Friday, January 23, 2009

106-TNG Radio - Christopher Thornberg 1-24-09

Bruce Norris is joined this week by Founding Partner and Economist with Beacon Economics, Dr. Christopher Thornberg.

Bruce asks what Christopher thinks about the phrase, “Since the Great Depression.” Christopher says it’s a bit of an exaggeration and there are definitely sectors that have been hit hard but it’s not that bad. Some assets are still holding well.

Bruce asks about the benchmark numbers that clue us in on a depression. Christopher says that before World War II, every recession was a depression. The word “recession” was created so there could be talk about economic downturns without alluding to the Great Depression which might cause panic. He says you could categorize a really bad recession as a depression.

Bruce asks about employment and if they’re measuring differently as there are several categories including under employed. Christopher says employment numbers are measured the same and there have always been those other categories. We’re mainly talking about people who want to find employment but can’t.

Bruce asks if Christopher thought he would ever see these big financial corporations fall. He said he did about six months before it happened because they had really leveraged themselves and it was unsustainable. Debt to equity ratios were 80 to 1. It became apparent any turmoil would cause a failure. The thinking was the more leverage, the more return. During bad times, that same principle works the other way; it magnifies losses. Now the government is picking up the pieces.

Bruce talks about the rating systems that we thought were independent and we find out they were getting commissions. Christopher says people who listen to Moody’s and S&P need to understand the system a little more. Many of these assets they were rating were new and didn’t have much history. Their ratings came from modeling so there was not a complete knowledge of risk. Bruce says that’s an issue because people were looking to these companies and they thought they could trust them. Christopher says people have to do their own due diligence. People stopped looking at fundamentals and weren’t doing their homework. When the market was working, people got lax. Bruce and Christopher talk about Bernie Madoff and how he could possibly get away with that for years without getting caught.

Bruce asks why it seems that when our bubble popped it seemingly caused the rest of the world to collapse. Christopher says that the U.S. is definitely the financial guerilla in the world at 25% of the world economy. However, the U.S. was not the only place where abuses of the financial systems were going on. The kind of borrowing going on in Eastern Europe is a perfect example. Some countries are in much worse shape than we are currently.

Bruce asks Christopher if there are ramifications to the U.S. and its reputation because of the fall. Christopher says there won’t be. Our dollar is good by comparison. In the U.S., you know what you’re getting and we have a very diverse and large asset base. U.S. Government debt is considered the best. The talk that everyone was going to Euro was all talk. In 2005 there were some issues but the problem spread to other banks in other countries and the dollar got everything back that it lost in 2005.

Bruce talks about TARP and if Christopher thinks the first half was spent wisely. Christopher said yes. Congress is upset that there is not enough oversight. Christopher says TARP was not meant to force banks to lend money. It was meant to stabilize the banking system. The system is still in horrible shape. There was an enormous increase in asset value and not just in real estate. The delinquencies on all sorts of debt are way up. Banks will possibly lose trillions. The banking system needs to keep going and we have to step in and help the banks recover.

The initial TARP program Christopher did not like. They were going to go in and overpay for assets. They’ve been taking chunks of the money and give it to banks that are too big to fail (Citigroup, Bank of America) and small banks that are healthy that haven’t participated in the debt frenzy to allow them to expand. It allows these banks to pick up other banks as they fail.

Christopher says the TARP money is all borrowing and the government creating Treasury bonds. The government is also facing a huge fiscal deficit so they need t borrow.

Bruce talks about interest rates and its effect on inflation and trillions in deficits. Christopher sees about another two trillion to total 11.5 trillion. It will be 15% of GDP. It’s all relative and it’s not that bad. And they unfortunately have to pick up next week. More about Christopher and Beacon Economics at beaconeconomics.com.

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.

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