As an economist with UCLA's Anderson Forecast, Christopher Thornberg garnered a reputation as something of a pessimist. In late 2003, Thornberg began warning about the single-family housing bubble and the risks facing the broader economy. He was often met with unbelieving, blank stares by the real estate industry professionals who came to hear him speak.
Thornberg's forecast has certainly proven prescient. But he believes that the doom-and-gloom scenarios currently dominating economic discourse are far too pessimistic, that irrational greed has now given way to irrational fear.
Thornberg, who, in 2006, founded the Los Angeles-based research and consulting firm Beacon Economics, recently sat down with Hanley Wood's Apartment Finance Today to offer his view of what went wrong—and when the economy will start to right itself.
AFT: So, have you developed a Cassandra complex? Do you feel doomed to see the future but powerless to change it?
CT: I'd call it job security. When you sit down and think about the mistakes that were made—forgetting risk, forgetting about fundamentals—how many times has this been done in the past? The magnitude and scope of this one is pretty awe-inspiring, but it's the same stupidity and the same greed, the same mistakes.
I have a much better sense of the whole Keynesian greed and fear model now. Because when you boil it down, you can talk yourself blue in the face, but those two emotions dominate people's rational thinking. There was no way that anyone could have justified those kinds of crazy cap rates and lending rates and terms. It just didn't make any sense. But it was shocking to me how people refused to acknowledge the obvious.
AFT: Did you anticipate that the single-family housing meltdown would have the kind of ramifications it's had throughout the economy?
CT: Yes, but it's not single-family. Single-family was the symptom, not the disease. The real problem was consumer spending. We had asset prices across the board at local levels that weren't realistic. Now, they're crashing down, and, as a result, Americans who thought they were rich are no longer taking the risk or overspending. That was the problem in the economy. Single-family was just the most outrageous aspect of the entire disaster. When everything started tumbling down, it was the first to go. But housing is not a driver; it's the canary in the coal mine.
AFT: The talking heads out there are increasingly saying that this will be a five-year downturn, or even that we're entering a depression. Has the current discourse become too pessimistic?
CT: Absolutely. At some point in time, we moved through the structural collapse. The housing prices in California, for example, have gotten back to historic normal levels relative to incomes in the state, yet they're still falling. Stock prices and price-to-earnings ratios for a lot of companies have reached levels that make them terrific deals if the stock market continues to fall. When you look at the firms and the money they're making, it's pretty clear the stock market has fallen too far.
AFT: So, where's the bottom? Does the economy have to get worse before it gets better?
CT: The big driver of the economy at this point is by far the consumer and the fact that consumers had been overspending. Savings rates had gone from 8 percent or 9 percent down to 0 percent, and that just wasn't sustainable. Everybody talks about how we need to expand credit, that the consumer needs more credit so they can go spend more. Every time I hear a politician say that, I want to scream. The problem in the economy is too much credit that boosted consumer spending. It's like this man is dying of alcohol poisoning—so quick, give him a beer.
You're not supposed to use credit to consume. Credit is for investment, credit is for the future. You buy a car on credit because the car will give you value over the next five years; you buy a house on credit because that will give you value over the next 20 years. You don't buy an iPod on credit, and you don't buy food on credit. You buy that from your income.
So the good news is that savings rates have gone from basically 0 percent to 5 percent in the past five months. What this means is that in a few months, at the pace we're going, we're going to have an 8 percent savings rate. That's when we'll see consumer spending stabilize. Of course, there's the injury, and then there's the healing. So when consumer savings hits 8 percent or 9 percent, the injury is over, but we're still going to have a year of healing.
AFT: Outside of consumer spending and savings rates, what other leading indicators will point to the early signs of a recovery?