From the February 17, 2008 Sunday Times (London)
February 17, 2008
by Irwin Stelzer
“PLEASE, SIR, can I have some more,” whinge the Oliver Twists on Wall Street. More interest-rate cuts from the Federal Reserve Board, a bigger portion of stimulus from the president and Congress, more direct relief for the housing market, a bail-out of bond insurers – you name it, and investors and bankers want more of it. Except for write-downs: the increased recognition of losses that nervous auditors are demanding is the one thing the bankers don’t want any more of piled onto their plates.
This desire for more doesn’t result from any recent deprivation: year-end bonuses have been generous. Rather, it is that toilers in the financial-services sector see lean times ahead, with even more lay-offs, and the value of their homes, especially second homes, dropping. In Britain, even modestly paid bankers who happen to be nondoms (foreigners resident in the UK, but planning to go home eventually) face a new annual tax of £30,000 on each family member, in addition to the UK taxes they now pay.
Worse still, the American economy seems to be in dire shape. Desmond Lachman, an economist at the American Enterprise Institute, expects “a more painful recession and one of longer duration than the nine months characterising the average postwar recession”, rather than one that is “relatively mild by historical standards”, as Goldman Sachs’ economists are predicting. Treasury secretary Hank Paulson says “the worst is just beginning” in the sub-prime mortgage market. “More economists signal recession”, said a headline in The Wall Street Journal.
Nor will the rest of the world be unaffected by America’s woes. The Financial Stability Forum (a group of leading central bankers) expects “further shocks . . . a prolonged readjustment which could be difficult”. BNP Paribas economists warn of “ever worse news ahead”. And the governor of the Bank of England, Mervyn King, warns that all of Britain will experience a “genuine reduction in our standard of living”.
We know three things with reasonable certainty. The first is that credit is more difficult to come by, both for businesses and consumers. Not because interest rates are unattractive to borrowers, but because lenders have become pickier about whose IOUs they are prepared to accept. Second, we know that the housing sector is in disarray, with foreclosures and inventories of unsold units rising, and prices falling. Finally, we know that the American economy is, at minimum, slowing, and possibly already in recession. So the investment bankers’ demands for “more” must be met: Ben Bernanke must cut interest rates, and the president must meet the demands of Senate Democrats to enhance the $168 billion stimulus package he signed last week.
Really? Consider each of those certainties in turn. To those who moan about a credit crisis, Warren Buffett, the legendary sage of Omaha, has this to say: “Money is available and it’s really quite cheap.” What he calls the “dumb money” might have stopped chasing risky investments, but cash is readily available for sound deals and to sound creditors.
As for the housing market, it is not at all clear that the problems are as severe as they have been made to seem. Yes, builders have built more homes than the market can now absorb. But interest rates are falling, government agencies have gained permission to be more active in the mortgage markets, lenders have agreed to renegotiate terms with hard-pressed sub-prime borrowers, and many local markets are doing well.
Indeed, the widely reported house-price indexes that are producing so much talk of price collapse are so imperfect that Charles Calormiris, an economist at New York’s Columbia University, says that “housing prices may not be falling as much as some economists say they are”. One index shows a decline of 4.5% between the third quarters of 2006 and 2007, while a similarly constructed and equally well-regarded index shows a rise of 1.8% in house prices across the nation in that period.
Finally, we come to the question of the condition of the American economy. Most economists and Wall Street analysts differ only slightly on this, with some saying a recession is already under way, and the others saying we have hit a period of zero growth. All, or almost all, seem to agree that hard times are here, that the overly indebted consumer has taken or will soon take to the sidelines, that businesses will, as a consequence, begin laying off staff and cutting spending.
But that’s not how the executives of big companies see things. Jurgen Hambrecht is chief executive of BASF, a giant manufacturer with sales of more than €50 billion (£37 billion), garnered by selling hundreds of thousands of products to a wide variety of industries. He told the press that he does not foresee an American recession, and that “I am glad to say that business in general does not show the panicking approach of the financial industry . . . I am sleeping well at night.”
Hambrecht is not alone. Executives at General Electric, Honeywell, Procter & Gamble, Kraft Foods and the ultimate owner of this paper, News Corp, are among the many who claim their businesses have never been better, that sales and profits are up, and that bookings are strong. The more cautious add “so far”.
If the economy is indeed stronger than high oil prices, housing woes, and slower job growth would lead us to believe, and if inflation is the looming threat that it increasingly seems to be, perhaps policymakers would do well to turn a deaf ear to the bankers who clamour for “more”. Better to stand pat until recent rate cuts and the new stimulus package take effect later this year.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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