Air
date: October 1, 2004
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Rubin interview
GEOFF COLVIN: He was Treasury Secretary during what may have been the best economic times in America's history. Now Robert Rubin is advising John Kerry at a moment when the economy is a huge issue, yet the presidential candidates are focusing mainly on Iraq.
Are they wise to do so? Are they unwilling to tell us the truth about our economy's future? And what does a man who has spent his career in the markets think the markets will do next?
Robert Rubin, now part of the Office of the Chairman at Citigroup, joins us from New York. Mr. Secretary, the war in Iraq has become the central issue in the campaign, certainly a huge issue in the first debate. The conventional view on the war back when it was sort of about to begin was that the markets couldn't go anyplace until the issue was resolved. There's still no feeling that it's resolved. Do you believe that somehow we have to come to some kind of closure on it before the markets can go further?
ROBERT RUBIN: Well, I don't know what markets are going to do, Geoff, and neither does anybody else, but I think that dealing with the issues, the new post cold war geopolitical issues, Iraq, nuclear proliferation, North Korea, and whole host of others, instability in countries that are very important to us, is going to be with us for a long, long time. And I think we can have favorable economic conditions and I think markets basically follow the economy.
But amongst many other things, I think it is going to require that we handle these in a very thoughtful and effective and sound fashion, and as you know a lot of people have raised a lot of questions with respect to how they're being handled at the present time.
COLVIN: A few weeks ago, President Clinton called John Kerry from his hospital bed and advised him to start attacking George Bush on the economy, and Kerry did so for awhile and he didn't seem to go anywhere. In fact, he declined in the polls. Why do you think that was?
RUBIN: Well, leave the politics aside, because I'm not a political analyst. But I do think, and I think it's one of the unfortunate things about this election, Geoff, I do think that we have enormous opportunities for the years and decades ahead. We have a dynamic culture. We have a willingness to take risk. We have flexible labor markets. We have tremendous comparative advantages in the global economy.
But we also face complex and hugely consequential challenges. For example, the enormous fiscal deficits that are now projected over the next decade and unfortunately way beyond that, our large current account deficits, the geopolitical issues we were just discussing, tremendous competitive challenges from India and from China, which I think can be met, but only if we have a world class public education system, basic research, and the like.
All of that, in my judgment, is at stake in this election. It should be central to the discussions and the debate, but unfortunately I think it's receiving far less focus than it should receive, and I at least think we're on the wrong track in virtually every respect I've just mentioned, energy policy, health care policy, and I think we need dramatic change of policy in all these respects. But it is not so far at least central enough, at least as central as I think it ought to be, in this election.
COLVIN: Well, let's talk about some of those things. The first one you mentioned was the federal deficit. It has gone of course from a big budget surplus 3 ½ years ago to a huge record-setting deficit today. Both candidates have said they will reduce the deficit by half in four years. Why do you believe John Kerry and don't believe George Bush?
RUBIN: Very simply, Geoff, the fundamental fiscal prospect facing this country now is a projected deficit for the next 10 years, according to Goldman Sachs and virtually all of their independent analysts, of between $5 (trillion) and $5.5 trillion in contrast to what had been a projected surplus of about $5.6 trillion 3 ½ years ago. That's a deterioration of about $11 trillion. It's actually a deterioration of about $9 trillion if you allow for some methodological issues. The 2001 and 2003 tax cuts are absolutely at the heart of that fiscal problem.
The Congressional Budget Office projects that they'll cost about $4 trillion, or about 75 percent of the projected 10-year deficit over the next 10 years. We could have had all the stimulus we wanted, and I think it was appropriate to have tax cut stimulus in 2001, with temporary tax cuts that would have been more jobs effective, far less costly per dollar of stimulus, and would have created virtually none, well, it would have created none actually of these long-term fiscal problems that we now have.
