QUESTONER: Are you? Well, for, I'm just saying for a journalist, can I follow a lot of people in the room who tweet, and so you kept up on what people are thinking, just as so that way, you don't have to do any creative thinking on your own. Sam, do you tweet? QUESTONER: Dickerson tweets a lot. MARK ZANDI: Is that right? Well, I'll give you my quick three-cents on where we are. I don't think we'll double dip, but it will be a close call. I put the odds of going back into recession in the next six to twelve months at 1 in 3. QUESTONER: You've really narrowed your odds, then, haven't you? Because you started at, like, one in four, one in five? MARK ZANDI: Yeah, if you had asked me three or four weeks ago, I would have said 1 in 5. So, that clearly has risen. Theit's not surprising that the economy has slowed this summer. Fading fiscal stimulus, the end of the inventory swing in manufacturing, strongly argued for some slowing in growth, so I'm not surprised that growth has weakened, but I am surprised at how much it has weakened, and I think it's due primarily to European debt crisis and the impact that had on our stock market back in April, May, and June. Stock prices are down 10, 15 percent, and I think this economy is unusually sensitive to movements in equity prices for various reasons. So, it knocked the wind out of confidence, and caused high end consumers to become a bit more cautious, sent a signal to businesses to pull back a bit, and it came at the wrong time. The recovery was just about ready to evolve into a self-sustaining economic expansion and it got hit by that shot. [0:02:18] I would also throw into the mix that Congress failed to pass Emergency UI benefit extensions, so we had a four, five, six week period when a couple, three, four hundred thousand people were running off the UI roles and I think that was a very bad timing, and also hit confidence. So, the weakening growth has been more than I had expected. I guess I'll throw in a third thing. I will say I am surprised at how sharply the housing market has pulled back in the wake of the tax credit. It's not at all surprising that it would weaken the 3.8, 3 million existing home sales, which is what we got yesterday. That's a new cyclical low, that is surprising to me. So, I think that also has played a role. I don't think we'll go back into recession, primarily because big business, mid-size companies are very profitable and their balance sheets are very strong, they have a lot of cash, they have been de-leveraging, and so they have a lot of financial fire power. It's not really a question of can they invest in hiring, it's a question of are they willing? And given that, I don't think they'll start cutting, but it doesn't mean they will start hiring and investing quickly, but I don't think it means they will cut, and that is what you need for a recession. Also, the banking system is slowly repairing, particularly large banks. They are now very well-capitalized, in fact, in aggregate, the 19 largest bank holding companies that went through the stress test last spring are arguably over-capitalized. They are capitalized to a depression, which we are not going to get. [0:04:07] And as they feel more comfortable, as regulators feel more comfortable with the environment, and as credit conditions continue to improve, and they are improving quite rapidly, I think we will start to see credit flowing more freely. I don't think it's going to be like a light switch going on. I think it's just going to be a slow, but gentle improvement in credit conditions, and so that should also help. And third, I think, some of the policy uncertainty that has been weighing on decision making will abate. You know, we've gone through some pretty significant policy debates which are necessary, and I think it's important to nail these things down, but when you're in the middle of them, and in the immediate wake of them, I think it does create a high level of uncertainty that causes businesses to be cautious, and that will fade, as we make our way, and to make sure, and hopefully, we nail down, soon, thewhat we are going to do about the tax code. And once we are past that, I think uncertainty will slowly abate and businesses will get their groove back, and we will be off and running. So, if you asked me back in another year, I'll have good news for you then. [0:05:26] QUESTONER: Right, I hope to still be employed. Let me ask you one or two, and then we'll go to my colleagues, starting with Jill Lawrence, Miles, Vince, and Francine Keefer, and John Dickerson. You were talking about the drop in housing and existing home sales yesterday. What does it mean for the economy and does it portend additional price drops in housing? MARK ZANDI: Well, the housing market is double dipping. Sales, obviously, construction, and I do think house prices will fall further. The key metric for house prices this year from sales that are distressed, foreclosure in short, that share had been declining over the past year, partly because the tax credit is juicing on non-distressed sales and partly because of the loan modification efforts delaying the movement of loans through the foreclosure process to end foreclosure or short sale. Both of those things are now reversing. Of course, the tax credits are off and non-distressed sales have fallen sharply. And I do expect foreclosure and short sales to pick up as more loans move through the modification process. In fact, you can see already, REO, which is the last stage of foreclosure, where the bank takes possession of the property and that's right before it tries to make a sale, is rising. It's been rising for six months. [0:06:47] Most of the Fannie, Freddie, FHA, the private label security, the loans backed with private label securities, is sub primal today, that's declined, but Fannie, Freddie, FHA REO is now rising, and bank REO is rising pretty rapidly. So, I would expect this year of sales that are distressed to rise over the next six to 12 months and that means house prices will fall further. If I had to put a number on it, and I do because clients pay me for any number, it's 5 percent decline, further decline in national house prices, based on the key showing national index. QUESTONER: And that compares to how much to date? MARK ZANDI: They are down 30 percent to date. The peak was Q1 '06, the current bottom is Q2 '09, and that's another 5 percent decline. QUESTONER: One more for me and then we'll move to my colleagues. As you probably know, yesterday, Republican Leader Boehner gave an economic speech that had a number of interesting points to make. One of them was, "All this stimulus spending has gotten us nowhere." Perusing your document, How the Great Recession Was Brought to an End, I gather you don't agree with Mr. Boehner? [0:08:02] MARK ZANDI: No. QUESTONER: The reason you don't is? MARK ZANDI: I don't agree. I think that we would be in an immeasurably worse place if not for the stimulus. I don't think it's any coincidence