In his weekly newsletter, which includes a summary of Moneytalk, David Korn summarized the salient points of the Mark Zandi interview. David Korn wrote the following [posted with permission]:
1. Mark said a big part of TARP was bailing out the banks which were bad actors and caused much of the problems leading to the financial crises leading to the recession. If the government had not stepped in, the stakeholders in the bank would have been wiped out. As it turned out, shareholders in the stock got hurt bad, but bondholders for the most part were made whole. Mark said people are mad that these "bad actors" got away with something; however, that being said, Mark said he isn't sure there was anyway around it because we were in a sense bailing out ourselves.
2. Mark said there are a lot of pieces to TARP besides the banks; there was Chrysler, GM, AIG, Bank of America, foreclosure litigation efforts are funded by TARP. Given it is so complex, it is tough to break down and get a handle on. People tend to focus on one issue.
3. Mark said he thinks the Treasury had no choice on TARP. The original intent by Paulson was to purchase bad assets which would have been a better way to have gone if they had been given a choice. The problem was the financial system was deteriorating so fast they had to be more aggressive and take equity stakes in banks. If they had not done that, the banking system would have collapsed and the recession we experienced would have been far worse.
4. Bob asked Mark to comment on Hank Paulson's book, "On the Brink." Mark said it simply reinforced how fast moving things were and how the policy makers had to make epic decisions in short order under extreme distress.
5. Bob asked Mark to comment on what is going on in Europe and the bailout of Greece and the ripple effect in Ireland, Portugal and Spain. The European Union seems to have come to the rescue of the euro. How do you see the impact on the global economy. Mark said the events in Europe related to the sovereign debt had an immediate and significant impact on the US stock market. If you think back to the spring when the European debt crises hit, our stock market fell about 15% and that came at an unfortunate period of the recovery. At that time, it seemed that businesses were starting to get more aggressive about rehiring and the overall mood of the country was picking up. The decline in the stock market undermined the confidence of businesses and high-end consumers who are very sensitive to their net worth. The recovery got side-tracked and probably cost us 6-9 months and so it will probably take us another quarter or two to get back to where we were in the spring before the crises.
6. Bob said Mark to comment on the fact that Congress has not yet addressed the tax code and the expiration of the tax cuts that go into effect January 1. Mark said it creates a lot of uncertainty and is one of the reasons that businesses are not aggressively expanding or hiring. You would think it would be prudent for politicians to make a decision, one way or another --- whether they adopt the President¹s agenda or the Republican's Congressional agenda ‹ at least there would be a resolution to the issue and get rid of the uncertainty. It was a mistake not to nail that down.
7. How do you see the employment report coming out Friday. Mark said he thinks the consensus of 77,000 private jobs is about right and we are going to lose just about as many in census worker jobs. The total employment will probably be around the flat line and unemployment will probably tick up to 9.7%. The key benchmark is we need about 150,000 new jobs just to keep unemployment rate flat. It seems very likely that unemployment is going to drift higher as we go into the end of the year. Mark said he thinks we will probably see close to double-digit unemployment through most of next year. On a positive note, the preconditions for better job growth are coming into play. Mid-size and large growth companies are becoming very profitable and getting their balance sheets in order. They have been able to reduce their debt and lock in low rates. They are in such good financial shape, the question no longer is can they hire, but will they hire. If we can get our tax code squared away, and not get side-swiped by another European-type debt crises issue, by mid-next year, or at least by this time next year, the unemployment rate will start to come down in a more definitive way.
8. Bob noted that the U-6 calculation, which includes people who have part time jobs who would like full time jobs and the people who have given up looking for work, shows that the rate is 16.7% -- an extremely high number. Mark said this is a big number and why so many people are upset and it will take a long time to get all of these people who are unemployed and underemployed back to work. Even under the best scenario, it will be 2014 but maybe as far out as 2016 before we get back to full employment as we had before the recession.
[Korn] EC: There are actually several categories of employment measure the Bureau of Labor Statistics. The number that always gets reported is the U-3 which is the total unemployed as a percent of the civilian labor force and is considered the official unemployment rate. U-6 is defined as the "total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers." Marginally attached workers are persons who currently are neither working nor looking for work but indicate that want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.
9. Where do you think we stand on housing? Mark said we are 5 years into the housing crash and we are probably pretty close to the bottom. There will be a few more quarters of price pressure on housing but we are getting closer to the end of this foreclosure nightmare. If we do get the better job markets and mortgage/interest rates remain low, that lays the foundation for a better housing market by this time next year.
10. What do you propose to fix the situation? Mark said he is surprised that some of the things he suggested have been implemented. We got financial regulatory reform and there were efforts to improve underwriting standards for mortgage lending
Caller: What is your opinion on interest rates going out a few years? Mark said interest rates will rise in a few years, but in the next 9-12 months rates will remain low as the Federal Reserve continues to be very aggressive with monetary policy and openly discussing resuming quantitative easing, i.e. purchasing Treasury bonds. But down the road, when the economy does gain traction, and it will by 2012-2013, at that point the Federal Reserve will have to tighten, drain some liquidity and there will be expectations that inflation will pick up. At that point, interest rates will rise. In a normal well functioning economy, the 10-year Treasury yield should be around 4.5%. If you are planning for the long run, that is the kind of interest rate he would be expecting.
Caller: What do you think about Meredith Whitney's report that some of the large states are going to need a bailout which will require a huge bailout by the Federal Government. Mark said hasn't read the report but he doesn't think there will be any major municipal bond defaults. State general obligations are high on politicians priority list and they will do whatever is necessary to pay on those bonds because if they default it would make them difficult to raise money in the future. Mark said he thinks once the economy does improve and it will, state tax revenues will increase substantially, particularly in the states that are distressed like Illinois, California, etc. where they are supported by high income taxes. The concern for municipal bond defaults will fade rapidly when the economy recovers. Bottom line, Mark thinks the odds of municipal bond defaults remains low. That doesn't mean there won't be small bonds financed with specific projects, but that is a big difference between a general obligation of a State.
Caller: How will the economy improve when taxes are going to go up so high? Mark said there are good things that are happening. Strong corporate profits, which we are seeing, is always something that precedes a recovery. Household debt/leverage, which in a fundamental way got us in this predicament, is improving rapidly. The amount of debt that households have to service is also moving in the right direction. With regard to taxes, we have a serious fiscal problem to address but we don't have to fix it in one year. We just have to come up with a credible plan to address it over a long period of time, like a decade, but it doesn¹t mean we can't grow despite that.
Caller: This caller can't see why Mark is positive about the growth of our economy. Mark said another driver of our recovery will be growth in our exports. If you are an American company that survived this period of time, you are cost-competitive or have a market niche. We do a lot of things right, such as aerospace, machine tools, sophisticated equipment, agricultural equipment, and in the future we are going to increase our exports that are services such as engineering, legal, financial, management consulting, etc. We just have to get through the next 6-9 months without getting side-swiped with another unexpected crises."
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