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Dr' Jim Richardson

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Title: Dr' Jim Richardson

1
Growing Your Business in the New Ascension

Dr. Jim Richardson
Alumni Professor of Economics
Louisiana State University
November 5, 2008

2
The New Ascension of Total Employment
3
The National Economy

Financial Crisis/Recession?
Louisiana/BR Metro/Ascension?

4
Financial TurmoilHow Long Will It Last?

Comparison to Great Depression, reference point
in news outlets

5
Great Depression

1929
Sept 3rd, NY Times Stock Index Peaked at 452
Oct 24, record sales of 12,895,000
Oct 28, NY Times Index dropped 40 points with
sales of 16,410,000
Nov 13, NY Times Index was at 224, a drop of 50
from September to November
1930
Smoot Hawley Tariff Act was enacted
1,350 banks suspended operations during this year
1931
New York Fed raised discount rate from 1.5 to
3.5
2,293 banks suspended operations during 1931
4 to 5 million persons out of work

6
Unemployment Rates, 1929 to 1945
7
Comparisons of Recessions
8
2008 Financial Turmoil History and Development
9
Anatomy of Credit Crunch

Change in mortgage business
Originate to hold
Originate to Distribute
Creation of GSEs
Risk Separation
Borrowers
Mortgage brokers
Mortgage funders
Aggregators
Collateralized Debt Obligations
Investors
Fanny Mae and Freddy Mac

10
Sub-prime Risks, 2004-2006

Mortgages called 2/28s
Loans had fixed payment for first two years,
typically tied to low interest rate
Adjusted after two years to short-term market
index plus a margin every six months for
remaining 28 years
Peak number of payments being re-established will
occur between July 2007 and July 2008biggest
number of foreclosures occurring

11
Mark to Market Accounting Procedures

Assigning value to a financial instrument based
on current market value
Financial Accounting Standards Board issued
Statement No. 157 that became effective November
15, 2007
Impact on financial statements of financial
institutions, especially those with many assets
of mortgage-related securities

12
Recent Time Table for Liquidity Crisis

In March JP Morgan Chase purchased Bear Stearns
for 2 a share (had been 170 per share a year
ago)engineered and supported by Federal Reserve
LindyMac failed as bank in Julyliterally run on
the bank. FDIC intervened
Fannie Mae and Freddie Mac were put in
conservatorship by the federal government in
Septemberboth are GSEs
Bank of America purchased Merrill Lynch for 50
billionSeptember 2008

13
Recent Time Table for Liquidity Crisis

All in September 2008
Lehman Brothers failed
Banks formed consortium with 70 billion to work
through liquidity crisis
Government put up 85 billion for 80 of AIG
Chase purchased Washington Mutual
Wells Fargo purchased Wachovia

14
Dow-Jones Industrial Averages, 2008(monthly
averages except for Nov 3)
15
Spending Behavior and Impact of Deterioration of
Financial Wealth
Will Financial Turmoil Affect Spending?
16
What Do We Know About Spending?

Consumer
Spending on Durables fell by 3.1 in September
Spending on Non-durables fell by 0.6
Spending on Services rose by 0.3
Overall consumer spending fell by 0.3
Consumer Confidence Index at 38.0, an all time
low
Car sales fell 45 at GM, 30 at Ford, 33 at
Nissan, 25 at Honda, and 23 at Toyota
Private Investment
Manufacturing Index fell to 38.9, lowest since
1982
Government
Federal
Will not fall in fact, it will rise
State and Local
Will have to make cuts since must comply with
budgetary constraints

17
Regional Activity

In August New York had special session of
Assembly to cut the budget because of declining
revenues
On August 1 Merrill Lynch indicated Florida was
in recession
Moodys indicated that 2/3 of 381 metropolitan
areas were in recession in August and 28 states
qualified as being in recession

18
Bailout?

700 Billion bailout with over 125 billion in
other programs
Bailout to be used for purchasing toxic assets
with provisions for other purchases as well
Committed 250 billion for purchase of preferred
equity in banksalready committed 125 billion to
nine large banks and now taking requests from
second tier banks in terms of size
Many banks asking to be considered for program