that the recession endedthe great recession ended at precisely the same time that the stimulus, and in this case, when I say stimulus, I'm talking about the Recovery Act, because there's a lot of other stimulus, and the Recovery Act was providing its maximum economic benefit, which was Q2 '09 and Q3 '09. The key link between stimulus and the economy is the stimulus spend out, so we went from no stimulus in the first quarter of '09 or a minor amount of stimulus in the first quarter of '09, to about $100 billion in stimulus in Q2, and another $100 billion in Q3. It's that change that provides the economic juice, and that's when the recession ended. Now, the National Bureau of Economic Research has not officially dated the recession, but it will and it will be June or July when the recession ended. And this is an important point because this is why the benefits of the stimulus are fading because we are going from about $100 billion in stimulus spend out, which is tax cuts and spending increases, back to zero again, and it's that transition from $100 billion to zero that is actually a drag on economic growth and that's why stimulus goes from being a source of growth to being a drag. [0:09:29 ] But I don'tI think if we had not had the stimulus, estimates that are author-- for example, by the Congressional Budget Office, are exactly right, we would have 2.5 to 3 million fewer jobs today than we actually have. So, employment, payroll employment is off 8 million jobs from the peak. If we had not had the stimulus, we would be off by about 11 million jobs. And just to translate that into unemployment, that's about a couple percentage points on the unemployment seal, instead of a 9.5 percent unemployment, we'd have 11.5 percent unemployment rate. So, I think that's just wrong and the stimulus has been very helpful and it hasit certainly hasn't helped as much as anyone would like, although I think that's just a matter of expectations, I think the expectations were wrong. I think they were misplaced, but the stimulus did exactly what it was intended to do. It was to end the recession and jump start a recovery. Jill? JILL LAWRENCE: Well, I have a question related, actually, to the stimulus. The factors MARK ZANDI: You must be important because he went right to you. JILL LAWRENCE: No, I just kind of caught his eye for a second (inaudible). Okay, what was I going to say? So, basically, you've talked about in terms of why the economy is (inaudible) and so far, the direction of recovery seems to be beyond their control, and (inaudible), and I'm just wondering, if there is anything they could have done with the stimulus, bigger or smaller, different things to spend it on, that could have made it or anything that should have been (inaudible)? [0:11:09] MARK ZANDI: Yeah. Can you hear the question in the back? No? Yes. She asked why the Phillies are going to win the World Series. No, she asked is there anything else the administration, I'm stir crazy. Anything else the administration could have done to make the stimulus more effective? Is there anything more they can do now to help support the recovery, right? Yes, I think if thethinking back to January, February of '09, and if we werethinking about how we would design the stimulus package to make it more effective, I would have made it larger. I think we underestimated, significantly underestimated the severity of the situation that we were in, and still are in. And that would have argued for a larger stimulus package. I would have made, I would have increased the size of the stimulus package by more temporary tax cuts, probably a payroll tax holiday geared towards stimulating job creation, jobs tax credits, something similar to what we have in place now, but does anyone know we have a Jobs Tax Credit now in place? You don't because it's so small and it's not very effectively designed. I think if we had done that, that would have given us a bigger kick out of recession into recovery, and raised the odds that we would get escape velocity, which we have not achieved yet. I also think it was a mistake to conflate infrastructure spending with a stimulus. I don't view infrastructure spending as stimulus. Not to say that it's bad policy. I think it's very good policy, and I think, for goodness sakes, we can use the jobs now, and over the next couple, three years, as the infrastructure spending spends out, but I don't think that's an effective way of getting money into the economy quickly, which is how I define stimulus, so, and I also think it is one of the reasons why people have improper expectations regarding the stimulus. They view the stimulus as government spending that's wasteful, and I think, in part, that's because the Recovery Act had about $100-$150 billion in infrastructure spending. Now, in all fairness to policy makers during that period, first of all, there's a lot of uncertainty, knowing the magnitude or the scale of the problem that we were in. You know, this is in hindsight, to a significant degree. There were people who were, you know, arguing that it was worse, and we should do more. And they were right. [0:13:55] Second, you know, the infrastructure spending was a very small piece of the stimulus pie. It really was about $100, $150 billion out of $862 billion guesstimated costs to the Recovery Act. So, it was a small piece. And third, for me the most important criteria for the stimulus package in that time was getting it done fast because the economy was going down fast, and so it was critical for policy makers to get it together immediately and so they had to make compromises to get it through the senate, as I recall, and you know, part of that compromise was adding to the infrastructures of that thing. NIH spending a significant part of that, and it was something that Senator Specter demanded and he got, to get his vote, as I recall. So, I think I would havein all fairness to the process, alacrity was the key criteria and he didn't really have time to design a package that probably at the end of the day, wouldn't have wanted to get. [0:15:11] Now, to your second question about what to do now, very limited options. I mean, particularly, put into a political context, I mean, given the political environment, I think it's very difficult to envisage any significant kind of policy response to the current economic problem, in the near term. In the next six months, I don't think there's much that can be done to significantly affect the economy. Perhaps even as long as for the next year it's going to be very difficult. Now, there are a few things that could be done, and should be done, and it would help on the margin. Most importantly, I think, as I mentioned earlier, theyI think Congress and the administration should come to terms on the tax cuts. I do think, as I mentioned, policy uncertainty is an issue, and I think, right now, the tax, the uncertainty regarding the tax code is a problem, and I would nail that down. So I think they should come