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Local financial expert weighs-in on economic future of U.S.

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Posted: Monday, September 22, 2008 10:00 pm

As uncertainty hangs in a cloud over Wall Street, investors, analysts and consumers are wondering what is in store for the nation's financial future.

The Business Forecasting Center in the Eberhardt School of Business at University of the Pacific in Stockton, has been tracking trends and developments in the economy since 2004.

The director of the Forecasting Center, Jeff Michael, PhD., took a few moments to talk with News-Sentinel Business Editor Marc Lutz about the current economic climate in the U.S.

Q: Is this the most dramatic reordering of Wall Street since the Great Depression?

A: I think that's true without a doubt. We're seeing the fall of some of the large investment banks. (Monday) we (saw) the two remaining large investment banks changing over to commercial banks.

We're certainly on the cusp of some large changes in the financial sector. We don't know what forms those will take, but we know they're going to be significant.

Q: If a person can scrape together the down payment, is it a good time to buy real estate?

A: I think it is, if you're planning to stay in it for a while. Real estate prices have finally come down to a level that make sense with the local income base. That doesn't mean prices couldn't fall a little bit more.

Q: Should people buy gold?

A: I know people are interested in gold (and) are questioning the value of the dollar, but I wouldn't recommend it as a long-term investment.

Q: Have we hit the bottom of the real estate market yet in Lodi? How do we know when things will turn up?

A: If someone is waiting for prices to bounce way back up to the level we have seen in recent years, I wouldn't wait for a 20 percent appreciation. It's not likely to happen.

Q: Why shouldn't the federal government help people make their mortgage payments instead of bailing out big Wall Street firms?

A: Again, so many details of this are murky. As the government acquires these mortgage assets, it could be that homeowners could be afforded a way to stay in their homes.

Q: Are credit unions safer than banks in this type of economic environment?

A: I don't think so. In both cases your deposits are federally insured up to the limit.

Q: How much will this federal bailout cost for regular taxpayers?

A: Right now there is no way to know. It depends on a few things. It depends on how the treasury decides to price these assets and what they'll pay for them. And it depends on how the market develops as we go forward. One possibility is that it could cost people nothing, but then it could cost people the $750 billion that was paid up front.

Q: Should we have just let these major banks fail? Why can't we just let the free market correct itself?

A: That's something of a philosophical question. The concern is the continued wave of panic and a deepening recession in the economy. If we go into a deep, multi-level crisis, taxpayers could lose a lot more.

Bailing out bad business practices isn't good for the economy in the long run either.

Contact Business Editor Marc Lutz at marcl@lodinews.com.

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21 comments:

  • posted at 2:18 am on Mon, Sep 29, 2008.

    Posts:

    There has been a great deal of discussion regarding executive compensation packages but nothing that I have seen about fees to be paid out to companies chosen by Treasury to dispose of the MBS held by instiutions. Originally my understanding was that Paulson had suggested setting up separate funds of 50 Billion each to be administered by Wall Street Firms. According to Paulson these companies have the necessary expertise to handle this problem??? Weren't they the firms who didn't see this coming because the instuments were so complicated? Sounds like the 'no bid' contracts given out to rebuild Iraq. Given the size of this bailout even a 1/2% fee could total 3.5 Billion but my guess is will be closer to a 1% fee. Are we going to here about this after the fact? After Wall Street firms get a huge payday and Congress is outraged but unable to do anything about it? Why aren't Fannie and Freddie handling the buyback of illiquid assets, after all the taxpayers own those companies?

     
  • posted at 8:52 am on Sun, Sep 28, 2008.

    Posts:

    The question about "scraping together a down payment" to buy a home right now was interesting. IMO if you have to "scrape" together a downpayment what do you do when the first paymnent is due? People don't seem to recognize that there is a payment due every month there after. The wife or husband loses a job or there's a serious illness and they could be in trouble.

     
  • posted at 2:21 pm on Tue, Sep 23, 2008.

    Posts:

    To WTF: I heard the broadcast segment over the internet. Thanks for telling me about the station since I like to follow the Angels. Did you notice that Dougs (Ex Third base Angels and Orioles) son has a restaurant. I thought his son was a kid. LOLReggie Jackson and Nolan Ryan were with the Angels which was owned by Gene Autry. We need a sports blog here.

     
  • posted at 2:01 pm on Tue, Sep 23, 2008.

    Posts:

    Interesting article in the New York Times called "A Bailout Above the Law" that starts out with an excerpt from the proposed bailout:"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this act without regard to any other provision of law regarding public contracts."Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure."http://www.nytimes.com/2008/09/23/business/23sorkin.html?_r=4&adxnnl=1&oref=slogin&ref=business&adxnnlx=1222179150-73Js4y5C810MxCmC3eWeQg&pagewanted=print&oref=slogin&oref=slogin(And guess who gets to pay for it, edumcation? The American taxpayer....yep, you are **so** right, this is just hilarious.)But this C-SPAN video of Rep. Marcy Kapture shows me one of the first sensible things I've heard. She wants to bring back a modernized version of the Glass Steagall Act. It's about time these guys were reined in.http://www.youtube.com/watch?v=S27yitK32ds

     
  • posted at 1:38 pm on Tue, Sep 23, 2008.

