Mark Zandi, Chief Economist at Moody's Economy,com & Hugh Johnson, Chairman of Johnson Illington Advisors Comment On The Financial Crisis
Monday, September 15, 2008
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SUSIE GHARIB: Joining us now with more analysis of Wall Street's financial crisis, Mark Zandi, chief economist at Moody's Economy,com; and Hugh Johnson, chairman of Johnson Illington Advisors. Hello, Hugh. Hello, Mark. Nice to have you on the program.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: Good evening.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Hi, Susie.
GHARIB: Hugh, let me begin with you. Should Americans be worried about the U.S. financial system, given everything that has happened in the past 48 hours?
JOHNSON: There's a lot of changes, obviously. And to some extent they should be a little bit on edge or a little bit concerned. But as far as the survivability of the American financial system, they shouldn't be worried about it. There are going to be plenty of investment banks and plenty of brokers and plenty of commercial banks that are going to survive this turmoil and be able to lend again for an economy that grows on money and credit. I wouldn't be worried. So, yes, on edge but not deeply, deeply worried.
GHARIB: Mark, what are the repercussions of these Wall Street developments on the broader economy? Are we looking at a deeper recession, maybe a depression?
ZANDI: Not a depression, Susie, no. I mean, this financial shock is on par with the 1929 stock market crash, but this is no Great Depression we're going to suffer through. But it is going to be a tough economy. Unemployment is going to rise. We're going to lose jobs. It's going to be difficult through early next year.
GHARIB: Mark, a lot of people are banking on a recovery in the housing sector. If home prices keep falling, what does that mean for the stability of the financial system?
ZANDI: Well, that's a problem. I mean, at the core of our financial system problems are those falling houses values and the mortgage losses that's creating for the financial institutions. So hopefully house prices do begin to stabilize by next spring. I think the consensus view is that prices will fall another 10 percent from where they are today by next spring. If that consensus is right, then I think we'll be in pretty good shape. If it's more severe than that, obviously the financial system is going to have more difficulty.
GHARIB: Hugh, many people, many experts said a year ago that around this time the credit crisis would be over. Where are we in this cycle of the credit crisis?
JOHNSON: Well, it's hard to say, except, Susie, I would -- as a guess, I would say it's not over. In other words, we've obviously seen the problems of the last weekend. But the question is, are there other financial institutions that are going to get into trouble, severe trouble? In my judgment you have to worry about AIG, you have to worry about Washington Mutual (WM), you have to worry about some of the larger banks. You certainly have to worry about other banks. So do I think this credit crisis is over? Do I think lending is going to start or restart anew? The answer is no. I don't think we're through with all of the bad news. We have more bad news. And that obviously is to some extent going to serve as a drag on financial stocks, a drag on the overall stock market, and certainly a drag on the economy. So I don't think we're finished yet.
GHARIB: Mark, let me ask you this. Is this crisis too big even for the Federal Reserve and the U.S. Treasury to control? And I know that sounds unthinkable, but a lot of unthinkable things have happened recently. Can they fix this problem?
ZANDI: Yes. I don't think this is going to overwhelm the U.S. government and the Federal Reserve. The Federal Reserve has lots of room to maneuver. The funds rate target is 2 percent. They can drop it a full percentage point. They have other ways of providing liquidity to the financial system. And there's a lot of ways to help the financial system. The Treasury has drawn the line, said they're not going to help. But you know, at the end of the day, as things do unravel and get measurably worse, the Treasury will use the triple-A credit of the United States of America, and it's still triple-A. And it will continue to be triple-A.
GHARIB: Mark, what does the Federal Reserve do tomorrow about interest rates and how much longer do we have to wait for the economy to get out of this mess?
ZANDI: Well, you know, I think it's a game time decision for the Fed. They meet tomorrow. The FOMC is going to make a decision. I do think if the AIG problem is resolved by 2:00 p.m. when they make their announcement, I actually think they'll ease interest rates because that will help support the market. If the AIG problem is not resolved and the markets are a little unsettled, I actually think they'll wait. I don't think they'll want to cut rates in the face of that.
GHARIB: All right. Real quickly, let me ask Hugh, what happens with the stock market tomorrow and when do we get out of this bear market? Real quickly.
JOHNSON: Well, I don't think it's going to take too long to get out of the bear market, but it really depends. We need very good or much better signals coming from the financial market, more positive, bullish signals. We need positive signals from the economy, leading indicators for the economy have to turn up and tell us the economy and earnings are going to recover. We don't have that yet. Hopefully we'll get that in short order, Susie, which I'm saying another three to six months.
GHARIB: All right. Hugh, Mark, thank you so much for your insights. We really appreciate you coming on the program tonight.
ZANDI: Thanks a lot.
JOHNSON: A pleasure.
GHARIB: We've been speaking with Mark Zandi, chief economist at Moody's Economy.com; and Hugh Johnson, chairman of Johnson Illington Advisors.