together, figure it out, and I don't think this is too complex. Just come to terms and let's figure it out. I think that would make a big difference. There is a bill in front of Congress, regard to small businesses, I think that should pass. I think that would be helpful. I don't think it makes a big difference, but small businesses are a key to the job machine. They do lack credit. Small businesses rely on small banks, and unlike big banks, which, as I mentioned, are highly capitalized, small banks are under-capitalized and failing. And they need credit. And third, there is some proposals to help facilitate mortgage refinancing. The Federal Reserve is working very hard to keep fixed mortgage rates in your record lows. The Freddie Mac confirming loan rate is at 4.4, which is about as low as it gets. If you look at the distribution of mortgages and their coupon, their interest rate, it's somewhere between 5 and 5.5 percent, so you have several million, potentially up to 10 million loans that could be profitably refinanced, and they are not refinancing as quickly as they could, because of some significant impediments to that refinancing process, that policymakers could address. And that would make a difference, a meaningful difference. I don't know about significant, but it's meaningful, over the next six months. The average saving would be about $100 a month for the homeowner refinancing into a 4.4 mortgage if they could get that. And that would be helpful. [0:17:31] QUESTONER: We're going to go next to Miles, Vince, and the Francine Keefer, John Dickerson, Ian Swanson, Jim Landers, Bob Samuelson, and Mark Shields. Miles? MILES: Can I ask you to just speculate a little on (inaudible) during the effects of the future shocks on the course of economic recovery, (inaudible)? And (inaudible) that are actually (inaudible) the capability? What exactly something like that has taken on the face of the recovery, and prospects, and ever-reaching state of (inaudible)? QUESTONER: Would you summarize for the folks back here? MARK ZANDI: Yeah. The question is, what impact would various kinds of shocks, potential shocks have on our economy, and Miles mentioned the potential or the rumor that Iran may strike atIran's nuclear capabilities. Excuse me, Israel strike at Iran's nuclear capabilities. I won't speculate on any specific kind of shock, particularly, political, geo-political shock, I don't know. I will say this, that the collective psyche is incredibly fragile. You can see that in all of the surveys, the consumer surveys, consumer confidence is better than it was a year ago, but it's abysmal. I mean, it's still today, lower than it has been in the depths of previous recessions by good order of magnitude. Business confidence is also, you know, as I've discussed, very shaky. And of course, that investors, as you can go in the equity markets and the credit market are very nervous as well. I don't think it would take a whole lot to push us over the edge. We're on edge and it wouldn't take a whole lot to push us over the edge. I think it would be more damaging if it were an economic shock, you know, the political, geo-political shocks are, particularly if they are far away, I think, would be, you know, obviously, depends on what it is. [0:20:04] But I think if it were something like a European debt crisis, you know, if we got hit with another round of angst, regarding the ability of Sovereigns to make their debt payment, that would be a problem that could an overwhelming kind of problem. Now, there's other kinds of potential shocks. There's political shocks here at home that could occur, I mean, the most obvious is that if we don't successfully address the Tax Code, and tax rates rise for everybody on January 21, 2011, then that could be odds it would go double dip or better than even. I mean, that would be a problem. So, you know, we have to have a little bit ofwhen I say no recession in the next six, 12 months, the odds are 1 in 3, that's predicated on the assumption that we don't get hit by shock and we don't make a significant policy error. QUESTONER: Would it be just to follow up, is it a policy error to raise all taxes, or is it a policy error if, say, people who make $2 million a year find their taxes going up? MARK ZANDI: Well, there's different flavors of policy error. I mean, I think it would beI think we would go into recession if everyone's tax rates rise. I just don't think the economy can digest that that would be a serious policy error. That would be a Japanese-like policy error. You know, that would generate a scenario, could very easily generate a scenario much like what the Japanese have struggled through in the last couple decades. They raised taxes at a similar point for similar reasons and it was a mistake, and so I think that would be serious. Raising taxes in upper income households is, it's a credible argument. I mean, I think if that were to occur, we would still avoid recession. Obviously, odds would rise in my view, but I think we would still avoid a recession. But I would advocate not raising anyone's taxes in 2011, even for upper income households that, you know, if you use the straight up models, my model, for example, you don't get a recession if you raise taxes on folks who are making over $250K on a joint basis, which is what the President's proposed. [0:22:17 ] But these are models and I think that as I said earlier, people are on edge, and high income households, in particular, are very skittish. Their spending patterns have been moving up and down very unusually over the last couple, three or four years, probably because their nest egg is significantly diminished. It's one thing when you think you've got your child's education paid for and your retirement set, but it's a totally different thing when you're uncertain about that. The other thing is, everyone's a lot older. The largest single-year age group in the country is now 50. There are more 50-year-olds than any other single year age group, and when you're 50, you know you don't have a whole lot ofyou don't have a whole lot of time to get your act together. So, if the stock market goes south, you pull back quickly. If your financial situation erodes, if your taxes rise, you may pull back more than we're anticipating, so I think it's aI think it's a gamble to raise taxes on households, upper income households in 2011, that we don't need to take. I wouldn't take it. [0:23:26] Now, that doesn't mean we shouldn't allow these tax rates to rise in 2012, 13, 14, when the economy is off and running. I think, yes, then it makes, I think it makes good economic sense. I don't think it does any significant economic damage. It won't change the way the high income households spend, invest, work, but it would help to address our long-term fiscal problems, which, goodness knows, we need to address. And no matter what we do with the Tax Code, I don't think that has any bearing on what the Fiscal Commission can or should say. I mean, they