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Dean Baker: a really bad recession is a virtual certainty.

(2007-07-23 21:05:14) 下一個
iTulip Select Interview: Dean Baker

July 23, 2007, iTulip

Eric Janszen interviews Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC. on fall out from the housing bubble, the upcoming housing-led recession, and how excessive risk taking incentives within the private equity industry will likely lead to bankruptcies and cascading defaults among US corporations as the US economy goes into recession.

Dean Baker is a frequent guest on National Public Radio,Marketplace, CNN, CNBC and other news programs. He is the author of several books, including “The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and The United States Since 1980.” He received his Ph.D in economics from the University of Michigan.

Summary

Janszen: What impact will the decline of the housing bubble have on the economy?

Baker: The negative savings rate will revert to mean of 3% to 4%, up 5% to 6% from the current negative rate. This means approximately $500 billion of current consumer spending will become unavailable for consumption. Add this impact to negative wealth effects and other direct and indirect consequences of the declining housing bubble, and a really bad recession is a virtual certainty.

Janszen: Your more bullish colleagues tell us that the US economy will not experience a recession due to the collapsing housing bubble because the economy is well diversified. As housing declines, other sectors, such as healthcare and energy, will make up the difference in demand and employment. Also, in a 13 trillion dollar economy, a five hundred billion dollar shortfall in consumer demand isno a big deal. It can be made up in other areas.

Baker: I’m a fan of arithmetic and the arithmetic says if you lose 500 billion dollars in consumption then it has to be made up in corporate investment, net export demand, and government spending. Investment has been lagging and is likely to continue to slow. I can see export demand increasing as the dollar depreciates further and the trade deficit declines, but not enough to make up for the 500 billion dollar shortfall. That leaves government, and I don’tsee how government is going to make up the difference.

Janszen: Will the decline in housing continue to hurt the markets?

Baker: There’s no way around it. Eventually, “A”rated securities backed by prime mortgages will lose a substantial amount of value. Much as you pointed out back in the 1990s, when bubbles collapse various frauds are revealed. There are plenty of Enrons lurking below the surface which I am confident will eventually see the light of day as the housing bubble collapse proceeds.

Janszen: We are skeptical of government economic statistics. What’s your view of the CPI?

Baker: It does not accurately reflect the cost of living. The purpose of an inflation measure is to track the success of economic policy at delivering improving living standards. The CPI, by eliminating prices that are volatile, such as food and energy, but have a major impact on living standards no longer reflects improvements or declines in living standards.

Janszen: How about employment statistics?

Baker: They are useful but have limitations. Atthe peak of this recover we are still 1.4 percent below the peak employment rate we saw in 2000. Prime age workers have been the hardest hit. Large number of workers 55 and older have stayed in the work force,and their employment has come at the expense of workers ages 25 to 55.

Janszen: How about GDP?

Baker: I’ve been in Washington 15 years and am often surprised at the frequency and size of revisions, often the revisions are downward.

Janszen: How do you explain the mystery of higher than reported CPI, higher than reported unemployment, lower than reported initial GDP growth, suggesting an inflationary, slow growth environment, yet interest rates remain low?

Baker: No secret that US interest rates are maintained by foreign central banks generally and China’s central bank, specifically, via purchases of long term debt versus overnight deposits. But it’s hard to imagine that with the dollar depreciating and productivity growth declining that private and public foreign investors are not expecting a rise in inflation.

Janszen: Nearly everyone we talk to reassures us that foreign investors are stuck supporting lower interest rates and the dollar via purchases of long term US treasury debt, else US demand for their exports declines. Do you agree?

Baker: It’s not all that hard to shift an economyto become less dependent on export led growth and more on domestic consumption. It won’t happen overnight, but can happen over a relatively short three to five year period.

Janszen: In an economy with high structural debt levels in the financial system, you see a risk of a collapse in demand leading to a debt deflation?

Baker: I think there’s a likelihood of cascading defaults. The problem has been created by an incentive structure that motivates private equity managers to take a lot of risk with limited personal downside exposure. We will see a lot of corporate bankruptcies and debt defaults. This will certainly cascade as banks that count these loans as assets have to acknowledge that they are non-performing.

Janszen: Looks like we’re going to experience a recession before the 2008 elections. What impact do you foresee?

Baker: The administration in charge when the recession happens always take the blame, whether they deserve it or not. In this case, the Republicans will be blamed. If on top of heat from the war in Iraq, Republicans also have to deal with the fallout from a recession, that does not bode well for re-election.
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