Horizon, Host: Ted Simons

July 17, 2008


Host: Ted Simons

Economy


  • There is bad economic news just about every day, much of it related to the banking industry. Arizona State University Economists Anthony Sanders and Dennis Hoffman discuss problems in the banking industry as well as inflation and other issues.
Guests:
  • Anthony Sanders - Economist, Arizona State University
  • Dennis Hoffman - Economist, Arizona State University
Category: Business/Economy

View Transcript
Ted Simons:
Tonight on "Horizon", failing banks, increased inflation and jitters on Wall Street. Just some of the troubling economics news. Two of A.S.U.'s Economist will talk about the latest money news. And learn about a ballot initiative that supporters say will keep the freedom to choose health care. Some say this is just a way to stop universal healthcare. That's all next on "Horizon."

Announcer:
"Horizon" is made possible by contributions from the friends of Eight, members of your Arizona P.B.S. station. Thank you.

Ted Simons:
Good evening, and thanks for joining us tonight on "Horizon", I'm Ted Simons. Before we get to talking about the economy, the Arizona Appeals Court ruled today in favor of Maricopa County Attorney Andrew Thomas's interpretation of a human smuggling law. The court ruled that illegal immigrants can be convicted of conspiring to smuggle themselves. The court also said the law is not preempted by federal law. A contract has been awarded for 100 photo radar cameras for state highways. The contract went to Scottsdale-based red flex traffic systems. 60 of the cameras will be stationary, and 40 will be mobile. The cameras will be going up starting September 26th. The cameras will take photos of speeder's going ten miles over the speed limit. It seems like it's almost impossible to pick up a newspaper or watch the evening news without hearing bad economic conditions. Officially we are not in a recession. Although most folks probably think we are. Here to give us some perspective on our current economic conditions are Anthony Sanders and Dennis Hoffman. Thank you for joining us on "Horizon".

Tony Sanders:
Thanks Ted.

Dennis Hoffman:
Thanks Ted.

Ted Simons:
Tony lets start with big headlines of late Fannie Mae Freddie Mac 80\% of market value, just this year, adios. What is going on here?

Tony Sanders:
Well what's happening is that's as we know there is a meltdown in the housing market, mortgage market. What we are seeing is a lot of distrust, a lot of lack of liquidity, capital moving into the banking sector, Fannie Mae, Freddie Mac, even though they are runned really well, they are getting pinched by the liquidity problems hitting the United States.

Ted Simons:
There is a thought that Fannie Mae and Freddie Mac are very much backed by the government. Are they very much or kind of backed by the government?

Tony Sanders:
No, the have an implicit guarantee and implicit just means that it is not written anywhere, the whole thing as some people argue they're too big to fail, I want to say this. If you take a look at and it's online at FannieMaeandFreddieMac.com, look at their serious delinquent rates on all of these mortgages that they hold, less than 1\% delinquent. Those are not companies on the verge.

Ted Simons:
Is lack of capital at play here? Is that what you were referring to earlier?

Tony Sanders:
Yes.

Ted Simons:
If Fannie Mae and Freddie Mac, which is supposedly as you say the all-stars of the lending crowd, if they are having trouble, what does that say about the mortgage industry as a whole?

Tony Sanders:
What it says is that some of the financial institutions are really getting desperate for capital. As you already are aware or your listeners are aware Citibank has had to go overseas and raise money from off shore. Freddie Mac and Fannie Mae again are the most rock solid of all of them, but even they are feeling a little pinched - but it doesn't help when people like Bill Pool the ex-governor from a -- not governor of the state, but from the St. Louis fed comes out and trashes them. That clearly sets up a lot of jitters. And we had short selling of Fannie Mae and Freddie Mac stock, not good. They're actually quite well.

Ted Simons:
Ok, let's talk about what needs to happen from here on. Should Fannie Mae and Freddie Mac be nationalized?