should be working independently and coming up with their own proposals, regardless of what Congress and the Administration decide with respect to the tax code over the next few months. QUESTONER: Francine? FRANCINE KEEFER: I've got the converse of Miles's question, I guess. You mentioned at the beginning that it's really devastating, in fact, that the European debt crisis had on psyche and the stock market crisis and so on here in the United States. So, the converse question is, so if the Europe starts doing well, if it looks like it's getting things under control, could that conversely improve the psyche here, or is it just like assignments, I don't know, a good thing happens, but no one really pays attention? MARK ZANDI: Did you hear the question, you did a nice job of projecting. FRANCINE KEEFER: I was a cheerleader. QUESTONER: We could use that here. MARK ZANDI: Could you turn down the volume just a little bit? Yes, you're right that there are things that could go right that we are not counting on. In fact, you bring up a good case in point. A Euro. The European economy is surprisingly resilient. As surprised as I have been about the weakness in the US recovery, I've been equally surprised by the resilience of the European economy. I had expected at this point that the European economy would be rolling over and it isn't. Now, I don't think the coast is clear for Europe. I don't see how the European economy can't weaken measurably over the next six, 12 months, given the weakening of the US economy, given their fiscal austerity, given their financial constraints. You know, their equity markets are down, too. Their banking system is in measurably worse condition than our own, so I expect them to weaken, but they haven't and the German economy, in particular, is a juggernaut, and doing fabulously well, and so if it can hang tough, that would be helpful. [0:26:08 ] Perhaps even more importantly is China. The Chinese economy is slowing, and that is by design. The Chinese authorities have been trying to slow economic growth because of inflationary and speculative prices that have been developing in that economy because of the very, very strong growth that they've been getting. So, so far, so good. It's sticking to script, and if it sticks to script and if it's a soft landing in China, that would also be something that would be very positive and encouraging and help to lift our equity market. I think when other (inaudible) on US stock prices on global equity prices. It's the concern that the Chinese won't get it exactly right, that the Chinese economy will stumble. So, I think, yes, that would beand this goes back, again, to (inaudible) point, in sort of a broad theme, is that a lot depends on sentiment, on our collective thinking. You know, in normal times, psychology, sentiment really matters very little, it's reflection of economic conditions, but in unusual times, and in normal times of recession, and clearly, in the current period, the causality is reversed, then it's psychology and sentiment that drives economic conditions. And so, sentiment is a very fickle thing and it can go one way or the other very, very rapidly and this makes it difficult to gauge exactly where the economy is headed, so you're absolutely right, so we're focused on the down side for obvious reasons, but there are also reasons to be hopeful, that this could go in the other direction. [0:27:46 QUESTONER: John Dickerson? JOHN DICKERSON: I wonder if you could separate out the question on certainty and business (inaudible)atives, and business lack of confidence that you were talking about. What portion of that is uncertainty related to the fact that the economy is going through (inaudible), we haven't seen since the great depression was happening, Europe and all of that? What portion is that and what portion is the policy uncertainty? And then I have a quick follow up. MARK ZANDI: I can't quantify that for you. It's a difficult question to answer, and I don't have a concrete answer. But I think you're correct. There's different flavors of concern. One flavor is Iit was only a year ago that I was near death. I'm a business person. I saw a lot of my competitors go belly up. I came pretty close. I don't forget that. I can personally attest to that. I mean, I was a small business. I started my company in the early 90s, I sold it to Moody's in mid-'05, so for 15 years I was a small business person, and I went from no employees to 125 employees, and I went through1990 was a recession. I don't know why I started my company at a recession. Because I didn't know any better and I was thirty. To another point, when you're fifty, most people don't start companies, they start when they're thirty. I went through the 2001 recession. So, I can personally attest to the fact that you don'twhen the friendly back calls you up and says, "I'm calling your credit line," and you ask, "Why?" and there's no obvious reason, that makes you nervous. And you don't forget that quickly, certainly not within a year's period. So, I know that's clearly playing a role, particularly for small businesses, and there's no solution to that problem, except for time. You know, you need time. [0:29:49 ] The other flavor of that is a policy uncertainty, and I do think that's playing a role. But II don't know how to quantify it. I thick it's playing a role, because I hear that from my clients, they are in the business community, in all different industries and occupations, and I hear it universally, and they are focused on different things, obviously, I mean, my utility clients are nervous about energy policy, myalmost everybody is worried about health care policy. Of course all the financial institutions are worried about FinReg. You know, it's interesting, generally, I think we need to make policy changes and they are on board with that. What makes them nervous is they don't understand the rules. They don't understand the rules that are being set forth, because in many cases, the rules haven't been set forth, I mean, take FinReg, it's very complex and a lot of it is stillI mean, basically FinReg is an outline and regulators have to fill in the blanks, right. And until they fill in the blanks, right, and until they fill in the blanks, folks in the industry don't really understand what the rules are. And if you don't understand what the rules are, how can you possibly make a big investment or go out and hire a lot of people? So, that's the problem that they have, they don't really understand thethey needit's very precise. The planning processes arethey want every T crossed and every I dotted before they make a major commitment. And that - we're a long way from that. QUESTIONER: If we can't (inaudible at 00:31:20) the efforts between the kinds of uncertainty, Congressman Boehner make the case essentially that this uncertain - the policy uncertainty that we've just described with your clients is a big stopper in the economy. And if that can be removed, the uncertainty can