PROGRAM SUMMARY

January Program Summary:
The Current Outlook for the Economy
Thursday, January 22

Alice M. Rivlin – Guest Speaker

When will the recession end? Honestly, no one knows. We are in a recession because of too much spending and not enough saving. Recovery from this recession will not likely happen until 2010. The current 7.2% unemployment rate will possibly go to low 9s% in 2010. This is not good news for people in the retail business, because consumers are not spending as much. This is the deepest recession since World War II, but at least we are not concerned about a “Bank Run” like we experienced in 1929 and early 30s.

How did we get here?

In the 90s the economy was resilient. We were carried away by our success and started to excessively borrow money. We thought the stock market would keep rising, but the asset values could not be justified. This is called “bubble psychology”.

The economy was going well and interest rates were low and there was a minimal cost of living increase. The explosion of sub-prime lending both caused “housing bubble” and the low interest rates and the housing cost increase fed the “housing bubble”. Lenders were not concerned about whether they could be paid back because they were selling the loans to another company. This provided the housing market and its affiliate lots of money at first.

Failure to modernize the regulatory system hurts us.

What should we do now?

Get financial system back on its feet and lending again.

The government should have bought up the bad assets off the books of the banks, cleansed them and then started lending again. But, instead we gave “bailout” money to the banks, which helped the situation from becoming more catastrophic, but the financial institutions are too worried about lending. So, we should go back to the original plan of having a Federal buyout of the banks' bad assets.

If the government continues to lend to banks, they need to make sure there is more transparency and better reporting regulations.

We need to make investments in the future through:

• Payroll tax holiday
• Improved communications and transportation infrastructures
• Improved healthcare technology
• Shift resources from somewhere else to fund these ideas.

We cannot borrow lots of money from others in the world to finance our debts.

How is the Washington DC region affected?

The DC area is very lucky since the recession applies less to this region because of the major government work in the area, low industry work and high education level of the workers. However, we must focus on being a more sustainable region. We must spend much less time in automobiles. The real opportunities for us lie in:

• Denser development
• Better public transportation
• Less driving

What should be done about Fannie & Freddie?

They were told they are private companies, but also told they needed to provide affordable housing mortgages. So, they made as much money as they could and tried to put some of the profits into affordable housing mortgages after. It didn't work. Now they are owned by the government. We need to keep them under the government until things get better and the mortgage interest rates are brought down.

Key indicators that the economy is improving:

• Sustained productivity growth
• Improved skills in the labor force
• Increased Entrepreneurship
• Innovation

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