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Speaker not expecting long, severe recession
By Jim Mackinnon
Beacon Journal business writer
Published on Friday, Nov 14, 2008
Are you looking for someone or something to blame for the current economic mess?
Ken Mayland has identified a few culprits:
• China;
• Affordable housing policies;
• Borrowers;
• Mortgage bankers and Wall Street investment bankers;
• Credit-rating agencies;
• Bankers again, as investors;
• California.
And let's not leave out high energy prices, said economist Mayland, head of ClearView Economics in Pepper Pike.
Mayland and economist Jack Kleinhenz were the main speakers Thursday morning before about 200 people at the 2009 economic forecast breakfast for the Greater Akron Chamber at the Rosemont Country Club in Fairlawn.
The two gave their thoughts on
what they believe has created a recession as well as signs that will show the economy has begun growing again.
The economy got a one-two punch that apparently has put it into recession, Mayland said.
One punch was the ''stupendous, mind-boggling'' increase in oil prices this past year, he said.
At $125 for a barrel, oil users transfer $3.9 trillion a year to oil producers, he said. That amount of money would allow the oil producers to buy out all of corporate America in two years, he said.
''Oil is still expensive at $60 a barrel,'' Mayland said. ''The rise of oil prices gutted the world economy.''
The high oil prices interacted with mortgage debt, he said. For instance, when gas prices go up, people will begin missing mortgage payments, he said.
The other punch came from the credit mess, which Mayland said has roots in a place not many other people have discussed.
''I put China at the top of my list,'' Mayland said. China's economic policies over the years created a huge trade imbalance with the United States and in turn led to China using its U.S. dollars to buy massive amounts of U.S. debt.
Purchases of hundreds of billions of dollars of U.S. treasuries pushed yields down so low that investors looked elsewhere to get a better return, Mayland said.
''Along comes Wall Street,'' he said. They offered mortgage securities and called them one of the safest available assets, he said.
''Of course, the politicians want to see low-income people have affordable housing,'' Mayland said. ''Apparently, affordable housing is housing they can't afford.''
Demand for securities
Demand for higher yield products created a voracious demand for securities that led to people handing out mortgage money, he said.
Borrowers wanted a first house, then a bigger house or a better house, a vacation home and a retirement home, he said. Much of the money was made available at 100 percent loan to value, he said.
Mortgage bankers had an incentive to push mortgages because they get paid only if they get a fee for approving the loans, he said.
Credit-rating agencies put a AAA rating on a subprime mortgage of 100 percent loan to value with someone with a low credit rating, he said.
''That's what you call putting lipstick on a pig,'' he said.
A mess in California
There's more blame to go around, he said.
''Californians are largely to blame for the credit mess,'' Mayland said.
California home prices started rising in the mid-1990s to a point where home prices reached six times household earnings by 2004, he said.
''There's virtually no room for error,'' he said. ''This creates the vulnerability for default and foreclosures and loss of value in these mortgage securities.''
California alone in August accounted for 33 percent of all foreclosures in the United States, Mayland said, while foreclosures are at the heart of the loss of value in mortgage securities.
Mayland questioned whether the federal government's current $700 billion effort will fix the economy.
''I wish there was a game plan,'' he said. ''They are just playing it by ear. . . . They are just throwing stuff against the wall and seeing what works. I ultimately think things will work out.''
The concerted global effort to fix the financial markets will be a major help, Mayland said.
And there are definite signs of economic recovery to watch for — though they're not here yet, the chamber members were told.
A simple interpretation of the recent spikes in weekly unemployment claims above 400,000 strongly suggests the economy is in recession, Mayland said.
When weekly claims begin declining below 400,000, that will be a sign the economy is recovering, he said.
Other signs to watch for are:
• When the personal-savings rate decreases, meaning consumers are willing to spend.
• When there is a decrease in an arcane economic indicator that measures credit risk called the ''TED,'' or T-bill and Eurodollar, spread. A rise in the TED spread means liquidity is being drawn out, while dropping numbers means liquidity is coming into the economy.
• The stock market begins rising.
Mayland said he is not sure that the nation will be in a severe and prolonged recession, based on a number of factors:
• The decline in housing starts might be largely over.
• Housing affordability is improving.
• The decline in consumer spending for autos is largely behind us.
• Declining oil prices will free up discretionary income
• Banks continue to lend.
• Consumers do not appear to be overextended, or in too much debt and living off credit cards.
Kleinhenz of Cleveland-based Kleinhenz & Associates, said it is clear from his perspective that the economy is in recession.
''The key to a recovery in my mind is getting the housing on track,'' Kleinhenz said. ''Some states are doing well.''
Ohio's economy was still growing, although slowly, as late as November 2007, he said.
But employment in the greater Akron area likely will be down year over year, Kleinhenz said.
Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com.
Are you looking for someone or something to blame for the current economic mess?
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