That's the record of this administration. It is one of putting in place a set of tax cuts that are at the heart of what is now a very serious threat to our economic health and only a small portion of which fell into this period for stimulus, and in contrast you have John Kerry, who in his 18 years in the Senate has supported virtually every fiscal responsibility and deficit reduction measure, including crossing party lines in 1985 to support very important changes in congressional rules. And he's put forth a program which pays for itself, and in addition is proposing that we reinstate the budget rules that were so important in the 1990s, but have since lapsed. The administration, on the other hand, is opposed to reinstating the budget rules.
COLVIN: But if the tax cuts are so instrumental or so central to the huge deficits we now face, Senator Kerry has proposed not reversing the tax cuts, most of them, but has said that he will cut taxes for 98 percent of American citizens. Is this consistent with your advice to him?
RUBIN: What he has basically said, as you said, Geoff, is that he would rescind the tax cuts for people earning over $200,000, and he would use that for his education and his health care. And he has said that he is in favor of having middle class tax cuts, because middle income people have had a very difficult time over the last 3 ½ years. They've had declining, inflation-adjusted incomes, actually over the last 30 years.
Except for the extraordinary growth period in the 1990s, middle income families have not done well. And he does favor having middle class tax cuts. But basically whoever is elected is going to have to face a very difficult fiscal situation and is going to have to provide leadership to both houses of Congress and the leaders of both houses to make some very difficult political judgments. I think there's no question that John Kerry has evidenced that he understands these issues and is committed to them, and I think the administration's policy speaks for themselves.
COLVIN: Back at the beginning of the Clinton administration, you and the team, the economic team, had to prioritize the big economic issues of the day and decide what you're going to go after first. Back then it was deficit reduction, welfare reform, and health care reform. If you had to prioritize the nation's big economic issues today, how would the list read?
RUBIN: I think in a broad brush sense, I would agree with where Senator Kerry is. I think we absolutely must face our long-term fiscal deficits. They are now at levels where they're a very serious threat to our economic well-being, and those levels are likely to increase, not decrease, as time goes on because of the retirement of the baby boomer generation
I also think that we have to put in place a policy regime that favors the middle class. Middle income people basically have not done well over the last 30 years on an inflation-adjusted basis, except for that period of extraordinary growth in the '90s, and the last 3 ½ years they've had, most middle income families and lower income families have declining inflation-adjusted incomes. I think we need to put in place programs that help those who are dislocated by trade and other change, which is actually the change is predominately technological, not trade-driven. And we must have a far more effective focus on promoting our competitiveness in the global economy through a world class public education system, basic research, certain kinds of infrastructure, and very fundamentally a restoration of fiscal discipline, to have low interest rates to spur investment, and have the resources to fund what we need to do in the areas I've just mentioned.
COLVIN: In your book, which is called In an Uncertain World, has just been reissued in paperback, you say "Markets, which are expressions of collective behavior, tend to go to excess in both directions because human nature tends to go to excess." So in which direction are we tending to go to excess right now?
RUBIN: Well, the book actually is titled In an Uncertain World from Wall Street to Washington, and the reason it has that title is what the book tries to do is to describe experiences I had when I was on Wall Street and then while I was at the White House and then the Treasury, in order to discuss precisely the kinds of issues that you are now talking about. And there's a lot of discussion there not only about the experiences we had with respect to public policy, but also markets, as you say.
I don't really have a view, Geoff, as to the market in the shorter-term. In the longer-term, I think, as I said a few moments ago, and as I discuss quite a bit in the book, I think in the longer-term the markets are going to reflect what happens to our economy, and that gets you right back to the issues I was talking about before, and that is the whole range of issues that we need to face in order to realize what I think could be a very good potential for our economy. I might add that if we don't face the issues that we have before us, then I think we could have extended difficulty, and I think markets will reflect what happens to our economy, and therefore in effect what happens with respect to how well we face our challenges.
COLVIN: When you were Treasury Secretary, you traveled the world pretty extensively, and you travel the world pretty extensively now. What's your impression of America's standing in the world now compared with eight or 10 years ago?
