Is the Economy Getting Better?

There are always differing opinions about the economy. One thing for sure is that the decline is slowing and there are some signs of steadiness.

The big problem is the banks. There is a lot of confusion about their strength, viability, and survivability. The bottom line in how this affects real estate is that it is still hard to get loans for consumers and even harder to get a small business loan.

Recovery for the banks is based upon a 2 prong approach:

1. 1. Get enough capital into the largest 19 banks to ensure their viability. This will take the form of loans by the federal government for preferred shares of stock of the bank. How much the banks need was determined by the recent stress tests.
   

2. 2.Get toxic assets off of the banks’ balance sheets via setting up an aggressor bank. This aggressor bank will consist of funds from the federal government as well as private equity investors.
   

For now, the FDIC is insuring the bank debt until the above programs are in place and operational.

The government has many plans for main street:

1. 1. The government will put 1 trillion dollars more in TALF to open up the credit markets for auto and credit card loans.
   

2. 2.The government will increase the number of loans they buy from Frannie and Freddie from 600 billion to 1.25 trillion. This has opened up the market considerably for first time home buyers in California.
   

3. 3. Start the program to help foreclosures by modifying some loans and/or refinance existing debt under more favorable terms.
   

4. 4.The government will buy 300 billion long-term US treasuries to bring interest rates down on T-Bills which have a correlation with mortgage interest rates.
   

5. 5. The stimulus package
   

Lets talk about the current state of the economy in terms of pros and cons.

Pros:

1. 1. The stock market is doing better having gone from 6547 to 8547.
   

2. 2.The credit markets are starting to open up.
   

3. 3.Banks have said they are profitable again in the first months of 2009.
   

4. 4.Oil is trading relatively low.
   

5. 5.New home sales were up 22%.
   

Cons:

1. 1. The unemployment rate is realistically at 12 or 13%, not at the 8.6% stated.
   

2. 2.The stock market could take one more beating before year end.
   

3. 3.The government budget for 2009 is BIG.
   

4. 4.The government may want to over-regulate Wall Street.
   

5. 5.The value of the dollar is being stressed again as the government continues to build up debt. Look for inflation as a result in 2011.
   

6. 6.Consumers have lost wealth and as a result are not spending as much. It has been estimated that 11 trillion dollars in consumer wealth as evaporated.
   

In conclusion we will get through this. Look for light at the end of the tunnel in the 2010/2011 time frame. We have had recessions before in which the the norm was every 4 years. Now with federal engineering these recessions are about every 8 years. In the end, less risk, less leverage, more saving, and less reckless spending is a good prescription for us all.