jobs that wouldn't otherwise be created, a big number, yet a fraction of the 8.3 million jobs wiped out in the recession. In a December ... (in a) survey of private economists, 42 of 52 called the estimate too optimistic."

Optimistic or not, if a job was created every time someone wrote a wistful, sighing approximation of the phrase "a fraction of the 8.3 million jobs wiped out in the recession," it is possible no one would be unemployed by now.

Credit bureau TransUnion said Thursday the number of mortgage accounts with payments 60 days past due is expected to decline "nearly 20 percent," in 2011, about twice the decline from 2009 to 2010 and a far cry from the 50 percent annual increases of the past three years.

The decline would come from improved fundamentals and a slightly improved labor market, TransUnion said -- a fraction of a panacea, perhaps.

Consumers have also slowed their use of credit cards for Christmas shopping this year, using debit cards or cash to fund the frivolity, dropping credit card use to the lowest percentage in 27 years.

"The consumer really feels a lot of pressure from previous debts and they just aren't going to dig themselves into that kind of hole," Britt Beemer, chief executive of America's Research Group, told The New York Times.

The disciplined approach to the holidays includes a fair share of hard knocks adjustments and a credit environment that looks like a moonscape. More than 15 million consumers have been cut out of the credit card option by bank restrictions and the 2009 federal credit card reform bill. Similarly, about 11 million homeowners cannot take advantage of low interest rates to refinance or apply for a home equity loan because they owe more on their mortgage than their homes are worth.

In international markets Friday, the Nikkei 225 index lost 0.72 percent and the Shanghai composite index in China added 1.07 percent. The Hang Seng index in Hong Kong was flat, dropping 0.04 percent and the Sensex in India added 1.39 percent.

The S&P/ASX 200 in Australia gained 0.1 percent.

In midday trading in Europe, the FTSE 100 index in Britain rose 0.07 percent while the DAX 30 in Germany gained 0.59 percent. The CAC 40 in France added 0.11 percent and the Stoxx Europe 600 gained 0.12 percent.