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University of Massachusetts Amherst

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Economic Forecast: Patient is Sick but Not Terminal

By Shel Horowitz

Gil Ehmke, Owner And Portfolio Manager for Bank Street Investment Advisors, LLC, shared statistics that were not encouraging: 21% of Massachusetts mortgages are in default, 11% are in foreclosure.

Still, he thinks the media's handling of the crisis is wildly overblown: "It's a crisis on Wall Street, but if you didn't read the paper or watch TV, you wouldn't know.

"Subprime issues spread to insurers. Bear Stearns' failure was the bottom of this crisis. Once people realized the world wasn't going to implode, the markets turned around, the fear started to abate. CNN created fear. Everything that happened—good news, bad news—they made it bad news. The crisis was spreading to mainstream America because of this fear."

Using the classic economists' definition, "There've only been 2 recessions in the last 25 years: 1991 and 2001-02 Money market funds have more money in them than ever before. But there was a crisis of consumer confidence.

Massachusetts, he says, is in far better shape than much of the rest of the country. But still, we're under that cloud.

"Every time the national unemployment rate has gone up .6% in less than a year, it's been followed by a recession. And we're up .6 percent." And coupled with rapid inflation of food, fuel, and other essentials, wage earners are taking a big hit in spending power—which will continue to worsen. "Oil was $124 today [May 14, 2008]. They're talking about $150 a barrel."

Why are we in this pickle? The money supply had been artificially high; there were "no lending standards, people who should not have been granted loans were given loans." And then came the counter-reaction: supplies tightened. "The money supply growth is still stagnant, until the credit markets grow some more," but we're still in much better shape than we were in 2001.

Ehmke’s referred to the stimulus checks as "putting a Band-Aid on a gaping wound. It doesn't solve anybody's problems."

Meanwhile, China's 8% inflation rate is twice America's—which means they'll need their money at home and won't be investing so heavily in the U.S. This could contribute to "a long period of slow growth"—along with several other factors:

"We've got five months in a row of declines on leading indicators, usually a good indicator of recession—but it's been wrong before.

"You're in out and out recession in California, Nevada, Michigan, and Florida, but if you look at other parts of the country (including Massachusetts), it's not so bad.

"We're up to nine months to sell a house, and we were running 4-5 forever. It looks like it may have stopped, but it's still going to take a while to burn through all those homes on the market.

"We're on the edge of recession but haven't gone there and probably won't. The mortgage market is one of the reasons why; you can't get a jumbo mortgage! Over 100 subprime and jump lenders went out of business. You can't get a loan for 400,000. Normally, to get out of foreclosure, you sell your house. They can't do that this time. Now Fannie Mae and Freddie Mac will give the same terms for their jumbo mortgages, and that will help."

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