Summary of Bob Brinker's Moneytalk Guest: Mark Zandi

[honeybee]

Last Sunday, Bob Brinker's guest-speaker in the third hour of the
program was Mark Zandi. Many thought that Zandi was one of the most
interesting guests that Bob Brinker has had on the program lately.

In his weekly newsletter, which includes a summary of Moneytalk, David
Korn summarized the salient points of the Mark Zandi interview. David
Korn wrote the following [posted with permission]:


1. Mark said a big part of TARP was bailing out the banks which were
bad actors and caused much of the problems leading to the financial
crises leading to the recession. If the government had not stepped in,
the stakeholders in the bank would have been wiped out. As it turned
out, shareholders in the stock got hurt bad, but bondholders for the
most part were made whole. Mark said people are mad that these "bad
actors" got away with something; however, that being said, Mark said
he isn't sure there was anyway around it because we were in a sense
bailing out ourselves.

2. Mark said there are a lot of pieces to TARP besides the banks;
there was Chrysler, GM, AIG, Bank of America, foreclosure litigation
efforts are funded by TARP. Given it is so complex, it is tough to
break down and get a handle on. People tend to focus on one issue.

3. Mark said he thinks the Treasury had no choice on TARP. The
original intent by Paulson was to purchase bad assets which would have
been a better way to have gone if they had been given a choice. The
problem was the financial system was deteriorating so fast they had to
be more aggressive and take equity stakes in banks. If they had not
done that, the banking system would have collapsed and the recession
we experienced would have been far worse.

4. Bob asked Mark to comment on Hank Paulson's book, "On the Brink."
Mark said it simply reinforced how fast moving things were and how the
policy makers had to make epic decisions in short order under extreme
distress.

5. Bob asked Mark to comment on what is going on in Europe and the
bailout of Greece and the ripple effect in Ireland, Portugal and
Spain. The European Union seems to have come to the rescue of the
euro. How do you see the impact on the global economy. Mark said the
events in Europe related to the sovereign debt had an immediate and
significant impact on the US stock market. If you think back to the
spring when the European debt crises hit, our stock market fell about
15% and that came at an unfortunate period of the recovery. At that
time, it seemed that businesses were starting to get more aggressive
about rehiring and the overall mood of the country was picking up. The
decline in the stock market undermined the confidence of businesses
and high-end consumers who are very sensitive to their net worth. The
recovery got side-tracked and probably cost us 6-9 months and so it
will probably take us another quarter or two to get back to where we
were in the spring before the crises.

6. Bob said Mark to comment on the fact that Congress has not yet
addressed the tax code and the expiration of the tax cuts that go into
effect January 1. Mark said it creates a lot of uncertainty and is one
of the reasons that businesses are not aggressively expanding or
hiring. You would think it would be prudent for politicians to make a
decision, one way or another --- whether they adopt the President¹s
agenda or the Republican's Congressional agenda ‹ at least there would
be a resolution to the issue and get rid of the uncertainty. It was a
mistake not to nail that down.

7. How do you see the employment report coming out Friday. Mark said
he thinks the consensus of 77,000 private jobs is about right and we
are going to lose just about as many in census worker jobs. The total
employment will probably be around the flat line and unemployment will
probably tick up to 9.7%. The key benchmark is we need about 150,000
new jobs just to keep unemployment rate flat. It seems very likely
that unemployment is going to drift higher as we go into the end of
the year. Mark said he thinks we will probably see close to double-
digit unemployment through most of next year. On a positive note, the
preconditions for better job growth are coming into play. Mid-size and
large growth companies are becoming very profitable and getting their
balance sheets in order. They have been able to reduce their debt and
lock in low rates. They are in such good financial shape, the question
no longer is can they hire, but will they hire. If we can get our tax
code squared away, and not get side-swiped by another European-type
debt crises issue, by mid-next year, or at least by this time next
year, the unemployment rate will start to come down in a more
definitive way.

8. Bob noted that the U-6 calculation, which includes people who have
part time jobs who would like full time jobs and the people who have
given up looking for work, shows that the rate is 16.7% -- an
extremely high number. Mark said this is a big number and why so many
people are upset and it will take a long time to get all of these
people who are unemployed and underemployed back to work. Even under
the best scenario, it will be 2014 but maybe as far out as 2016 before
we get back to full employment as we had before the recession.

