Irresponsible media blamed for negative feedback loop

By JOHN NORTH

Economist James F. Smith of Parsec Financial took the news media to task for — in his view — fueling public fears that have resulted in the current economic downtown in the United States, in comments made during the 24th Annual Economic Crystal Ball Seminar last Thursday night in Asheville.

Smith and David W. Berson of PMI Group addressed a gathering of more than 200 people in UNC Asheville’s Reuter Center. Each spoke for 30 minutes and then they jointly fielded questions for 30 minutes. (A separate story on the Q&A appears on Page 11.)

Regarding the near-term future for the economy, Berson said, “It looks like it will be a short and mild recession.”

Smith said, “Basically, I don’t think we’ve had a recession. I don’t think we’re in one now,” and he said he does not foresee much more than a mild downturn.

The speakers were introduced by Dr. Joe Sulock, a professor of economics at UNCA, who noted that their forecasts especially should prove interesting to the crowd because “the housing market appears to be in a free-fall.” Credit markets are drying up and “recession appears imminent, if it isn’t already here.”

He added, “The danger, as I see it, is the Fed’s going to overreact and put us back in ‘That ‘70s Show.’ But what do I know?”

Sulock, also director of interdisciplinary studies at UNCA, praised Berson and Smith as “A-plus economists whose opinions” are highly regarded throughout the U.S.

Berson, chief economist and strategist for the PMI Group, noted that he and Smith were on target when they warned of serious impending problems in the housing market during the last Crystal Ball Seminar in April 2007.

“Did we forecast that home prices would be 13 percent lower in value? No!” Berson said the decline was greater than they projected.

In a gloomy vein, he added that “we think the declines in home prices, at best, are halfway done, if not a third done. If we’re wrong, the pessimistic view is a massive decline to a 40-percent drop.”

However, Berson emphasized, “We’re more optimistic than that.”

Some in the crowd muttered their disagreement when he said, “In Asheville, (housing) prices haven’t declined. The market might be slow, but prices aren’t down.”

In contrast , Berson said places like Las Vegas, Nev., and nearly all of Florida have suffered 30 to 30 percent dips in housing prices.

He said all of the parties involved are at fault for the housing price declines, including the Federal Reserve System, the lenders and the borrowers.

In his prediction of a short and mild recession, Berson said, “We expect home sales to stabilize in the second half of the year — by the fourth quarter” at the lates and “no necessarily to increase, but to stop falling” at least.

“The biggest problems is we’ve got such a high number of vacant houses,” which he termed “the single biggest reason for the decline in housing costs ... There are simply too many houses on the market, given the demand for homes.”

He added, “Home prices won’t start to pick up until 2009, perhaps 2010.” Berson said “the areas with the biggest vacancy problems” are Las Vegas, almost all of Florida, Northern Virginia, California and an area around Boston.

“By the second half of this year, we’ll see some of that light, but it’s not over yet.” Berson concluded.

Smith, the chief economist for Parsec, was introduced by Sulock as a four-time winner of the most accurace economics forecaster among the panelists of prognosticators for The Wall Street Journal. Sulock also said Smith is a decided optimist.

He began by recommending a book, “Manias, Panics, and Crashes: A History of Financial Crises” by Charles P. Kindleberge.

“If you haven’t read this book, read it,” Smith urged. “If you’ve already read it, reread it.”

He noted that the book could be helpful for readers to keep calm when economic panic appears to be running rife now. “Banks are in a panic around the world,” Smith said. “The problems are global — Japan, not so much in China, Europe, the United Kingdom....”

“If you really want to scare yourself, go to the Federal Reserve Web site,” where there is an eye-opening treatise on a negative feedback loop — a theory of self-fulfilling prophecy.

Smith then read from a paper titled “Talking Ourselves Into a Recession,” which, “by the way, I think that’s the problem.” He cited a poll that indicated that 90 percent of respondents felt the U.S. is in a recession.

Shaking his head, Smith said Americans have “not been this pessimistic since March 1982, when there was a 9.5 percent unemployment and a 10.5 percent consumer price index.

“If you were pessimistic back then, you had a good reason. Now, you don’t have a good reason,” noting that the current jobless rate is 5.1 percent. He added that interest rates are 2 percent — a figure that has only been lower twice in the last 50 years. Smith said inflation “is a bit high,” but otherwise, the situation is much better than in 1982.

“So where does all this (recession talk) come from?” Smith asked, rhetorically. “The media! The media will report on the person who loses his or her home, but not on” the satisfied , stable homeowners.

The home ownership rate went up 0.2 percent last month for the first time in two years,” he said. “Do you think the media hyped it? No!”

On Sept. 18, 2007, one in four small-business owners expected the economy to improve, according to a poll, which triggered them to reduce their hiring, Smith said.

“The evidence strongly suggests warnings in the news result in cutbacks by small-business owners,” he asserted. “Would it have been so bad without all the hoopla from the media? I doubt it.”

He said checks to the American taxpayers should start arriving soon as part of the Economic Stimulus Package. Smith prompted laughter from the crowd when he added, “I think whenever you give money to U.S. citizens, they’ll spend it. That’s our mantra.”

In addition to the projected increase in consumer spending, he said housing prices are “probably not going much lower ... Someone, somewhere is probably going to buy a new home.

Another good sign of the economy is that industrial and manufacturing production continues to rise, “which is very good news — that index indicates we’re growing.” The government put the aforementioned information in a report, he said, “but the media almost never bothers to tell you” about it.

Smith also another good economic indicator that is being overlooked is that personal income is growing.

He also included a complex formula, based on economic date to be released from the government on Halloween will indicate whether a Democrat or Republican will win office. “From Harry S. Truman to George Bush, it’s worked.” Smith said.