Publications & Resources
July/August 2008
Focus: Lending & Credit
Productivity, Technology and Export Growth Trump Housing’s Fall in
the Long Run – The Economy According to Brian Wesbury
The Wall Street Journal ranked Wesbury as the nation’s
#1
The wrap up speaker at WIB’s Annual Conference provided
attendees with a generally optimist long term outlook on the economy. Brian
Wesbury, chief economist at First Trust Advisors L.P., a financial services
firm, and advisory board member of First Trust Capital Partners, an affiliated
private-equity firm, shared with the audience that although the housing market
is in chaos, housing is not the dominant force in our economic model today, and
he doesn’t believe that we are in, or will have, a true recession.
He explained how our national acceptance of talk of a
recession has changed dramatically. In the past, politicians who used the word
“recession” were immediately vilified. “If you’re not pessimistic today
you are in trouble. It used to be that if you were pessimistic you got in
trouble.”
Wesbury pointed out that people are being more careful now
because they are worried about a recession, and that should keep us from
entering into one. “If you are a businessperson and are worried about a
recession, are you building up inventory today? Are you making high-risk
investments today? NO! In fact, you are holding back like crazy. Inventories are
razor thin. We are more likely to see problems at retailers because their
inventory is too low.” He added, “People are holding off on decisions today
because they are fearful of the future. Recessions surprise people. We let our
guard down and things happen.”
He says there are three types of people when it comes to
perspectives on the economy and financial markets:
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Traders – They don’t care if the market goes up or down. They just want to buy low, sell high. Long term for them is about a week.
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Investors – They want to invest in good companies with good management that are making profits, entering markets, doing things right and competing. They want dividends.
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Economists – “We were put on earth to make weathermen look good.” Economists don’t always look at the same period of time going forward, so their forecasts don’t always match up. Forecasts on cable news stations can take short-term information and make it seem long-term.
He said there are two things that John Maynard Keynes,
probably the most famous economist out there, preached that dominate what is
believed about economics today:
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The consumer is the heart of the economy. If the consumer doesn’t spend, the economy isn’t strong. That’s why we look at “consumer confidence” all the time.
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We – a collective we here on earth – cannot be trusted. We can’t control ourselves. So we must have a government to keep us in line. “Sometimes ‘we’ are driving too fast. That’s why the Fed raises interest rates before things get out of control. Or, sometimes ‘we’ are not driving fast enough, so the Fed lowers the rates,” he said.
It’s absurd, in Westbury’s view, that politicians get
elected and then suddenly know enough about the economy to keep consumers’
spending under control. “We don’t go to bed one day misers and wake up the
next day spendthrifts.” He said that with consumer confidence levels, we are
trying to put the consumer on the couch, trying to find out how he is
‘feeling.’
He offered his best analogy as argument for his view point:
“Sailboats move with the wind. The faster the wind, the faster they go, the
slower the wind, the slower they go. If there is no wind, the sailboat doesn’t
move. Does it matter how the sailors ‘feel’ about this? No. It doesn’t
matter.”
He said that if you review what is going on today with the
housing market any measure of housing trends looks about the same until 2003
when there was a big leap way above trend. Did all
The reason housing started to fall was not because interest
rates were ever too high, but because they were too low and encouraged a lot of
crazy activity. The consumer did the behavior, but the government encouraged it.
He pointed out that CRA forced banks to go into subprime neighborhoods. He fears
that the problem is being compounded by driving interest rates too low again and
believes we would be better off today if the Fed had not cut rates once over the
past six to nine months.
Wesbury says that one of the reasons he is not worried
about the economy today is that housing is only 4% of gross domestic product
(GDP). Exports are 12% of GDP and are up 17% over the past year and that offsets
housing. He does not believe we will have one negative quarter of GDP growth at
all in 2008. He pointed out that we produce seven times as much “stuff”
today as we did in 1950, but with the same number of workers. The world has
changed. “We don’t need as many people in manufacturing because they are
more productive.”
“We haven’t seen change like this since the industrial
revolution, and it is a huge positive for the economy. We are in one of the
greatest periods of change ever in history. I get exciting thinking about what
the future will be and what we are in the midst of right now,” he said.
“Everybody can get scared, but this is a temporary thing.”
He shared his thoughts on the subprime situation, saying
that there is about $1 trillion in subprime mortgages. If 50 percent of those
mortgages go bad, and banks only recover 50 cents on the dollar, that is a $250
billion loss. Because of what the loans are selling for now, everybody is going
to have to do write downs. He thinks the industry has done too many write downs
and anticipates write-ups.
He thinks the Fed should announce that they will not be
lowering rates any more so people will stop waiting for the next drop and do
something now. He thinks that the bulk of the losses in the housing market are
done.
He concluded, “We are really close to turning the corner
in many, many places [in the country]. Once [the people in these places] realize
that the interest rates aren’t going to get cut any more, I think we are going
to see a lot of pent-up demand. The bottom line is that I think the stock market
is more undervalued than it has been in 17 years. The correct value for the
stock market is about 35 percent higher than we are today.
“What we have today is not a liquidity problem in the sense that the Fed’s not added enough money, we have a pricing problem. We have a fear problem. But I have a feeling we are about to get over it. I am really optimistic that underneath all of this is the productivity growth and the technology, and you’ve got to remember – because we are in the midst of the second great industrial revolution – that people didn’t like it during the last one, but there was tremendous wealth made, and there is going to be tremendous wealth made now.”
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