be removed, the history of (inaudible at 00:31:36) firing economic advisors today or firing Democrats (inaudible at 00:31:39) that you removing that stopper will create incredible economic growth. Is it possible to quantify the feeling you just described (inaudible at 00:31:49) economic impact? MARK ZANDI: Well let me just say, I don't - I think the uncertainty is abated. I mean we - that we're passed the worst of it. And we also had to go through it. I mean how could we go through the financial panic and not have financial regulatory performed. I mean we just can't do that. I mean it would be a mistake for many generations if we had not made fundamental changes to our financial system. Now you may disagree and not like the changes but I don't see how you can't go through that process. You know healthcare reform is - that's another debate but there's logic to that as well. I mean healthcare is clearly the biggest cost - increasingly the biggest cost, at least in terms of growth, for most businesses. We have to address it. Now you may disagree about actually we came up with but it's something we had to - I think was prudent to address. So quite - we've nailed down healthcare reform. We've nailed down financial regulatory reform. There's still - you've got to figure out what these things mean exactly but they're done. Tax policy is next. And I think we're pretty close. And I think most people feel that the energy policy and immigration are things for another day. And (inaudible at 00:33:09) people in the utility industry are much less nervous about this than they were 6 - 12 months ago that they feel okay with what's going on. So I like we're definitely past the worst of this uncertainty both with respect to I can't forget what happened a year ago because it's now a year and a half ago and six months from now, it'll be two years ago but also with respect to policy uncertainty. And I don't think it's like a light switch going on. I don't think there's any way and certainly changing leadership doesn't (inaudible at 00:33:39) confidence - significant confidence. I don't think there's - that would be prudent during - that would help - be helpful in any way. I will say one other thing with regard to the uncertainty. I do think there is a general sense in the business community. And I'm not saying whether it's right or wrong, I'm just hearing it from this community that they don't - they feel like they're being beaten up on in the political - in a public way. And it's enervating, it's tiring. And I think that's something that could be addressed. If we could all feel like we're working together as opposed to we're not working on the same team. Ian. IAN: (inaudible at 00:34:29) do you think businesses are (inaudible at 00:34:32). And secondly, you also said you think we're pretty close on dealing with that uncertainty and you're (inaudible at 00:34:40) probably skeptical that they're getting (inaudible at 00:34:46). MARK ZANDI: Yeah. Well, in terms of the uncertainty, just one more clarification. If I and I classify the uncertainty into that related to sort of the economic environment and what I've been through in the other political circuit. I think the former is more important than the latter. I really think I was put through the ringer. I don't have clarity with respect to what my sales are going to look like over the next 12 - 18 months. So therefore, I'm going to be cautious in using my financial resources. So I think that's the predominant reason for businesses not taking the plunge. One other point about that. That is not unusual in a business cycle. That always happens. It's more significant in this go round because of the severity of what we went through. But that, as I recall, that was the same environment that prevailed back in '02 - '03, '90, '91, '92. It took businesses a time to feel comfortable about the business environment to the point where they were going to make - they were going to start deploying their cash. And with regard to your second question, I'm much more op - first of all, we have nailed down so big policy debates. They're done. They're in the books. And I am more optimistic about the tax - that we'll address the tax code. I mean because I do think that it is a very important issue. And I think we'll come to terms on it. Maybe not before the election, I don't know. I'm not sure. But I think before January '11, we'll have - the odds are much over - they're relatively high that we will have something that everyone understands. QUESTIONER: (inaudible at 00:36:30) to raise anyone's taxes at this point (inaudible at 00:36:38)? MARK ZANDI: Judging by the e-mails, yes. Yeah. Yeah. Yeah. Jim Landers. JIM LANDERS: Are we still talking about recovering to an economy that doesn't exist anymore? I mean have very high reliance about consumer spending, very high reliance on credit on the larger pull from the House, the (inaudible at 00:36:58) might could justify giving deployment now? I mean we've got seven quarters (inaudible at 00:37:04) leveraging by consumers to run down $800 billion in debt and (inaudible at 00:37:10) is, at least in the opinion of some people, expected to (inaudible at 00:37:15)? I mean can we see the kind of recovery that's talked about politically when these kinds of fundamental changes (inaudible at 00:37:23) going on (inaudible at 00:37:25)? MARK ZANDI: Yeah. Did you hear the question in the back? Okay. I'm much more optimistic about the economy after we get through the next 6 to 12 months. I think it will be a different economy. You're right. We're not going to be powered by consumer spending which has been the major source of growth for the past 25 - 30 years. Consumers aren't going to lead the way. But I do think that slack will be made up for by selling more of what we produce to the rest of the world particularly to emerging economies, particularly to places like China and Brazil, India, the (inaudible at 00:38:15), Russia. Those kinds of big, fast growing, young economies. It's a tricky transition. And we're in the middle of it. And it isn't as graceful as anyone would like. But it's happening and I think ultimately that that will be the key source of growth. And that if fundamental rate of growth in the economy, the so called potential rate of growth in the economy, will not be materially different pre and post the great recession. I think we'll be growing roughly at the same pace. You know accounting for demographics roughly at the same pace. I do think we are making progress with respect to righting the wrongs - the fundamental wrongs that got us into the current situation that we're in. You mentioned leverage and I think that's the most obvious wrong. We did - consumers did power the way in part because lower middle income households did and were able to take on a significant amount of leverage and maintain a rate of spending that was above their income levels. And that - working down that leverage and working through the problem loans that that