19
Private/Public Activity

FDIC and IndyMactrying to rework many bad
mortgages
Mortgages directly with bank
Debts secured from other sources
Mortgages that are securitized
JP Morgan Chase announces plan for 70 billion of
reworking mortgages
Bank of America doing revision of mortgages to
avoid foreclosures

20
Economic Forecasts

Despite newspaper headlines, the large gyrations
in the stock market, and the international
concerns, most forecasts of the U.S. economy
indicate a recovery in the second half of 2009
There is no prediction of a second Great
Depression

21
RGDP Forecasts(8 10/08)

Quarter Moodys (8)
PNC (10)
08-II 2.8 2.8
08-III 1.9 - 0.5
08-IV 1.2 -1.0
09-I 1.1 -1.5
09-II 2.5 0.5
09-III 3.5 1.5
09-IV 3.8
2.0
10-I 3.9 NA
10-II 3.3
NA
10-III 3.3
NA
10-IV 3.3
NA

22
What Can We Do?

Restore/Keep the Faith in Financial System
Banks can be trusted (250,000 FDIC insurance)
Liquidity for banks and financial institutions
Careful evaluation of regulatory processes and
expansion of credit conditions that led to
foreclosures, but do not overreact
Make the FASB rule (mark to market) workable in
the short term and long term
We cannot eliminate every foreclosurenor should
we.
Stable FED policydo not overdo the expansionary
monetary policy, but be ready to stop any banking
panic

23
What Can We Do?

Moratorium on any tax increase for three years
Investment Program by Federal Government over 5
to 7 year process focusing on investments adding
to social infrastructure
Investments with known rate of return such as
highway/bridges/waterways
Small amount of investment in new or relatively
unused technology such as wind power and other
alternative fuel options

24
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25
Demand Side Slowing

Chinas recent track record
2002 4.9
2003 8.1
2004 14.7
2005 7.8
2006 8.2
2007 6.2
2008 5.5p (Raised fuel prices 18 June 08)
Worldwide demand 20043.4 20051.6
20061.3 20070.9

26
Would have slowed even more except for two things
27
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29
Asian Price Control Increases

Malaysia 41 June 08
China 17 June 08
Thailand Allows prices to move with market now
India 10 June 08

30
Demand Side Slowing

US
20070.1
2008
-0.4p (Way off!)
40 billion fewer miles driven in last 7 months
5/08 v 5/07 miles driven down 3.7, sharpest
monthly drop since government began collecting
data in 1942.

31
U.S. Sales of Large Cars

2006 -2.6
2007 -10.5
2008-1st 7 months
Mid-size SUVs -29.7
Large SUVs -33
Luxury SUVs -14.7
Large cars -31.2
Luxury cars -14.5
Compacts 10.9

32
The Supply Side

Cambridge Energy Research Associates
20-30 major projects coming on line every year to
2010 (3-4 mmbd annually)
Not speculative based on analysis of fields
unfolding
GOM, Nigeria, Caspian Sea, Angola, Canadian Oil
Sands
Total production up to 108 mmbd by 2015 (from 87
mmbd in 2005)

33
Supply Side

Venezuelas Orinoco Oil Belt
Alberta Canadas Athabasca tar sands
Estimated 3.5 trillion bbls
World consumes about 30 Billion bbls a year.
100 years of supply

34
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35
Other New Finds

Petrobras (Brazil)
Tupi Field in 2006 (11 bill barrels)
New Carioca field in 2008 (33 bill barrels!!)
6k feet of water10k feet of sand/rock 6k feet
of salt
Watch Enhanced Oil Recovery (EOR)!

36
Horizontal Drilling
37
Other New Finds

Saudi Khurais Field
1.2 mmbd
15 bill to develop (low pressure field
injection of massive amounts of seawater
required)
Watch EOR (Enhanced Oil Recovery)
About 78 of oil left in ground using
conventional techniques
A 1 increase would generate 88 bill bbls (3
years of oil production)

38
Wildcard I Geo-politics(The real problem)