You would probably have to have been living on a remote desert island for the better part of two years to not see any signs of the slowdown in the economy of the United States. Since August of 2007, the real estate market has been reeling from plummeting house prices, due primarily to increasing defaults on sub-prime mortgages. While these mortgages were issued to millions of borrowers with patchy or relatively poor credit ratings over the past several years, interest rates remained unusually low before the Federal Reserve began to increase rates over 2005-2006.

Up until late 2006, this process was self-reinforcing, mainly due to the delayed impacts of interest rate changes, not to mention encouraging profits for lenders, who would often repackage the loans into securities which could be sold to investors globally. Many analysts called it a new era in risk management, justifying the arcane nature of many of these new investment entities with ever-larger profits.

But just as higher interest rates began to take their deflationary effects on the larger economy, millions of sub-prime mortgages began to reset, their rates immediately dependent on available credit. Moreover, many borrowers were not made aware of the insidious nature of their home loans.

Often, their interest rates are artificially low for some period of time, usually one to two years, and then change to reflect market rates afterward. These "teaser" rates were designed to lure more potential homeowners, and they worked: all estimates of the amount of sub-prime mortgages number in the millions, and many consumer advocacy groups have decried the skyrocketing incidence of "predatory loaning" leading up to the credit crunch. Defaults have continued to increase, which has forced the financial institutions which invested in mortgage-backed securities to write down billions, eventually leading to the spectacular collapse earlier this year of Bear Stearns, formerly Wall Street's fifth-largest investment bank.

Since the securities made from these increasingly worthless mortgages have been so widespread, any effort towards recovery must first be focused on stabilizing borrowers, who are increasingly behind on payments. In this respect, the government has taken several different courses of action. In an effort to stop unnecessary foreclosures, the US Treasury has begun an initiative to freeze mortgage payments at current levels for qualified recipients. However, its restrictions make less than 5% of homeowners eligible for the program.

In addition, the Treasury has introduced a plan to reorganize and regulate the lending industry over the next several years, which should help streamline the financial system in the future. However, its greatest effect so far has been to distract from more immediate economic problems.

By far, the greatest player in the recovery effort has been the Federal Reserve, which reversed its previously hawkish view to drop mortgage interest rates multiple times, from 5.25% last summer to 2.25% now, with a further cut of 25 basis points highly likely at the next meeting. They have also taken the unprecedented move of making its "discount window" rate loans available to investment banks. This access has historically only been available for commercial banks up until this point as a matter of last resort, but by bailing out Bear Stearns, the Fed made a commitment to help troubled investment banks weather the credit crisis. A recovery will require a combination of liberal monetary policy, further government intervention on behalf of mortgage holders, and enforceable regulation in order to prevent another bubble.

Ki is a real estate agent in Austin Texas. He runs a site filled with information about Austin real estate. His site provides information on mortgage interest rates along with a search of the Austin MLS.

When thinking about the economic slowdown now gripping the United States, one might think of the naked emperor of yore, who could not realize his condition until told by a child. By the time analysts and the White House recognize the extent of the credit crisis, its effects will probably not be noticeable. So where are we now? Several times since last August's signs of an imminent drop in growth, markets have rallied due to speculation that problems in the area of sub-prime mortgages have "bottomed out." Alas, thus far it appears to have been in vain.

On April 25th, Reuters and the University of Michigan reported in their Survey of Consumers that consumer sentiment fell ever deeper in April to settle at 62.6 from 69.5 in the preceding month. Not only is this the third straight month that consumer's outlooks have remained downbeat, but this month's ratings are the lowest in 26 years. The last time consumers' finances were as stressed was in 1982, which was due to the "stagflationary" economy of the time. Stagflation refers to a stagnating economy with low or limited growth prospects coupled to high inflation. The recent recession came from a different set of circumstances, but consumers are feeling the pinch all the same. While inflation remains a key factor for monetary policy makers and politicians, estimates of core inflation (which excludes volatile food and energy prices) remain low for now.

