September 15, 2009
Host: Ted Simons
- It appears the recession is finally over, although unemployment continues to rise. Arizona State University economist Herb Kaufman will discuss the economy.
- Herb Kaufman - Arizona State University Economist
Ted Simons: Federal Reserve Chairman Ben Bernanke says the recession is probably, technically, over. But he says the pain will continue because of rising unemployment. Bernanke says the economy now seems to be growing but that growth won't be enough to offset the rising unemployment rate. Also on the economic front, President Obama sent a warning to Wall Street not to repeat the mistakes that led to last year's economic meltdown. Here now to talk about the president's remarks is Herb Kaufman, an economist with the W.P. Carey School of Business at Arizona State University. What are they and are they viable?
Herb Kaufman: There are several different aspects to it. The one I consider the most important is to invest the fed with the ability to liquidate in an orderly fashion other than bank holding companies and banks, big financial institutions that are, have been judged to be too big to fail. We have had in essence, for example, Alfredo Gutierrez, as an example -- A.I.G., institutions deemed by the government too big to fail. The fed has no authority until this comes through to liquidate those institutions in an orderly fashion so as a result the only alternative you have is to bail out the organization. As you know from previous comments, I thought that that was appropriate at the time and it saved us from going over the abyss. But we can't repeat this. I think one of the things that I was impressed with the President's discussion of the fact that don't come back again. This is a one off and we're not going to do it again. That's the major thing. There are other elements of it, of course, consumer protection agency that intervenes for the consumer, registration and transparency for hedge funds and the like. But the major thing that has been controversial is, of course, the systemic risk.
Ted Simons: The idea, correct me if I am wrong, the idea would be if you are too big to fail you are too big period?
Herb Kaufman: Well, that could be. But we're not going to -- in fact, it's kind of ironic. As a result of this crisis and meltdown that we've had, and for which I think we have started our recovery. I agree with chairman Bernanke on that. From this crisis we actually have had consolidation continue. You know, Bank of America bought Merrill and J.P. Morgan chase merger and as a result of that we get bigger institutions. I'm not positive in our system without just onerous regulation that we can prevent financial institutions getting too big. But I think what the notion is, and I agree with it, is, when they get too big, if we have no alternative, if we can't liquidate them in an orderly fashion we have to bail them out and I think that the idea of having the fed take over as systemic regulator for all large financial institutions outside of the banks, in addition to banks, makes it possible to have an alternative. That's the idea.
Ted Simons: So you like the idea of the fed being first among equals?
Herb Kaufman: I actually do because I think the fed has the best expertise to manage the financial system from that vantage point in terms of failure. Now, I don't want the fed, and I don't think the fed wants, to be an organization that intervenes in any kind of day to day operation. But if we got in the situation, for example, A.I.G., perhaps we could have saved $185 billion. Given the crisis nature at the time maybe not but it does make some sense.
Ted Simons: But should the fed have not seen that crisis nature if not earlier than have a better grasp of it once it hit?
Herb Kaufman: Yes. I think that is a fair criticism that they should have seen what was developing in the financial markets. Whether they could have actually taken effective action earlier, I don't know. But they certainly could have raised the alarm in the markets would have disciplined a bit better. Once it hit, once it hit, they were slow as I have said on this program before to move. Once they did move, once Bernanke moved he moved aggressively and effectively and I believe as I told you before, that it was the aggressiveness of the fed in pumping liquidity into the system that kept us from going over the abyss. The other stuff that was important was tan general shall to that.
Ted Simons: The president wants to tighten rules regarding derivatives, wants to look at executive pay, limiting that as well. Again, that stuff viable?
Herb Kaufman: I don't think some of that's going -- the executive pay, we have a long tradition in this country of rewards for presumably performance. Unfortunately, in the financial meltdown we found there were rewards formal fees sans and that was not certainly something we would like to see. I still think it's going to be a very tough sell. I don't particularly agree with it. That that's an appropriate use of government power. As far as derivatives are concerned and hedge fund registration and so forth, I think the way the market system works is on information. You can't have an effective market if there's no information. We really didn't have it. I agree with that. From a transparency point of view. Not telling people what they can do. Just making it available to the public to make the decision in a market environment.
Ted Simons: Balancing act to keep from too much intrusion into the private market? Is that what you are saying?
Herb Kaufman: Precisely. But at the same time guaranteed transparency so the actors in the private market, in the private sector, will understand what the risks are and they can assess it accordingly. If A.I.G., for example, and it's fairly clear even the executives at A.I.G. did not know what their total exposure was. It was enormous with a very small amount of capital. To have -- if that had been, if the light of day had been shined on that perhaps three times earlier in terms of leverage, perhaps we could have avoided the debacle.
