Where is the US economy headed?

Look up the role of the esteemed Barney Frank and Senator Dodd in their dealings with Fannie Mae and Freddie Mac. You will learn something.

The question is, what is the best solution for the current mess if not increasing credit?

Subprime crisis: A timeline
Hints of turmoil in the subprime mortgage market began to surface less than 2 years ago.

NEW YORK (CNNMoney.com) -- The subprime mortgage meltdown and resulting rippling repercussions have a brief, but dramatic, history.

Feb. 7, 2007 - HSBC announces it will see larger than anticipated losses from rising defaults of subprime mortgages in the United States, the first major bank to make an announcement about rising losses in the sector. While the announcement gets little attention at the time, subprime mortgages soon become a watch word along Wall Street and in financial news.

April 2, 2007 - New Century Financial, one of the nation's largest subprime mortgage lenders files for bankruptcy court protections, cutting 3,200 jobs, or 54% of its remaining work force that had already been scaled back in previous weeks as it stopped accepting new loans.

June 2007 - Two hedge funds run by Bear Stearns that had large holdings of subprime mortgages run into large losses and are forced to dump assets, with the trouble spreading with major Wall Street firms such as Merrill Lynch (MER, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500) and Goldman Sachs (GS, Fortune 500) which had loaned the firm money.

Sept. 18, 2007 - The Federal Reserve starts cutting interest rates, citing the credit crunch on Wall Street and in the broad economy. The nation's central bank will make cuts at seven straight meetings, including one emergency meeting, before it pauses. It also agrees to start loaning money directly to Wall Street firms, rather than only to commercial banks, and to accept troubled mortgage-backed securities as collateral.

July 11, 2008 - The FDIC takes over IndyMac, a California bank that had been one of the leading lenders who made home loans to people who did not provide proof of their income. The failure may turn out to be the most expensive in U.S. history, but FDIC warns that more bank failures lay ahead.

March 16, 2008 - JPMorgan Chase & Co. acquires troubled Wall Street firm Bear Stearns, in a deal engineered by the Federal Reserve, which agrees to provide up to $29 billion in financing to cover potential Bear Stearns losses that JPMorgan agrees to assume.

Sept. 6, 2008 - Treasury Secretary Henry Paulson announces a takeover of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), putting the government in charge of the twin mortgage giants that own or back more than $5 trillion in mortgages. The Treasury Department agrees to provide up to $200 billion in loans to the cash-starved firms that are crucial sources of mortgage funding for banks and other home lenders.

Sept. 15, 2008 - Bank of America (BAC, Fortune 500) agrees to acquire Merrill Lynch, in a deal joining one of the nation's largest banks with one of the its largest brokerage firms, for up to $50 billion. Deal comes after talks to have Bank of America buy Lehman Brothers, another money-losing Wall Street firm, fall through. Unable to find a buyer, Lehman Brothers files for bankruptcy court protection.

But, as is often the case, there is disagreement among the economists about the risks that the subprime market poses to the overall U.S. economy.

"Mortgage credit-quality problems go well beyond the subprime sector," wrote Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, in a research note. "The underlying problem is not the subprime market per se, but the reset of large quantities of adjustable-rate debt -- some of which is classified as subprime some as prime -- to higher interest rates in an environment of flat or falling house prices in most of the United States."

Mr. Hatzius notes that the so-called teaser rate, or low initial rate on adjustable-rate mortgages, expires sooner for subprime mortgages. This implies that mortgage-holders with prime ARMs may come to experience the same woes currently making waves in the subprime sector.

The extent of any spillover from subprime to the broader housing market remains unclear. "You can tell a lot of scary stories," said Richard DeKaser of National City Corp., "but they're not broadly accurate. We're still talking about a small segment of the nation's homes that are affected." According to the American Housing Survey for 2005, the most recent date for which data are available, 33% of all homes are owned outright and 57% have traditional mortgages, leaving just 10% potentially affected by ARM woes.

The subprime concerns are also likely to weigh on prices, according to Mr. Lonski. "Home sellers will be forced to accept lower prices in the spring. The subprime issue reinforces that home prices would be subject to price recession, creating an expectation of lower prices among buyers."

Economists' expectations for home prices dropped from the previous survey. On average, they see a 0.77% decline in prices, measured by the government's Office of Federal Housing Enterprise Oversight index, in 2007, compared with their forecast in a survey last month for a 0.44% decline. Of the 55 economists who answered the question, 34 predicted prices will be flat or will decline. The index, which tracks price changes in repeat sales or refinancings on the same properties, has never posted a year-to-year decline.
About the Survey

The Wall Street Journal surveys a group of 60 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted semiannually, at midyear and at year-end. Between each semiannual survey, four monthly updates are conducted for the most closely watched forecasts. This is the monthly survey for March. For prior installments of the semiannual and monthly surveys, see: WSJ.com/Economists.

The economists were split on whether regulators should have acted sooner in the subprime mortgage market. Twenty-eight of the respondents said "yes," while 24 said "no." Robert DiClemente of Citigroup contended that the problem wasn't centered on regulated institutions.

But some economists put part of the blame on the Federal Reserve. "Was it necessary to cut the fed funds rate to 1%, supercharging the housing recovery?" said Mr. Lonski. The June 2003 move, which ended a three-year cycle of rate cuts, was aimed at fostering economic growth and contributed to continued low mortgage rates.

Three-quarters of the economists " 40 of 54 who responded -- said they believe interest rates would be at the same level today if Mr. Greenspan were still chairman of the Fed instead of Ben Bernanke. Nine said rates would be lower now, while five said rates would be higher now.

Mr. Greenspan has roiled the markets this month with his prediction that slowing growth in corporate profit margins means that the risk of recession is greater than many believe. Amid the stir Mr. Greenspan caused, about a quarter of the economists said he should refrain from making public comments about the economy, while the rest said he should speak his mind. "I'd prefer more Greenspan commentary, not less," said Bruce Kasman at JP Morgan Chase. The economists were about evenly split on his assessment of profit margins.

February 12, 2008
Mortgage Crisis Spreads Past Subprime Loans
By VIKAS BAJAJ and LOUISE STORY

The credit crisis is no longer just a subprime mortgage problem.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.

“This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.

Like subprime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.

“Subprime was a symptom of the problem,” said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. “The problem was we had a debt or credit bubble.”

The bursting of that bubble has led to steep losses across the financial industry. American International Group said on Monday that auditors found it may have understated losses on complex financial instruments linked to mortgages and corporate loans.