    Posts:

    Post at 6:25 PM was for edumacation 'cause, well, shucks! He real smart. guffaw! Ooooh! See, me make funny, too, edumacation! Har, har, hardy, har, har.

     
  • posted at 1:36 pm on Tue, Sep 23, 2008.

    Posts:

    Rich there's no argument that Jeff Michael didn't provide the LNS with an analysis and comment in a timely fashion, and I realize he did the best he could with the information he has.However, it was reported by the AP that the FBI is investigating companies at the heart of the meltdown and a lot of that article was provided by law enforcement officials who spoke on condition of anonymity due to it being an ongoing investigation.I seriously doubt if anyone knows the full extent of the damage or the true shenanigans that have lead up to this crisis. Most likely, the facts will trickle out slowly and, even then, we may never know exactly what went on.

     
  • posted at 1:25 pm on Tue, Sep 23, 2008.

    Posts:

    Regarding your checking out the posts...I seriously doubt it ;) Otherwise you would have actually **heard** the radio interview; but, if I recall, you have that medical condition that prevents you from hearing anything but BS....what was it? Rectal Cranial Inversion? That's right! Sorry you couldn't hear the radio interview; it really was quite excellent.

     
  • posted at 1:21 pm on Tue, Sep 23, 2008.

    Posts:

    edumacation your attempt at humor is noted. I'm sure Bernanke and Paulson were rolling on the floor today in the Senate Banking Committee on the Federal Intervention in the Financial Markets. They were probably doubling over when the committee didn't cave in to their demands.Bernanke and Paulson will probably be joining you on floor tomorrow as well when they're before the House Committee on Financial Services, regarding the Future of Financial Services and Exploring Solutions for the Market Crisis.Oh, and incidentally, edumacation, Ron Paul happens to be a member of the House Committee on Financial Services; he's also on the Subcommittee on Oversight and Investigations and a Ranking Member on the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology.Yep, Paulson and Bernanke are probably with you on this, edumacation; it's a real knee slapper.

     
  • Rich Hanner posted at 1:01 pm on Tue, Sep 23, 2008.

    Richard Hanner Posts: 10 Staff

    Note from editor Rich Hanner.I want to thank Dr. Michael for sharing his expertise. We find the biz school at UOP quite responsive in providing analysis and comment in a timely fashion.

     
  • posted at 12:26 pm on Tue, Sep 23, 2008.

    Posts:

    To WTF: Oh and I forgot this: " High ceilings combined with rich cherry wood laminate cabinets, Terrazzo style tile floors, and your own island make the large kitchen area a gathering room that will host mealtime to busy students...."And they actually get paid to utter this nonsense....!It's so funny that I am laughing on the floor. "Cherry wood laminate..." Oh yeah --- I'll pay $200,000 for those cabinets, you know how it makes the food taste better...!specially with a "simulated faux granite counter top". I guess if you say it really fast no one will understand that its FAKE. LOL

     
  • posted at 12:15 pm on Tue, Sep 23, 2008.

    Posts:

    To WTF: GREAT POST! I checked the links. Are you an Angels fan? So they got Doug up for an interview! Good business. Back to Ron Paul. He is a very intelligent man AND WORKS FOR FREE as a US congressman ( Did you read this Bob?) I think we need to draft Dr. Ron Paul for President to help us out of this mess! IT REALLY IS a problem of misallocation of resources. The Realtors and US GOB made money only because it was there sector that was misallocated. It could have been transportation, utilities, communication, anything. Unfortuntaely the F.I.R.E. segment (Finance, Insurance, Real Estate) sector thinks they did something profound. Oh yes----..."and here is the kitchen..." and..." this is a closet...." LOL ROFLIT TAKES "BRAINS" ? NOT!

     
  • posted at 10:57 am on Tue, Sep 23, 2008.

    Posts:

    Ron Paul had an opinion piece on CNN today. Congressman Paul serves on the House Financial Services Committee.From the article:"Laws passed by Congress such as the Community Reinvestment Act required banks to make loans to previously underserved segments of their communities, thus forcing banks to lend to people who normally would be rejected as bad credit risks..."... Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand."In this case, this manifested itself in overbuilding in real estate...Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term."Article in full:http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.htmlCongressman Paul was interviewed earlier on am830 KLAAs Insight. The station broadcasts out of Los Angeles.http://am830.net/audio/KLAA-Oxman-20080923-RepRonPaul.mp3

     
  • posted at 7:54 am on Tue, Sep 23, 2008.

