Global

Signs of economic weakness have continued, suggesting barely positive GDP growth in 1H2008.

The Fed’s aggressive easing and alternative policy measures aim to calm financial markets, whose wider spreads look to slow growth for a more extended period.

Economic growth remains weak, although financial market volatility has drawn attention from the weakness. The recent financial market volatility and wider credit spreads suggest a more extended period of weakness. We expect GDP growth below 1% in 1H 2008 and growth to remain below trend until the 2H 2009, leading the unemployment rate to peak at 5.8% in the middle of 2008.

As discussed in several notes this year and mentioned in the FOMC preview, the plethora of new liquidity programs that the Fed has put into place are creating balance sheet issues. The $30 billion that the Fed may be lending to JPM, plus whatever else it lends through the PDCF can be added to the list laid out on Friday.

The Fed has already liquidated over $100 billion of Treasury bills since last summer, and it feels like there is at least $100 billion more to go in the next month or two. Market participants need to be prepared for some potentially radical results.

While the mortgage credit losses still don’t look huge relative to the size of the economy or the financial markets — the baseline assumption in the paper is $400 billion in losses, which is about 2-1/2% of total equity market cap or “just one bad day in the market” — they are nevertheless responsible for much of the financial and economic turmoil of the past 6 months. It is estimated that roughly half of the total losses are likely to be borne by leveraged US financial institutions, which aggressively mark to market and closely monitor their leverage and value at risk.

If you can stop a foreclosure by consolidating your debt, reducing your monthly payments to other creditors, and then having enough money to pay your mortgage lender, you should definitely consider that route. Not only will you improve your credit by getting all past-due loans up-to-date; you can save your home. The key problem is finding a lender who will do that for you. But think twice about consolidating your debt, because you are converting unsecured debt (credit cards) to secured debt (an equity line) and putting your home ownership at risk of foreclosure.