WASHINGTON, Jan. 16 (UPI) -- The view of a landscape depends entirely where exactly you're standing. David Berson, chief economist at Fannie Mae, proved this was also true in the economic sphere Tuesday with an address to the Washington chapter of Financial Executives International.
To an investment banker, 2001 was a dreadful economic year, and 2002 looks to be worse -- that is why the major Wall Street houses are notably less upbeat than other economists in their outlook for the year. To a retailer (unless it's Kmart) 2001 was a pretty decent year, and the outlook for 2002 is thus also reasonable. To an Enron ex-employee, looking back at 2001, 1929 doesn't paint a black enough picture as a comparison -- maybe 1348, the year the Black Death hit Europe and wiped out a third of the population, would better foot the bill!
To an economist involved in the housing market, of course, 2001 was a record year and the outlook for 2002 is correspondingly rosy. Berson's forecast for the housing market does include uncertainty, but only whether 2002 will be the second best mortgage origination year on record (after 2001) or the third best, trailing 1999 but still ahead of 2000. Refinancings, he admits, are likely to be down somewhat this year, although not by much because the holdover into the first quarter from homeowners trying to refinance in 2001 was so huge. He expects new mortgages to be up to a record since any slight dip in volume will be compensated for by a further increase in prices.
Berson outlined four outstanding factors which he expects to contribute to revived growth in 2002 (a sharp production increase to rebuild inventories in the first quarter, then slow growth until the summer, but growth running at an annual rate of 4 percent per annum by the fourth quarter.)
First, the Fed has cut interest rates aggressively.
Second, the Bush tax cut, which put cash into people's pockets in the third quarter of 2001, will continue to do so in 2002.
Third, energy prices have dropped sharply since the summer, which puts more purchasing power in people's pockets.
Fourth, the record level of cash-out mortgage refinancings in 2001 has put an additional $85 billion into consumers' pockets, about $50 billion of which has already been spent.
In addition, Berson sees the upward blip in long term rates since November as being indicative that the economy has already turned or is about to do so -- only in 1990 and 1980 did interest rates rise before the economy turned, and then by only a few months.
Berson is clearly a highly skilled and experienced economist, and nobody at this stage can prove him wrong. But if one wanted to, one could point out that three at least of his four stimulative factors were already in play in the last half of 2001 but don't seem to have caused much growth. The upward tick in long-term interest rates has already reversed a third of its movement (the 10 year Treasury bond yield was 4.21 percent at its early November nadir, 5.16 percent at its peak in December, and is now back down to 4.85 percent -- one year ago it was at 5.62 percent.) The ability of the U.S. to lead a world recovery is severely constrained by its $400 billion per annum payments deficit, while the ability of the consumer to lead a U.S. recovery is constrained by his record levels of consumer debt and delinquency rates. Moreover, one factor which Berson didn't mention was the stock market: It is currently trading on around twice the historical average price-earnings ratio, and any reversion towards its long term trend would cause a considerable further negative wealth effect that would wipe out a nascent recovery.
While we're on the subject of forecasts, Berson also mentioned that, for 2002 and beyond, for the foreseeable future, Wall Street is forecasting that Fannie Mae will have "mid teens" growth rates in earnings. If this is true, rain or shine, then for Fannie Mae the laws of the market have truly been repealed. The company, a "natural monopoly," is in the position of the British clearing banks before the 1980's financial deregulation, and some kind of "excess profits tax" should be imposed to redistribute its unearned monopoly rents to the needs of the rest of us.
We will know in six months' time whether Berson was right or not. In the meantime, there is one simple conclusion to draw. For those who spent 2001 in the housing market, and still more in the mortgage origination market, in the words of the 1932 hit song, the Sun Has Got His Hat On!
