NBR Transcripts- November 17, 2008
Monday, November 17, 2008Kansas City Federal Reserve Bank President Thomas Hoenig's Dismal View of the Economy
SUSIE GHARIB: A top Federal Reserve official said today the U.S. economy is deteriorating faster than expected and the recession is more severe than anticipated. In an exclusive interview with NIGHTLY BUSINESS REPORT, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City told me that even though Americans are benefiting from lower gasoline prices, they are not spending because of quote, uncertainty and fear. When I sat down with Hoenig earlier today, I asked him if he thought the Fed had done all that it can do to fix the economy.
THOMAS HOENIG, PRES., FED RESERVE BANK OF KANSAS CITY: I think the Fed had done about as much as it can do. Interest rates are extremely low. Excess reserves, that is we may put it out there but banks are not able to given their own capital constraints, able to lend as aggressively. So there is a lot of excess reserves building. So we've done about as much as we can. And I think we'll see what the fiscal side wants to do.
GHARIB: One thing that's troubling many people is the direction of the government's financial rescue plan. We're told now that the original plan isn't operational. And it doesn't look like there is a new one. And so what do you say to people who say that the Federal Reserve and the Treasury are confused and they don't have a plan?
HOENIG: It's not that there is no plan. It's the plan that is evolving. And unfortunately, that does cause some confusion out there. I don't know of any organizations in history in crisis that have had a very, here's what we will do and it's going to work out just fine. The question is, are you being as deliberate as you can and making decisions that are geared towards a solution. And can you justify those decisions as you move through them? Now in hindsight you are going to say I wish I had done this differently and I know that is a challenge right now, given the fact that the economy, even as you do this is slipping away, has slipped into a recession.
GHARIB: Now the Fed has lent money to a lot of banks and non-banks like AIG. Do you have any concerns about lending more money to non-banks?
HOENIG: Yes. I think the broader that you make the safety net and lend to non-banks, the greater you create a moral hazard issues around that and the more need you have to bring supervision into those institutions and the more you interfere with the natural incentives of the market. And so I do have concerns about that. And I'm very concerned, I think there should be a bright line between banking and commerce, so that you don't extend that to an ever-larger group of institutions that will bring forward and increased interference into the market. I think a very strong temptation towards credit allocation into the economy and those are all dangers that we want to avoid. We take them on, because you have this crisis and you want to keep it from spilling over into the larger economy, but you do so at some risk.
GHARIB: Do you think it would be OK to lend money to General Motors or to bail it out?
HOENIG: I personally think that's more of a fiscal -- that's something for the government to decide to do for a corporation that is not a financial institution involved in the payment system and the things that we are, I think created to support.
GHARIB: In this financial crisis, a lot has been done to bail out the banks. Have we done enough for the consumer? Have we done enough for the homeowner?
HOENIG: There have been important steps taken to help the consumer in terms of renegotiating the debt, to make it possible for those who can afford a home to have a home, a lot of care for the consumer, I think on everyone's mind or certainly the Federal Reserve's. I think many within the banking industry or financial industry and a lot of other groups trying to help the homeowner out. So there is a lot been done. Whether it's enough, it's never enough and whether you are the bank looking for help or the consumer looking for help.
GHARIB: The problems in the housing market triggered this whole financial crisis. How much longer before housing turns around and we begin to see the light at the end of the tunnel?
HOENIG: There is an enormous excess supply of housing. The last numbers I saw were 10 to 11 months inventory. It's going to take quite awhile, a year, 18 months, 24 months before you begin to work that inventory down. And it's only when the inventory is worked down, like any supply and demand situation that the housing market will begin to turn around. So I think we have a struggle ahead of us with housing markets still.
GHARIB: Are things getting worse in the economy faster than you expected?
HOENIG: I think the de-leveraging was more severe than people accepted. It was more severe than I had anticipated. And that did make it come a little bit more quickly than I thought it would, in fact, the fact that we have the recession now is a little bit more than what I had anticipated.
GHARIB: Mr. Hoenig, some people say that this could be the worst recession in the postwar period. Do you think it's going to be that bad?
