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Economist: 'Stagflation' Could Rear its Ugly Head
By Ted Cornwell
As if mortgage servicers don't have enough to worry about, what with the subprime meltdown and the erosion of home prices, one economist suggests that the worst could be yet to come.
Paul Bennett, the chief economist for the NYSE, said there's "not much sign of a bottom" in the nation's housing markets, especially for the home construction industry.
So far, he says data show a 10% to 15% decline in home prices last year.
"The gloomy side of that is that it looks like we're going to have another decline in home prices of about the same amount this year," Mr. Bennett said during SourceMedia's Mortgage Servicing Conference in Dallas last week. (SourceMedia is also the publisher of MSN Bulletin).
But he sees emerging parallels between today's economy and the situation during the 1970s, which saw a weak economy coupled with rising prices for commodities such as food and energy. Already, oil prices are at record highs, and agricultural commodities also have seen price surges, fueled at least in part by rising demand from fast-growing economies such as China. With an economy growing at a 10% annual rate, China is "sucking in" resources, pushing up prices for oil and other commodities, he said.
So far, the Federal Reserve Board's interest rate cuts have not sparked inflationary pressure, Mr. Bennett said. And he expects the Fed to cut rates again in response to the weakening housing sector. But with inflation running near 4% in some months, that inflationary pressure will make the Fed "very uncomfortable" going forward. Moreover, the price increases seem to be spreading beyond just food and energy.
"The inflation problem is something that seems to be with us," he said.
The Fed's balancing act - trying to promote low unemployment while not sparking inflationary pressure - doesn't look to get any easier in the near future. But Mr. Bennett, formerly an economist with the New York Federal Reserve Bank, said that the subprime mortgage meltdown is only the latest economic crisis to challenge policymakers and the financial services sector.
"You don't understand how all these risks are interconnected until they go bad. That's the sad history of these things," he said.
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