[Korn] EC: There are actually several categories of employment measure
the Bureau of Labor Statistics. The number that always gets reported
is the U-3 which is the total unemployed as a percent of the civilian
labor force and is considered the official unemployment rate. U-6 is
defined as the "total unemployed, plus all marginally attached
workers, plus total employed part time for economic reasons, as a
percent of the civilian labor force plus all marginally attached
workers." Marginally attached workers are persons who currently are
neither working nor looking for work but indicate that want and are
available for a job and have looked for work sometime in the recent
past. Discouraged workers, a subset of the marginally attached, have
given a job-market related reason for not looking currently for a job.
Persons employed part time for economic reasons are those who want and
are available for full-time work but have had to settle for a part-
time schedule.

9. Where do you think we stand on housing? Mark said we are 5 years
into the housing crash and we are probably pretty close to the bottom.
There will be a few more quarters of price pressure on housing but we
are getting closer to the end of this foreclosure nightmare. If we do
get the better job markets and mortgage/interest rates remain low,
that lays the foundation for a better housing market by this time next
year.

10. What do you propose to fix the situation? Mark said he is
surprised that some of the things he suggested have been implemented.
We got financial regulatory reform and there were efforts to improve
underwriting standards for mortgage lending

Caller: What is your opinion on interest rates going out a few years?
Mark said interest rates will rise in a few years, but in the next
9-12 months rates will remain low as the Federal Reserve continues to
be very aggressive with monetary policy and openly discussing resuming
quantitative easing, i.e. purchasing Treasury bonds. But down the
road, when the economy does gain traction, and it will by 2012-2013,
at that point the Federal Reserve will have to tighten, drain some
liquidity and there will be expectations that inflation will pick up.
At that point, interest rates will rise. In a normal well functioning
economy, the 10-year Treasury yield should be around 4.5%. If you are
planning for the long run, that is the kind of interest rate he would
be expecting.

Caller: What do you think about Meredith Whitney's report that some of
the large states are going to need a bailout which will require a huge
bailout by the Federal Government. Mark said hasn't read the report
but he doesn't think there will be any major municipal bond defaults.
State general obligations are high on politicians priority list and
they will do whatever is necessary to pay on those bonds because if
they default it would make them difficult to raise money in the
future. Mark said he thinks once the economy does improve and it will,
state tax revenues will increase substantially, particularly in the
states that are distressed like Illinois, California, etc. where they
are supported by high income taxes. The concern for municipal bond
defaults will fade rapidly when the economy recovers. Bottom line,
Mark thinks the odds of municipal bond defaults remains low. That
doesn't mean there won't be small bonds financed with specific
projects, but that is a big difference between a general obligation of
a State.

Caller: How will the economy improve when taxes are going to go up so
high? Mark said there are good things that are happening. Strong
corporate profits, which we are seeing, is always something that
precedes a recovery. Household debt/leverage, which in a fundamental
way got us in this predicament, is improving rapidly. The amount of
debt that households have to service is also moving in the right
direction. With regard to taxes, we have a serious fiscal problem to
address but we don't have to fix it in one year. We just have to come
up with a credible plan to address it over a long period of time, like
a decade, but it doesn¹t mean we can't grow despite that.

Caller: This caller can't see why Mark is positive about the growth of
our economy. Mark said another driver of our recovery will be growth
in our exports. If you are an American company that survived this
period of time, you are cost-competitive or have a market niche. We do
a lot of things right, such as aerospace, machine tools, sophisticated
equipment, agricultural equipment, and in the future we are going to
increase our exports that are services such as engineering, legal,
financial, management consulting, etc. We just have to get through the
next 6-9 months without getting side-swiped with another unexpected
crises."

David Korn's Stock Market Commentary, Interpretation of Moneytalk
(Bob Brinker Host), Financial Education, Helpful Links, Guest
Editorials, and Special Alert E-Mail Service. Copyright David Korn,
L.L.C. 2010


Honey here: The Moneytalk interview will be available for free
download at KGO810 radio until 3pm next Sunday.

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