TheMReport

January, 2013

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link: http://digital.themreport.com/i/105753

Contents of this Issue

Navigation

Page 37 of 84

Feature "If we look at the stocks and how they performed during that QE1 extension period, we actually see that housing-rated stocks performed best." —Christopher Vecchio, DailyFX housing market having a very significant downturn because of what is going on in Europe now is a bit of a reach, especially over the next three to six months," Vecchio says. "There are just a ton of options out there right now for the Fed to keep a firm cushion underneath the housing market." There are several reasons the eurozone is in its current predicament. But the crisis might not seem as daunting if the European Central Bank had powers similar to those of the Federal Reserve. On January 1, 1999, 17 countries agreed to adopt a single currency called the euro. Today more than 330 million people use the euro. The currency has been credited as "a major step in European integration," according to the European Commission. But the rules and powers to manage and control the euro limit the European Central Bank's ability to counteract a recession. Both the Federal Reserve, America's central bank, and its 36 | The M Report counterpart, the European Central Bank, can print money. Each also is mandated to keep inflation low. The Fed has a second charge that the ECB doesn't have: to keep unemployment low. Another important difference is that the Fed can purchase bonds directly from the government, an essential monetary lever during an economic downturn. By purchasing bonds, the Fed lowers rates, which increases competition. Investors are forced to either accept a lower return on their money or invest elsewhere, usually in a dicier venture. For instance, between late 2008 and mid-2010, the Fed initiated a program called Quantitative Easing 1, or QE1. Using its power to directly buy government bonds, the Fed purchased more than $1 trillion in mortgages from Fannie Mae and Freddie Mac to bring some stability to the housing market. "The Fed was saying this is the one sector that we're worried about so we're going to pump money into this one sector until it recovers," Vecchio says. "If we look at the stocks and how they performed during that QE1 extension period, we actually see that housing-rated stocks performed best." But when recession settled over the eurozone, the ECB had to purchase government bonds from the secondary market at the going rate. Eurozone countries trying to raise cash to stimulate their economies also had to go directly to the marketplace to sell their bonds. Without a central bank driving down the price, interest rates on bonds stayed high, thus adding more red ink to each country's already deficit laden ledgers. "We're still the United States of America," Daniel says. "Don't get me wrong; we still have serious problems but we have control of our currency. Europe is constrained because of the European Union." The Eurozone's Future T he one thing everyone seems to agree on is that there is no silver bullet that will solve the eurozone's problems. But the eurozone cannot maintain the status quo. Spain's overall unemployment rate is 26 percent. But it's 53 percent for younger people. In Greece, the numbers are 25 percent and 55 percent. Higher taxes, combined with fiscal uncertainty, are driving wealth out of Europe. "I know from clients in France that, because of the increased taxes to combat issues there, people are moving out of the country and to the United Kingdom," Fitzsimons says. "I have a client from Geneva, Switzerland, who is moving his assets out of the country because he fears that the eurozone is going to collapse." So what lies ahead for the eurozone? Some analysts predict that one or more countries—Greece and Spain—will exit the eurozone and return to a national currency sometime later this year or early in 2014. But any departing country, say others, would face fiscal suicide complete with bank runs and riots. "If we saw something horrific like the eurozone breaking apart, it would likely result in political schism and other social unrest," Vecchio says. Vecchio says that until the European Union makes the transition from an economic zone to a true fiscal union, the threat of the eurozone breaking up will remain a constant concern for markets. "If the European Union achieves a real fiscal union, then the eurozone breakup is something that will be written off completely," he says. "I don't think that is likely. Until they get a fiscal union in place, a eurozone breakup will remain on the table."

Articles in this issue

Archives of this issue

view archives of TheMReport - January, 2013