Fed: Housing Slump Will Be Drag On Economy

Federal Reserve Chairman Ben Bernanke Says Wall Street Recovery Will Take Time

(AP)  A deepening housing slump probably will be a "significant drag" on economic growth into next year and it will take time for Wall Street to fully recover from a painful credit crisis, Federal Reserve Chairman Ben Bernanke warned Monday.

Bernanke once again pledged to "act as needed" to help financial markets - which have suffered through several months of turbulence - function smoothly and to keep the economy and inflation on an even keel.

"Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks," Bernanke said in a speech to the New York Economic Club. A copy of his remarks were made available in Washington.

It was Bernanke's most extensive assessment of the country's current economic situation since the August turmoil unhinged Wall Street.

The ultimate implications of the credit crunch on the broader economy, however, remain "uncertain," the Fed chief said.

Against that backdrop, Bernanke said the central bank will be closely watching the economy's vital signs in determining the Fed's next move. He didn't specifically commit to cutting rates again, but rather kept his options open.

Economists have mixed opinions on whether the Fed will lower interest rates at their next meeting, Oct. 30-31. Some insist the odds are lessening that the Fed will need to slice rates; Others, however, think rates will move lower.

"The Fed appears to be in watch mode at the present time," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.

To help cushion the economy from the ill effects of the credit crunch and housing slump, the Fed on Sept. 18 slashed a key short-term interest rate by one-half percentage point to 4.75 percent. It marked the first rate cut in more than four years. It also reflected the most aggressive action taken by the Fed to curb fallout from the credit crisis, which intensified in August.

Since that September meeting, the housing slump - the worst in 16 years - has gotten deeper, Bernanke said.

"The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," he said.

"However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions," he added.

Spending by businesses and individuals is an important ingredient to keeping the economic expansion - which began in late 2001 - from fizzling out.

Developments affecting the job market and income growth also will be watched closely. "The labor market has shown some signs of cooling, but these are quite tentative so far, and real income is still growing at a solid pace," Bernanke observed.

The benefits of a mostly sturdy employment climate have helped cushion some of the negative effects that the housing slump, weaker home values and a credit crunch have had on consumers.

Job creation rebounded in September, with employers boosting payrolls by 110,000, the most in four months. Wages grew solidly. The unemployment rate did creep up to 4.7 percent last month but that rate is still considered low by historical standards.

Given all the problems faced by the economy, the economic performance so far this year "has been reasonably good," Bernanke said.

On the inflation front, Bernanke noted that the prices of crude oil and other commodities have been rising and that the value of the dollar has weakened. Oil prices galloped to a record high of $86.13 a barrel on Monday.

Bernanke said the Fed will continue to monitor inflation developments carefully. Yet, with the limited information seen since the central bank's September meeting, the inflation barometers "are consistent with continued moderate increases in consumer prices," he said.

The Fed's September rate reduction, Bernanke said, has helped ease "some of the pressure in financial markets, although considerable strains remain." He said Fed policymakers were prepared to "reverse" the rate reduction if inflation turned out stronger than expected.

The Fed's next move will be determined by what is best for the economy, Bernanke suggested. As he has said previously, it is not the Fed's job to shield investors from the consequences of bad financial decisions.

"The truth is that it (the Fed) can hardly insulate investors from risk, even if it wished to do so," Bernanke said. "Developments over the past few months reinforce this point. Those who made bad investment decisions lost money."

The worst carnage has affected investors in "subprime" mortgages - those made to people with spotty credit or low incomes. Some lenders have been forced out of business and some investors in those and related mortgage-backed securities have taken a huge financial hit.

Overstretched homeowners with subprime loans got clobbered by the mortgage meltdown, too. Foreclosures and late payments have soared.

Weaker home prices seen during the housing bust have made it more difficult for some subprime borrowers to refinance out of loans that offered low "teaser" rates but jumped to much higher rates, resulting in payment shocks. Delinquencies on these mortgages are expected to rise further, Bernanke predicted.

[nurse70-2009]

THE GOVERNMENT HAD BETTER SHOW SOME CONCERN FOR THEIR OWN OR THEY COULD JUST PRETEND THAT WE ARE PEOPLE IN A FAR AWAY LAND AND SEND US SOME RELIEF AID. SO FAR BUSH HAS SHOWN HE COULD CARE LESS FOR THE LOW TO MIDDLE CLASS AMERICANS WHO ARE BUSTING THEIR BUTTS EVEY DAY TO PAY FOR ALL OF THE POLITICIANS FANCY LIFFESTYLES!! AMERICANS NEED TO RISE UP AND TAKE THEIR COUNTRY BACK. DEMAND HELP FOR THE WORKING CLASS THAT ALWAYS SEEM TO FALL BVETWEEN THE CRACKS AND FOR GODS SAK DON''T ALLOW THESE BIG BUSINESS TO INTEREST RATE FAMILY''S OUT OF THEIR HOMES. THAT IS SO DISGUSTING.

