9.12.08

World could face a decade-long slump: Krugman


(SOURCE: www.timesofindia.com)


9 Dec 2008, 1603 hrs IST, REUTERS


Nice to be right on the money along with Nobel laureate (like Japanese 1990’s economy)


STOCKHOLM: The world economy will likely feel the impact of the global financial turmoil for another three years at least, the 2008 winner of Nobel economics prize Paul Krugman said on Monday.

"We could easily be talking about a world economy that is depressed into 2011 and even beyond," the Princeton University professor and New York Times columnist told reporters in Stockholm, where he will receive his Nobel prize this week.

"The scenario I fear is that we'll see for the whole world the equivalent of Japan's lost decade in the 1990s, that we'll see a world of zero interest rates and inflation and no sign of recovery and it will just go on for a very, very extended period," he said.

"On top of that, we'll have a series of extremely severe crises in particular countries in trouble," he predicted, pointing out that "we certainly see the roots of ... Argentina- or Indonesia-style crises ... particularly in the European periphery."

As for the United States, Krugman, who has previously said that a stimulus plan of at least four percent of the US gross domestic product is needed next year, said on Monday that amount might not be enough.

"If you're serious about the size of the hole that needs to be filled, that's actually modest," he said, stressing that that amount "is not enough to prevent a further decline in the economy. It's enough to prevent a sharp decline."

The falling US housing market, which triggered the global financial crisis, will probably continue to weaken, he said, pointing out that recent estimates show "we have another 10 to 15 percent to go."

Krugman, who won the Nobel prize for his work on the impact of free trade and globalisation, said Washington should not hesitate to spend on infrastructure that would provide long-term benefit to the country, even if it means running up a high deficit in the short term.

"We're probably in the US going to run a deficit of seven or eight percent of GDP next year. That's clearly not something you can do indefinitely," he said.

"If it's two years of massive stimulus and massive debts, that's okay. If it's two years of that, and no sign that anything is getting better then I start to worry," he added.

Krugman will receive his Nobel gold medal and diploma along with 10 million Swedish kronor (1.2 million dollars, 929,000 euros) at a formal prize ceremony in Stockholm on December 10.

Half of rescued borrowers default anyway

Half of rescued borrowers default anyway

Top federal regulator says many mortgages that are modified end up in default within 6 months.

By Tami Luhby, CNNMoney.com senior writer

WASHINGTON, D.C. -- More than half of delinquent homeowners whose mortgages were modified earlier this year ended up redefaulting within six months, a top bank regulator said Monday.

Some 53% of borrowers with loans modified in the first three months of 2008 and 51% of those with loans modified in the second quarter could not keep up with payments within six months, according to U.S. Comptroller John Dugan, who spoke at a housing conference.

The report, which will be released in full next week, covers nearly 35 million loans worth a total of $6 trillion -- or 60% of all primary mortgages in the United States.

The high redefault rate raises concerns about the long-term effectiveness of loan modifications, which many are pushing as a key solution to the nation's financial crisis.

A record 1.35 million homes are in foreclosure, while the number of borrowers who have fallen behind on their payments soared to a record 6.99%, the Mortgage Bankers Association said last week.

Meanwhile, 1.7 million homeowners have been helped in 2008 through the Hope Now Alliance, a coalition of lenders, servicers, investors and counselors working with delinquent borrowers on modifications and repayment plans.

Dugan said the Office of the Comptroller of the Currency is asking servicers for more details on the loans in his report to determine what went wrong. He wants to know whether the modifications reduced the monthly payments to affordable levels or whether the borrowers had too much other debt to keep their head above water.

"These answers are important, because they have important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months," Dugan said.

Other regulators speaking at the conference questioned the quality of the loan modifications, saying that early efforts to restructure loans were not very effective. Many simply tacked on the missed payments and penalties to the end of the loan.

"The quality of the modifications are not what they should be," said FDIC Chairwoman Sheila Bair, a vocal proponent of adjusting loans by reducing interest rates, extending loan terms and deferring principal. Also, verifying income is very important.

Modifications that include an interest rate reduction have a 15% redefault rate, said Bair, citing a recent Credit Suisse study.

Last month, Bair unveiled a plan to address the foreclosure crisis by modifying loans to as low as 31% of a borrower's gross monthly income. This could be done by setting interest rates to as low as 3% or extending loan terms to 40 years. Principal could also be deferred free of interest to the end of the loan.

To entice servicers and investors to participate, Bair's plan calls for the government would share up to 50% of losses should the loan redefault. But that guarantee only kicks in after the borrower has made six monthly payments to better ensure the mortgage modification is sustainable long-term. It would cost $24.4 billion, which Bair has said could come from the rescue funds.

Bair's efforts have been widely praised, but the Bush administration has yet to act on it.

As the housing crisis continues to spin out of control, lawmakers, economists and community activists are increasingly demanding that financial institutions and the Bush administration do more to help homeowners by modifying loans to affordable monthly payments.