This is a good thing, because it has allowed the Federal Reserve a lot of leeway regarding monetary policy. They have cut the interest rate they charge for lending to commercial banks by nearly three full percentage points since the onset of the credit crunch last summer, and are poised to cut rates 25 further basis points at their next rate-setting meeting April 30th. However, interest-rate futures contracts also predict a 20% chance that they may not cut the rate at all, signaling a possible end to further monetary stimulus. It is unclear whether inflationary concerns or macro-economic stability is guiding the Fed's decisions because, since rate cuts began, food and energy prices have also skyrocketed.

While this doesn't normally affect core inflation to a significant degree, over a protracted period of time prices will continue to increase for everyone. In addition, the Treasury's stimulus package is set to begin arriving to millions of American consumers at the end of April, four days ahead of schedule. The Bush administration and other prominent authorities have touted the $152 billion influx as a means to increase spending, which accounts for two-thirds of the US economy. While consumer spending should begin to pick up somewhat, surveys have shown that many people plan to spend their check one of two ways: relieving personal debt (which reached epic proportions in 2007), or adding to savings. This reflects both how necessary a lump sum of cash is to many poor Americans, and how much spending has been curbed. Until spending picks back up, the service sector will continue to ache. Promising numbers in manufacturing orders for April also reflect strong fundamentals, even as the housing and construction industries continue to slump It may be presumptuous to assume that the US is out of the proverbial woods, but there may yet be light at the end of the tunnel.

Ki lives in Austin and works as a real estate broker in the Austin real estate market. He provides a free search of the Austin MLS on his website along with information on mortgage interest rates.

In Greek mythology, the hydra was a beast that, when one of its many heads were severed, would grow new heads in their place. The sub-prime mortgage crisis has developed in a similar fashion, initially appearing to be constrained to a sector of unworthy credit borrowers who likely didn't have the financial ability to own a home normally. However, this expected loss translated into falls in construction, consumer spending, and widespread mortgage defaults in prime markets. This hydra doesn't respond well to lip service, such as the interest rate freezing plan ushered in by the US Treasury which is constrained to a statistically small minority of distressed homeowners.

Yet the knock-on effect of the sub-prime crisis that has gotten the most attention is relatively removed from those experiencing foreclosure: the financial sector, overexposed and reeling from massive writedowns due to investment in securities backed by these same sub-prime mortgages. However, both sides of this crisis can be traced to the changing relationship between monetary policy and reality. Real interest rates, those which banks charge each other for overnight lending, have remained stubbornly above their historical highs, reflecting the reluctance of banks to let go of needed capital. Consumer confidence is at its lowest level since the statistics were taken, asserting the credit crunch's diffusion into the larger economy. With such widespread signals of an economic downturn, the Federal Reserve has been the focus of many investors, especially after the unprecedented bailout of troubled investment bank Bear Stearns.

When the Fed lowers their discount rate, the cut is generally assumed to filter throughout the financial system, making loans cheaper for everyone and stimulating the economy. The US central bank has also not shied away from its ability to auction funds, which it has done liberally in order to stem further liquidity issues. While banks have taken advantage of more cheaper money, they have not passed all those savings on to others, and mortgage interest rates while low remain higher than would be expected. These rates affect both the returns on stocks for investors all over the world, but also rates for other loans from mortgage payments to fundraising efforts to buy up the troubled derivatives that began wreaking havoc on balance sheets a year ago. If the Fed is to maintain its credibility as a viable beacon of stability, then they will need to rein in with regulation further in the future or risk losing their legitimacy: that inflation remains within target levels, if on the high end of the spectrum. Until banks are completely through writing down losses, lending is not likely to get much cheaper. In fact, with plenty of investors jumping ship to profitable commodities, raising capital for necessities like student loans are going to be harder to come by. Analysts have projected that 10% of the lowest bracket of previous year's accepted borrowers expected not to qualify under recently tightened standards. Interest rates will reap an unprecedented level of control over the livelihoods of millions of Americans to an extent seldom seen.

Ki is a realtor/broker in Austin Texas working with homebuyers in the Austin real estate market. His site provides users a free graphical search of the Austin MLS along with a free mortgage calculator.

This week, a storm of bad news gave markets cold feet, resulting in Friday's 250-point loss. While this pattern of volatility has been the status quo for stock exchanges worldwide for the better part of the year-to-date, another factor has caused at least as many difficulties for a much larger percentage of the global population: the recent skyrocketing prices in energy and food. Wheat and other cereal prices have more than doubled this year, causing widespread effects ranging from speculative overbuying, which exacerbates the problem, to food riots in many poor countries. Millions of children around the world are likely to suffer from malnutrition in coming years if prices stay at or near current levels, according to International Monetary Fund (IMF) estimates.

