“THESE are the times that try men’s souls,” wrote Tom Paine in the harsh winter of 1776 in an effort to persuade his countrymen to persist in their war to throw off the British yoke. “Tis surprising to see how rapidly a panic will sometimes run through a country,” added the English-born Paine.

Some 232 years later the chairman of the Federal Reserve Board and the secretary of Treasury find themselves fighting a different sort of panic, while ordinary investors find themselves in soul-trying straits as their net worth declines for the first time in decades.

Fed chairman Ben Bernanke pulled no punches when he gave his semi-annual report to Congress. “Sizeable losses at financial institutions . . . financial headwinds . . . inflation has remained elevated . . . declining house prices, a softening labour market . . . deteriorating performance of sub-prime mortgages . . . turbulence . . . Decline in the . . . value of the dollar.” There’s more, but you get the idea — a Fed chairman who has deployed every weapon at his command and manufactured new ones in his fight to right the economy, and is not certain he has succeeded.

It just might be that Bernanke, with assistance from Treasury secretary Hank Paulson, has been more successful than he dares dream, and that the panic has been contained. Not that we will soon see the boom times that investors remember so fondly, or that homeowners can soon look forward to double-digit annual increases in the value of their homes. But it is possible that the woes that have beset the housing and financial sectors, and the damage inflicted on consumers by rising petrol prices, are about to be contained and mitigated.

Start with housing. Falling prices, inventories of unsold homes, slowing construction and rising repossessions have combined to shake mortgage institutions to their foundations.

But sales of existing homes seem to have stabilised this year at an annual rate of close to 5m units, with gains in the northeast and Midwest offsetting declines in the south and west. Inventories of new single-family homes are down 21% from their 2006 peak. Nationwide, average house prices continue to decline, but whereas in March only two of the 18 markets covered by the much-watched Case-Shiller Index recorded increases, in April prices rose in six regions. And, as Barron’s magazine points out in an article under the title “Home prices are about to bottom”, price figures are biased downward by the overweighting of sales of homes with sub-prime mortgages. Chip Case — the Case of the Case-Shiller Index — believes that homes are now more affordable and that, barring a recession, prices “may well stabilise” and begin to recover by the year end. Barron’s Jonathan Laing concludes that “the scary dive in home prices soon will be over”.

Improvements in housing would, of course, translate into improvements in the banking sector. The immediate intervention of the Federal Deposit Insurance Corporation (FDIC), protecting up to $100,000 per depositor, prevented panic after the Indy Mac failure, the third largest in American history. Meanwhile, Merrill Lynch announced that it is raising $4.5 billion by selling its stake in Bloomberg and increasing its excess-liquidity pool to record levels; several investment houses reported earnings that, although off from last year, beat the market’s expectations; and shares in Fannie Mae and Freddie Mac began to recover some of the ground lost the previous week.

Freddie Mac (a client of mine) and Fannie Mae are government-sponsored enterprises that finance about half the mortgages in America. Despite the slump in their share prices, these enterprises continued doing what the government wants them to do — they kept mortgage money flowing. True, to offset some of the panic caused by declines in their share prices, Paulson and Bernanke decided to make explicit what investors in Freddie and Fannie bonds always knew — these enterprises are too big to be allowed to fail. So this month both were able to borrow money at attractive rates, and to continue business as usual, writing billions in new mortgages.

It is too early to say that all is calm in the financial sector. More bad loans will be written off, several banks are in less than robust health, and the FDIC has already committed 10% of all its funds to Indy Mac depositors, meaning it might have to call on taxpayers for funds if failures become widespread. Many banks still need to raise equity capital.

Finally, there is oil. Students of the impact of oil prices know that the rapidity of an upward movement has as much effect on the economy as the level of prices. We cannot predict the course of prices with any certainty, since this market is cartel-ridden, affected by “resource nationalism” that inhibits new investment, and has other features that can’t be understood by thumbing through a copy of The Wealth of Nations. But it does seem that higher prices are destroying demand at a more rapid rate than economists anticipated, which might, just might, hold back further price increases, or sustain last week’s downturn in crude prices.

Perhaps most important, the flexible American economy so far — and the “so far” is important — seems to be doing better than the troubled housing and financial sectors. “The economy has continued to expand, though at a subdued pace . . . Personal consumption expenditures have advanced at a modest pace . . . generally holding up somewhat better than might have been expected . . . Growth is expected to pick up gradually over the next two years,” said Bernanke. Imports are adding perhaps a full point to GDP, offsetting all or most of the housing-related decline.

And financial markets are being restructured. Paine wisely noted that “panics, in some cases . . . produce as much good as hurt. They bring things and men to light, which otherwise have lain forever undiscovered”. So inept chief executives have found.

There is, then, light at the end of the tunnel. Let’s hope that Larry Lindsey, former economic adviser to President George W Bush, is wrong when he says the light comes from an onrushing train.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

stelzer@aol.com

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