Editor's note: This story went to print on Sept. 15, 2008. Since them, many of the trends discussed in this story have accelerated and aggravated. Lehman Brothers, AIG, Merrill Lynch, Washington Mutual and Wachovia have been absorbed or acquired. U.S Congress is discussing an "Emergency Economic Stabilization" reaching $700 billion dollars. We keep with current economics events daily on HispanicBusiness.com">HispanicBusiness.com. We have enabled comments at the end of the story in which you can leave your feedback on how the current economic conditions are affecting your business, company or geographical area.
One year into the current financial downturn, the recovery formerly expected during the second half of this year will not actually occur for at least another year. The initially anticipated $100 billion of write-downs is surpassing the $500 billion mark, not yet counting the unknown costs from the U.S. takeover of Fannie Mae and Freddie Mac. The impact of a few states' real estate losses, previously believed to be fairly circumscribed, is spreading nationwide. The stock market correction has deleted $2.2 trillion of market value on the S&P 500 alone. Unemployment hit 6.1 percent in August, extending its reach to all industries except healthcare and mining. Moreover, standard policies to counteract slowdown and induce a recovery (stimulus checks and reduction of federal discount rates) have proven ineffective. In a budget update on Sept. 9, 2008, the nonpartisan Congressional Budget Office indicate that the economy will likely grow 1.5% this year and 1.1% next year.
Non-Responsive Economic Policies
The Federal Reserve has acted aggressively by providing liquidity and lowering its target federal fund rate. But contrary to the Fed's plans, reducing the Federal Funds Effective Rate to 2 percent has not lowered the 30-year mortgage rate. Instead, the 30-year mortgage rate has increased to 6.48 percent. The difference, 4.48 percentage points above the Fed rate, represents the risk premium of the 30-year mortgage rate.
The $152 billion stimulus plan, proposed by President George W. Bush and approved by Congress, was implemented in May and June but is not having a substantial effect. The economy has not revived, in part, because the stimulus represents just 1.5 percent of the total U.S. annual consumption.
With consumers retreating, companies restraining spending and investment, high mortgages rates, and continuous write-downs disclosures, the worsening of economic conditions caused by the subprime mortgage segment of the financial industry is spreading to other credit segments and industries previously considered to be in solid condition. Credit card debt is one area of growing concern.
Impact and Outlook on Housing Markets
As indicated above, the relative failure of decreasing federal rates to bringing down mortgage rates has postponed any stabilization of the housing sector, either by allowing existing homeowners to refinance with variable or high fixed rates or by attracting new homebuyers. Home values, therefore, have continued to decline, further denting consumers' assets and debt balances. As a consequence, "2.75 percent of all home loans are now somewhere in the foreclosure process, and 6.41 percent of all homeowners have at least one outstanding mortgage payment," according to latest report from the Mortgage Bankers Association. The impact is higher than the national average in Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana, and Ohio.
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