Investors are wrapping their arms around a lot more this earnings season besides the results. You have the "will they, won't they" debate on if the Fed does QE2, the "when" will the U.S. Treasury release their report declaring China as a "currency manipulator", the blossoming mortgage fiasco and come November third will there be any political will to tackle spending and cutting the deficit.
I decided to get an economic pulse check with Mark Olson, Co-Chairman of Treliant Risk Advisors and former member of the Federal Reserve Board of Governors.
LL: Do you think the economy needs QE2 now?
MO: QE is outside of my experience of the role of the central bank, but these are extraordinary times. I have a skepticism about using QE but I do not have access to all the information that FOMC members can access.
LL : Do the benefits outweigh the risks?
MO: A large part of the benefit is psychological. The danger is that the Fed is perceived as taking the lions share of responsibility for the recovery. If the Fed moves ahead with QE, it will be necessary to do so in a manner that makes clear that monetary policy cannot bear the full brunt of reviving final demand which is necessary to restore a full employment economy.
LL: Some economists are giving a 20% chance of another recession in the next 12 months. Do you agree?
MO: I agree that there is less than a 50% chance — substantially less. I would put it closer to 10%.
LL: The foreclosure crisis is picking up steam, it spilled into stocks Thursday, is this just the beginning?
MO: The current crisis is one additional fallout from the low documentation, hastily closed mortgage environment where product was pushed into the secondary market faster than normal quality assurance would permit. I think we will see repeats of these issues throughout the peak foreclosure period.
LL: Do you think there should be a moratorium on foreclosures?
MO: No. All efforts should be made to keep the process fair and within the law, but these foreclosures need to proceed in order to manage the residential property backlogs and market overhang. We should not delay the inevitable foreclosures, but borrowers are entitled some assurance they were fairly and legally treated, so a certain level of care is required.
LL: The US Treasury is delaying its China currency decision report labeling China as a "currency manipulator" until after the elections most likely.
This is a political hot potato for the US, what do you think of this? Does the US really have anything to gain considering China is our largest foreign debt holder?
MO: China is the only dominant economy of the world with an officially pegged currency so their efforts are very obvious. Also, a pegged currency will be a constant source of irritation for US based manufacturers feeling the competitive pressure from China. We need to keep some level of pressure on them but declaring them officially as a "market manipulator" the resulting restrictions would be counterproductive. The Chinese fully understand our dilemma and make occasional adjustments in their peg to keep the heat manageable.
LL: What's your outlook on the currency wars.
MO: The currency markets are the most complex of all markets. Changes in currency valuations adjust for international misallocations of labor and capital in addition to being impacted by the psychological impact of fiscal disparities among nations. Currencies will continue to fluctuate in unpredictable ways and efforts to control or limit currency fluctuations usually are counterproductive. Also, the currency markets are easily spooked so it is rare to hear U. S officials speak with any real candor about currency levels. Remember Paul O'Neill?
LL: One of my emerging markets contacts recently told me the United States in the next decade will become irrelevant to the world markets and it will be dominated by China and the other BRIC countries. What do you think?
MO: China and the BRIC countries will continue to improve their respective market shares but no reasonable scenario suggests U. S. irrelevancy.
LL: The deficit is a ticking time bomb. How would you characterize the health of Uncle Sam?
MO: Our total debt relative to our GDP is manageable but at the moment we have no coherent fiscal strategy. It is the lack of a coherent plan rather than our debt level that is most worrisome.
LL: Are you confident Congress will have the political will after the election to tackle spending once the Midterms are over?
MO: No. You can't just look at one side of the issue. Spending and revenue need to be addressed in tandem. I see no evidence that it will improve post election.
LL: Should the Bush Tax cuts be extended?
MO: I am marginally in favor of extending all, but I would accept some adjustment in order to get bipartisan agreement.
LL: What has you worried right now?
MO: The level of anger I feel in the electorate. I am not sure it will produce a new Congress that can deal rationally with these important issues.
LL: Are you seeing any glimmers of economic hope?
MO: I am a born optimist. There is a lot happening in the U.S. economy to make one hopeful. Not the least, the progress we have seen on the TARP loans and consistent progress in corporate earnings. But there is much to be concerned about.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."
