EVENTS

Date:	Tuesday, March 17, 2009
Time:	2:00 PM -- 4:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

Looks Like Rain: Economic Forecast and Policy Recommendations for the Next Six Months

WASHINGTON, MARCH 24, 2009--On March 17th, the American Enterprise Institute hosted a group of financial experts for the fifth in a series of conferences discussing the ongoing financial crisis triggered by the collapse of the housing bubble. Despite some recent positive developments, the panelists were unanimously dour on the current state and six month outlook of the economy. Desmond Lachman, a resident fellow at AEI, commented, "I think now you can see certain signs of improvement that … indicate this is going to pass like everything else," but "the trouble is that the bad news really dominates."

 None of the panelists was optimistic that the housing market will rebound soon. Thomas Zimmerman, the managing director at UBS AG Investment Bank, noted that, following a year of flat existing home sales, the numbers turned negative again in the fourth quarter of 2008, and Lachman pointed to the substantial and growing foreclosure inventory nationwide as evidence that prices still have some distance yet to fall. The sputtering economy, restricted access to credit, and a lack of confidence in financial markets have combined to depress homebuyer traffic severely despite a substantial increase in affordability. Furthermore, Zimmerman expressed fears that the weakness in the market could spread during the next year. "Some of these states have held up pretty well," he said. "It's now their turn to get hit."

There was little support for the current government programs designed to prop up the housing market, as Zimmerman noted that the recently announced "Homeowner Affordability and Stability Plan" (HASP) effectively rewards those homebuyers who were least responsible when acquiring a mortgage, encourages more homeowners to become delinquent, and will likely lead to high default rates after the expiration of its five-year subsidy period. However, Zimmerman's primary concern with HASP is that it "punishes investors in order to save homeowners," and will "discourage investors from ever getting back into the securitized market."

John Makin, a visiting scholar at AEI, and Christopher Whalen, the cofounder and managing director of Institutional Risk Analytics (IRA), agreed that an important step toward resolving the banking system's instability is admitting that "there are too many banks, too many of them are insolvent, and some of them have to go away." Whalen said that IRA currently rates 2,200 banks with a grade of "F," and if the federal government continues discouraging bankruptcy, the financial obligations of those institutions may prove too large to maintain America's sovereign debt rating.  Eventually "someone else is going to be telling us to act. That is when you're right on the verge of bankruptcy--as a country."

There was a lack of confidence in the Obama administration's handling of the financial crisis thus far among all the panelists, and a belief that the key players currently in place in the administration are not the right people for the job. Makin said that pushing for a huge fiscal stimulus was "the biggest strategic mistake of President Obama immediately after taking office" because "everybody knows that the first thing you fix is the financial system." Whalen in turn argued that "The biggest problem we have right now is that we've got a Secretary of the Treasury and a Federal Reserve Board Chairman who are not credible with the financial markets. The people in my business know when they are hearing a load of nonsense." Alex Pollock, a resident fellow at AEI, concluded that to restore confidence the Obama administration should appoint someone like Jesse Jones, who successfully ran the Reconstruction Finance Corporation during the 1930s, "a tough-minded, financially savvy old guy."

--SCOTT GANZ