Ted Simons: The president also saying his vote was -- quote was Wall Street was ignoring the lessons of the crisis. Some critics are seeing the same clouds building on the horizon. Are we kind of inching our way back toward what we were trying to get away from?
Herb Kaufman: There certainly has been more, more risk being undertaken by decisions that are made now than would have been made six or eight months ago. There's no question about that. I'm not positive at this point in time whether that is dangerous, whether it retracts the path that we've trod before. I think it's not at this moment in time. If we don't have risk taking in this economy, and I'm not talking about specific instruments and so forth, we really don't have effective economic stimulus in financial market operations. I think it's, we're right to be cautious about how this proceeds, how this monitor, how this development proceeds. We're right to be cautious in terms of how we monitor this risk. And that really goes to my point about transparency so that we can't get too our same situation. I do think that many of the players, although they are always going to look for the best trade and the best buck, have been chastened a bit. And I think that will also be somewhat effective.
Ted Simons: Can't let you go without real quickly you referred to this earlier. Bernanke says the recession is maybe possibly perhaps over. Do you agree?
Herb Kaufman: I will be a little more definite than that. I think when the NBER, the makes the determination, we'll find that this quarter, third quarter was the turning point. However, I don't expect a very rapid recovery, especially in employment and that's unfortunate.
Ted Simons: Very good. Herb, thanks so much for joining us.
Herb Kaufman: Thank you. I enjoyed it.
- The number of foreclosures being sold in the Valley is still high. Arizona State University real estate professor Jay Butler talks about a new report on foreclosures.
Category: Mortgage Crisis
- Jay Butler - Professor of Real Estate at Arizona State University
Ted Simons: Good news and not so good news for the valley's housing market. More homes are being sold but way too many of those homes are foreclosures. A new ASU report shows the ratio of foreclosure sales to regular sales is about 10 times higher than historic levels. Here now to talk about those numbers is Jay Butler, an associate professor in real estate in the W.P. Carey School of Business at ASU. Thanks for joining us. Home sales up but foreclosure sales up, too. Right?
Jay Butler: Right. Basically about 67% of the recorded activity from last month dealt with foreclosures, either the lend are tearing a home which is about 30 some percent and half of what we call traditional, lenders selling home. The foreclosure market is the driving force of the local housing market.
Ted Simons: Compare and contrast what is normal if there is a normal to what's happening.
Jay Butler: Foreclosures were 35%. Historically they are three to 5%.
Ted Simons: What does that tell us?
Jay Butler: There's a lot of foreclosure activity going on out there. Loss of jobs, a big unknown for a lot of people, they are on furloughs. They lose income or are moved from part time to and can't make the payments so they lose their homes. There's still a lot of foreclosure activity going on.
Ted Simons: I have heard some suggest there will be even more in the future because the banks are holding back some properties.
Jay Butler: Well, you know, in a sense that we don't know. That doesn't really make sense because the bankers really found they can sell these properties pretty quickly and for many of them for cash. So there's no real reason sort of hold them back other than to be 2 million to the market that may depress the market a little bit. But you got some areas like Gilbert and Chandler where the mark down from what the lender took the home back for what they sell it is less than 10%.
Ted Simons: It sounds like we are seeing a lot of investor activity on these foreclosed homes.
Jay Butler: That's the driving force. A lot of people are buying. There are groups of people now, one thing we really didn't see in the prior hypermarket, investment clubs, investment networks where a group of people put together the group of money so they can go pay cash for the home so they don't have to worry about the finance.
Ted Simons: That doesn't sound all that healthy to me for the market.
Jay Butler: For the market is really isn't. I think we are beginning to see too many rental properties, too many flipped properties. I have talked to people who have been investors for a long time and for them the market is weak. The homes they have for rent have been on the market for longer than they normally are. People want cuts in rented. A lot of people are renting are in financial problems, too. And so they want the deal. I mean, so it's troublesome in many areas.
Ted Simons: Well, and not only that but it also leading up to this whole housing market fiasco was a lot of investor activity. Are those same clouds bubbling?
Jay Butler: To some degree, yes. At a much cheaper rate. Probably without the financing to it. That's why a lot of investors, especially foreign investors, Canadians and Asians are in these network clubs are paying cash. We're not building the mortgage problem we saw before. But I think in many areas we are simply getting too many of these.