[usayesterday]

Just wait until the next "terrorist" attack on U.S. soil, or an attack/war on Iran. (Either/or within the next 10 to 15 months).

"...drag on the Economy?"


WE AIN''T SEEN NOTHIN YET!

[missingamerica]

This can only be called "a world-class coverup".

The housing slump is but a symptom that has its own cascading impact, not a primary causitive factor.

[shanev137]

Amazing this guy barely notes the dollar is completely in the sh|tter and oil is at $85 a barrel. LOL

He must be on some really good drugs.

[ringading3]

Ok, I will vote for Hillary or Obama. Now can I quit working and have the government take care of me?

[mediapreachr]

"Fed: Housing Slump Will Be Drag On Economy"-No kidding.
Guess who started all this mess.Greenspan and co.
I also like the way he got paid for his work-the"book deal"(someone else wrote it for him)-In Latin America they just give you an envelope with cash,same as in the mob.
Here in the USA if you make billions for a chosen few you also get a bonus-"the book".I don''t know why everyone else takes us for fools ''cause I''m certain we''re not.

[brianbwb-2009]

Using Wall Street as a barometer of the US economy is at best lunacy, as it prospers on the misery of people, unemployment rises, so does the Dow.

Wall street''s joy is America''s pain, but the economists repeatedly cater to the Dow, then wring their hands in mock frustration that Americans don''t perceive any economic benefit.

If you have been laid off, they seem to expect that you should be happy that the company that canned you is enjoying higher profits from outsourcing to slave labor...

[alphaa10-2009]

This is the priceless moment when our free-market capitalists go into hiding. Gone is their brass band and confetti parade. Once again, they become believers in Killer Capitalism.

They blame it all (of course) on the feeding frenzy of speculation, of being the last in the herd, and first to be set upon by market mechanics. "Too bad," Bernanke says. "How unfortunate."

But fortune has little to do with it. Capitalism is not a benevolent system in the raw, and everyone knows it is kill-or-be-killed, by design.

While those who still can play the market claim ours is the greatest country and economic system in the world, they cannot account for a huge and widening gulf between a monied minority, and what is left of the American middle class.

Nor can they explain why third-world scenes haunt our major cities, with people eating garbage and sleeping over grates (if they are lucky). Or why Americans spend 2.5 times more than EU citizens for what is called "healthcare"-- yet our infant mortality lags behind Cuba.

Capitalism is not a doctrine delivered on golden tablets from above, but a system whose imperfections require constant effort to overcome. To the True Believers of left and right goes this challenge-- we must renovate the American economic system to benefit all Americans by something far better than promises of "rising tides" and trickledown effects.

[sharncedar]

Ron Paul tapped in the stall next to me. He''s a friendly guy.

[feelfree1]

Correction-

Title should be, "Housing Collapse Will Cripple Economy".

Thanks again, Alan Greedscam!!!

[omega39-2009]

To help cushion the economy from the ill effects of the credit crunch and housing slump, the Fed on Sept. 18 slashed a key short-term interest rate by one-half percentage point to 4.75 percent.

Big deal, there are much larger issues undermining this economy such as well paying jobs being turned into low paying service sector jobs. The only "drag" on the economy is the fact that people who have been using their home equity as instant credit are now being forced to move to higher rate revolving credit to continue their present standard of living.

[goldesprit]

The war is damaging the economy much, much worse than housing woes. And Bush has already spent more than all the previous presidents COMBINED --money that does not actually EXIST!

As expressed, this supposedly unbiased news story is in fact biased in favor of the administration, because it is a wide eyed acceptance of its own stated premise, which is insane.
THINK.

Bush (through this yes man) is simply assigning blame to a sector that is already a problem, and deferring any real responsibility--just like he likes to do with any health programs and anything similar like education.

[l8c6]

Ron Paul, member of the host party of the neo con ideology that began with Reagan.

Ron Paul wants to start at the beginning of the neo con movement which began with Ronnie because it was fun back then. Republicans who are disillusioned with the current pres fail to see that the policies of Reagan, which Ron Paul has supported have led the the current abuses.

Privatization, "free market", small government, all have a dark side that apparently the long term republicans who don''t like what they''re getting now cannot make the connection with.

[tnt1954]

to overcome the housing crisis, just build
77 million spaces for low-cost trailer parks
one-star parks for the retiring boozing boomers,
on social security who never made much money
to save or invest anyway. tax the heck out
of their yuppie brethren who did insider trading,
with all their cronies and contacts at college,
who never did a real day''s work in their lives.
who promoted all the porno and pro bono. so
we can be the trailer trash, the high class
so long to be. yay britney spears, heroine of the old folks at home. at the trailer parks. some like
it cool. not hot. the security should be done
by goldwater inc. not blackwater inc. or whitewater
inc. sorta like a military base.

[tburzio]

Vote Kook! Vote Ron Paul!