Tony Sanders:
No, I think we leave their charters alone. We let them -- all the treasury has done is step forward and said if you need anything, we are going to stand by you. I don't foresee them needing anything. I think that is just to basically stabilize the market and say these giants are in good shape, leave them alone.

Ted Simons:
Further regulation necessary?

Tony Sanders:
Further regulation will happen anyway. They will make them keep increasing capitals. They are going to make them pare back the retain portfolio, which is right now is about half of the mortgages in the United States. We will get them to tone that down eventually.

Ted Simons:
There had been talk last week. Over the weekend, there had been talk that maybe you break them up. Is that talk going to die away now, what do you think?

Tony Sanders:
Yes, I heard Steve Forbes talk about that. I got to tell ya, as someone familiar with Fannie Mae and Freddie Mac, they are the most hyper-competitive organizations against each other. And don't forget the commercial banks of the United States would love to take their business. They could originate those mortgages or keep them and sell them to private label. It is already ultra competitive. So I don't think that would serve any purpose.

Ted Simons:
I want to get back to the banking industry in a second. But Dennis, when you hear about a fed person saying some things and everyone gets all excited, or a congressman says something in a bank in California and all the sudden everyone starts running to get their money out there. How much of what we are dealing with in terms of the economy is psychological?

Dennis Hoffman:
A huge amount, Ted. A huge amount. You said the banks in California. If you have less than 100,000 deposited in those banks, and many of those folks in that line have far less than $100,000 deposited in the bank, to waste day standing in line for something that is a virtual certainty, that is a payment, if that is what they choose to withdraw their money, it just seems ludicrous to me. So panic, confidence, a huge piece of the puzzle today.

Ted Simons:
Was the government seizure of indymac, is that a hint of things to come you think?

Dennis Hoffman:
Uh Tony probably knows this, if he tells us, better than I. You know, banks thrive on confidence. You know, when people expect or fear bank failure, they withdraw funds. That brings about bank failure with virtual certainty. Again, if the issue of confidence -- I heard statistics the other night that suggest that the situation that we face right now with the banking community, and I will let Tony speak to it, but it is no where near -- we're no where near the number of failures today or banks at risk today that we had in the late 80s. But I will defer to my colleague.

Ted Simons:
The S & L crisis, this is nothing compared to that.

Tony Sanders:
That's correct.


Ted Simons:
Isn't there a fine line though between confidence and reality? I mean, I can tell someone, you know, I'm confident that you will be better than Michael Jordan on the basketball court. The fact is they're not going to be. At what point do you say the public needs to know?

Tony Sanders:
Well I think getting back to what Dennis was referring to, you have Indymac. You take a look at what Indymac did, they were publicly specializing in alt-A, not quite A mortgages. That is a risky business model. They were risky by definition. Those are the type of lenders, 150 of them in the United States that are on the cutting edge, and anything that is a very specialized, goes -- dulls under the sub prime, all day market, those are likely to go. Some community banks by the way, innocent victims just because they have had to be in areas that have had housing prices get demolished and mortgages going through foreclosure, but mostly it is the specialized lender banks, the ones that are not widely diversified like Wells or Citi or Bank of America.

Ted Simons:
Would fraud play a part in Indymac?

Tony Sanders:
F.B.I. is investigating a lot of lenders. Countrywide, Indymac - of course Indymac was started by Countrywide - they're both facing a lot of allegations of wrongdoing, guiding people into mortgages and some fraud issues, yes.

Ted Simons:
Last question on Indymac, with this failure, FDIC still in good shape?

Tony Sanders:
They have probably seen better times, they're still okay --

Ted Simons:
But there are no concern that the FDIC will get swamped by the banks going out of business.

Tony Sanders:
I don't foresee it. As we were discussing before we came on the air, some areas in the United States showing stability, and finally hitting the bottom of the housing market. That is great news for the banks in terms of default and the FDIC.

Ted Simons:
And yet Dennis we come out today with some numbers regarding unemployment that don't look that promising.