HOENIG: It isn't yet and it doesn't have to be. And that will depend on how the psychology of the marketplace works. We have a new administration coming in what it does, I think the fact that we have a very accommodative policy is a factor offsetting the slowdown to some degree and then we know under discussion are some important fiscal stimulus discussions. And what those are and how they come out I think will also define just how serious this recession is or isn't going forward.
GHARIB: Mr. Hoenig, thank you very much for your time.
HOENIG: Thank you for having me. Enjoyed it.
How Best To Bailout The Auto Industry
SUSIE GHARIB: Late today, Senate Democrats proposed a $25 billion bailout of the U.S. auto industry, with the money coming from the government's financial rescue plan. Senate Republicans and the White House oppose the measure. While that may make passing an auto rescue package difficult in this lame duck term, industry insiders and experts agree any deal will come with string attached. We have two reports tonight on the potential auto maker bailout and what's at stake for Detroit. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: One surprise in the Senate auto rescue plan is just how far down the strings attached to the government bailout will reach. Congress is considering a ban on bonuses for any executive making more than $250,000. The auto industry fears that saying it could make it harder to attract and keep talent. Also on the list, a ban on golden parachutes for top executives and limits on compensation that could, quote, encourage excessive risk-taking. The government would also receive warrants which are like stock options in the auto companies. Though it's not clear he will have the votes to act before the new Congress meets in January, Senator Majority Leader Harry Reid is still hoping to move forward on an auto rescue package this week.
SEN. HARRY REID, MAJORITY LEADER: We're seeing a potential meltdown in the auto industry with consequences that could impact directly upon millions of American workers and cause further devastation to our economy.
GERSH: Skeptics want Congress to go further, firing the current big three management. Tennessee Congressman Jim Cooper says Detroit's leadership has been on a downward slide for decades.
REP. JIM COOPER, (D) TENNESSEE: I don't see any strategic vision. And what does the Bible say, where there is no vision, the people perish. We've got to have a plan so that these companies will be stronger five, 10 years from now, than they are today. And all Detroit has been doing for the last 40 years is decline in market share.
GERSH: An auto industry source points out two of the big three leaders are recent hires. And auto analyst John Wolkonowisz says it would be a bad idea for the government to push for a management change during a crisis.
JOHN WOLKONOWISZ, AUTO ANALYST, IHS GLOBAL INSIGHT: I think it's a bad. (INAUDIBLE) government would have pushed for management changes. I think that there's no substitute for experience in this business. This is an unusual business, the auto business. And it's not something that can be easily stepped into.
GERSH: Economist Dan Ikenson opposes any bailout, but if there is one, he says it would be better to rip up the current union contract.
DANIEL IKENSON, ASSOCIATE DIRECTOR, CATO INSTITUTE: The average compensation at GM for an hour of work is about $74 and at Toyota, about $47. And that reflects the fact that the big three are using unionized labor and the unions have extracted demands that are just implausible.
GERSH: The UAW argues it has already agreed to end traditional union benefits for new hires. The big three are also funding a union-run trust that will assume responsibility for retiree benefits. By 2010, some auto industry analysts say the big three could have an employee cost structure as competitive or more than a Toyota plant or Honda plants in the United States, that is, if the companies make it to 2010. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Diane Eastabrook. On a recent afternoon there were lots of new vehicles, but no customers at this Chevrolet dealership in suburban Chicago. Owner Bill Kay says high fuel prices slowed sales earlier this spring. But, the credit crunch slammed the brakes on them this fall. He fears emerging from this slump will be much harder than the others he's seen in his 30-year career.
BILL KAY, CHEVROLET DEALER: From a domestic dealer standpoint there is less market share for all three of the domestic manufacturers. And, coming out of this recession, I don't think that the sales volume will be the same as we could have expected in the last two downturns that I have been through.
EASTABROOK: Industry expert John Casesa says overcapacity, not high fuel prices or a credit crunch is at the heart of the dilemma now facing Detroit's auto companies.
JOHN CASESA, PRESIDENT, CASESA STRATEGIC ADVISORS: These three companies today are a size 38 in size 44 suits, too many factories, too many people, too many dealers and they need to be smaller and it's hard to succeed as a small auto company and that is why there has been consolidation globally.