leverage implies is why we're here, why we went through the financial panic and the great recession. But we're making progress. The households are deleveraging very rapidly. By my estimates based on credit file data, household liabilities are now down by about $800 billion from their peak two years ago. That's a very substantive deleveraging. And it continues to this day. I mean people are reducing credit card debt, certainly mortgage debt, auto debt. The only thing that's rising is student loan debt which makes sense. (Laughter) MARK ZANDI: Other than that, everything is falling pretty rapidly. Debt service burdens which is perhaps more important in terms of people's immediate spending behavior; that's a proportion of their income that they have to devote to servicing their debt, making interest and principle payments, is as low as it's been since 2000. And, it's falling rapidly in part because of the deleveraging but also in part because of the incredibly low interest rates. So I think a year or two from now debt service burdens will be about as low as they've ever been - closing in on record lows. One other quick point about leverage in the consumer sector, there's two kinds of households probably identified by the median household income which is $55,000 per year on a household - on a family basis. People making above that level and I know $55,000 doesn't sound like a lot in D.C. but nationwide that's the median income. The houses are in good financial shape. Their balance sheet is strong. If they have any debt at all, it's a fixed rate mortgage loan and they're able to refinance down into a record low mortgage rate loan. The problem is really lower income, lower middle income households. Their debt loads are high. And that's who has to do the deleveraging. Now, upper income households, the guys that make over the median, account for the bulk of the spending. Just one statistic harking back to the debate over the tax - what we (inaudible at 00:41:49) about the tax code. The top 3 percent of households which is whom the tax rate would rise in the present proposal account for 25 percent - approximately 25 percent of personal outlays. So if the spending, this region of spending is very, very skewed. And folks in the top part of the distribution are in good financial shape. They're very - their balance sheet's in good - they're very sensitive. They're worried. They're very nervous about their stock portfolio and they're shifting their spending relative to what's going on with their assets. But they're on the liability side; their leverage is now quite low. So I think we have made significant progress. And we'll make significant further progress immediately in the next year or two in righting those fundamental wrongs and setting the stage for a much stronger growth. One final point, demographics are a pretty powerful thing in the immediate term. And the demographics strongly argue for lots of economic growth beginning in - by this time next year particularly in 2012. But just to give you one example of what I mean by that. In the vehicle industry, demographics would argue for a sales rate of 15 million units per annum. The current sales rate is 11 million units. So right now, people are spending below their demographic need. Meaning households are forming the age composition of households. You know when you have a child and they go to school, you need a car. You just you need a car. But they are figuring out ways to not do that because of the current financial situation. But those demographic forces are a pretty powerful thing so ultimately they prevail. And so at some point, we're going to go from 11 million units to no less than 15 million units because we've got people pent up. Demand is developing. And so, I wouldn't be surprised if you get into 2012 and we see vehicle sales rocketing higher. And that's going to provide a lot of economic growth. Much more than anyone's anticipating right now. And I use the vehicle sector as an example. That applies to lots of other sects. You know housing as well. We've got about 15 minutes left. We're going to go to Bob Samuelson, Mark Shields, (inaudible at 00:44:04) and Richard Wolfe. Bobby. BOB SAMUELSON: Mark, what is your estimate for the proportion of households - mortgage holders - who (inaudible at 00:44:18) the prices - house prices (inaudible at 00:44:26) related to that? You know some kind of crude estimates that there's perhaps another 5 million delinquencies - defaults that are going to occur in the next couple of years based on delinquencies that are already in the pipeline. Can you go over your outlook for mortgage defaults and again, how that would be affected by the price (inaudible at 00:44:56)? MARK ZANDI: Sure. Did you hear the question? Okay. As of Q1 2010, I'm estimating 14.3 million homeowners are under water - under their mortgage. That's based on credit file data from Equifax. So I know exactly how much debt people have. And it's based on interest housing values on an AVM - an automated evaluation model - that uses comps essentially to value housing. So that is the basis for the construction of that estimate. If house prices fall another 5 percent which is my outlook then that would raise the number of negative equity homers to over 16 million by Q1 2011. I can send you the precise numbers and spreadsheets. It's over 16 million. I can't remember exactly how many. About 16 million. To give you context, there are 49 million homeowners with first mortgage loans. So, that's about a third, right? Roughly about a third that are in the water. Just one other data point. The proportion or the number of homeowners that are under water by more than 20 percent and that's a key statistic because that tends to be a point at which people start strategically defaulting. You know walking away from their home even though they get under more - under reasonable assumptions to make their mortgage payment is about 9 million - about 9 million. I should say that my estimates are higher than estimates that are produced by CoreLogic. CoreLogic also very good organization with good data has lower estimates. And I haven't quite been able to figure out why. I have better debt estimates than they do. They have better housing price estimates than I do. I'm using Case-Sheller house price measures. They're using their own. And, my price measures may be shown - this is probably too much detail. I'll stop. Sorry. But something only the economists can love. (Laughter) MARK ZANDI: But it's about 9 million that are under water by more than 20 percent. I'm expecting - there are now 4.3 million first mortgage loans that are in default for 90 days in over delinquent. So, in all likelihood, headed towards default. QUESTIONER: 4.3 -? MARK ZANDI: 4.3 million. 