Dennis Hoffman:
Uh Ted unemployment ticked up to 4.8 on a seasonally adjusted basis. This is the time of the year when there is a lot of seasonal turnover in workers, especially government workers. So it is not surprising to see people in education churning in terms of the labor force. We do have unemployment rate up to 4.8\% in Arizona. That is about 1.2\% higher than it was a year ago at this time.

Ted Simons:
We're also are looking at inflation. I know nationwide inflation is creeping up there.

Dennis Hoffman:
You know, we have had commodity price pressures on inflation rates, fuel primarily, gasoline, everybody knows about gasoline prices at the pump related fundamental prices. Metals prices, steel prices, packaging prices, anything that goes into the transport of products, and you're seeing it, you pick up a bag of ice at a grocery store, my guess is it will be higher because it costs money to transport it. And that is being reflected in consumer prices, absolutely.

Ted Simons:
You got the consumer prices going up. You have jobless rates, seasonal, but still up there a bit. Retail sales have to be getting hit.

Dennis Hoffman:
Retail sales are getting hit. Actually, for sustained inflation, we've got to see those prices then spill over into higher wages, and wage inflation has to take place, and then wage inflation pushes prices up. And we're not seeing massive wage inflation at this point. As a matter of fact, what we're seeing is people are moving from one set of consumption goods to another. You know, in terms of inflation, you know apparel is cheaper today than it was ten years ago. There is no longer inflationary pressure in apparel. We got fundamental pressures due to fuel prices now. What is happening, people are changing consumption patterns. The changes in consumption of automobiles over the last year in Arizona in particular is absolutely striking. Numbers that I have not seen in 25 years of looking at these data.

Ted Simons:
Other big ticket items affected as well?

Dennis Hoffman:
Yes, furniture, fixtures down seven to eight percent. Automobiles sales down north of 20\% for the first half of 2008.

Ted Simons:
Everything you have talked about so far, inflation, jobs, the whole nine yards, commodity pressure, comes back to oil, doesn't it?


Dennis Hoffman:
It does. And there is a little bit of good news on that. I'm glad the show is today and not Monday. There is a little bit of good news on that front. Oil down $17 a barrel over the last several days, $5 just today. Below $130, you know, it seems strange that we're celebrating that, but at any rate, but the interesting thing is wholesale gasoline prices are down just in two days of trading, are down over 40 cents a gallon at the wholesale level.

Ted Simons:
Interesting. Tony, help me with this. Spending seems to be slowing down. Yet inflation seems to be speeding up. Is that unusual?

Tony Sanders:
Well, we are no longer in a stand-alone economy. We are competing with all of the countries in the world. China is consuming as we know a lot more oil than it used to. Their economy slowing down a bit too. They are one of the biggest demanders of steel. Steel, we see steel prices going up. It is just not us anymore. We have heavy competition outside of the country bidding for the steel. So a lot of prices are going up. Corn, you have heard about that that is partly from oil. We then started planting all of the corn to go into the substitute for fuel, and corn prices, food related to corn is going up. So it's a lot of substitution effects as Dennis is talking about.

Ted Simons:
Dennis, stimulus checks that were supposed to jump start everything, are we still waiting for those?

Dennis Hoffman:
Everyone talked about the stimulus checks. It didn't matter. Didn't know what to do with it. I'm going to send it back to the government. I think they should send them to the W.P. Kerry School of Business is where I think they should go. Seriously, the stimulus checks injection for Arizona two to 2.5 billion injected into the state over a three month period. Absolutely a lot of that money went to debt -- it went to savings. It didn't go necessarily into the spending stream. But at the end of the day, it is $2.5 billion more that was injected into this economy than would have been injected without that stimulus.

Ted Simons:
We talked about oil being such a factor in everything. Here in Arizona, housing is a major factor as well. What are you seeing out there? When is the turn around going to happen?

