Hugh Johnson of Johnson Illington & Mark Zandi of Moody's Economy.com Analyze The Bailout Rejection & Stock Slide
Monday, September 29, 2008
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SUSIE GHARIB: Joining us now with more analysis: Hugh Johnson, chairman of Johnson Illington; and Mark Zandi, chief economist at Moody's Economy.com. Hi, guys.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: Hi.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Hi.
GHARIB: Mark, let me begin with you. What happens next for the economy?
ZANDI: Well, I think this is a body blow to the economy. I think if Congress doesn't pass legislation by the end of the week, and legislation that's pretty close to what they rejected today, I think we'll be in a very severe recession very quickly. If they -- even if they pass legislation, it's going to be a tough economy, but without it, I think credit markets will remain frozen, businesses will have difficulty making payroll in two, three, four weeks, and we'll be in a deep recession.
GHARIB: Hugh, what happens next for the markets tomorrow, overseas, and on Wall Street?
JOHNSON: Well, first of all, overnight overseas I think they are going to probably follow the lead from Wall Street and they will be down sharply. It's hard for me to believe, Susie, that with a 770-point decline in the stock market today that we're not going to get some recovery in the stock market tomorrow. So I wouldn't be surprised to see a recovery particularly because, you know, we're starting to think about, well, look, they didn't pass this package, but they haven't given up, they are likely to pass a package. Obviously the Senate has got to vote on it on Wednesday. And maybe by Thursday they'll pass a package. So I think just with that hope or expectation, maybe we get a little bit of a bounce-back. But Mark is right. Look, there is not going to be a lot of bounce-back so long as the outlook for the economy is so dark as a result of their failure to respond to clear signals.
GHARIB: Mark, let's get more from you. You are saying that the economy is going to be in trouble or recession. Treasury Secretary Paulson said late this afternoon that our tool kit is substantial but insufficient. If Congress doesn't come through, what else can Treasury and the Fed do to solve this problem?
ZANDI: Well, they can do what they've been doing. In the case of the Treasury, when you do have failures -- financial failures, they can take it one at a time, decide whether the institution is too big to fail. And if it is too big, come in and provide help. Or it could turn it over to the FDIC. If you are in the Federal Reserve, you can do more of what you have been doing, and that is providing as much liquidity to the financial system as you possibly can. So those are the things they have been doing. Obviously it's not working. I mean, they've been doing that now for the better part of a year. And over the past four weeks, they've been doing a lot of it. And it's not enough. And it's very clear that they do, in fact, need more tools in that tool kit. And this legislation that was rejected today, I think, would have been -- would be very effective in going to the heart of the problems that we face. And it needs to be passed.
GHARIB: Hugh, we know that liquidity is the lifeblood of the economy. What does all of this mean on the corporate side? Tomorrow the third quarter ends. We're going to start getting earnings reports from corporate America. What can we expect to hear from companies and big companies and small companies?
JOHNSON: You know, we -- well, the first thing they're going to say is their earnings were terrible in the third quarter. The second thing they're going to say, which gets to what Mark was -- is worried about and was talking about is that they are not getting -- it's not easy to raise money in the short-term credit markets in order to pay their bills to meet payrolls. And because of that then the outlook for the economy is pretty dark. So they are going to say those two things : earnings are lousy and prospects for earnings under current conditions are not good, which is essentially saying, look, the Congress has got to get their act together and has got to pass either this bill or something that's pretty close to it, and do it pretty soon.
ZANDI: Susie, can I say, you know.
GHARIB: Hugh, let me ask you -- oh, go ahead.
ZANDI: I was just going say, you know, I have a lot of clients, big clients, clients with names that you would know. And I'm getting calls from them telling me that they're having trouble getting working capital. That is the cash they need to make payroll to go out and finance the inventories, to finance exports. And it's not in just one industry, it's in lots of different industries. And it's not just small companies. It's big -- it's very large companies. So this highlights the stress.
GHARIB: And, Mark, and we've been hearing about this split between Wall Street and Main Street. What do you think the American people need to hear to know that all of this does impact them? I mean, bottom line, what would you say simply?
ZANDI: Bottom line, credit is the mother's milk of economic activity. Without it the economy doesn't function and that credit comes from Wall Street and the financial system more broadly. And if Wall Street is not working, neither will Main Street. And it's not next year, it's really next month.
GHARIB: All right. Real quickly, Hugh, we just have a few seconds. What should people do with their portfolios tomorrow and this week?
JOHNSON: You know, well, unfortunately, I have been saying, sit tight, hold tight and sit tight, and if you can't sleep at night, maybe you take a little bit off the board. In other words, you reduce your exposure to stocks some. Make sure on the fixed income side you stick with quality or stick with Treasuries. So the point is, is play it very safe and wait for the markets -- and important economic numbers, but wait for the markets to give you the all clear sign. And clearly they haven't done that yet.
GHARIB: All right. We hope we get that all clear sign soon. Thank you so much, gentleman. Appreciate you coming on the program.
ZANDI: Thank you.
JOHNSON: You bet.
GHARIB: My guests tonight: Hugh Johnson chairman of Johnson Illington; and Mark Zandi, chief economist at Moody's Economy.com.