RUBIN: Oh, there is no question, Geoff, as to what has happened. There's always going to be some resentment with respect to the United States, and it's a natural phenomenon when you have the economic and geopolitical position that we have. But what has happened is there is now enormous antagonism toward the United States, not only in the fringe circles, but in mainstream establishment, business, and political circles around the world. And it is I think very largely -- not I think, it is -- very largely a function of a view around the world that we have been highhanded with respect to a whole range of issues.
Iraq is one, but it's not solely Iraq. There's a whole range of issues. And that's very much against our economic interest and national security interest. It makes it harder for us to marshal support, to deal with the big international economic issues, as well as the big international security issues, and it can also affect American companies' ability to do business abroad over time. The International Herald Tribune had a very good op-ed a couple of months ago I guess it was about how the phenomenon I just described can over time erode the brand value of American companies abroad. That can be reversed, but it can only be reversed if we are committed to working with other countries around the world to partnership as opposed to being seen as being highhanded.
COLVIN: Is it something that will erode as other economies grow and the U.S. ceases to be the one giant economic hyper-power on the planet?
RUBIN: I guess the answer to that is over a long, long period of time...
COLVIN: We're talking decades, you're saying.
RUBIN: I think you're talking about, I think at least for the foreseeable future, let's say for the next 10 years, although I think Asia is likely to be highly dynamic and I think there's a great deal that's happening over there that's very promising, fundamentally we are still going to be the engine of growth for the global economy. And I think we're going to face this same problem of sort of a natural tendency to be somewhat resentful perhaps. But I think that we could easily return to fundamentally having very good relations with the rest of the world, but only if we change our mindset toward the rest of the world and recognize that yes, we have to lead, just as we did in the Mexican financial crisis and Asian financial crisis when I was there, but we have to work with the rest of the world.
COLVIN: What are two or three things that the U.S. could do in the near term that would make that difference?
RUBIN: I think we could reach out to the rest of the world in a far more consulted way with respect to the major geopolitical issues that we face, of which obviously Iraq is one, and I think we could just project a very different attitude toward the whole range of international issues that we deal with. I don't know if you remember when the, when Kim Dae-jung from South Korea came to the United States, he was a heroic figure, and yet we undercut him while he was in this country, and it was totally unnecessary. And there was a whole host of instances of that kind. And I think one thing we could do very quickly is to manifest to the rest of the world that we intend to deal with them as partners and respectfully and in a sense of true cooperation, and at the same time continue to provide, as I think we inevitably have to given our position, very strong leadership on economic and national security issues.
COLVIN: Bob Rubin, thank you very much for your views.
RUBIN: You're more than welcome. It was very good to be with you, Geoff.
Tradesports debate
COLVIN: Did the first presidential debate change the likely outcome of the election? Pollsters are frantically asking voters their opinions, but on this program we like to ask markets, including one we've taken you to before, Tradesports.com, where you state your opinion by putting real money on the line.
This may not look like a trading room, but online investors are buying and selling contracts tied to each candidate. If you own a Bush contract and he wins, it pays $100; if he loses, it pays nothing. Ditto with the Kerry contract. Before the debate, traders had Bush a huge favorite, pricing his contract at 66 vs. just 35 for Kerry. And the debate changed the odds hardly at all -- a tiny decrease for Bush and increase for Kerry.
Markets like these have proven extraordinarily accurate at predicting election outcomes, and they give you something most of the talking heads don't: a straight answer to the question, who do you think will win?
Housing roundtable
KAREN GIBBS: Home is where the heart is, or so the saying goes, and there's no place like it. But it's not so humble anymore. Home values have soared, unscathed by rising interest rates, undeterred despite the stock market's sell off of 2000 to 2003. Data released this week by the Census Bureau showed not only a 10 percent annual surge in new home sales, but an almost 11 percent annual gain in median home prices.
What's fueling this red-hot housing market? Is real estate a bubble about to burst? Is now the time to buy that vacation home? Where can you get the biggest bang for your retirement dollar? Well, Shawn Tully has written extensively on the real estate market for FORTUNE magazine. He joins us from New York. Jim Gillespie is CEO of Coldwell Banker Real Estate Corp., a residential real estate leader, which recently released its annual home price comparison report this week. Well, Jim, the housing sector is red-hot. What's fueling this rise?