Tony Sanders:
Well, housing is -- Arizona State released an index saying down 18.5\%. Once again, that is just a continuation of the outskirts, which oil is not helping any. Outskirts of town where new building was occurring, they are getting hammered badly. But even Scottsdale is showing up in the negative range, and in the northeast area. So housing prices should be starting to get more resilient. We should see a turn around coming shortly. Simply because when we are looking, we are starting to see some sales where we didn't see them before. It is slow. It is not like a corpse that jumps up off the operating table. Its slowing will get up and walk around. It looks like we are starting to see some pulse, which is good.

Ted Simons:
Will we ever see -- we will, I'm sure, but in the near future, will we ever see a situation similar to what we saw where people who used to be happy if they made 20 to $30,000 on their home being appreciated that much over five and ten years, are we expecting to see two and $300,000 appreciation--

Tony Sanders:
I hope they don't expect to see it but it has been a reoccurring theme. We got San Francisco, L.A., San Diego, not so much Phoenix, but a lot of cities have gone through the bubble, burst, bubble, burst. It is not something that we want. Generally, in monetary policy we try to not have that happen, but it happens in the housing market.

Ted Simons:
Last question, in general, overall, are we in a situation right now where risk in general is not necessarily being rewarded?

Dennis Hoffman:
Risk is not being rewarded?

Ted Simons:
Yeah.

Dennis Hoffman:
I don't know if I would say that in general, Ted. You know, I think that there are investment opportunities out there. The stock best tip I can give you is to buy the financial sector three days ago. That would be the best stock tip I could give you today. No, I think that there are still potential rewards for investments. I think the smart money in real estate. If you look at this historically, the smart money in real estate in Arizona was in the early 90s, at the end of the long down cycle, and they made out very, very well ten years later. Slow, steady, but very, very lucrative. The problem in '04, '05, '06 was the frenzy, as Tony was hinting at, I hope we don't repeat.

Ted Simons:
Alright. Well gentlemen great discussion. Thank you for joining us.

Tony Sanders:
Thank you, Ted.

Ted Simons:
If you would like to see a transcript or video of this interview, you can check it out on our web site. Here is how.

Ted Simons (VO):
When you are finished watching tonight's "Horizon," don't forget to check our web site for many extras. Go to azpbs.org. Once you are on our home page, click on the word "Horizon" under the public affairs section. That will take you to the "Horizon" home page where you can access features to help you become better informed. The first feature you may notice is video from the previous night's show. If you would like to view previous segments, click on archives right above the video box. Once you select a show, you will have access to a summary of topics, guest list, transcript and video. On the "horizon" home page you can see what is coming up on "Horizon." if you would like to be alerted on topics, sign up, maybe you would like an audio podcast of the program. That is available on the home page. You can check out the latest Cronkite Eight Poll and order a DVD of the show. Our web site links you to hundreds of useful and informative sites gathered over the years by "Horizon" producers. "Horizon" is especially known for political coverage. We provide links for you to contact lawmakers. "Horizon's" home page is a full service web site for those who want to keep up with what is happening in Arizona.

Ted Simons:
One of the ballot measures you might be voting on this November is called the Freedom of Choice in Health Care Act. Backers say it would change the Constitution to prohibit laws that limit choices on health care or health care insurance. Those against the measure say it would stop universal health care in Arizona. Here to talk about it is Dr. Eric Novak, the chairman if the initiative. Thank you for joining us.

Eric Novak:
Thank you for having me.

Ted Simons:
Why is this important?

Eric Novak:
It is essentially important. It is important that everyone out there read it themselves. Invariably over the next four months will be a lot of misinformation. And it's essentially important because everybody across the political spectrum believes with certainty that the current trajectory of our health care system is unsustainable. The question is what is it going to look like? Now you and I know and everyone out there understands that when legislation gets made, it is all about the interest groups getting a piece of the pie. When you look at $40 billion in health care in this state alone, four times the size of the budget, a lot of people will be grabbing at it. The one group that will be left out are actual individual patients.