4.3 million. QUESTIONER: Is in default? MARK ZANDI: In default or 90 days in over delinquent. Yeah. So I'm assuming that the vast majority of those go into default status at some point over the next 3 - 6 months. I'm expecting that of those 4.3 million about half are (inaudible at 00:47:55) out either through the HAMP program, either HAMP 1.0 or the HAMP 2.0 which is now just coming into effect or private loan modification efforts which actually are more significant than the HAMP Program. There will be re-defaults on those loans but that will be over a period of time. So that leaves you with a couple and a half million that are going to go to a foreclosure short sale over the course of the next 18 months. Now there are loans that are 30, 60, 90 - 30 - 60 day delinquent. But the good news there is that they are now falling. We're making progress with respect to early stage delinquency. And so the number of loans that are 30 - 60 is declining. And I expect that to decline further going forward. That is, again, based on the assumption no double dip. If we have another double dip then things obviously are going to turn ugly with regard to the housing market as well but assuming no double dip. So I think we're pretty close to the peak right now in terms of loans entering into the foreclosure process and I think we will be peaking in the first half of next year in terms of the number of homes that are sold into the marketplace under distressed conditions - foreclosure and short sales. And that is - that goes back to my expectation with respect to house prices. Mark. MARK SHIELDS: Mark, before he even spoke a syllable yesterday, Congressman Boehner was pummeled by every Democrat not under (inaudible at 00:49:34) that he talks. And, but you - I assume you looked at what he said. MARK ZANDI: Not carefully. MARK SHIELDS: Not carefully. MARK ZANDI: No. MARK SHIELDS: Was there any idea that you, as an economist, would embrace? And was there any in particular you'd reject? And then the follow up to that is just simply that you mentioned (inaudible at 00:49:51). And as a citizen, what would you, as well as a professional, what you want their primary recommendations to be? MARK ZANDI: Well I don't know if - what Congressman Boehner said specifically enough to respond to anything in particular that he said. Unless there's something you want to bring up specifically. MARK SHIELDS: Well (inaudible at 00:50:12) obviously you mentioned tax and regulation (inaudible at 00:50:17). It was traditional when - but I was wondering if there was anything that you said (inaudible at 00:50:20) administration would embrace that would be better for the economy. MARK ZANDI: Well, just that I think if the administration could find a middle ground with the Republican Congress with respect to the tax code, that would be - and do that quickly, I think that would be helpful to the economy now going back to the point on political uncertainty. And I think one middle ground is what I've been arguing. And that is; don't raise anyone's taxes in 2011. Allow the tax rates in upper income households as the President has proposed to rise in the beginning in 2012 and phase that in over a three year period when the economy is off and running. I think that would be a prudent middle ground. And perhaps, that would be a way to come to terms on this relatively quickly which I think is key. In terms of a long term fiscal situation, I do think that we have going to have to both restrain spending growth and cut - and raise taxes to address our long term fiscal problems. I think it, from my perspective; it would be prudent and appropriate to focus on spending restraint more than tax increases. If you look at previous historical experiences in our own history with fiscal austerity and we've had a few and/or look overseas at experiences overseas with fiscal austerity, economies that address their fiscal problems through restraint spending do better than through higher taxes. But again, we need to do both but I would focus more on the spending side than on the tax side. Now, what do we need to do? Well, many things but I'll name one thing on the spending side and one thing on the tax side. On the spending side, I think it's pretty clear you have to go where the money is and that's the entitlement programs. If we're going to have spending restraint, that means we have to restrain Social Security and Medicare in particular. And I think that we need to do this by changing these programs from entitlement programs to insurance policies. Means test. I think you get the benefit if you need it. Now then we debate what need means and that's an appropriate debate. But I think not everyone should get Social Security and Medicare at least not to the degree - not to the benefit as currently written into law. So if you're very wealthy, you don't need the insurance to pay out. You don't get that benefit. On the tax side, I think the most - it would be very nice to have comprehensive tax reform but that might be asking too much. So one sort of intermediate side before you got comprehensive tax reform would be to limit deductions. So right now, you're unlimited with respect to the deductions you can use. Limit that to some percentage of your tax liability. And let the tax payer pick which deductions they want to use - mortgage interest, property tax, state and local government income, charitable giving - but limit it. If you did that, that would help raise a significant amount of revenue. I think if you did those two things and even you know I understand Medicare might be a tough nut to crack given we went through healthcare reform. Just focus on Social Security. Just focus on Social Security and focus on the deductions. If you did those two things, I think we would go a long way to addressing our fiscal problems. We wouldn't solve them forever. But we would go a long way to addressing them at least to the degree that it would keep global investors committed to buying our debt in a low interest rate. That it would not have any material economic impact. So I'm actually a lot - it's very easy to be pessimistic in regard to our long term fiscal situation. And I'm actually more optimistic. I am optimistic. I think we can come to agreement on some things that will bring our - restore fiscal stability. And that's the sustainability. That's what we need. (inaudible at 00:54:35) QUESTIONER: Yes sir. Thank you. I just want to make sure (inaudible at 00:54:39). When we say no tax increases, you mean also the 250 and above, right? MARK ZANDI: Correct. QUESTIONER: (inaudible at 00:54:44). MARK ZANDI: Correct. QUESTIONER: Okay. And now let's say (inaudible at 00:54:52). What worries you about (inaudible at 00:54:59)? And clearly Boehner is (inaudible at 00:55:02) any kind of tax increase. He wants to cut spending (inaudible at 00:55:09). And that's only half of what you're suggesting needs to be done to (inaudible at 00:55:14). MARK ZANDI: Well, you're asking me to kind of step out of my strike zone. And - QUESTIONER: (inaudible at 00:55:20). MARK ZANDI: Pardon me? QUESTIONER: (inaudible at 00:55:22). MARK ZANDI: Yeah. Right. (Laughter). And I'm not going to swing. (Laughter) MARK ZANDI: I'm going