Horizon, Host: Ted Simons

August 24, 2009


Host: Ted Simons

Economists Roundtable


  • Economists are saying that the recession is over, yet bad economic news continues. Find out more about how the economy is doing in an economic roundtable with Professor of Economics Dennis Hoffman, W. P. Carey School of Business, ASU; Professor of Finance Herb Kaufman, W. P. Carey School of Business, ASU; and Senior Vice President Jim Rounds, Elliott D. Pollack & Company.
Guests:
  • Dennis Hoffman - Professor of Economics, W. P. Carey School of Business, ASU
  • Herb Kaufman, Professor of Finance, W. P. Carey School of Business, ASU
  • Jim Rounds, Senior Vice President, Elliott D. Pollack & Company.
Category: Business/Economy

View Transcript
Ted Simons:
Good evening, and welcome to "Horizon," I'm Ted Simons. For the first time in a while, economic forecasters are talking about growth. Some are predicting the G.D.P. will grow in the third and fourth quarters of this year. For many Arizonans, it still feels like we're in a recession. Here to talk more about the economy is Arizona State University economist Herb Kaufman, and also A.S.U. economist Dennis Hoffman. Joining us as well is Jim Rounds with Elliott D. Pollack and Company.

Ted Simons:
Ben Bernanke says we're on the verge of a recovery, is he right?

Herb Kaufman:
We will have some lags in Arizona. I do think we are on the verge of a recovery, but I do not think it'll be a wild recovery. It'll be a subdued recovery, but a lot of the indicators won't arrive simultaneously. For example, employment will continue to lag as it always does as we come out of a recession. And especially with the recovery that I expect, which will not be dramatic, it'll take some while to work that off. It'll still be the situation in Arizona.

Ted Simons:
The Fed chairman sees the glass half full. What do you see?

Dennis Hoffman:
It'll be the longest recession in history by September of this year, so I concur with my colleague in terms of the national recession will end. I share his view as well that we're not going to jump out of this. On the other hand, there's a lot of action, a lot of positive triggers in the economy. We still have billions and billions of stimulus that's yet to hit the economy. We have incredibly attractive interest rates, historical low interest rates. We still have many people with the capacity to make those purchases. There's bargains galore, seize the moment.

Ted Simons:
Sounds like a lot of encouraging talk. What say you?

Jim Rounds:
You have to be pessimistic, and that's my role. I'm concerned because of three main things. The G.D.P. is likely to turn positive in the third quarter this year. There's going to be a lot of activity toward stores that were depleted. We are also relating G.D.P. numbers to a very weak 2008. When you're comparing numbers to a weak year, its easy to post positive numbers. Aside from that, when we identify a recession, like employment, and we just talked about retail sales activity, other activities, I expect those to be weak for maybe even three more quarters. Technically, we might be identified as being out of a recession, it doesn't mean we are going to have a strong recovery. 2010 will be pretty bad by historical standards.

Ted Simons:
Pretty bad, but the Fed chairman says action helped stave off a crisis. Do you agree with that?

Jim Rounds:
I think it turned a possible tragedy into a very, very bad recession. It's hard to quantify it, but a lot of the activities were certainly needed at this point.

Ted Simons:
Dennis, government action: How much has that impacted where we are now?

Dennis Hoffman:
We've got two experiments now. We had 1929, and we did nothing. We found ourselves all the way into 1932 before much happened. This time we were on the precipice, I think, of dealing with that kind of an issue. There was that kind of a threat out there. There was clear action from Washington, clear action from the Fed, and I think it averted, as Jim said, I think it averted a major, major downturn.

Ted Simons:
What do you think?

Herb Kaufman:
I agree with what was said. In fact, Ben Bernanke made his reputation before he went to the Fed by his work -- and I think you and I have talked about this before -- by studying the policy mistakes done in concert with the Great Depression, and in fact were causal to the Great Depression. I think we learned from it. As you might remember, it's a while, but I thought at first he was a little slow to the table. Once he came to the table and recognized what needed to be done, I think the Fed acted aggressively, and I do think it kept us from falling into the abyss which fall of 2008 suggested might happen. I think it's been extraordinarily positive. Now, has it reversed or has it made the recovery likely to be extraordinarily strong? No, but I think it has guaranteed that we will have a recovery.

Ted Simons:
Addressing the crisis is one thing. What led to the crisis is another. We're getting reports that risky mortgages are getting repackaged again. First of all, are the reports true? And secondly, are we headed for the same thing all over again?

Herb Kaufman:
Deja vu, no. Although I've used that in commentary, as was noted in Associated Press, in fact I think not. Because what they are doing now -- and I am all in favor of this -- is they are trying to -- and trying is an operative word -- but they are trying to parse the mortgages and C.E.O.s to what are called prime mortgages and the most risky mortgages. They are breaking it apart as opposed to putting it into one security crisis. The people that are buying the risky portions of that are the risk-takers like private equity funds. And the other portion is a much more solid investment. Now, should we have another debacle, it is not impossible that the most solid investments like the high-rated mortgages will follow the same course again. I am not predicting another debacle and I am very encouraged by getting the market back into the game. The freezing of the capital markets is critical.

Ted Simons:
Dennis, are you seeing an unfreezing of credit? Is it starting to thaw a little bit? It's still difficult for businesses and consumers to get loans.

