Horizon, Host: Ted Simons

March 24, 2008


Host: Ted Simons

Economy


  • Developer Elliot Pollack discusses the state of the local economy.
Guests:
  • Elliot Pollack - Elliot D. Pollack and Company
Category: Business/Economy

View Transcript
Ted Simons:
Good evening and welcome to Horizon. I'm Ted Simons. Gas prices are rising. Food prices are rising. And home values are falling. Just as inflation concerns and recession fears linger, all prompting the FED to take drastic measures. Joining us now to put all of this into perspective, from Elliot D. Pollack and Company, Elliot Pollack. Good to see you Elliot.

Elliot Pollack:
Good to be here. Thanks.

Ted Simons:
The credit crisis: getting a lot of headlines; getting a lot of concerns. How serious is this?

Elliot Pollack:
Very serious. It's probably the most serious credit situation we've had since the 30s, quite frankly. It has obviously spread from the housing and the junk bond sectors to the business sector, and it's probably going to move into the consumer sector. So not only can you not get a mortgage or it's more difficult to get a mortgage, but businesses will have a tougher time getting loans and so will consumers. That's all happening at a time when consumers are being squeezed, as you put it, because prices are going up and because we're now losing jobs nationally. So incomes won't be going up as much so it's going to be a very difficult period.

Ted Simons:
Those who aren't getting loans right now are having problems getting loans. Are these people who should have problems getting loans?

Elliot Pollack:
For the most part, yes. But what has happened is we've gone from one extreme to another. Three years ago if you breathed you could get a loan. They were called "ninja loan," no assets, no job, no income. Now you've gone the other direction, where even people who are qualified are having trouble and have to prove a lot more of their income than they used to historically. But we've probably cut out 25\% of the market that never should have had loans to begin with.

Ted Simons:
Did the economy in general, the credit crisis in particular, hit bottom with Bear Stearns?

Elliot Pollack:
No. Bear Stearns is the tip of the iceberg. And the FED did the right thing by bailing it out. Bear Stearns is delivered 30-to-1. If you mark their assets to market they're technically out of business. Morgan Stanley is 26-to-1 and Goldman Sachs is probably 27-to-1. All very highly leveraged. A typical bank is maybe 10 or 12-to-1 in terms of their assets to their equity. So it only takes a small change in the value of their assets which are these mortgage-backed securities, to really cause a lot of trouble.

Ted Simons:
You mentioned the FED did the right thing in rescuing or bailing out whatever term you want to use regarding Bear Stearns. Did the right thing -- Is it really the only thing the FED could have done.

Elliot Pollack:
Well, the FED has done stupid things in the past. For example, the good news is Bernanke is a student of history. He realizes one of the major mistakes in American history was when the FED tightened the money supply between 1929 and 1933. The money supply actually declined by a third between 1929 and 1933. He does not want that mistake repeated. He doesn't want runs on banks; he doesn't want things to snowball. So he's doing everything he can to provide liquidity to banks so they will stay afloat and will provide loans to the consumers and business sector of this economy. He didn't want to chance that a Bear Stearns caused a snowballing effect on the other major mortgage bankers in the country thereby cutting off credit to a lot of companies that needed to survive.

Ted Simons:
Interconnectedness obviously a factor here. But there are some who are saying some of these banks, some of these investment firms -- maybe they shouldn't be kept afloat and the FED did the wrong thing in rewarding risky behavior.

Elliot Pollack:
They have an argument. In just like those people who argue that homeowners who basically bought when they shouldn't have shouldn't be bailed out. But long and the short of it is, it's a question of which is the least of the evils? And the least of the evils is still keeping the economy afloat even if it means that some people don't get hurt as much as they should. But I will tell you, Bear Stearns stockholders clearly got hurt. Because all they had to lose was another $2. Because that's what it sold for. But the rest of the economy could have suffered had the Bear Stearns collapsed and it caused -- it brought into question the viability of other mortgage bankers.

Ted Simons:
Should some of these larger banks and larger investment firms, security firms, the real big ones, the ones that are looking like they're having some problems right now, should they be split up?

Elliot Pollack:
I don't think that's the problem. I think the problem is the government regulations themselves. Historically especially after the depression we learned enough so that if there was a bad period of time and banks had assets that they planned on holding for maturity, nobody made them mark them way down in price. Now you have mark to market accounting which is forcing them to write down things that they shouldn't have to write down. How do you know what these mortgage-backed securities are worth? If you sell them one at a time or if you sell them all at once you'll get different prices. How do you know what a house is worth? You know that right now you can't sell it. Should they be made to write it down to a very low level? I mean, there are so many questions. And if they're made to write it down it will wipe out their capital and they'll be out of business, much like the S&L's were. It's the type of thing where the trick is to do this in moderation, keep the economy afloat until the market clears. The market for all these assets will clear. It's going to take three or four years but it will clear. Anything the government does in the interim will just make the problem worse.

Ted Simons:
Real quickly though: Is that not an argument for fixing the car only after it runs off the road?

Elliot Pollack:
Well, no. The question is it's running off the road now, and do you steer it into a tree to stop it or do you let it coast to a halt?

Ted Simons:
Interesting. Inflation another concern. I know the FED continues to cut rates. Conventional thinking is the more you cut rates the more you heat up the economy, the more prices go up. Is that conventional thinking out the window right now?

Elliot Pollack:
Yes. I don't think there's a risk in the world of the economy overheating. In fact, the risks are on the other side right now. Inflation is a problem. I think it will moderate as demand moderates. A lot of it's oil, a lot it's food which is the biofuels -- the consumer price index is a series of goodies including a lot of high tech goods, TV's, autos, stereo systems -- things that have been declining in value. Unfortunately for the average consumer its food and fuel and utility bills and things he needs to pay every day that have been going up. So the real rate of inflation is higher for the average guy than the consumer price index rate.

Ted Simons:
Interesting. Recession. Are we in one?

Elliot Pollack:
If we're not, we will be shortly.

Ted Simons:
If we're in one shortly, is there a threat of double dip recession, where there's a quick recovery and all of a sudden we're back down again?

Elliot Pollack:
There will either be a double dip or this will be prolonged. We will not get out of this quickly and the recovery will not be a �V' it will be a �U'. The biggest problem beside the credit crunch is that the average consumer has very little in the way of traditional savings, has a lot of debt. During the �90s he offset it with stock market profits. During the start of this decade he used his house as a credit card to offset it. Now there's no other asset class to do that. So the only thing he can do is pay off debt and increase his savings and that means spend less. And that's what will keep us basically bouncing along the bottom for awhile.

Ted Simons:
Interesting as well. Now, for folks with a �For Sale' sign in their front yard and they can't get anyone to even look at the doggone place, what are you telling them?

Elliot Pollack:
I'm telling them two things. One, it's a difficult time. If you can, hold on and in five years this will be a bad memory. But it's going to take awhile. Two, if you must sell your house get ahead of the market. If the market is at one level you better be under it by 10 or $20,000 because otherwise you're not going to get any takers.

Ted Simons:
Wow. All right. Elliott, thank you so much for joining us. We appreciate it.

Elliot Pollack:
Thank you.

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