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CNN Transcript re: Recession?

Are We in Recession?; Where Do the Candidates Stand on Your Money?; Bank of America Purchasing Countrywide

Aired January 13, 2008 - 15:00 ET


ALI VELSHI, CNN HOST: Welcome to YOUR MONEY. Where we look at how the news of the week affects your wallets. I'm Ali Velshi.


ROMANS: If you have been concerned that we are headed for a recession, you're not alone. The majority of Americans think so too. A growing course of economists are right behind them.

VELSHI: According to last week's job report, unemployment jumped from 4.7 percent to 5 percent. For most of you, that may not seem like a big deal. It is a significant increase in the number of people without a job.

ROMANS: Add that bad news to record-setting energy prices, housing foreclosures, retail holiday sales; you might think the economy is already in a recession. Ali as you reported this week, we won't know from the experts until it is over. For some people, they think they are already there.

VELSHI: Except for some people, they don't think we are headed that way. One of those people is Fed Chairman Ben Bernanke. Here is what he had to say this week.


BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth. As I mentioned, there are down side risks. It is very important for us to stand ready, as I mentioned to take action to address those risks and provide some insurance against those negative outcomes.


VELSHI: Take substantive actions to prevent those risks.

ROMANS: Translation.

VELSHI: They are going to cut interest rates again January 30th is when the Fed stands next to make a decision. It might do it before that. That's what the market thought. We have two economists here to help us figure out where we are, what it means for you and me and everyone else in this country.

Peter Morici is a professor at the University Of Maryland School Of Business and the former chief economist at the U.S. International Trade Commission. Lakshman Achuthan is the managing director of the Economic Cycle Research Institute.

Welcome to both of you. Thank you very much for being with us. Lakshman you are in the business of predicting recessions. I guess there are some lulls in this business. Where are we now? You are the one who is going to tell us, your figures say we are in or headed for a recession.

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INSTITUTE: Well, we are certainly in a very precarious state. I don't think a recession is a done deal yet. What we are seeing in the key indicator(s) that generat(e) recession, is the beginning of a self-reinforcing downturn. You don't want that to continue because then you are in a recession. Now, Chairman Bernanke is in a unique position to make the statement he made because he is one of the only people who know if we are going to get what need is in order to avert a recession.

ROMANS: Peter, let me ask you what you think is needed to revert a recession? You told me that when you look at those job numbers, outside of the private sector is where the hiring is. That means the government -- you are worried about what is going to happen in the next few months and what we are in right now?

PETER MORICI, UNIV. OF MARYLAND BUSINESS SCHOOL: If we measure GDP on a monthly basis as opposed to a quarterly basis, I wouldn't be surprised if December were a month of negative growth. Bernanke really can't say we are headed for a recession, it would be wide spread panic, he has to say that we are not going to have one. I don't believe he is on track.

Cutting interest rates alone is not going to solve the problem. It won't have much effect on the ability of all day mortgages or jumble mortgages because the bond market has broken down. They have not taking any actions to really improve that basic situation. The takeover of Countrywide is more or less a celebration of failure. It doesn't signal something new and better is going to follow.

VELSHI: That is interesting. All right. Lakshman let me ask you about this. You are saying that maybe Bernanke has a better clue because he knows what is going to happen, because he can actually be at the meeting when they decide to cut interest rates. First of all, are they going to continue to cut interest rates by .5 percentage point at the end of this month? And as Goldman Sachs says maybe another 1 1/4 through the course of the year and secondly will that be enough?

ACHUTHAN: There is an important distinction. Look they are going to cut interest rates. There is no debate about that, whether they like it or not. The question is, do we get prompt policy stimulus? If it doesn't happen promptly, they can cut until the cows come home and you will have a recession.

If you think back to the last recession, Chairman Greenspan was at the helm. In January of 2001, he began cutting rates. He cut 200 basis points very, very quickly. We still had a recession, because the timing was too late. We are -- we have a very brief window here where some stimulus may abort ...

VELSHI: Tell us why -- the day they cut rates, people's loans get cheaper.

ACHUTHAN: Yes, but see what happens, this is where Peter and I are on the same page, is that once you start a sequence of events, it begins to gain momentum. We see sales falling down and getting weaker. Then, production, for example, if it was multi-production, begins to decline. Once production declines, job growth could go negative, which impacts incomes. Then, that comes full circle and brings down sales.

That's a self-reinforcing downturn. Once it starts, you can't stop it. That's what they have to get ahead of. They are running out of time. It is not baked in the cake but we are headed in that direction.

ROMANS: Peter, if there is a half percentage growth, if there is a half percentage point contraction in the economy it still feels the same to me sitting where I am sitting. And in some places it is already clear.

In Michigan and Detroit, it is already clear there has been a recession there for some time. What happens from this point forward? We have Congress talking about some kind of stimulus. The president, his aide saying he is watching all the numbers and may announce something at the State of the Union. When it is Congress waiting for more numbers, is it too late?

MORICI: I think it may well be too late, because of the kinds of stimulus they are talking about. If the president gave us back $500 a piece in February, would that jump-start the housing market, would that make mortgages more available and put equity back in people's pockets by raising home prices? I think not. Cutting interest rates might make the commercial paper market a little more viable than it has been but it won't repair the mortgage market.

They are not taking the structural steps necessary. Paulson's Hope Now Program really doesn't address the mortgage crises. They have been too late on this one. They have really lacked creativity; at least Greenspan was forward looking and very unconventional. He was willing to jump forward. Bernanke seems to be running the economy through the rearview mirror; these are not the black boards at Princeton. He is running this place as if it was MI University using the models we use. It doesn't work.

VELSHI: That's exactly right. The economy is not a blackboard at Princeton. I think Lakshman; you guys have both said it is what it feels like. Will that stimulus help -- will lower loan rates help people? This is psychological. Let's be clear on this. Whether we have got blackboards to tell us what a recession is. A recession is people's behavior is it not Lakshman?

ACHUTHAN: Absolutely. If we do, indeed, get a recession, this will be the most forecast recession we have ever had. It is very unusual in that respect. The fundamental reason why is because we have had all these bad shocks yet the economy has some how muddled through and been resilient. Now, the cyclical vulnerability is joining all of these negative shocks and that makes it very difficult to avoid a recession. You have to be very aggressive as Peter was suggesting in terms of policy to counter those forces and the psychology is critical.

For example, during the holiday season, people would go to the pumps, they would lose the battle. They would have to fill up their cars but they would still be OK with going to the mall and buying something at a deep discount. All of the retailers that made money had huge sales they had to get the consumer to spend money.

VELSHI: Thank you for this. MORICI: Two things, retail sales are hardly up but imports are up a great deal, which means that demand for U.S. products has already turned down. That is really quite problematical and we still don't have a repair for the housing market. Without those two things, we are not there.

VELSHI: Thanks, guys. Lakshman is managing director of the Economic Cycle Research Institute and Peter Morici, professor at the University of Maryland School of Business. Thanks to both of you.

ROMANS: There is a spirited debate going on about what's happening in the economy. Up next on YOUR MONEY, we are going to tell you what the presidential candidates are going to do about it.