JIM GILLESPIE: Well, I think the main thing that's fueling it, Karen, is interest rates. Interest rates have been at historic lows, 35, 40-year lows, and they continue to be very, very low, and that is the main driver. The economy, of course, has been fairly good the last few years, but interest rates are the main reason.
GIBBS: Well, interest rates are still, even though they've ticked up a little bit, historically low. But as they rise, won't they start affecting housing affordability, Jim?
GILLESPIE: Well, interest rates as they start to rise means that the economy is picking up, and it means there will be more jobs, and, in theory, higher paying jobs and more promotions out there. So, yes, rising interest rates is going to increase your principal and interest payments, but hopefully this will be offset as the economy picks up. But most recently with the three increases that the Fed has given the economy to kind of hold down inflation and, you know, put some brakes on what they're interpreting an increase in the economy, actually, mortgage rates, which are tied to the 10-year Treasury securities, have gone down. In fact, this last week, they've gone down on an average, according to Freddie Mac, from 5.75 to 5.70 (percent). So, the 10-year Treasury securities are really what we take a look at.
GIBBS: Well, I'm a bond babe from way back, and the traders that I've talked to say that long-term rates, like the 10-year note which mortgage rates are backed on, are really priced off of -- are not rising because those traders don't really believe that the economy is gaining traction, that it may slow down in 2005, which bodes poorly for job creation and personal income.
GILLESPIE: That's exactly right. And if that does happen, then the Fed is not going to continue to raise rates. In fact, several articles that I've read in the last couple of weeks seem to indicate, and I'm not an economist or a prognosticator, but seem to indicate that Greenspan is probably going to hold off on raising rates both times. And again, that means that the economy isn't improving and gaining speed like he said. And if that's the case, in the real estate industry we went either way, because if that is the case then long-term rates are going to remain very, very low, like they are right now, and fixed rates under 6 percent, and adjustable rates at 5 percent or below. So really we've kind of got the best of both worlds, regardless of which way the Fed goes.
GIBBS: Well, let's talk about the Coldwell Banker Home Price Comparison Index and the report that was released this week. Tell us about it.
GILLESPIE: Basically, what we do, Karen, is we try to take apples to apples comparison of a similar property in the 348 markets that we do the survey in, and this property that we're comparing is in a middle management, high transfer area, and the property is a 2,200 square foot home, four bedrooms, two-and-a-half baths, two car garage, and a family room, and this gives us apples to apples comparison for the consumer.
GIBBS: Well, let's talk about a 2,200 square foot home. What's the most expensive real estate market for that?
GILLESPIE: Well, this year, and actually for the second year in a row, it's on one of the coasts, and it's in La Jolla, California. That property in La Jolla will be somewhere around $1.7 million dollars.
GIBBS: Why not Minot, North Dakota?
GILLESPIE: Well, because Minot is a little bit more affordable. In fact, it is, this year, the most affordable market according to our index, and that same property in Minot would not cost $1.7 million, but would cost right around $130,000. A little bit of a difference there. Like a million-and-a-half difference.
GIBBS: Okay, we're going to go coast to coast and everywhere in between and take a look at home values, comparing apples to apples, looking at a 2200 square foot home, starting in San Francisco. That's worth $1.1 million. Seattle, the world's city, $341,000, and Las Vegas, what happens there stays there, but a home price, $263,000. And right in the heartland, St. Louis, $229,000.
GIBBS: Well, Shawn Tully, you follow this real estate market. Why the wide disparity in prices?
SHAWN TULLY: Well, the coastal markets have much more limited land and building, and they traditionally have had much, much higher prices. They also have stronger job creation. In many cases, much more higher paying jobs. In New York City, for example, Wall Street is famous for overpaying, or at least lavishly paying people.
The medical market in Boston is a big payer, etc, all the way up and down both coasts, the tech industry in California. And that's where the huge increases in prices have happened, and where we're at levels that we really have never seen before, and we've seen increases in real terms that we've never seen before, ratios to rents and personal incomes that are very unusual.