EASTABROOK: GM, Ford and Chrysler have been losing market share to foreign competitors for the past 40 years. But despite that, the domestics still have more than twice as many dealerships as the imports. Paola Sapienza is a finance professor at Northwestern University's Kellogg School of Management. She agrees GM, Ford and Chrysler must resize, but questions whether a government bailout can do that.
PAOLA SAPIENZA, FINANCE PROFESSOR, NORTHWESTERN UNIVERSITY: We have a process, a procedure in the U.S. which is Chapter 11 which actually does this. It's not always perfect, but basically forces the management to come with a restructuring plan within a certain period of time and it's not entirely clear why the intervention of the government would be preferable to that.
EASTABROOK: Casesa thinks Congress could require restructuring in a bailout. He says in either a bankruptcy or bailout, thousands of jobs will be lost, but he's optimistic the industry will adjust.
CASESA: Not every dealership will go away and not every plant will go away. And there will be new companies and new jobs that will fill the gaps.
EASTABROOK: Chevy dealer Bill Kay believes there could be fewer U.S. auto companies and fewer dealers five years from now. His challenge will be remaining one of the survivors. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Downers Grove, Illinois.
Kevin McCormally's Tax Tips-IRA Required Minimum Distributions
SUSIE GHARIB: As we head toward the end of the year, now is the time to start preparing your 2008 taxes. Here to help all this week is our tax guru, Kevin McCormally. He's editorial director at Kiplinger's personal finance. Kevin kicks off our year-end tax tips with a controversial issue that's yet to be decided: IRA required minimum distributions.
KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: Usually, year-end tax tips focus on something you should do right away. Tonight I want to talk about something you should drag your feet on, taking the required minimum distribution from your IRA. Now, this applies only to people age 70 1/2 or older, but if you're too young to worry about it, listen up for your parents or grandparents sake. Once you reach age 70 1/2, the law demands that you take a minimum amount out of your IRA each year, so the IRS can tax it. This year's minimum is based on your age and the amount in the account at the end of 2007. And that's the problem. The market meltdown between then and now has devastated many IRAs. Forcing retirees to dip into shrinking accounts to satisfy the minimum payout rule would further cut into their nest eggs. Now, a lot of people, including the president-elect, think a better idea would be to temporarily suspend the minimum payout rule and let folks who don't need the money skip this year's distribution. The hope, of course, is that a market recovery will allow the balances to grow, which would be good for both retirees, who would have more money and the IRS, because it would ultimately have more money to tax. It is unclear whether the Treasury has the authority to suspend the required payout rule on its own or whether Congress needs to weigh in. In any event, we'll know very soon whether a change will be made. And that's why I advise cooling your heels if you're about to make a withdrawal. Sure, there's a nasty 50 percent penalty for failing to withdraw the required amount. But there's no penalty for waiting a few more weeks to see if the requirement will be waived. If not, you'll have time to make your withdrawal. And if it is, you'll benefit by leaving more money in your IRA to enjoy tax-free compounding. I'm Kevin McCormally.
GHARIB: And one final note about required minimum distributions. They are on our viewers' minds. Last week Harriet Johnson Brackey's "Money File" tackled the subject. She called plans to suspend the RMD a bad idea and that provoked a flood of email from people who disagreed. So, she clarified her thoughts in an entry on our blog. Log onto our web site to read it.
KANGAS: Also on our website, you can submit your tax questions to Kevin McCormally and learn more about the stories in tonight's broadcast. Go to NIGHTLY BUSINESS REPORT on pbs.org and look for the tax tips logo on our home page. You can also email us at nbr@pbs.org
"Riding out the Storm"-Old School
SUSIE GHARIB: And finally tonight, many of you are riding out the storm by watching what you spend when it comes to technology. Sarah from eastern Idaho wants to buy a windmill to generate electricity. In this current climate, she wants to pay cash for it, not credit. Another viewer saves electricity and half of her utility bill by giving the thermostat a break. She uses a fan during the summer and puts on a sweater now that it's cooler. And Lesley says she doesn't need the modern trappings of a cell phone or a fast Internet connection. She's happy paying $50 a month for a landline phone and a dial-up connection. And Paul, there are so many great suggestions. We hope the ideas keep coming in to our web site. And also, I just want to apologize for the music in the background. There is a party going on here at the New York Stock Exchange. We have some background music for a program tonight.
KANGAS: Who can party on a day like this in the market?
