Speaking at the British Consulate in Kendall Square, last week,  Morgan Stanley Chief Market Strategist David Kelly predicted slow (3%) growth for the US economy in 2012–unless  there are no major disruptions  like  last year’s  Arab Spring, the European Debt Crisis,  the Tsunami in Japan or  what he termed a “home grown” crisis like the one created when Congress allowed this country to hover on the brink of default rather than raise the debt ceiling.

While the deficit is cause for concern, he said, a default would have thrown the nation into a true “great depression.” In diminishing its debt,  the US should proceed slowly. Both tax and entitlement reforms are needed, he said, and moving bit by bit can lead to a balanced budget within 7 years (?) whereas trying to change everything all at once could lead to disaster.

Despite the crises of  2011,   he pointed out, the Standard and Poor’s Index ended up  just .003 percent lower than it had been  at the year’s start. The coming year will  be one of uncertainty, but “the US economy can grow through that, ” he said.

According to Kelly,   factors in several areas will  likely lead to growth:

Housing:
-The  current very low level of housing starts, low inventories and  rising rents will lead to greater demand for homes, especially as consumer finances continue to improve.

-With mortgage rates at 3.8 percent, consumers are refinancing their homes, which means that consumers now have 14% disposable income, compared with 11% in 2007.

-This is the most affordable housing market “ever. ” Mortgage payments now account for  just 10 percent of average household income–which means that people have more money to spend elsewhere.

Automobile:  

-The age of the average vehicle in the US has risen from 9.8 several years ago to ten years;  as cars break  down, sales will go up.

Capital Spending
-Companies have held back on capital spending; as confidence rises,  spending will increase.%.

The key to it all, he emphasized, is confidence that the economy will improve.  Still, he said, he wished that  Ben Bernacke and the Federal Reserve Bank would take the year off “to work on their golf game” instead of telling people that interest rates will remain low for the next few years–which encourages people to put off spending.  What is more, he said,  keeping interest rates low will discourage banks from lending–because they do not want to be locked in to low rates for thirty years, when they know that rates are likely to rise a few years from now.

A link to Morgan Stanley’s  Guide to the Markets for Q1 2012     is available at

https://www.jpmorganfunds.com/cm/Satellite?pagename=jpmfVanityWrapper&UserFriendlyURL=insidemarket_browsetheguide

—Anita M. Harris

New Cambridge Observer is a publication of the Harris Communications Group, a strategic PR firm specializing in integrated marketing communications, thought leadership,  media relations and social media for companies in health, science, technology and energy, worldwide. 

Over a brown-bag lunch at Harvard’s Joan Shorenstein Center on the Press, Politics and Public Policy, New York Times Business  Columnist Joe Nocera opened his talk on the daunting question, “The Economy: Where Are We Headed?” with a resounding:  “I don’t know.”

He  offered background on the current (and future, he predicts) financial crisis, focusing first on the  housing foreclosure  crisis, and then on the banking industry.

Regarding housing, he suggested that– unfair as it may seem to people who didn’t buy into risky mortgages they couldn’t afford–we as an nation should bite the bullet and find ways to help those who did hold onto their homes.  One suggestion:  rather than  kick people out of foreclosed  homes, banks could rent them to the forfeiters  with an option to buy them back in five years with a 10 per cent down payment.

Regarding banking, Nocera said he sees no reason why “shareholder value” should remain the cornerstone  of banking industry strategy.  He  feels little sympathy for those who bet that they’d win big profits–up to 25 per cent–but lost, he said.

In Nocera’s view, Washington currently seems paralyzed by indecision over how to proceed.

One option  is the “bad bank,” in which the government buys all of the bad assets but that option has stalled because no one knows what the assets are worth.

Another is an  “RTC”  strategy like that used during the Savings and Loan Crisis of the  1980s,  in which the government formed the Resolution Trust Corporation to take over  banks. The RTC  allowed some to fold, and sold others, without the assets to new owners. The RTC  then gradually sold aoff the assets, with riders assuring that if the new owners made money, the government would receive a portion of the profits.  The process took ten years, Nocera said, but it worked.

While  President Obama  is confident about his ability to make decisions on many topics, the economy isn’t one of them, Nocera said.   Obama  chose  Bush holdover Tim Geitner as Treasury Secretary over former Harvard President Larry Summers mainly for personality reasons, but, Nocera predicted, Geitner is not likely to be able to move away from the thinking of the previous administration in order to come up with much needed  new options.

Nocera commented  wryly that his  blog, the Executive Suite,  has served as a clearning house for ideas on how to solve both the economic crisis–none of which appear to have been taken up by either administration.

Nocera’s latest post as of this writing is entitled” Bankers Gone Bonkers.”  It appeared on January 30, 2009 at http://executivesuite.blogs.nytimes.com/.

AMH

New Cambridge Observer is a publication of the Harris Communications Group of Cambridge, MA.