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Richard DeKaser, Parthenon Group deputy chief economist, breaks down the latest in the European debt crisis, and the risk of financial contagion to th...
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Financial contagion and -- me now through to the case or.
Forecaster of the month by MarketWatch in October congratulations Richard.
Thank you very much right now let's talk about this contagion everytime we get a word contains in -- Wall Street will get a look nervous Brigham downforce exactly how would it look.
Well basically what we're looking at potentially is a replay of what we saw in October of 2008.
In the context of the Lehman collapse.
Banks lend each other huge sums of money on an overnight basis to the extent that they fear.
That institutions are gonna make good on -- short term loans they charge higher rates those higher rates translate over into more restrictive credit lending so.
The risk is that we have all this fear -- you know in 2008 was about mortgage backed securities on bank's balance sheet and 2011 it's about.
Sovereign debt on banks' balance sheet but the fundamental argument is the same.
I don't think it's entirely just a potential problem but I think to some extent it's a real problem we've already seen for example.
The European Central Bank which does -- periodic survey of bank lending standards reported in October dramatic tightening of lending standards.
Here in the US the Federal Reserve does a survey of lenders.
A -- exactly see tightening but we saw the slowest pace of easing that we've seen since using began about two years ago.
So we already have a financial crisis translating into something of a credit crunch.
It is of manageable proportions now but it always presents the risk of getting much worse.
But here's -- thing Richard I was really want your pieces -- you talked about two powerful conflicting forces.
The European sovereign died credit situation.
And also -- deleveraging and you know it's interesting because we had -- Bob Hope our Black Friday weekend we had great numbers yesterday for Cyber Monday.
And today we -- consumer confidence numbers that came in significantly above estimates.
And that could kill we've stayed through this on the fact that -- -- the average American doesn't care about European dead bond prices in contagion right now.
While I'm glad you asked because the answer is yes I mean and we were talking just a moment ago about downside risks they're not to be dismissed their very real.
But underlying this all is a very long progressive gradual ongoing recovery in household balance sheets.
You know one of the defining characteristics of the Great Recession was the largest loss in wealth the adjusted for inflation etc.
Since the 1930s.
Well for the past couple of years that's been coming back in fits and starts to be sure.
What we're seeing people pay down their deaths were seeing them save more money we're seeing appreciation in certain assets certainly equities to a lesser extent houses.
But the balance -- recovery process which I would argue is underpinning the very slow pace of recovery of the severity of the recession.
Continues in eggs are -- households and businesses alike current far better financial condition today than they were one year ago which was far better than it was.
A year prior to that.
And I think one -- -- we'll continue to be better than it is today so this underlying improvement in financial conditions is what I think people enable.
The US economy to skate past the severe European financial crisis.
Without joining it into another recession.
And on that -- -- one other thing -- -- I found very interest thing you talked about the unusual relationship between animal spirits in economic fundamentals having broken down somebody.
Exactly what does that mean and one what would that threat to our recovery be from a well you know over the long run fundamentals tend to apply but over the short run we -- -- behavior depart from what those fundamentals look like today's consumer confidence rebound I think -- one.
Sign of overly pessimistic consumers getting back in sync with a not quite so egregious economy.
Other areas where we might see that the stock markets.
But valuation is far depressed relative to what it should be.
Given today's level of interest rates given today's level of corporate profits.
Clearly that is due to the uncertainty looming related trivia European financial crisis and what lesser extent.
The US debt to uncertainty.
Here in the US.
But again.
The fundamentals -- should prevail in the long run I think the disconnect now is with confidence both consumer and investor.
Far below where it should be and over time those tend to correct.
All right thank you very much -- dictator of the Parthenon group and congratulations again on an award.
Thank you very much for bankruptcy protection.
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