Goldman: Recovery Will Require Three Rate Cuts

According to Goldman Sachs, the Federal Reserve will have to cut interest rates three times in 2007 if it wants the economy to recover from the housing bust, reports the Telegraph's Ambrose Evans-Pritchard.

"Americans have shown a complete lack of self-control. The personal savings rate is at its lowest point ever, and has actually been negative since April 2005," says David Kostin, Goldman's U.S. strategist. "We believe that housing will soon become the proverbial ‘straw that breaks the camel's back'."

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Rising home values have allowed homeowners to cash in the equity in their homes, providing them with an artificial boost to their incomes and allowing them to spend more. Now that home prices are not appreciating, homeowners have lost this "recurring income," according to Goldman Sachs.

According to Goldman, equity withdrawal will fall from 13 percent of "discretionary household cash flow" in 2006 to 7 percent in 2007. Already spending as a result of this boost in income has fallen from 7 percent to 4 percent of GDP in the past year, and Goldman says it is likely to drop in half again in 2007.

MoneyNews readers will recall that we have been warning readers of a housing bust for some time now. Subscribers to Financial Intelligence Report, our investment recommendation publication, cashed in gains of 62.8 percent, 55.4 percent, 47.6 percent, 34 percent, 30 percent, and much more on real estate-related investments prior to the housing collapse. Get FIR's latest recommendations to profit from the real estate bust in 2007 now.

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