Part of this unfavorable price increase has been due to shifting ideas about energy consumption and the press towards the use of alternative sources of fuel other than gasoline: namely, the subsidies issued by many governments of developed countries to change over to ethanol and other plant-based hydrocarbons, such as that made from palm oil (a particularly environmentally destructive process for ecosystems). Since these subsidies and programs have been introduced, farmers are often able to make better returns by selling their crops to biodiesel companies than to food companies. Until economic incentives change, the supply end is unlikely to provide solutions. For many of these farmers, these developments mean they are able to make a decent living for the first time in years, and they desperately want to (even if it results in local food shortages sometimes).

While this widespread problem affects consumers all over the world, these micro effects are only half of the story for gas-sensitive American consumers. Energy prices have taken headlines this year due to speculation and supply concerns from OPEC and South American countries after hitting the psychologically important $100 a barrel mark for the first time in the third quarter of 2007. Crude prices remain stubbornly above historical trends, even as suppliers contend that output need not increase. Analysts have also projected US gasoline prices to climb above $4 a gallon during the summer, another equally unprecedented number that may be tough pill for consumers to swallow, after the one-two punch of a national housing slump and the global credit crunch.

Should oil suppliers continue to maintain current output levels, demand is eventually likely to contract. But they aren't the only links in this chain. If oil becomes a less attractive option to Americans, oil companies may eventually be priced out of the market. Many have been keeping an exceptionally low profile in recent months. Auto companies play a huge part in the process, but shrinking sales and looming layoffs will likely increase the pressure towards manufacturing lower-emission vehicles. But the single biggest mover and shaker will be the government, which has the ability to regulate both inflation (through the FEDs influence on mortgage interest rates) and the move towards more sustainable technologies. The next US president will have the ability to help determine how long the lone superpower continues to expose its Achilles heel, but at some point all eyes will be on the Federal Reserve if inflation once again rears its ugly head.

Ki works as a real estate agent in the Austin real estate market. His site provides a free Austin MLS search along with updates on the Austin market on his Austin real estate blog

On March 14th, Bear Stearns, the fifth-largest investment bank in the United States, entered a period of insolvency. As growing lack of confidence in the firm's subprime exposure grew, other banks eventually refused to lend to the stricken company, which has existed for over 85 years. Were Bear Stearns a commercial bank, (i.e. institutions that loan money to people or businesses) it would be able to, as a last resort, take advantage of the Federal Reserve's so-called "discount window," thus receiving a government loan at the lowest available interest rate. The reasoning behind making loans to private businesses is sound, because overall confidence in banks is much stronger. But for equally obvious reasons, the discount window cannot by definition extend to institutions that take on risk as their business because they have less or no accountability to taxpayers.

However, after Bear Stearns seemed on the brink of collapse, everything changed. Bear Stearns shares began to falter as investors took flight. The Federal Reserve took decisive action to save the beleaguered bank by guaranteeing a $30 billion loan to their biggest competitor, JPMorgan Chase, so they could buy BS without fear of acquiring more dangerous subprime mortgage-related debt. In effect the government has now bought a troubled investment bank for pennies on the dollar, (their first offer was $2 a share, when BS traded at a high of $170 a year ago) knowing that taxpayers might have to foot the entire bill themselves. At the same time, the Bush administration has maintained that no government bailouts would extend to the financial sector. Moreover, wealthy BS shareholders balked so much at the firesale of their investments that the Fed, under pressure from potential litigation, increased the bid for BS by five times, to $10 a share. This means that, while the potential losses will be felt by millions of taxpayers (many of whom are in danger of losing their homes to foreclosure), while profits will most certainly be reaped by the corporate executives at JPMorgan.

