What’s Important in the Financial World (4/27/2012) Brand New Homes Underwater, Postal Service War

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The war among politicians between the economic values of austerity and stimulus has heated up again. French presidential candidate François Hollande said German leader Angela Merkel cannot decide the financial fate of Europe on her own. Bloomberg quotes Hollande as remarking, “It’s not for Germany to decide for the rest of Europe. I’m getting a lot of signals, direct and indirect, from other governments, even if they’re conservative.” Hollande must not have reviewed the financial plights of Greece, Italy, Portugal and Spain. Germany still provides the largest portion of capital for the financial bailouts of these nations. Current French president Nicolas Sarkozy was dragged along with Germany as it set austerity measures for the European Union. He may have held a different vision for how Europe could repair itself. He did not have the money to challenge Merkel. Neither does Hollande.

Home Buyers “Strike”

New home buyers have begun to suffer from the drop in housing prices. Reuters reports that one million Americans who have taken mortgages in the past two years now find themselves “under water.” The data provided to Reuters by real estate research firm Corelogic shows that one of 10 mortgages taken over that period is now higher than the value of the homes that they cover. The data confirm why many Americans have stayed out of the housing market completely. This “buyer’s strike” is one reason homes sit on the market for such a long number of days, historically, and why foreclosures are up while prices continue to fall. Many potential buyers believe that prices could fall another 10% or more in many markets. The value of their caution has been confirmed by the new data.

Fed Dissent

Richmond Fed President Lacker went public with his objections to the Federal Reserve’s decision to keep rates low through 2014. He issued this statement:

The Federal Open Market Committee released a statement following its April 24–25, 2012, meeting stating that the Committee currently anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. I dissented because I do not believe economic conditions are likely to warrant an exceptionally low federal funds rate for this length of time. My current assessment is that an increase in interest rates is likely to be necessary by mid-2013 in order to prevent the emergence of inflationary pressures.

Lacker sees the cup of the U.S. economy as more than half full. His beliefs are about to be tested, at least short term. Unemployment numbers are about to be issued for April. Early data on inventories suggest a slowdown in GDP expansion. And, almost every economist with an eye on Europe believes the financial situation, and the region’s buying power, will deteriorate further over the near and mid term.

USPS Tug of War

The debate over the fate of the postal system continues. The Senate passed legislation that would fund the agency so that it will not have to make substantial personnel, office location or service cuts. Republicans in the House intend to block a similar bill. The U.S. Postal Service Board of Governors also rejected the Senate plan. If the House can prevail, the odds are that a slew of cuts will be made. This eventually will involve closing hundreds of offices, laying off tens of thousands of workers, eliminating Saturday delivery and possibly challenging the size of the pensions of current and future postal employees. The Postmaster General has fought for the cuts. Despite the Senate’s action, other political and bureaucratic forces make it likely he will get his way.

Douglas A. McIntyre

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