Perspectives on Economics

"Hello, and welcome to Business Roundtable. My name is Tony Myers and my guests tonight are Harold Smith, chief economist at Fred, Wilma and Barney Associates, and Mary Ann Moore, chief investment strategist at Penny Bank and Trust. Harry, Mary Ann, thanks for stopping by and welcome to Business Roundtable."

"Nice to be hear"

"Always a pleasure, TM."

"Let's start with the news that's on everyone's mind these days - namely, the subprime mortgage crisis. There's a lot of worry on the street that if New Century Mortgage goes bankrupt it could cripple the entire global economy. What's your take on that? Harry, let's start with you."

"Well, what's happening in the subprime market is unprecedented. There's never been a crisis like it in the entire economic history of the civilized world. The idea that a bank could make bad loans and go out of business is simply unheard of, and I'm afraid that unless Congress intervenes we could be looking at mass unemployment, bread lines, and nuclear winter."

"Mary Ann, do you agree with Harry. Will this be a crisis of apocalyptic proportions?"

"It's revolutionary, TM, however I don't think it would be proper for Congress to intervene at this juncture. If New Century goes under we're advising our clients to secure their doors and windows, make sure they're well armed and well supplied with food and water, and not look to the government to provide security or assistance."

"Sound advice, but what does this mean for the housing market Harry?"

"Housing prices will go up. I mean, they may go down a little at first, but then they'll go up again. They always do."

"Do you also see a recovery in the housing market Mary Ann?"

"Of course. All that this subprime mortgage crisis has done is create a pent-up demand among buyers vainly hoping that houses will become affordable one day. As soon as they get tired of waiting they'll be off to the races again and housing prices will shoot through the roof. I've been around a long time, TM, and I've seen it happen over and over again."

"How about the mortgage lenders? Will they have the money to lend?"

"Are you kidding. If you've got a job and a pulse, there'll be someone there to lend you money (at the right interest rate, of course). Lenders are feeling a little chastened right now, but as soon as the next housing rush starts they'll be as careless with their money as ever."

"Turning away from the subprime mortgage crisis for a second, Fed chairman Ben Bernanke was at a MacDonalds today and was overheard asking for a condiment. What do you make of that? Mary Ann?"

"I believe the exact quote was 'I need more ketchup', TM. I tell you, I didn't overhear the complete conversation but I think the fact that he was low on ketchup and needed more has a lot of significance for the financial markets."

"Why is that?"

"I think it clearly signals that we'll see a rate hike - perhaps as soon as this summer."

"Harry, do you think the chairman was signaling a return to higher rates?"

"Well clearly he didn't say 'we need more ketchup' but rather 'I need more ketchup'. There's been a lot of talk about a rift within the Board of Governors, and by going out his own and saying that 'I need more ketchup' the chairman was at least raising the possibility that he was going to split the vote and make his own decision about interest rates. Whether that's up or down is pure speculation at this point."

"No I disagree..."

"Mary Ann you wanted to say something?"

"I disagree with Harry on this. Chairman Bernanke said I 'need' more ketchup, not I 'want' more ketchup. I think that is a signal to the markets that a rate hike is not an option at this point, but a necessity. I think it's safe to say that another 1/4 point rise is a done deal at this point."

"What about that Harry? He did say I 'need' more ketchup. Doesn't that imply that a rate hike is almost compulsory at this point?"

"We shouldn't forget that he was talking about ketchup here TM. My question would be 'what did he mean by ketchup?' Some, like Mary Ann are arguing that ketchup implies blood and suffering, but I think what Chairman Bernanke was really talking about was liquidity. Ketchup is, after all, a liquid, and by signaling that we need more of it I think he may in fact have been signaling a rate cut in the near future."

"A rate cut, Mary Ann?"

"Highly unlikely, DC. Inflation is still a concern, and I think by saying 'ketchup' what he was really talking about was adding some thickness and gooeyiness to the economy. I'd be looking for either a rate hike or at least another quarter or two of the status quo."

"Ok, we'll have to leave it at that. I want to thank my guests - Harold Smith, chief economist at Fred, Wilma and Barney Associates and Mary Ann Moore, chief investment strategist at Penny Bank and Trust. Thank you both for being here."