Even with its exceptional exposure to subprime securities, BS is still worth well over a billion dollars. Profit-taking was the name of the game on the heels of the announcement, as day traders bought up huge amounts of BS stock at $2 or $3 a share and sold after the bid increased. By taking responsibility for the BS takeover, the Fed has changed the course of America's financial future. By guaranteeing the discount rate to BS, they implicitly must be able to do so for other investment banks in trouble in the future, which implies continued taxpayer absorption of Wall Street failures without any corresponding kickback from banks. Unless the Fed intend to rein in on banks more as the economy struggles through the recession, this policy clearly demonstrates a dramatically different view of finance than the Federal Reserve of 1913, when there was a real discount window you could use to keep your bank alive. Now, it seems, the most secure economically secure institutions are those most separated from average American lives. Politicians who recognize the increasing resonance of populist messages in the present climate are sure to turn this takeover into a major issue.

Ki works and lives in Austin Texas. As a realtor he helps investors interested in Austin real estate. His site provides a search of the Austin MLS for visitors along with a Austin real estate blog to keep people up to date on the market.

As the sub-prime mortgage crisis continues to unfold, new figures emerge from the Mortgage Banker's Association: A record .83. That means that, in three months, almost one out of one hundred homeowners have been foreclosed on. Because of America's size and diverse population, the statistics are somewhat skewed: In many places like Austin, Texas and New England, growth remains steady and house prices remain strong. However, in placed like Cleveland, Ohio and other pockets throughout the Midwest, foreclosures are much higher. One in every three mortgages has defaulted recently in these smaller, white-collar towns due in large part to predatory lending, as well as increasing energy costs.

But the other half of the subprime crisis plays out on Wall Street. As investment banks like big player Bear Stearns fail and the credit crisis remains, markets are pinched for investors in sub-prime securities, which have worked their way into the larger economy through such complex financial instruments as Structured Investment Vehicles, or SIVS. These entities don't consist of money per se, but "commercial paper," and therefore aren't reflected on a balance sheet, making them difficult to track.

As the Federal Reserve continues to slash discount rates, mortgage interest rates remains stubbornly above historical levels, meaning that credit is not available to banks in quantities that can allow cheaper home loans. By hoarding cash, banks are less likely to spook investors or lose needed capital. But by doing so, they exacerbate the problem, leaving central banks responsible for massive injections of liquidity to keep the cogs moving. In addition, the Fed has taken the unprecedented step of offering its "discount window" to investment banks in addition to commercial ones. Such behavior represents a fundamental break in policy for both the central bank and the president. There may be good reason for them getting their hands dirty. The extent of this credit crunch has been recently compared to the Great Depression, painfully reminding America of its most desperate moments.

Faced with the twin serpent of financial market volatility and increasing consumer pressure, it is no wonder investors are reeling. As the economy has cooled, oil prices have maintained record highs, peaking above $110 a barrel. While crude futures have reflected speculation more than lack of supply, recent falls suggest that investors may be recognizing a slow in oil demand. This also reverses the dollar's lurching fall, thus absorbing some lost profits to oil-producing countries, who peg their currency to the dollar. However, this reflects the exception rather than the rule.

In general, this cycle is self-reinforcing until a new equilibrium is reached, which cannot happen until the full extent of sub-prime exposure is known. This factor depends on the number of foreclosures on sub-prime borrowers, a mechanism for resolving both the individual defaults (necessarily a lengthy process) and subsequently assessing the potential devaluation of all its reinvested components. Until then, the economy remains like a proverbial deer in headlights, unable to understand how much risk it has taken on but running out of time.

Ki helps buyers and sellers navigate the Austin Texas real estate market. His web site has a free search for Austin Homes along with information on Austin Foreclosures

