Tom talks with Robert Albertson, chief strategist for investment bank Sandler O'Neill, on disposable income in the U.S.
You say in your report: Disposable personal income is "highly artificial." You call it a "dangerous aneurysm." That's strong language.
I don't know a better metaphor. An aneurysm is something you know is there. You just don't know when it will cause trouble. If you look at the consumer side of it, over the last 20 years you have had savings drained. Over the last 10, over half of consumer spending came from home equity withdrawals. Now we are out of the recession and consumer spending was up another $159 billion annually in the fourth quarter over the third. Forty-four percent of it came from lower savings and new debt. That is not sustainable.
That's not all you're worried about.
We need to ask what it would mean if we had a 100, 200 basis point increase in interest rates. What would it mean to housing? Here's a disturbing fact: A 30 basis point increase in interest rates for the government would completely wipe out everything Obama said in the last three months in terms of deficit and debt reduction.
Are you optimistic that we are setting up policies that will clear markets, particularly in housing?
The government is still focused on, I think, the wrong thing, which is to keep the cost of financing housing low. They need to focus on establishing sensible down-payment minimums and they must deal with the damage that already happened.