Ted Simons:
Which interests and lobbyists concern you?


Eric Novak:
All of them. Insurance providers, if you can think of it - everyone wants a piece of this $40 billion healthcare pie in Arizona. And so its all of them together. All we're saying is that, the first stage of healthcare reform or even a cornerstone upon which universal healthcare is built needs to be the protection and preservation of individuals to be in charge of their healthcare.

Ted Simons:
And yet critics will say that this initiative tries to protect a broken system.

Eric Novak:
I would encourage every person out there to read the language themselves. It really doesn't do that at all. Again, really what it does is limit the ability of the Legislature, Bureaucrats and special interest in back room deals down at the state house from sacrificing my right to get a second opinion, choose alternative care, choose the care I want for my children. They will sacrifice those rights on the alter of healthcare of reform. When again what they're really doing is trying to save as much as they can for themselves.

Ted Simons:
Universal health care obviously has been talked about at the capitol. Again, a criticism is that this initiative basically is a way to circumvent that.

Eric Novak:
We would make the case, and we do strongly make the case with our supporters across the political spectrum. Again, we're not promoting health care reform per se. There are creative, intelligent people with solutions for health care. If you look at the language and what it says, I don't know that it's not much different than the first amendment of the U.S. Constitution. It doesn't prevent involvement in freedom of speech, freedom of press, freedom of religion. It simply says there is a basic right to be in charge of your speech. We're simply saying that the health care reform needs to be built on the protection of individual rights because those rights will be lost.

Ted Simons:
Under a universal system, everyone has to be in it, doctors, I would think, de facto, would pretty much all be in it, most of them, I would think. If you are my doctor under a universal system, why would I not have the choice of choosing you?

Eric Novak:
It a question of how we define universal. Again I don't want to dive into what people mean by universal health care. I think we might leave that to some of the critics for you to ask them the specific questions of the genuine limitations that will actually occur. This is not a doctor initiative. I am a physician. There is nothing in this that is any upside for me professionally. It means more for me as a patient, parent, than anything professionally.


Ted Simons:
You emphasized the word choice, under that system, we will move away from that one. Under a current system, if I have a certain medical plan by way of my employer and I want you as my physician, you may or may not be on that plan, and that is not much of a choice.

Eric Novak:
I am not convinced and having the government come in, and some bureaucrat who you never meet or your family member never meets who is going to be there and make all of the rules forcing you to only get the care you provide. Remember what will come out of this is genuine control over every dollar you spend on health care. With the $40 billion number you hear critics talk about includes every health care service you can imagine, going down to Walgreens and buying Advil. They want to control where that money goes. I would make the case that I am not convinced that for people out there seeking out the care that they want, this doesn't mean freedom of choice in the health care act, is not intending to say Ted Simons, Eric Novak, go get what you want wherever you want, it says you can opt out of a government run system for whatever reason you might find it object able. If you want to spend your own money directly for a service, you have the right to do that.

Ted Simons:
Who is behind this initiative?

Eric Novak:
This is a genuine Arizona grass roots initiative. There is no big corporate interest; there is no big union interest. There is no big organizational interest. This is -- started here in Arizona as being funded by effectively the hard work of lots of people to go out and get it and individuals for the most part who have had direct contact with the health care system as a patient.

Ted Simons:
Alright well doctor, thank you so much for joining us.

Eric Novak:
Thank you for having me.

Ted Simons:
Thank you for joining us. That is it for now. I am Ted Simons, and this is a gentleman by the name of Jim Jacoby. He is the director of the program on "Horizon" and has worked here at channel eight for ten years. This is his last directing of "Horizon." he is off to go to the Cronkite School. So we wish Jim all the best. Good luck. Thanks for leaving us in the lurch, you son of a gun, and that is it again for now. You have a great evening. Good luck, Jim.


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