Start the conversation
By Mike Caggeso
In spite of the market turmoil of recent weeks, global economist Jay Bryson has a message for investors and consumers alike.
Calm down, folks: It’s not as bad as it seems.
In fact, Bryson even says the odds of a full-blown recession are unlikely.
With the strong recovery in stocks late last week, many economists concluded that Federal Reserve Chairman Ben Bernanke had found some maneuvering room, and wouldn’t be forced to cut interest rates. The pattern has been repeated this week.
While the central bank hasn’t cut the Federal Funds rate, the benchmark short-term interest rate that directly affects the prime lending rate, the interest rate that most other consumer loan rates are based upon, it has cut the discount rate, which has injected liquidity into the financial system. And central banks worldwide have pumped hundreds of billions of capital into the system,
“People were expecting the Fed to cut rates. Now, reasonable people can disagree,” Bryson, a global economist for Wachovia Corp. (NYSE: WB), told Money Morning in an exclusive interview. “The overnight money market is very liquid at present. Don’t think the liquidity injections per se led to market stabilization. That probably was more of a result of the Fed’s discount rate cut.”
Bryson made a name for himself recently when he crafted a research report in which he showed everyone just where the subprime debt was distributed worldwide.
And recession? Unlikely, says Bryson. The housing and credit markets will recover, though some buried in subprime debt may not survive. But their negative impact on the rest of the market is waning. In fact, strong market performance can help pull the housing and credit markets out of the hole.
Perception that the Fed is on the job and will do what it takes to prevent the economy from sliding into recession,” Bryson said.
A recent study by the National Association of Business Economics reinforces that point.
Its newest study shows that credit risk has leapfrogged terrorism as the No. 1 business concern. This survey was conducted smack in the middle of the mortgage and credit crunch, and at the time, they were losing more of their own money to the market than Osama bin Laden. Its last survey, conducted in March, didn’t give pollers the option of checking off credit scares because there weren’t any.
The lesson here is perception. Ask a person how things are going when their ceiling is being rebuilt, and you’ll likely get a more positive answer than from someone who’s ceiling is caving in.
And investors act on perception and emotion. Yes, the housing market will take a while to get back on its feet, but the rest of the market will recover faster. Fewer stocks will be in the red, and the perception of an overall market recovery lends another hand to steady the housing market’s shaky steering wheel. Such a process takes time, though.
“It’ll be spread out a little more,” he said. “They generally fall faster than they rise.”
And if Bernanke cuts rates, it’ll be faster, though arguably unnecessary.
International Rate Cuts
But pressure on Bernanke to cut rates isn’t just coming from stateside investors, banks and bearish economists. Interest rates overseas have been in limbo because Bernanke’s decision affects our major trading partners. Pressure could mount to the point where Bernanke acts before the Fed’s next scheduled meeting Sept. 18.
Last week, the Philippines recently voted to keep its rate locked at 6%. But a month earlier, Bangko Sentral cut its key rate for the first time since July 2003. The move was intended to spur the economy after exports to the U.S., the Philippines’ largest export destination, waned after our stateside housing crisis.
Also last week, Japan’s Central Bank voted to keep its 0.5% rate on hold. That day, though, Bank of Japan Governor Toshihiko Fukui signaled an eventual rate raise. The low rate was intended to spur business after Japan’s infamous recession. But by raising them, Fukui hopes to curb risky investments (i.e. real estate).
But other countries haven’t been as patient. Bloomberg reported that Australia, Chile, China, Hungary, Norway, South Africa and South Korea have cut rates to ease borrowing costs. All have varying reasons, but the U.S. recession is one of them because other countries rely on our spending on their exports.
Moreover, it affects their stock markets, which in turn feeds their investor perception. On Monday, Reserve Bank of Australia deputy governor Ric Battellino said there was a “continuing high degree of nervousness among investors that might return to the market,” Australia’s Herald Sun reported. Central banks down under have injected almost $350 billion because banks are refusing to lend money after the U.S. subprime mortgage meltdown.
And they are still in the waiting stages.
That’s just one example of the outside pressures weighing on Bernanke shoulders.
“Certainly, [a U.S. rate cut] will help those markets because it reduces the probability that the U.S. economy is going to slide into recession,” Bryson said.