Homes are no longer ATMs, but the recession that sped into town on the Housing Bubble Express appears to be coming to an end, if very, very slowly.
What”™s ahead for the region and other questions were answered when Joel Naroff, chief economic adviser for TD Bank, spoke to 150 members and guests of the Rockland Business Association at IBM”™s Palisades/Dolce Center on Sept. 17.
Naroff, whose opinions are courted by many in the business arena, said the recession will experience a different recovery, unlike any the country has ever gone through. And while other parts of the U.S. will rebound more quickly, the mid-Hudson region with its concentration of small businesses is going to see slower recovery and should see changes in the way people do business as a result.
“Just imagine, a year ago, Bear Sterns was taken over and Lehman Brothers went bankrupt,” Naroff said. “We were already in the throes of the worst economic crisis since the Great Depression. We”™re coming out of it now for a lot of different reasons. And while we may not agree on how some of the money was spent to make that happen, and it is still not clear if we gave the right people the money, we are entering a recovery period. But it will be a different kind of recovery that will change the way we do business.”
Naroff said it is not a good idea to wonder who will be next to fail. “Yes, some banks will still fail,” he said. “There will be more foreclosures. Recovery, unfortunately, may not be that great for several reasons: It will take at least two to four years for banks to recapitalize. People looking for loans will no longer qualify by fogging a mirror, but it will take a while before banking system revs up lending. Without available credit at reasonable rates, it”™s difficult to lend and even more difficult to grow.”
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Naroff pointed to one national bank, saying it is “now trying to get rid of TARP (Troubled Assets Relief Program) money. While that money could be going to help elsewhere in the economy, it isn”™t.”
The housing bubble, said Naroff, can”™t be compared with the dot-com bubble “because people were creating wealth during the dot-com heyday; in the housing bubble, they were spending their own wealth, the equity in their homes. How many re-did their kitchens and baths with their equity?” Naroff asked. Dozens of hands shot up.
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He predicted it will take four to five years to see business back to a new norm, and due to job growth being more sluggish in the mid-Hudson and slower growth in business spending, it will take the region longer to recover. “I don”™t like to be coming out to say expect a long period of sluggish growth. But, if my forecast is right, it will be a slow recovery.
“We do not have a normal rate of interest right now,” said Naroff. “Zero to a half-percentage point is a crisis rate. Once the Fed chair thinks this recession is over, we”™re going to see interest rates increase. Lower levels of interest are not sustainable: 2 to 2 ½ percent is more reasonable and would put us back on a normal growth track.”
Globally, said Naroff, Europe seems to have fared better in the economic meltdown than the U.S. did. “Their problems were not as broad-based as ours were during the recession. China, however, is a different story. While it had a stimulus bill 50 percent larger than ours in relation to its population, it needs to keep its manufacturing plants going. It looks like they are doing great,but they are concerned about their recovery.”
For Baby Boomers who saw 401K”™s skyrocket during the dot-com frenzy and then see them drop beginning in March 2000, this recession hit them much harder. Some lost their entire nest egg. “I figured that I can now retire at the age of 107,” Naroff said with a smile. “For Boomers, they are going to be in the workforce longer, which is great for companies because it is going to keep an intelligent labor force available that might otherwise have been lost.”
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Financial regulatory reforms need to occur, said Naroff. “The housing market regulations in place were not enforced. Others flew under the radar or were not even regulated. It”™s a big lesson we want to forget. The last thing an economist is supportive of is more regulations. But we need to be able to close the barn door before the horse get out. After the dot-com bubble burst, people scanned the horizon for a safer investment; they found it in housing. Unfortunately, someone”™s always looking for the next mistake.”
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What”™s different now than when the dot-com bubble arrived on the scene in the ”™90s?
“The U.S. was leading in innovation,” Naroff said. “That is not the case today. We need a burst of productivity. China produced 600,000 engineers, and they are coming up with the brilliant ideas and have surpassed us.”
Naroff predicted technology innovation, with the emphasis in the green tech area, could be the touchstone to put the U.S. back on track. But a caveat was attached: “It may well be the next bubble.”
Naroff feels President Obama is doing the best he can with a bad situation. While he may have added to the national deficit he inherited, “we”™re moving out of what could have been an even deeper recession as a result of the spending put in place.” As for comparing Obama”™s handling of The Great Recession to Roosevelt”™s handling of the Great Depression? “Roosevelt was a piker,” declared Naroff. “He didn”™t spend enough, and the country didn”™t recover until we entered World War II. I think our new economy is going to see higher taxes but less government spending; and as the economy grows, we have to make sure the government doesn”™t grow with it.”