Ted Simons: So could it be, usually it's a good sign if sales continue. But I guess summer months you kind of usually see a dropoff in sales. If you don't see a dropoff that may be a sign the foreclosure active TV has still got a long ways to go.
Jay Butler: It does. Usually we see the resale market in August. Investors probably won't care because they are not going to move their kids or other things. The name of the game is let's make a deal. The problem is investors pay for homes keep the prices low so people who really want to sell their home for good reasons can't because they can't get the price they needed.
Ted Simons: We mentioned a few areas. Talk to me about the areas where you have seen a lot of activity and the more stable areas.
Jay Butler: Well, you see a lot of foreclosure activity and sale foreclosed homes in Maryvale because you can buy homes for 40 or $50,000 or less. The most active market last month was Surprise. A lot of homes that had been foreclosed on were being sold in that area. More stable areas are whether and Chandler and parts of Tempe and east Mesa where although you had foreclosures the market down isn't as great because these are family-oriented, well located houses relative to transportation, schools, and other things. In parts of Scottsdale are also fairly sort of stable.
Ted Simons: But it seems as well from your numbers that some pricey areas are getting hit as well because these folks aren't eligible for loan modification programs.
Jay Butler: There are not eligible for loan modification programs. Also the secondary market for their mortgages, the nonperforming has been really devastated in the last year or so. What's happening a lot of these homes are dropping into, even the FHA range, 340, 350 so a lot of people are seeing that they can buy that really upgrade home and take advantage of the market.
Ted Simons: I know you talked about underwriting standards on the housing market, talked about the economy and jobs and these sorts of things. What do we look for away from hard numbers, sales from one point in time to another point in time? What else do we look for to see if the horizon is getting a little brighter?
Jay Butler: Basically seeing the traditional home being sold where the typical buyer and seller are active in the market where home price is beginning to move up and we don't have so many underwater. Underwriting is extremely tough right now. FICO score for basically mortgages lending is a 720 right now. If you are in the 600's you are looked at askance. You better be willing to put money down to buy these homes.
Ted Simons: All right. Very good. By the way, that's why you are seeing all those cash investors. Don't have to worry about it.
Jay Butler: Don't have to worry about it.
Ted Simons: Thanks, Jay, for joining us. We appreciate it.
Phoenix City Manager
- Phoenix’s long-time City Manager, Frank Fairbanks, is retiring. He will talk about his tenure and the cuts the city will soon have to make.
- Frank Fairbanks - Phoenix City Manager
Ted Simons: Phoenix manager, excuse me, Phoenix City Manager Frank Fairbanks will be retiring after 19 years of service as the city manager. The city faces another round of budget cuts. Here now is Phoenix City Manager Frank Fairbanks. Good to see you again. Thanks for joining us.
Frank Fairbanks: Good to be here.
Ted Simons: Let's talk about these budget cuts. I know earlier in the year you had biggest budget cuts and it's not over. Is it?
Frank Fairbanks: We cut about $270 million out of the general fund budget and that was about a 22% cut. And I think we were successful and, in fact, as of today, we still have a balanced budget. The problem is that as we look at the rest of this fiscal year, through July 1st, our revenues are still going down. And if they continue to go down the way they are now, we'll be about $80 million short by the end of this fiscal year.
Ted Simons: We are talking, what, 9, 10%?
Frank Fairbanks: That's about 7% of the general fund budget.
Ted Simons: But as far as projected sales tax money this year, that's a drop? Considerable drop?
Frank Fairbanks: We are seeing 13 and 14% declines over a year earlier. In some cases, a year earlier we're down 10% from the prior year. So in some cases over two years we're down as much as 23, 24%.
Ted Simons: OK. So how do you do it? How do you balance cutting budget, cutting all sorts of things without sacrificing the community?
Frank Fairbanks: And that's the challenge. I think last year we went out to the community and we asked the community's help and we tried to cut the things, the services we deliver that have the least impact on the community. Very tough. We are able to add some back to the community felt were wrong. And I think in the end, we're able to cut services that were important but not critical. This time around, we are doing just an enormous belt tightening. We are pinching every penny, turning off the lights, not driving the car. Copying on three sides of the same sheet of paper. And for now, we are hoping to save as much as we can. And, of course, if the economy will turn around, the problem could be solved. If we could see an economic turn around in the next three or four months, this deficit could dissolve.
Ted Simons: Early retirement, unpaid, the furlough situation as well. How much is that a factor in what you are trying to do?