In the great Heartland of America, the market's much more normal. If you look at Dallas or Houston, or Cleveland, Pittsburgh, Rochester, New York the prices have actually dropped. You don't see the kinds of frothy markets that you see in the coastal markets, and that's where we've seen run-ups that are really historic.
GIBBS: Shawn, you mentioned ratios such as rental to price of homes, and personal income to price of homes. Are those kind of like P/E ratios? Or explain those terms to us.
TULLY: A lot of people don't rent their houses, although in certain markets there are very active single family home rental markets, like in California, Orange County, also Las Vegas is a very active single home rental market. But if you don't rent your house, you can gauge off of condos that are for rent, or apartments in the area. And if you take the rental comparisons, in a lot of areas those numbers have doubled.
You know, in a lot of cases the price of homes in certain markets have gone up by 100 percent, and rents have barely budged, they've gone up by 10 or 15 percent in the same five-year periods as if the price of a stock doubled and the earnings only went up by 10 or 15 percent, usually these ratios, these P/Es, come back to a more normal level, and that's what we've traditionally seen in the housing market.
GIBBS:Well, to get back to those normal, traditional levels, will we need to see a burst in the real estate market?
TULLY: Not necessarily. If the economy stays strong in these areas, which -- and we don't know whether it will or not -- then what you tend to see is a sideways market where prices level off and kind of stay the same in nominal terms. To say a half-a-million dollar house just doesn't go up, or down, and you have very, very few sales in those areas, and inflation kind of eats away at the value of the house, and five years later the market returns to normal again and prices start creeping up. We've seen this kind of sideway motions in a lot of the coastal markets in the early '90s, and also in the early '80s. But we've also have seen big decreases in prices, in nominal terms, in some of the frothy markets, historically; in Boston, in the early '90s, for example, in Texas in the late '80s with the oil bust. This happens at certain times. But if you don't have to move, and you have a good mortgage, a lot of people don't move.
You know, they hang on to their 30-year mortgage, it's got a rate that's below the prevailing rate. So they want to stay in their house and they don't want to sell, and you tend to get, again, these stubborn owners and these sideways motions and prices where actually nothing happens for a long time and the market kind of dries up.
GIBBS: How do the level of home prices affect retirees?
TULLY: Well, retirees often have paid off their mortgages and they have very high property taxes in a lot of these coastal cities, and the property taxes are going up very, very rapidly, much faster than inflation. So often retirees' big expense is property taxes.
In my story I profiled one gentleman who had moved to Las Vegas from the Chicago area, loved Las Vegas, and then he found that Phoenix was a lot cheaper than Las Vegas. He could buy a much bigger house, or a slightly bigger house at least, bank a lot of money from the appreciation in his house in Las Vegas and move to Phoenix. Retirees can move from a Las Vegas to a Phoenix or from a Miami or a Tampa to a Phoenix. And the temptation among a lot of these retirees is to leave and to move to another more, part of the interior of the country that may be less expensive, but then that puts their house on the market in a market like Miami or a market like Las Vegas or a market like Tampa, and that drives the inventories up.
GIBBS: Jim, are you seeing that same phenomenon?
GILLESPIE: Yes, absolutely. We're talking about folks that have built up a tremendous amount of equity in their real estate, and they have so many options available to them now that folks their age a generation ago did not have. And many, many of these people have no mortgages. Many have very, very small percentage mortgages, and they have a lot of options.
One of the options, like Shawn said, is to take the equity out, purchase a home in a much less expensive area, and then use that additional money as additional 401(k) money. A lot of folks are looking to have two retirement homes, one in the South and one close to where they've spent most of their life, and many times that's close to where their children are. So there's a lot more options out there for folks nearing retirement than there were years and years ago.
GIBBS: Jim Gillespie, Shawn Tully, thanks very much for joining us.
GILLESPIE: Thank you, Karen.
TULLY: Thanks, Karen.
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