HH: Well, another terrible day on the Dow, a 330 point loss, four out of five days big losses this week, one very good day yesterday, of course. Freddie Mac announced a $25 billion dollar loss in the last quarter. They are in the hole $13.8 billion. The Treasury TARP fund shift is drawing fire from all sides. The Eurozone entered recession for the first time. The automakers aren’t going to get their bailout. And in fact, the bad news is just mounting everywhere. To discuss this and other subjects, economist, Dr. James Smith, is the chief economist for Parsec Financial Management in Nashville, North Carolina. He is regularly quoted in the Wall Street Journal and the USA Today. He’s been co-chair of the European Council of Economists, and welcome, Dr. Smith, thanks for joining me today.
JS: Thank you, Hugh, great to be with you.
HH: All of this news, as you sit there behind your desk and think economic thoughts, where’s the world economy going? Where’s the American economy going?
JS: Well, we’re probably going to turn around a lot faster than most anybody thinks. It’s really all hanging on you and me and the other 303 million consumers out there. If we peel out our wallets and use some of the fifty plus trillion dollars of net worth we still have left after, despite all this rigmarole that’s been going on in the stock market and many housing markets, and have a bang up Christmas shopping season, we’ll be out of it and back. The new problem’s next year, but the world is going to be slower because the Europeans, and Heaven help us, the poor Japanese have far more serious structural problems than we do.
HH: Now obviously, that tone is what I believe, and that’s why I asked you to come on, but not a lot of people in the media seem to believe it. In fact, there’s a breathlessness about this recession that I don’t recall in two decades in journalism, and 52 years as an American. Do you sense the same kind of over-reporting of economic bad news underway?
JS: Pretty much. I tell every audience I speak to, and students when I’m doing a class, go out and buy Charles Kindleberger’s Manias, Panics & Crashes, fifth edition. We’re in a panic. We’ve been in one since August 9, 2007. And we’ll get out of it. We always get out of it by throwing money at the problem, and boy are we doing it. $3 trillion so far in the U.S., $2.5 trillion from the European Central Bank, $568 billion from the Chinese, which is proportioned to their economy the same as us. Every single time in world history that happens, two things happen very shortly. First, equity markets go through the roof, second, the real side of the economy, the production of goods and services, takes off. And then comes the $50 trillion dollar question, can the central banks pull the excess liquidity out in time to prevent inflation.
HH: Now today’s New York Times, Dr. Smith, has an article, “Many Line Up For Cash, But Bailout Plan Falters”. It begins, “As the government’s financial rescue plan enters a new phase, Wall Street and many ordinary Americans are wondering the same thing. Is any of this working? The short answer is not nearly as much or as fast as many had hoped. And I thought that was rather alarmist given that the financial bailout plan is what, five weeks old?
JS: Well, I’m not sure it’s that old. They clearly made a huge mistake by allowing Lehman Brothers to fail. They should have done an assisted takeover like they did with Merrill Lynch or Countrywide or Wachovia, for that matter. And that’s the one and only primary dealer that’s ever been allowed to fail. And so far, about all they’ve done is bail out the other primary dealers. So it would be nice if they would actually get money flowing to ordinary citizens. Who knows? There’s a lot of speculation that the G-20 meeting, which starts tomorrow, in which every country is in dire straits except Australia, which is overheating and will soon be in dire straits, and China which just sails serenely on as the one economy in the world that doesn’t need a lot of outside help. But of course, it’s catching up from, oh, a hundred years of civil war, turmoil, and Mao Tse Tung, who could, never saw an economy he couldn’t ruin.
HH: I’m talking with Dr. James Smith, chief economist for Parsec Financial Management, very widely credentialed and respected in the world of economists. Now Dr. Smith, the FDIC today said they’re going to help out mortgage holders who may be in danger of foreclosure. This began in the home market. Should the government be looking at helping people get into homes, not just retain their homes, but maybe get into homes by somehow bringing down the cost of mortgage interest rates, which are stubbornly far above where one ordinarily expect them to be with the Fed Funds where it is?
JS: Well, mortgage interest rates are up where they are because long term interest rates are still stubbornly high, because people are worried about inflation. Soon, they’ll quit worrying about inflation, and long rates will come down farther, and mortgages will become more affordable. If you want to get the economy moving, you have to get new housing starts to pick up. That’s the big impact on the gross domestic product of the overall economy. And the best way to do that is to make sure credit’s available to credit-worthy people, not replay 2006-07 when we gave an enormous amount of credit to people who we now know never should have been given credit, and get the economy going again.
HH: Are we in danger of fighting the last war, though, by over-securing credit against the danger that someone might default at this point?
JS: Oh, of course. We’re always in danger of fighting the last war. That’s the problem we have with Sarbanes-Oxley, which is a bigger problem than most people give it credit for.
HH: In terms of individuals listening as investors, do you believe the stock market is oversold? Do you think the housing decline is at bottom as well?
JS: Well, the housing decline in terms of new housing starts is within a month of the bottom, I think. The home price declines in some states are going to keep going down for a while. And in other states, the majority are going to pick up. And as I say, it’s new housing starts that we have to see turning around to get real enthusiastic about the overall outlook for the economy.
HH: How about the equities market, the Dow and the Nasdaq and the S&P 500?
JS: Well, it looks like screaming buys to me, and that’s…I say that because as I said, when you have this unbelievable amount of liquidity, it goes into stocks. And therefore, with a lot of demand and no increase in supply, then the stock market, and not just ours, but around the world, should be going up dramatically very soon.
HH: 30 seconds, Dr. Smith, gold and oil, where are they going?
HH: Both of them?
JS: Both of them. Oil demand is dropping, and new supply is coming on the stream.
HH: Dr. James Smith from North Carolina, I appreciate it, look forward to having you back. A sober but useful tone as we assess the economy.
End of interview.