Mitch Stapley espouses the “First Rules of Holes:” If you’re in one, stop digging.
The chief fixed income officer for Fifth Third Asset Management said last week the Great Recession put the country “in a hole, but we didn’t go over the cliff.” He gave the Obama administration credit for enacting $787 billion in stimulus programs, but acknowledged this was a deeper recession with a slower recovery than previous downturns in 1981-82, 1990-01 and in 2001.
The slow recovery has spurred “our Harry Potter moment,” said Stapley, in which the Federal Reserve and Obama administration will consider such options as quantitative easing for the second time in recent years, a process that “won’t create the same bang for the buck that it had the first time.” “Additional stimulus spending is probably counterproductive at this point in the economic cycle,” he said.
“We’re at a time when the cost associated with refinancing this debt will begin to choke off other government programs,” Stapley told a luncheon audience of the Grand Rapids Chapter of the Institute of Management Accountants.
He said the Fed will implement QEII by crediting its own account with money it creates “ex nihilo — out of nothing.” And that, Stapley said, is the magical Harry Potter factor.
When the Fed purchases financial assets, “the idea is that the banks will then have more money available to lend to consumers and businesses who in turn spend the money back in the economy.”
The risk of adding more debt to an already overloaded system is unlikely to yield enough “pop” to boost the economy, Stapley said, particularly when currently “it’s not a question of the cost of money.” Thirty-year mortgage interest rates are at historic lows and new home sales — following a successful federal tax incentive program that expired earlier this year — “have clunked.”
He also noted consumer confidence has flat lined at the same time the public has found “financial religion,” with savings rates escalating in order to attack massive personal debt.
In “rebuilding their own balance sheets,” consumers are “acting with the absolute correct level of responsiveness.” But, he added, “a lot more work is ahead of us on the consumer credit side.”
Businesses and financial circles are stuck in a holding pattern due to onerous unknowns lurking in massive federal health care and financial reform measures.
“Uncertainty is the biggest economic headwind today, killing job creation, consumer confidence and spending,” said the 25-year veteran as a fixed income analyst.
Stapley doesn’t anticipate a double-dip of recessionary conditions, but “we’re about at stall speed with 1½ to 2 percent growth continuing well into 2011-12.”
“We avoid the double dip as long as we avoid a policy error, such as raising taxes, but growth remains subpar.”
Michigan is “doing a lot better on a year-over-year” basis, Stapley noted, and “we’re seeing definite improvement” in the state’s economic outlook.
“A quiet secret is that 27,800 jobs were produced in July in Michigan. Home prices are up. We’re clawing our way back.”