GHARIB: I agree. I agree.
Paul Kangas' Stocks in the News
PAUL KANGAS: Recession fears gave Wall Street a weak start as did news of big layoffs at Citigroup and uncertainty about an auto industry bailout. More about both of those in a moment. An hour into trading, the Dow posted a 225 point loss and the NASDAQ was off 30 points. With midday came a sharp rally that put the blue chips briefly higher, but traders sold aggressively into the strength late into the day and that resulted in a broadly lower close. The Dow Industrial Average ended off 223.73 points at 8273.58. The NASDAQ Composite down 34.80 at 1482.05, while the Standard & Poor's 500 Index lost 22.54 points at 850.75. Over in the bond market, the 10-year note rose 21/32 to par and 27/32, putting the yield at 3.65 percent.
Topping the active list was Citigroup (C) on 21.7 million shares, traded as high as $8.75 and you just heard all about those massive job cuts.
Bank of America (BAC) down $1.39. The company will exercise its option to boost its stake in China construction Bancorp to a total of 19 percent.
General Electric (GE) in there with a $0.09 gain.
JPMorgan Chase (JPM) down $1.70. Veteran banking analyst Dick Bovet (ph) of Ladenburg Thalman (ph) cut his price target on JPM from $45 to $37 a share.
ExxonMobil (XOM) down $0.30 on those lower oil prices in New York.
Wachovia (WB) down $0.22.
Wells Fargo (WFC) $0.90 drop there.
Sprint Nextel (S) down $0.12.
Pfizer (PFE) fell $0.36.
Tenth in volume Wal-Mart Stores (WMT) losing $0.90 a share.
Alcoa (AA) down $1.17. UBS financial downgraded it from "buy" to "neutral" as aluminum demand globally has eased.
Then we see Disney (DIS) dropping $1.34. Soleil securities downgraded it from "buy" to "hold" and believes the company's 2009 earnings forecast is too high.
General Motors (GM) a $0.17 gain, one of the few blue chips in the plus column. The company will sell its entire stake in Suzuki Motors in order to raise $230 million in cash.
McDonald's (MCD) down $0.52, even though UBS financial upgraded it from "neutral" to "buy," did the same thing with Yum Brands which rose $0.52 a share.
And then Lowes companies (LOW), $0.76 gain, traded as high as $20. Third quarter earnings were lower, $0.33, down from $0.43 a year ago, but a nickel above the Street estimate. Standard & Poor's upgraded the stock from "hold" to "buy." Raymond James financial repeated a "strong buy."
Target (TGT) down $1.35. Third quarter earnings dropped to $0.49 from $0.56 last year, but a penny better than the Street consensus. However, same store sales in the third quarter down 3.3 percent.
A good gainer here in CTS Corp (CTS), which is in the electronic parts business, traded as high as $6.43 after JPMorgan upgraded it from "under weight" to "neutral," noting there's been some recent insider buying in the stock.
Agilent Technologies (A) down $1.63. Friday the company posted higher earnings, $0.62 versus $0.46, but the company sees first quarter revenues flat to down 4 percent from a year ago. Needham securities downgraded it from "buy" to "hold" today, saying the stock is fairly valued.
Goldman Sachs (GS) down $4.24. The "Wall Street Journal" reports top executives, including the chief executive officer will forego 2008 bonuses.
Apple (AAPL) topped the NASDAQ, down $2.10.
Then Google (GOOG) losing $9.90.
Microsoft (MSFT) $0.74 drop there.
And then Baidu.com (BIDU) plunging $44.80 or 25 percent on reports that the company is selling search links to medical firms making unsubstantiated claims about their products. Several analysts however said that the stock over reacted.
Research in Motion (RIMM) with a gain of $2.24.
Intel (INTC) $0.32 loss.
$0.41 drop in Cisco Systems (CSCO).
Oracle (ORCL) down $0.49.
Qualcomm (QCOM) down $1.29.
And First Solar (FSLR) posted a loss of $1.23, tenth in volume.
United Therapeutics (UTHR) plunging $31.90. That's 35 percent of its value. That was after late stage trials of its oral pulmonary arterial hypertension drug showed that patients were unable to take the full dosage due to side effects.
And those are the stocks in the news tonight.
