McClatchy: Deep problems plague U.S. economy, stimulus plans notwithstanding [View All]

[babylonsister]

Deep problems plague U.S. economy, stimulus plans notwithstanding
By Kevin G. Hall | McClatchy Newspapers

* Posted on Friday, January 18, 2008


WASHINGTON — The economic growth package being prepared by President Bush and Congress may help ease the sting of an economic downturn or soften the blow of a recession, but it won't fix the deeper structural problems that are menacing the economy.

That's because the U.S. economy has rarely faced such a combination of challenges all at the same time.

First, the economy is mired in what arguably is the worst housing slump since the Great Depression.

Just last August, President Bush told economic reporters that he saw a "soft landing" for the housing sector. On Friday, Treasury Secretary Henry Paulson offered this grimmer view: "This market needs to correct. We've had unsustainable growth for some period of time. We're not trying to prolong that — it needs to correct."

New housing starts in 2007 fell 24.8 percent to their lowest level since 1980; building permits fell 25.2 percent. Median home prices in hard-hit California fell more than 15 percent last year, and no one's quite sure where the bottom is there or in the other troubled states such as Florida and Nevada.

Related problems in housing finance have spilled over, infecting the broader credit markets and roiling Wall Street. Because investment banks packaged mortgages into special bonds sold to investors, they're taking it on the chin now that the housing market is sinking.

Mammoth investment banks Citigroup and Merrill Lynch this month respectively announced fourth-quarter losses of $10 billion and $9.8 billion, respectively, and write-downs of $18.1 billion and $11.5 billion for bad bets made on mortgage-related bonds.

Now, the other shoe may be dropping.

more...

http://www.mcclatchydc.com/homepage/story/25053.html