Frank Fairbanks: Well, we have done, when we do layoffs, and we do cut backs, we have done early retirement. But early retirement is quite expensive. So we try to do that just in the context of layoffs. But we are working very closely with our unions and trying to find ways to cut our costs because the city is a service organization and almost everything we do is a service. And 70, 80% of our costs are to labor and benefits and costs related to the employees. If you think about the police department, the fire department, the parks department, these are people-intensive services. And you really need the people to deliver the service. We are looking every way we can to cut those costs. We are working hard with the unions and looking for ways like furlough that are voluntary furlough program that's been quite successful. We are looking for other ways to cut cost.
Ted Simons: You mention you really need the people. You really need morale for those people to be up as well. How do you address the morale of employees both before cuts and after?
Frank Fairbanks: I think that's been a very important part of what we do. And part of it is we try to involve employees at every stage of designing the cuts. We try to keep them informed so they know what's happened. The city is lucky because part of the City, the airport and the water department, are separate. They are enterprise departments. They are paid fully by their own revenues. No tax dollars go to them and they don't provide us any revenue. But the airport and the water utility have done OK. So they have been able to absorb some employees. We have actually had a situation in which we cut several hundred employees in the general fund. But we are able to put them to work in the water department, and the aviation department. Employees appreciate that. And we really do a good job of communicating so people know where they are, what to expect. I think morale is really quite high for as tough as the situation is but that's something we work at. We really value our employees because when you are in a business that's service Oriented, your employees right whole story. And they are good at it, too. It's crucial.
Ted Simons: Why are you retiring?
Frank Fairbanks: You know, I have done this for about 37 years. And it is exciting. The time comes for a change. And for a lot of reasons I think now is the time. We just have a great city manager's office now that's ready for the change. Actually, I thought about retiring five years ago. We had a great city manager's office then. I didn't retire and almost everybody in the office left and I had to train the new group. I think timing is right for me. And I want to leave while the organization is successful. And I think it's time for some new ideas and a fresh outlook.
Ted Simons: You have been obviously city manager in that position for 19, going on close to 20 years here. What has changed? The best things you have seen change about Phoenix and some of the things you worry about.
Frank Fairbanks: You know, I think a lot of good changes have happened. And the change that I point to that is most important for all of us is when I started with the city and as I became city manager, our focus was on growing as fast as we could. So how do you extend streets and roads and water lines? How do you get services out so they would grow and grow and grow. Over the period of time I've been the city manager and I don't deserve the credit. It really belongs to mayor and the council and the community. I think we have moved to a focus of making the city a better place to live. So that the focus has gone from quantity -- how can we grow as fast as possible -- to how can we make this a better place. We focus tremendously on some of the lower income and blight areas of the city. There's been huge improvements in south Phoenix, sunny slope. We are starting to make employee improvements on the west side. We still have a lot to do and there's a lot of improvements that are needed. But I think the direction is great. If you look at light rail, ASU downtown there's a lot going on in Phoenix. And I think there's some real excitement and energy and we are starting to have a big city downtown.
Ted Simons: What's the most important thing you could tell your successor?
Frank Fairbanks: One thing? Well, that's tough. I would really settle on two. First, the key to Phoenix's success is partnerships. Partnerships between the city and the community, the city and business, the city and labor. But also in the end, it's you have to have this relationship and you have to have motivated, caring, quality employees if you are going to make a difference in the community. So I would say partnerships with everyone you can find, and then taking care of employees, giving the quality work force and letting them know that they are important to the services the city delivers.
Ted Simons: Are you going to miss it?
Frank Fairbanks: I am. I love this place. I was born in Phoenix. I'll spend the rest of my life here. I love it.
Ted Simons: I was going to say you might be around in case people need some guidance, you might be there for them or are you going to be on a golf course?
Frank Fairbanks: Consulting it will be free consulting.
Ted Simons: Yeah. Real quickly got about a minute left, I know you were in the Peace Corps. Have you taken much of that experience into your professional life?
Frank Fairbanks: You know, I really ended up, my education has been in finance and management and business. When I was in the peace corps I ended up in a project in which the president of the country was focused on improving the quality of city government as a way to benefit his country. And I went to work in that and I saw firsthand how this local government gets better people have better lives, they're healthier, they're happier. So it shape might whole life, my whole career. If I hadn't been there I don't think I would have been in this business so to speak, I don't think I would have gone into government at all. And it's also taught me one of the things they stress in the peace corps is value other people whether you agree with them, whether they're the same with you or not, because they're people. They're valuable and respect their point of view.
Ted Simons: Very good. It's a pleasure having you on the program. Thank you so much.
Frank Fairbanks: Thank you.