On Thursday, January 29, 2009, the Irvine (Calif.) Chamber of Commerce and the University of California, Irvine's Paul Merage School of Business hosted the Business Outlook 2009, an economic forecast featuring presentations by three speakers: Andrew Policano, dean of UCI's business school; Emile Haddad, CIO of Lennar Corp.; and Rick Keller, CEO of The Keller Group Investment Management Inc.
The forecast yielded insights on the state of the economy, the real estate industry, and the performance of the stock market.
First, some salient points:
- A lax regulatory environment was one of the top two reasons for the severity of the current financial crisis, according to Dean Policano. In one example, Policano pointed out that credit default swaps were banned after the Depression. But in 2000, Congress OK'd them. Even more troubling is the fact that no one knows for sure how much money was in the CDS market. Estimates range between $30 trillion and $66 trillion.
- Lennar's Haddad noted that the housing industry precipitated disaster by attempting to supply a demand that was unsustainable. The misjudgment was severe. Since late 2005, home sales have dropped 70 percent.
- The value of stocks fell 37 percent last year, but even during a seemingly dismal showing, performance was relative. The U.S. stock market finished third best in the world, which just goes to show, as investment expert Keller asserted, there's "really no place to hide."
Besides the depressing numbers, though, all three presenters made the point that consumer and investor confidence must pick up before the economy can recover.
Policano mentioned the "paradox of thrift," a term coined by influential 20th century economist John Maynard Keynes. The idea is that if everyone becomes a Scrooge, overall wealth actually declines. In other words, if you and everyone else you know stop spending, there will be less demand for products and services and, ultimately, workers ... and maybe the person who's suddenly out of a job is you.
In an earlier entry, I mentioned some grounds for confidence. I'd like to add another: change (or if you prefer, the occurrence of a business cycle) is inevitable, but not inevitably bad.
During his presentation, Policano showed the following chart and asked the audience to guess the economies.
Answer: Economy A is the U.S. in 1955; B is the U.S. in 2007.
Clearly, it's not the first time our economy has undergone significant changes, and the overall trajectory has been positive.
The scope of this crisis has and will continue to force painful adjustments, but as history demonstrates, there's an inherent opportunity to make things better. Haddad spoke of grabbing the "opportunity of a lifetime" in relation to buying a home, but these days, this can apply to a lot more things, not least of all the financial markets.