Even the most bearish pundits are sounding a bit more optimistic lately: Specifically, they are grudgingly admitting that we may have avoided another Great Depression.
But they quickly point out that we may still steaming full-throttle toward doom, this time as a result of the Fed and Congress removing the cheap money and spending stimulus that saved our necks.
Martin Wolf of the FT, for example, thinks the government will have a devil of a time managing this transition smoothly.
Right now, banks are printing money courtesy of subsidized borrowing rates from the Fed. They’re also dumping their crappy mortgage assets on the Fed’s balance sheet in exchange for fresh cash, thus avoiding further asset write-downs. As soon as the Fed begins to reverse these measures, banks may come under pressure again.
Worse, the Fed is still buying mortgage securities in the open market, thus helping to keep mortgage rates low. If the Fed abandons this crutch, mortgage rates could rise, putting new pressure on the housing market.