Dennis Hoffman:
I have to say candidly, Ted, I'm not seeing anything in revenue flows. They lag a bit in terms of our taxable retail flows. Even Cash for Clunkers that began in late July, we won't really see the impact of that until late this month or even into September. The transactions take place and the taxes are paid and they are finally booked. I think there are good signs out there. Anecdotally, you hear about traffic on the lots, not just Cash for Clunkers, or clunker trade-ins, having people walk the lots. It's changing what I've been calling a consumption-depression psychology. That's what we have been enduring in Arizona and the nation, and I think there are signs of change.

Ted Simons:
Back to the idea of repackaging risky mortgages and not-so-risky mortgages, it seems like no one could quite figure out what was really going on. Do we know what's going on or is Wall Street once again tiptoeing towards things that no one understands?

Jim Rounds:
Wall Street makes decisions not necessarily based on fact but a lot of emotion. The thing that I'm more worried about, the data that we track has not indicated banks are freeing up lending to businesses. We may not see that again for another two, three, four months. I'm really more worried about the consistent oversupply of housing we still have in Arizona, and it also exists nationwide. It's going to dampen our economic recovery. Back to the theme, we will still go into economic recovery phase at some point, but it's going to take a while. This isn't your grandfather's recovery, it's a little bit different.

Ted Simons:
There are reports that the worst is over as far as the housing market is concerned. Do you agree with that particular idea? I hear concern there is a bunch of foreclosure activity that is about to happen. They are holding off on getting foreclosure homes out there on the market. Conspiracy theory or really happening?

Jim Rounds:
No, it's really happening. It looks like we're getting back into balance with supply and demand but we're not. Investors are making up a third to half of the market. All of these activities are skewing the reality of the situation. We have hit bottom in terms of permits. Probably about the same number as we'll do next year in terms of single-family homes. And it'll probably escalate. It'll increase between 2010 and 2011 but we're still going to be about a quarter of where we were during the peak. There's a big difference between percent changes and absolute levels, and that's what we've got to start talking about.

Ted Simons:
Housing concerns in general, let's dovetail that into the job market. Unemployment at 9.2% no doubt rising in Arizona, and those that are underemployed, 15, 16, 17%. How does that affect housing and all aspects of the economy?

Dennis Hoffman:
It certainly is a huge drag. In terms of the overall level of employment, job loss numbers are far worse. We are among the worst of the nation and have been all spring. We lost 7.7% of jobs year on year, yet we're below the national average in terms of unemployment? That doesn't really jive. The better statistics, unemployment, I think you're right, is realistically in the teens in terms of any kind of basic comparisons here.

Herb Kaufman:
Let me just make a comment about something that Jim said. I don't disagree that we're still having difficulty in terms of provision of credit, and I agree with Jim as well on commercial lending still being very tight. What you tried to suggest with these is that there is one attempt now to reenergize the capital markets and to bring credit back into the mortgage game from the capital markets, so we're not totally reliant on banks explicitly, even though they may make the loans. Those funds will now be more available to them. They may be still more reluctant, but they will be more available. Similarly, you asked me before that the Fed had been under the TALF. What they did in terms of buying commercial paper, in terms of buying mortgages in the secondary market, in terms of buying agency securities, all provided a basis or a flow-back in terms of liquidity that wasn't there. I do think there are lags that we will have to wait for, and I think normality is still several quarters if not several years away. But I do think we're showing encouraging signs with regard to the provision of credit. Dennis's work really comes in terms of retail sales and so forth. But I think we have a credit environment that is getting better. It's not perfect, but getting better.

Ted Simons:
Dennis, you mentioned Cash for Clunkers, the idea of just stirring the pot and getting people to the lots and just looking around, should we have Cash for Fridges? Dishwashers? How does this go?

Dennis Hoffman:
I think you could draw a line of rationality when you're replacing old fuel inefficient automobiles, or destroying them actually, with more fuel efficient automobiles. If you can draw the same links with other major consumer durables, I suppose you could make the case. The key for the dealers wasn't the cash, it's the action on the lots. Their problem, they couldn't get anybody to walk on the lot.

Ted Simons:
Cash for Clunkers, these kinds of stimulus ideas. First of all, are they working? Should we do more of them if they are getting folks out to, say, a car lot?

Jim Rounds:
The programs are clearly working. It's going to be impacting sales and tax collections. We're still trying to get a handle on it. It's not a huge level, but a positive impact on the state economy. There will be dynamic benefits that we talked about before. I'm not a big fan of stimulus packages. I didn't mind Cash for Clunkers, cash for refrigerators and cash for hairdryers later and shoes, whatever it may be. I'm not a big fan of some of the stimulus programs of social programs. But a chunk did indeed go to infrastructure. If it's for transportation and things weld have spent money on anyways, it's a great way of getting through this trough.

Ted Simons:
We'll stop right there. Thanks for joining us, gentlemen.

What's on?
  About KAET Contact Support Legal Follow Us  
  About Eight
Mission/Impact
History
Site Map
Pressroom
Contact Us
Sign up for e-news
Pledge to Eight
Donate Monthly
Volunteer
Other ways to support
FCC Public Files
Privacy Policy
Facebook
Twitter
YouTube
Google+
Pinterest
 

Need help accessing? Contact disabilityaccess@asu.edu

Eight is a member-supported service of Arizona State University    Copyright Arizona Board of Regents