Smith Faculty Opinion Article	December 6, 2007
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

President Bush's Mortgage Program
and Rumblings from Europe about the Dollar

This week, the big news may be the shoes that are yet to drop: President Bush's program to help distressed homeowners and halt the free fall in housing and subprime securities markets, and the continued carping from the Europeans about the decline in the dollar.

Mortgages

The critical component of President Bush's program will be what he provides to move worthy homeowners into long-term fixed rate mortgages. Freezing adjustable mortgages at teaser rates will only push the problem to the next president. What is needed is a mechanism to provide permanent financing--fixed-rate, long-term mortgages. Details on that to come--hopefully it is more creative than the ruminations so far from the Treasury and Federal Reserve. The Treasury seems obsessed with what investment bankers do best in a pinch, short-term workouts that punt difficulties into the high grass. From Federal Reserve economists, we get lots of ideological ruminations about the need to force profligate lenders and borrowers to the gallows. President Bush is a politician--read: pragmatist--and hopefully he will require more of them, and the mortgage industry.

The Weak Dollar

The Europeans are pleading with Washington to do something about the fall of the dollar against the euro. The problem is that Washington's hands are tied by political correctness.

The Peoples Bank of China is destabilizing global currency markets by buying $450 billion a year in mostly U.S. dollars, but also euros and other foreign securities, to keep the yuan down and its exports up. Chinese labor is cheap but its trade surplus has more to do with the export subsidy Ben Bernanke identified in those transactions. Free traders in Washington say any U.S. action would be protectionist, when in reality China is practicing currency mercantilism.

The flip side of that has been a huge and growing U.S. non-petroleum trade deficit with China, and Americans finance that deficit by borrowing. Now world markets are jittery about the global inflationary consequences of so much U.S. paper circulating abroad and fleeing the once almighty dollar. The best substitute for the dollar is the euro.

Europeans need to take aim at China's yuan policy to solve the problem. If China insists on subsidizing U.S. and European purchases of yuan to finance its exports, the U.S. and EU governments can tax conversion of dollars and euros into yuan to ensure those exports are sold at market prices in the United States and Europe. Washington could use the revenue it gets to pay off the bonds held by the Peoples Bank of China.

The Week Ahead: Forecasts for the Weeks of December 10 and 17

Forecast Prior Period

December 7
Nonfarm Payrolls - Nov 88k 188
Manufacturing Payrolls -13k -21
Unemployment Rate 4.7% 4.7
Average Work Week 33.8hrs 33.8
Hourly Earnings 0.3% 0.2

Mich Cons Sentiment - Dec (p) 73.5 76.1
Mich Cur Conditions 91.5
Mich Expectations __._ 66.2

Consumer Credit - Oct $4.3 b 3.7b

Week of December 10

December 10
Pending Home Sales - Oct 84.5 85.7

December 11

Wholesale Inventories - Oct 0.5% 0.8
Wholesale Sales 0.6% 1.3

Federal Funds Target 4.25 4.50

December 12

Export Prices - Nov 0.5% 0.9
Export Prices, ex agriculture 0.5

Import Prices - Nov 2.4% 1.8
Import Prices, ex petroleum 0.2 0.5
Import Prices, petroleum 2.2 6.9

Trade Balance - Oct -$57.436b -56.5
Treasury Budget - Nov -$67.0b -55.6

December 13
PPI - Nov 1.8% 0.1
PPI - Core 0.1 0.0

Retail Sales - Nov 0.5% .2
Retail Sales, ex Autos 0.5 .2

Business Inventories - Oct 0.3 0.4

Initial Jobless Claims 335K 338

December 14
CPI - Nov 0.6% 0.3
CPI - Core 0.2 0.2

Real Earnings - Oct _._% -0.2

Industrial Production - Nov 0.1 -0.5
Capacity Utilization 81.7 81.7

Week of December 17

December 17
Current Account Q3 -$182.0 b -190.8
Net Foreign Purchases - Oct $35.0b 26.4 (line 19 US Treasury TIC Report)

NAHB Market Index 20 19

December 18
Housing Starts - Nov 1.185m 1.229
Building Permits 1.178 1.178

December 20
GDP - Q3 (f) 4.9 4.9
GDP Deflator 0.9 0.9
PCE 2.7 2.7
PCE Deflator 1.7 1.7
Core Deflator 1.6 1.8

Leading Indicators Nov 0.0 -0.5%

December 21
Personal Income - Nov 0.3 0.2
Personal Spending 0.3 0.2
PCE Index 0.6 0.3
Core PCE Index 0.2 0.2
Real Personal Spending -0.4 0.0

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.