    Posts:

    To: MARZO2008: I agree with you!Those houses I posted, were overpriced when they were sold new at $200,000. In my conversation with the economists at UOP today, they agreed that there is not only a "mark to market" value of houses (the asking/selling prices we see day to day), but there is also an "intrinsic value". This has three components. The largest factor is labor costs. The other two are development costs and costs of building materials. It has been proven time and time again that houses over a long period of time are actually depreciating assets. Most of us as mortals, forget to include inflationary equity, the costs of repairs and upkeep (painting, HVAC, new roof, plumbing,lanscaping etc) and the possibility of a decline in speculative equity (example your once "nice area" is no longer as desireable in the new market).At one time (2004), I thought that the bubble was peaking, but it exploded through 2006. But now that we are at 2002 prices AND THE CRASH HAS JUST STARTED, I CAN SEE PRICES DROP TO THE MID 1990's or lower. Actual labor costs are declining. Very SCARY!

     
  • posted at 7:19 am on Tue, Sep 23, 2008.

    Posts:

    wait until the price goes down. no home at today's prices are worth it. they are all over priced. just like most products in America. things will remain the same fort he next two years. it will not matter who get in the white house. it will only effect the out come of what we will have to work with to fit things.

     
  • posted at 6:45 am on Tue, Sep 23, 2008.

    Posts:

    Here is another from the same Realtor. The house sold for $625,000 in July,2007. It is for sale again. They are asking the same price $625,000. There is a similar but larger house larger lot, in the same development a block away for sale with an asking of $510,000.If it is possible to sell at this price, the owner will have ONLY lost $115,000 in 14 months. How many people can afford lose $10,000/month? The $525,000 house has been for sale for some time. If you want to do your own research. You only need two sources for ballpark figures. www.metrolistmls.com and www.zillow.comThese are public websites and are free.Also if you want to see how fast houses are declining in value, visit the Lodi Association Of Realters website at www.lodirealtors.org and click "market status", and then click "Lodi prices". According to what I see, the August month to month value of 2008 is almost the same as it was in 2002. From an August index of ~390k down to ~225k today. This chart only shows average prices. Look for 1996 - 1997 prices. Not on the chart.

     
  • posted at 6:23 am on Tue, Sep 23, 2008.

    Posts:

    Continued: I ran a quick survey of a few local houses for sale TODAY that were sold by ONE Realtor over the past few years: Here is the result: A house that had asking of $724,950 in July, 2005 was finally sold for $635,000 10 months later in May, 2006 (-$89,950). This same house (remember the recommendation to "BUY NOW") is for sale again at initially the same price (same broker) but has been recently reduced to an asking of $524,950. The Zillow Zindex recommends a value of $328,500. Many local appraisers feel the Zindex figures are too high! That unfortunate buyer got a haircut of $110,000 over 16 months. IF they can sell it at the Zillow estimate it is an additional haircut (LOSS) of $196,450= NEGATIVE $296,500 in 1 1/3 years!! OUCH!! Is this a good time to buy? The buyer of one year ago is the seller of today. Zillow statistics show this house has dropped in Zestimate $18,000 over the last 30 days. I have many more.

     
  • posted at 6:15 am on Tue, Sep 23, 2008.

    Posts:

    I agree with you edumacation. Michael's answers were, for the most part, vague and wishy-washy. Nothing was based on fact, but instead on his own personal views.

     
  • posted at 5:45 am on Tue, Sep 23, 2008.

    Posts:

    I carefully studied the answers to the LNS questions and was dismayed. I understand that it is difficult to correctly define complex issues like these. Understanding this limitation, I disagree with Dr. Michaels responses. I contacted the UOP Business Forecasting Center today and spoke with Dr. Christiadi about the responses.Dr. Christiadi agreed with me. Now "can" be a good time to buy a house, but since speculative and inflation equity are not predictable, it is still possible to lose money on the purchase even over a very long period of twenty years (to give advantage to the real estate cheerleaders). You must tolerate the economic risks of deflation and negative speculative equity as well as being able to reduce your mortgage costs by either having a larger downpayment (decrease LTV ratio) and/or decreasing the term of the mortgage (increase down payment and mortgage equity). Buying any depreciating asset (like a house) in a time like this "can" be financially very risky. The question becomes: What is your financial risk tolerance? Can you afford to lose your savings and gain a new mortgage debt on an asset that you can't sell?

     
  • posted at 4:17 am on Tue, Sep 23, 2008.

    Posts:

    And in other news....The new $700 BILLION bailout has come up with a new emblem:The government today announced that it is creating a new emblem to symbolize this $700 Billion bailout.The CONDOM has been chosen because it more accurately reflects the government's political stance.A condom allows for inflation, halts production, destroys the next generation, protects a bunch of pricks, and gives you a sense of security while you're actually being screwed. Yeah, Jeff Michael, it might not cost the taxpayers anything...what drugs you on, I want some!Great posts t jefferson and Cogito!

     
  • posted at 3:56 am on Tue, Sep 23, 2008.

    Posts:

    Go to Yahoo finance and read today's article by Ben Stein. There's a lot more relevant information and truth there.

     
  • posted at 2:21 am on Tue, Sep 23, 2008.

    Posts:

    Wow, how about a not article. This is almost as good as when Snaith was at UoP talking about a housing Souffle. He was wrong then and still is wrong. Quoting someone from the University south of Target is pointless...good search the net, there are a lot better sources out there that can give you the true story about what is going to happen. As far as this guy being an expert...yea right.

     

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