Rod Klein on Economy

This is an e-mail interview by OurBlook with Rod Klein, a University of Phoenix (Chicago campus) faculty member.

Is the U.S. heading into a depression, and if so why, and how bad will it be? Like the 1930s? Or just more recession?
RK: The U.S. need not enter an immediate depression. Actions taken in 2008 by a Republican administration such as saving financial institutions and a general bailout of the economy suggest government activism will rapidly move to reverse the economic stagnation we find ourselves in. However, a number of actions must be taken or the economic blues could worsen significantly. The actions include: America must move with haste and in full measure to turn the economy around, and both political parties must not obstruct the inevitable need to act. The dollar amount needed to achieve these gains will surpass $4 trillion and require expenditure in a few years. A word of caution: the money has to be spent wisely. The end purpose must benefit the taxpayer.

The current bailout bills have been loaded down with pork barrel projects aimed at aiding few people often with political objectives. Either way, will there be problems across the board or would some sectors or parts of the nation be better off than others?

RK: All sectors will suffer to some extent, but some will fare better than others. In a declining economy and with a new administration, the “winners” will include: health care, eldercare, infrastructure repair and construction, green industries, power generation or energy in general, forensic accounting, jobs in hot growth markets, SOX (Sarbanes-Oxley), and perhaps Six Sigma expertise.

Even among “loser” sectors, exceptions will be found. High-end restaurants, as an example, will suffer, but lower cost family style establishments will gain. Could we be facing severe inflation or deflation?

RK: In the near term, if the government acts decisively to energize the economy, the rate of inflation will be nominal, say under 2 percent. Conversely, without government support, America may well be on its way to a period of deflation. Over the long run, America will face chronic inflation owing to immense government and private debt burdens. At this time, the two sectors of the economy owe in excess of $100 trillion, half the debt to units of governments. The government portion consists mainly of Social Security and Medicare/Medicaid program obligations. Compounding this burden is the diminishing savings Americans have to meet retirement or personal debt obligations. Our citizens used to enjoy a high rate of savings. Not any more.

How did we get into this predicament?

RK: The why we are in this mess stems from a number of factors including: · Americans have been on a consumption spree that has eaten up all savings and resulted in mortgaging of their souls. · We believed the value of houses would keep up an explosive growth. Real estate was so alluring that many decided to invest in real estate ventures in lieu of more conservative savings options. A large part of the spectacular growth in real estate values comes from the simple principle of supply and demand. Demand has sunk! · The U.S. government starting in 1977 with enactment of the Community Reinvestment Act and sparked by fundamental changes in 1994 of bank lending practices loosened underwriting standards, including the size of the mortgage payment relative to income, credit history, savings history and income verification. A massive amount of mortgages represented subprime ventures which homeowners would be unable to afford if the economy soured. · The U.S. tax regulations do not encourage savings. It taxes them. Another problem with the regulations is the rate at which corporate earnings are taxed, and the double taxation of dividends. · Environmental activists have drastically raised the cost of energy. Last year, the country’s cost of imported oil amounted to $700 billion.

One of your specialties is capital financing. Have you seen anything on a personal level in this field that would indicate hard times ... perhaps a company you feel sure has a good business plan and would be a success, but money has dried up for it?

RK: My company works in the corporate financing arena as well. We help firms raise capital which has been dramatically limited from conventional sources such as banks. Anecdotally, a hospital in Hammond and a scrap metal operation in Chicago Heights we worked with were recent casualties of the tight credit market. The former organization found funding but not until after over a year of frustration. The latter firm may go bankrupt even though it could earn an investor a very favorable rate of return.

Are there any other points you would like to make about the severe economic problems facing the U.S. and the world?

RK: America has corrupted the financial markets of the world with its overpriced mortgages. Once the golden calf of U.S. spending dried up, other countries thriving from our demands for product had the second shoe drop on their own economies. Here is a simple equation: overpriced real estate + no savings + debt up to our ears + waste of government = a country at the precipice. To undo the economic mess over the long run will require bold moves probably including: 1. Doing away of the Social Security program as we know it. It must resemble a well-run 401k plan pouring a substantial amount of equity into American investments, not worthless government debt. Before this change can be fully implemented, the retirement age has to be significantly raised. 2. Establishing guidelines for the Medicare and Medicaid programs through more inexpensive treatment alternatives and rationing of many high-cost procedures. Twenty-five percent of Medicare benefits are spent in the last year of recipients’ lives. 3. Adopting a balanced energy program that features an orderly wind-down of fossil fuel dependence. 4. Revision of tax regulations to encourage people to save and form more capital for jobs. 5. The cost of government in addition to entitlement programs needs to be trimmed. One way to start the process is to eliminate unnecessary regulatory programs. SOX, for instance, has not proven to be necessary or cost effective, but it adds to the cost of business and also reduces the attractiveness of companies conducting business in this country. 6. Americans have to learn to do with less. Less food, energy and unproductive pursuits such as television. This will free us to become more physically fit, increase savings for both our retirement and those of family. In regard to the latter, Americans must play a more active role in the care of the elderly.

Rod Klein received his MBA from the University of Michigan, with a major in accounting, and is a licensed CPA. His professional career has principally been as a finance executive, including capital financing, consulting, strategic planning and new business development. In addition to teaching for the University of Phoenix, he is engaged in commodity trading and structuring commercial financing programs.