In recent months, banks and federal agencies such as the Federal Deposit Insurance Corp. and Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have stepped up efforts to adjust loans so that payments are no more than 38% of a borrower's monthly income.

Rep. Barney Frank, D-Mass, who heads the powerful House Financial Services Committee, said Monday that Congress will not give the Bush administration the $350 billion left in the $700 billion financial system bailout package unless loan modifications are part of the plan.

However, other regulators said that federal money may be better spent on economic stimulus and job creation since a growing number of foreclosures are caused by unemployment. In those cases, loan modifications won't help.

The unemployment rate soared to 6.7% and is expected to go higher with companies announcing massive downsizings almost daily.

"I have to wonder whether or not focusing on job creation..is a better way to focus federal dollars than on a loan modification process that may be only partially effective," said John Reich, director of the Office of Thrift Supervision. To top of page


7.12.08

I have been saying this for 6 months Thank You Mr. President

Obama: Economy to get worse before it improves

By DAVID ESPO, AP Special Correspondent David Espo, Ap Special Correspondent Sun Dec 7, 10:36 pm ET

WASHINGTON – President-elect Barack Obama said Sunday the economy will get worse before it gets better, pledged a recovery plan "equal to the task" and warned lawmakers that the days of pork barrel spending are over.

Less than six weeks before his inauguration, Obama declined to say how large an economic stimulus plan he envisions. He said his blueprint for recovery will include help for homeowners facing foreclosure on their mortgages if President George W. Bush has not acted by Inauguration Day, Jan. 20.

"We've got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can't worry short term about the deficit. We've got to make sure that the economic stimulus plan is large enough to get the economy moving," he said.

Obama made his comments on NBC's "Meet the Press," in his most extensive interview since winning the White House more than a month ago, and later at a news conference in Chicago.

The president-elect said it is important that domestic carmakers survive the current crisis, although he accused the industry's executives of taking a "head in the sand approach" that has prevented their companies from becoming more competitive.

"Congress is doing the exact right thing by asking for a conditions-based assistance package that holds the industry's feet to the fire and gives the industry some short-term assistance," he said.
In addition to the policy issues, Obama avoided a direct answer when asked whether he has quit cigarettes as he prepares to move into a no-smoking White House.

"I have done a terrific job, under the circumstances, of making myself much healthier. And I think that you will not see any violations of these rules in the White House," he said.

Obama called the news conference to introduce retired Gen. Eric Shinseki as his choice to head the Veterans Affairs Department. Shinseki, who was a four-star general, was forced into retirement five years ago by the Bush administration after saying the president's plans to invade Iraq required more troops.

Shinseki pledged to build a "smooth, error-free, no-fail benefits-assured transition" back to civilian life for veterans.

Twice in the opening moments of the NBC interview, the president-elect said the economic situation "is going to get worse before it gets better," an unspoken plea with voters to have patience as the incoming administration tries to grapple with the issue.

He announced plans Saturday for the largest public works spending program since the creation of the interstate highway system a half-century ago, although he said aides are still debating among themselves how much it should cost.

"What we need to do is examine, what are the projects where we're going to get the most bang for the buck? How are we going to make sure taxpayers are protected? You know, the days of just pork coming out of Congress as a strategy, those days are over," he said.

Some lawmakers have mentioned an economic aid plan in the range of $500 billion or higher, and Democratic leaders say they hope to have legislation ready soon after Jan. 20.

The economic indicators have darkened since Obama's election, and Friday's report that 533,000 jobs were lost in November was the worst performance in more than 30 years. Unemployment stands at 6.7 percent, retailers are reporting weak holiday sales and the credit markets have yet to recover from the freeze that led Congress to approve a $700 billion bailout before the election.

Turning to foreign policy, the president-elect sidestepped a question about the pace of a troop withdrawal from Iraq, saying he would direct U.S. generals to come up with a plan "for a responsible drawdown." He said in the campaign he wanted most U.S. troops withdrawn within 16 months, but did not say then, nor has he now, how large a deployment should be left behind.

"We are going to maintain a large enough force in the region to assure that our civilian troops or our civilian personnel and our embassies are protected, to make sure that we can ferret out any remaining terrorist activity in the region" and providing training support for Iraqi personnel.

He did not respond directly when asked whether he believes India should have the right to pursue terrorist targets inside Pakistan in the wake of the deadly attacks in Mumbai. He also said he wants to "reset U.S.-Russian relations" following the Bush era.

"They are increasingly assertive and when it comes to Georgia and their threats against their neighboring countries I think they've been acting in a way that's contrary to international norms," he said of Kremlin leaders.

The president-elect declined to comment on the possible appointment of Caroline Kennedy to New York Sen. Hillary Rodham Clinton's seat in the Senate. Obama tapped Clinton recently as his secretary of state.

___
Associated Press writers Stephen Ohlemacher in Washington and Philip Elliott in Chicago contributed to this report.
Copyright © 2008 The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten or redistributed without the prior written authority of The Associated Press.
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