to take the pitch. Because I don't - I can't add anything in this regard that is insightful. QUESTIONER: (inaudible at 00:55:42). (Interposing) MARK ZANDI: But it's never stopped (inaudible at 00:55:43). QUESTIONER: Yeah. (Laughter) MARK ZANDI: Except to say that this, I - the consensus has it that we have divided government. That there's political vitriol and we're getting nothing done. I don't see that at all. We have political vitriol. We always have political vitriol. I mean I read Alexander Hamilton. Anyone pick up Alexander Hamilton - the Chernow book? I mean these guys are beating each other over the head much worse than what is being done. And we always have this. And it's very therapeutic. And it's exactly what we should go through. And at the end of the day, we come together and we figure it out. And that's why gold investors are buying our 10 year treasury bonds at 2.5 percent. They have faith. Right? They have faith. We don't. We obviously don't have faith. But I think we have been very productive with divided - with Congress and the Administration with the same party, Congress and Administration of different parties. We're going to figure this out. Because at the end of the day, I think our objectives are the same. QUESTIONER: (inaudible at 00:56:44). MARK ZANDI: No. No. I think we need - if we're going to adjust our fiscal situation, if we're going to be credible, we're going to need both. And I think at the end of the day everyone - we'll figure out a way politically to get there because the economics are compelling. Mr. Wolfe. RICHARD WOLFE: The next one is about jobs. The election is likely to be decided on jobs. Do you see a possibility that the 80 million don't come back? I don't know exactly how you expect them to come back. You mentioned demographics. You mentioned exports (inaudible at 00:57:20) but what about (inaudible at 00:57:22) increased efficiency of businesses and (inaudible at 00:57:25) the people who are not out in the job market? And then a very short thing, I don't think you expect any change - positive change before the election (inaudible at 00:57:36). Is it possible to have (inaudible at 00:57:40) significant negative changes (inaudible at 00:57:42) the election? MARK ZANDI: Okay. How much time do we have? MALE: You've got four minutes. MARK ZANDI: Okay. In the very near term, the job market is going - it's weakening and it's going to weaken. (inaudible at 00:57:56) is measured by the unemployment rate. The employment rate is going to drift higher. It's 10 percent. Come election day, I'm not sure. (inaudible at 00:58:05). It's going to be in that kind of ballpark. Certainly by early next year. So we need 150K in monthly payroll employment gains to stabilize unemployment. We're running at best around 100K - at best. Now we're probably south of that at the moment. So the math is - the arithmetic is clear. Unemployment's going to rise. I do think we're going to get those 800 million jobs back. Certainly not next year, it'll probably take five years to get them back. And, we have sources of growth. I'm going to go back to exports (inaudible at 00:58:48) expand on that. There is a lot of room to grow with respect to exports and the job creation that in (inaudible at 00:58:57). Some of it's pretty obvious. You know things that we do already - aircraft and machine tools, computer equipment, sophisticated materials, that kind of thing. In fact, they don't generate a whole lot of jobs. They're very productive manufacturing activities. But I do think over time we're going to start exporting services - things that we have been doing longer for anybody on the planet and we do very, very well. We're very productive. And they embody very sophisticated workers, highly skilled educated workers - accounting services, legal services. Your son will be employed providing legal services to Chinese companies. Management consulting services; I'm an economic consultant. Most of my growth is coming from building models for banks, stress testing in Brazilian banks and the Chinese Central Bank in Europe. Architectural services, engineering, media; you'll be writing for the rest of the world. Entertainment - MALE: (inaudible at 01:00:09). MALE: Yeah. MARK ZANDI: Yeah. MALE: (inaudible at 01:00:10). MARK ZANDI: So I think in that, there's a boat load of jobs. MALE: Yeah. MARK ZANDI: And they're the right kind of jobs. And again, we do them better than anybody because we've been doing them for a long time. Financial services; much (inaudible at 01:00:23) financial services. Here's a counter intuitive statement. Despite of what we went through, we have an incredibly productive financial system. We clearly messed up badly, made some huge mistakes but at the core, our financial services industry is very creative and very efficient. We save very little and we can invest a lot. No one else can do that on the planet because that goes to the efficiency of the intermediation process of the financial system. So, I think that we're - we all forecast with a ruler. In the good times, we forecast with a ruler. And we think these good times will never end. And then it's, of course, that's when we make silly mistakes. We go out and buy a bigger home than we can afford. We take on a larger mortgage than what we can afford. And we also forecast with a ruler in the dark times. And that's what we're doing forecasting with a ruler. We've taken the last three years and we're extrapolating out into the future. We can't forecast with a ruler. I firmly believe that once we get by the next 6 to 12 months we're going to get our groove back. And we're going to be surprised by how well the economy's doing not how poorly it's doing. But on that happy note, thank you. QUESTIONER: Yeah. Thank you. QUESTIONER: Thank you very much for the (inaudible at 01:01:40). QUESTIONER: Thank you. QUESTIONER: We really appreciate it and look forward to having you back. MARK ZANDI: Thank you. QUESTIONER: So you'd be investing? You'd be - MARK ZANDI: Actually I - my advisor's restraining me from not taking on more risk. He saying you're 50, you know? QUESTIONER: Yeah. (Laughter) QUESTIONER: And what's the difference now? You have a different title. You used to be in charge of economy (inaudible at 01:01:59). Now you're vice president or chief economist for the analytics. Does that mean you got broader responsibilities? MARK ZANDI: Nothing's changed. It's just a corporate name change. QUESTIONER: Oh. QUESTIONER: Yeah. MARK ZANDI: Moody's is a - has two independent subsidiaries - a rating agency and something called Moody's Analytics. They're separate independent organizations with a Chinese wall. I'm in Moody's Analytics. And I sold my company into Moody's Analytics (inaudible at 01:02:22) portfolio companies. And now I'm the chief economist of that organization. QUESTIONER: (inaudible at 01:02:26). MARK ZANDI: Yeah. (inaudible at 01:02:27). QUESTIONER: Thanks so much for (inaudible at 01:02:29). QUESTIONER: (inaudible at 01:02:29).