In recent months, the sub-prime crisis has reached unforeseen heights, infiltrating banks and financial institutions worldwide and causing many to report multi-billion losses due to the risky investments going sour. While the underlying economy of the US appears to be relatively robust, and the dollar's continued weakness has made investment and exports more attractive to foreigners than ever before, these factors have not salvaged pessimistic markets: The FTSE has dropped more in the past two business days than any other point since September 11th. In order for global markets to respond in such a definitive manner, they must either believe that the US is already in recession or that it is close. Ben Bernake referred to the economy as being on "a knife's edge" just as President Bush has unveiled a lackluster economic stimulus package that, if it is even able to make a substantial difference, may be implemented too late to do so. As banks continue to report record losses, in swoop foreign "sovereign-wealth funds," investment vehicles financed from state coffers in Asia and the Middle East, to shore up capital to the tune of $69 billion over the past ten months, according to Morgan Stanley. While the investment is needed badly, and no other source of capital has come running so willingly, the intentions of such funds is shrouded in secrecy. Most of this comes from genuine differences in the purposes of a given fund. Russia calls theirs a stabilization fund aimed at keeping energy prices consistent for Russians, but others are less obvious. As US citizens continue to be concerned about free trade's potential impact on American jobs, foreign investment is reaching new peaks, with their total value measured at $2.9 trillion. The downside to this gigantic increase of investment is also an upside, depending on how future events transpire. If oil prices continue to maintain their strength, oil-producing countries with huge surpluses will have more purchasing power than ever before, but at a price: By taking all the oil out of the ground, it cannot be spread out over decades and thus has limited reliability. But if that oil is converted into wealth, deposited into a sovereign-wealth fund, and invested in American firms, then the yield on their investment will keep GDP high and revenue stable. Plus, the US government won't breath down their necks (in the case of oil-related funds like the United Arab Emiritates-held Abu Dhabi Investment Authority) if they don't have oil to sell. The obvious problem here is that continued investment will be beneficial until controlling stakes in those companies are held, at which point an American backlash will be inevitable. One of the best publicized protectionist policies was the ban on Japanese companies operating radio stations, made under national security concerns. Other such problems have happened in the past, usually to the detriment of the investors, but never on the scale that economists predict will occur in the next couple of years. While looking a gift horse in the mouth is a bad policy, until sovereign-wealth funds have similar accountability to other financial vehicles, firms may be somewhat spooked. Ki is a realtor and broker in Austin helping clients searching for Austin homes. His website focuses on Austin real estate and offers a free home search. His Austin real estate blog offers insight and analysis on the market.

On January 22nd, the Federal Reserve cut their most important interest rate for the fourth time in the past six months, in an attempt to stem the widespread sentiment that the US is in, or headed for recession. Their cut comes at a strange time, because they were rumored, nay, expected, to deliver the cut at their monthly rate-setting meeting next week. But after stock and commodity markets suffered their largest losses in one day since the September 11th attacks, it seemed as though no amount of scheduled economic treatment would be able to rally confidence to a more optimistic level, especially given that the so-called "economic stimulus package" introduced by the White House in recent days actually made the problem much worse. Thus the Fed needed to act decisively, and so, for the first time since 1982, cut their most important rate by three-quarters of a percentage point, signifying how seriously they take the crisis. Yet markets, especially in the US, barely hiccuped upon the announcement: After a brief rally, Asian and European stock indexes closed down by several percentage points, and in the United States no change was seen. Might the Fed be able to wield the same power they used to over economic growth? It seems that an answer to that question is less than forthcoming, but certainly the Fed cut is a very good thing taking into account the historical role of interest rate cuts in similar times. As recently as 2001, with the dot-com bubble rapidly deflating, the mere adjustment of rates to moderately lower values brought the recession down to a dull roar. The biggest difference between that scenario, or for that matter any other previous economic downturn, is that now governments worldwide stand to lose something in a US recession, whereas even in the early 2000's foreign investment had not accelerated to its current breakneck pace. Even in the event of further cuts, credit markets are not required to pass on the savings they make onto their customers, which means that we won't necessarily be able to ever feel the effects of the most recent cut unless, as individual consumers, are able to borrow money more easily, an unlikely possibility under current conditions because, as a whole, Americans spend more than they can save. Throughout history, Americans have saved around %5 of their income, a lofty amount by current standards. This has allowed the US to run a giant deficit with far more stability than it should, because individual liquidity helps to guard against smaller economic bumps that could spiral out of control. A strong possibility is that the Federal Reserve never really had as much power as it would have us believe. As consumer confidence continues to crumble, it doesn't seem to make as big a difference to regular Americans that they can borrow more. They may not want to. And, even if this is an inevitable and beneficial adjustment, a lot of people will lose out in other countries who would normally be unaffected. Fortunately, the Fed isn't accountable to them quite as directly. As long as consumer spending slows, a Fed cut can only do a limited, and possibly impotent, amount of good for the larger economy. Ki Gray is a real estate agent in Austin. His site focuses on Austin real estate and has a Austin MLS search on his site. He also blogs about Austin on his Austin real estate blog.