Economy May Hold Hopeful Signals for New Year
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RAY SUAREZ: 2009 began with fears of a second Great Depression, companies on the brink of collapse, and unprecedented government interventions. Home foreclosures eventually topped four million. Unemployment soared, too. As of November, 10 percent of Americans were jobless. In March, the stock market slumped to a 12-year low, only to rise 61 percent by the end of the year, amid hints of an economic recovery.
Here to take stock of it all are David Wessel, economics editor of The Wall Street Journal he’s author of the book “In Fed We Trust,” in which he tracked the Federal Reserve’s response to the financial crisis Jim Ellis, assistant managing editor of “Bloomberg BusinessWeek” magazine, and Kathy Kristof, a syndicated financial columnist and blogger for CBS MoneyWatch. She’s also author of the book “Investing 101.”
And, Kathy Kristof, given where we started the year, how do things look to you now?
KATHY KRISTOF, syndicated financial columnist: Well, things are looking better. Given how bad they were, that’s pretty easy to say. I actually think that it this will be a slow recovery year. It’s not we’re not out of the woods. We’re going to have more foreclosures. We’re going to have more job losses. But I think that, slowly but surely, we’re going to be climbing out of this over the course of the year.
RAY SUAREZ: Jim Ellis, we heard a lot of stern lectures about things that were overvalued. And I guess, by now, a lot of that excess value has been stripped out of houses, of stocks.
If we are in a recovery, is it on a more secure foundation than the old economy we had before last year?
JIM ELLIS, Bloomberg BusinessWeek: Well, it’s definitely on a more secure foundation, simply because asset values have dropped a lot. But that doesn’t mean that it’s going to necessarily be a vigorous recovery.
One of the things that a lot of people are getting confused about is that the stock market investor has sort of they have drunk the Kool-Aid. They think, OK, we know where things are headed. They have decided to go ahead and push up both the Dow and S&P by more than 60 percent since the March lows. That’s great.
The problem is that they are a leading indicator. What they are saying is, things are not just going to go to hell, the way we thought they were, so, therefore, we’re going to buy stocks for the long haul.
The problem is that they are probably six to eight months ahead of the economy. And so, for the next, you know, for most of the next year and really into 2011, we’re going to see a pretty feeble recovery. That is going to be a problem for the Obama administration, and it is going to be a problem for a lot of investors, who, about mid-year, are going to wonder whether they got ahead of the game.
RAY SUAREZ: David Wessel, you agree with that, a leading indicator, but maybe way out ahead of where the economy really is?
DAVID WESSEL, The Wall Street Journal: I think that we will learn in the next year whether the stock market comes down to meet the economy or the economy goes up to meet the stock market.
Stocks do tend to rise before an economy recovers. They are reflecting a pretty good rebound on among the banks and among some industrial companies. They’re able to sell more stuff now. And they have cut costs and laid off a lot of workers, so that is all going to the bottom line.
A big question, it seems to me, is whether the economy can achieve what Ben Bernanke, the Fed chairman, calls escape velocity, when the government begins to withdraw some of its extraordinary support. And that is the big question for 2010.
RAY SUAREZ: You have spent recent months trying to figure out whether all the interventions of the government into the sort of girders and joists, the structure of the financial system, worked. How does it look now?
DAVID WESSEL: Well, it looks like they made a lot of mistakes, but I think they got the big things basically right.
The financial system is far stronger today than it was a year ago. The big banks have paid back a lot of the money that the share the taxpayers gave them. Some of them were even able to raise over $100 billion dollars of private capital, which is a good thing.
The usual measures that you look at to see whether investors and lenders are trusting each other in the markets have returned close to normal. So, the financial system as a whole is in better shape, with the exception of a few big ones, like GMAC, the car loan outfit, which is still sucking federal capital in, and, of course, many small and midsized banks that have huge portfolios of commercial real estate.
RAY SUAREZ: Kathy Kristof, does that healthier financial sector trickle down to the kitchen table economics, the back-of-the-envelope figuring that people are doing as they balance their checkbook and pay their bills?
KATHY KRISTOF: It absolutely does.
But the individual consumer has been saving themselves over the course of the last year. And what you have seen in this miserable economy is people getting their financial acts together, people paying down their debts, building up reserves, emergency funds, slowing down on spending, because they had to.
And why we’re beginning to see the signs of recovery now is because the consumer sector is in better shape, is in dramatically better shape, than they were a year ago.
RAY SUAREZ: Does that mean, Jim Ellis, that the recovery, by definition, has to be slow, because people are going to be more cautious about the way they spend money, and not going to spend money they don’t have?
JIM ELLIS: Well, I think it’s going to have to be slow, simply because I’m not certain that it is really as strong as it appears on the surface.
We have got to recognize that one reason the economy is in the passable shape that it is in now is because it has had a huge amount of stimulus added to it by, you know, central banks here in the U.S. and around the world.
I mean, the Fed and other government agencies alone have pumped in about $8.2 billion excuse me $8.2 trillion in either amounts that they have spent, loaned or guaranteed to sort of resuscitate the financial system. That is unprecedented. That is an amazing amount of stimulus that, unfortunately, is going to have to start coming out.
And that means that, over the next year or two, Ben Bernanke and his cohorts at the European Central Bank, at the Bank of England, are going to have to look for ways to pull some of that liquidity out of the system. The danger is that, if you pull it out too quickly, you risk stopping the recovery that we’re seeing now, the recovery that isn’t that strong, but it is a recovery.
And, if you actually take too long to get it out, however, it leaves a lot of money sloshing around the system, easy money that is going to fuel other bubbles. Next time, it won’t be housing. Who knows what it will be, but there will be a bubble that they are going to have to quash.
So, they are going to have to spend the next year looking for a way to do some very delicate surgery to remove that, without actually hurting the economy further.
RAY SUAREZ: Let’s talk a little bit about how that happens, because, during this year, we have learned to listen to conversations about the Federal Reserve creating liquidity or withdrawing liquidity.
What’s the mechanism. If you are going to take out the trillion dollars that you put in, how do you do that? Do you go to the bank and ask for it back?
DAVID WESSEL: Well, yes, in a sense. The Fed has lots of tools it can use to take money out of the system. It can sell securities to banks. The banks then give the cash to the Fed, and it not available for lending.
And they’re coming up with some newfangled securities, as they experiment with getting ready for what they call the exit strategy. But I really think that’s a ways off. I don’t expect the Fed to be draining credit or raising interest rates until the end of the year at the soonest, because the economy is, as Jim said, still pretty fragile.
It would have to be surprisingly strong, stronger than anticipated, before the Fed started to turn the spigot and drain some of the money out.
RAY SUAREZ: Kathy Kristof, do you worried about worry about the exposure of, not only the Federal Reserve, but the federal government, to all this stimulus and intervention?
KATHY KRISTOF: Yes, I think that’s our next big worry.
The cause of the last recession was that the consumer sector got overindebted, and it could not actually pay on all the bills that they have built up over time. And, you know, we have worked through the past year of people getting in a better spot.
But now the government is borrowing at an unsustainable rate. And unless something happens, like we raise taxes or we inflate, it’s going to be very difficult for all that debt to be paid back. And I think that is a true danger.
I mean, if you raise taxes, you can’t raise taxes just on wealthy people, because there aren’t enough of them. And you need a lot of extra money. If you inflate, the pain is felt by absolutely every human being. And it’s felt more dramatically by the people who can least afford it.
RAY SUAREZ: So, how do you painlessly remove that exposure, all that money that has been extended as credit?
KATHY KRISTOF: You can’t do it painlessly. That’s the problem.
I mean, you we got into a big problem, and we tried to buy our way out of it. And there will be pain, one way or another. I am actually hoping, as you know, as much as this will hurt me personally, I’m actually hoping that tax rates will rise a bit, because, otherwise, I think the prospect of inflation is pretty dramatic and pretty devastating.
RAY SUAREZ: Jim Ellis, are you worried about inflation?
JIM ELLIS: I’m worried about inflation, though I still think that that is a little way off, I mean, but it has to be an issue, simply because there is so much, you know, sort of public debt out there.
If you look at it now, I mean, I guess U.S. public debt is up at about $7.7 trillion. Now, that’s a big number. And to put it in perspective, a year ago, it was only about $6.5 trillion. And, more importantly, two years ago, I mean, the average public debt outstanding that’s Treasury debt that’s held in public hands was only about $5 trillion.
So, in other words, that public debt has gone up by about 50 percent in just two years. What we have done is, we have sort of made a giant commitment for ourselves and, unfortunately, for our children and grandchildren, that we’re going to have to soak up.
So, anybody who says that tax rates don’t have to go up is smoking something that you probably can’t do in most states. I mean, something is going to have to happen. You are going to have to raise taxes. You are also going to have to show some sort of fiscal discipline, which actually is more difficult than raising taxes.
And we’re going to have to hope that, you know, Mr. Bernanke and company and his counterparts at other central banks are going to be as smart and as aggressive as they have been over the last couple years in actually stopping the crisis.
RAY SUAREZ: So, David Wessel, just as families have been repairing their balance sheets, governments have to do the same?
DAVID WESSEL: Oh, yes, absolutely.
This you can worry too much about this at a time like this. It is a little bit like complaining that the fire department used too much water to put out the fire in your house. But, as we go as the economy gets better, some big decisions are going to have to be made in Washington.
I don’t think it’s all going to be tax increases. Some of it is going to be changes in spending, raising the retirement age or other things, in order to avoid a situation where either we layer so much debt on our children that they live less well than we do, or our creditors, many of them foreign, the Chinese, for instance, grow tired of lending us money, and the dollar falls and interest rates rise here.
RAY SUAREZ: David Wessel, Jim Ellis, Kathy Kristof, thank you, all. And happy new year.
DAVID WESSEL: Thank you. You’re welcome.
KATHY KRISTOF: Happy new year.
JIM ELLIS: Thank you.