Financial Expert Examines Possibility of Recession

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MICHEL MARTIN, host:

And now we want to check in with our regular contributor, personal finance guru Alvin Hall.

So, are we there yet? In a recession, that is. In the wake of the poor year end - end of year results on Wall Street, some analysts are saying that we are. So we wanted to ask Alvin what this means for us.

Welcome, Alvin.

ALVIN HALL: Thank you. I'm glad to be here today.

MARTIN: Well, I don't know if you're going to be glad after this conversation that we're…

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MARTIN: Are we in a recession?

HALL: I don't think we're quite in one, but you can sense it in the air. If you just walk around New York City or any major metropolitan area, people are not shopping. Everything is on sale. And if you go to dinner parties and you talk to your friends about their financial security, all of them are feeling a little less certain. Why? Because their house values have gone down. They see the volatility in the stock market, and when they get their 401(k) statements, they see that that value has gone down. All of that is contributing to the need for people to tighten their belt.

MARTIN: Some of this is cyclical, isn't it?

HALL: Yes, some of it is definitely cyclical. But a lot of it are three factors: There is no doubt that the subprime mortgage crisis has scared people. Whether you have a house and a good mortgage, you still worry that something else is going to happen. And if you work for one of the big financial institutions, you know that they're still leaking out the amount of losses that they have. So if you work in that sector, you could get laid off.

Second, most Americans feel wealthy because of the value of their homes. And when they see that value begin to drop, they become very worried. What about my retirement? What happens when I come to sell it? Maybe we need to cut back.

And the third factor, of course, is the price of fuel, which seems to know no upward limit these days. So during the boom - '80s and '90s - we bought these houses that were maybe a little bit much, and now we have to pay for the heating and all of that. Where is all that money going to come from? People have to cut back.

MARTIN: The reports say that people are already cutting back, that in December, Americans cut back significantly on personal consumption, which is what? Like 70 percent of the economy?

HALL: Yes. I read that number in the New York Times yesterday, and I was quite stunned. What that tells us in real simple terms is that the only way out of this recession is for us to spend, spend, spend. Now, I was living in Britain when there were the sort of early rumors of a recession in Britain under Tony Blair. And Tony Blair went to the British public and said we'll have to spend our way out of it. And they did. But the difference there was the housing prices had continued to rise every year. We don't have that feeling in America right now. So if the government thinks that by cutting taxes and putting money in our hands, that it's going to cause people to spend, I think they may be a little surprised.

MARTIN: What is the Fed chairman going to do here? I'm seeing that he's being criticized by some analysts for not doing more, not moving more aggressively to stimulate the economy. What do you think? I mean, obviously, people have whole parlor games to try to guess what the Fed is going to do. What is your sense?

HALL: Consulting my crystal ball about the economy over here to my right, and looking at my tea leaves on my left, I think he's in a difficult situation. I've been around long enough to live through three of these recessions, in the '70s when oil prices spiked, then the other one, I think, in the early '90s. That was when I bought my house, when there was a pullback in the price of real estate. And then in 2000, 2001 when there was the tech bubble, and there was a recession.

This one has some elements of each of those, but it's not similar enough to each of those. First, they come up with a definitive answer. I think that by cutting interest rates, he will be able to save a few people. But for a lot of people who got those mortgages, the bloodletting is going to continue. That will continue the perception that the economy is pulling back. People won't go out and spend, so corporate profits won't go up.

And I think - and maybe I'll be deported or something like this for saying this, Michel - by cutting the interest rates, he will encourage more merges and acquisition activity among private equity and hedge funds.

Now, what happens during M and A's, of course, it adds value to the companies, but results in the loss of jobs.

MARTIN: Hmm.

Mr. HALL: So I think by doing that, he may be actually providing a nice short-term buzz fix, but long-term, the specter will rise again.

MARTIN: Well, Alvin, what - how about your business? Are you been feeling something? Is there something in the air for you?

Mr. HALL: Yes. I certainly feel it. A lot of my clients are cutting back. Normally, at this time of year, I would have booked enough work to cover all of my expenses for the entire year. I'm very rigid about that. That's always one of my goals. For the first time since September the 11th, this year, I've been unable to do that. In fact, I've only booked about 75 percent worth of my expenses, and that's because many of my clients are cutting back.

MARTIN: So, what's your best advice for the - just the regular person out here just trying to, you know, maintain calm and make some good financial decisions? What's your best advice?

Mr. HALL: Look at what you're spending your money on, and ask yourself if it's necessary. If it's not necessary, I think you'd be better to hold on to some of your cash because if this recession deepens, we'll need that money to help us out. Most of us don't have a rich relative. And most of us don't have relatives who work for hedge funds.

So for the average person, we need to hold on to our money. Yes, the government will say, well, if you hold on to your money, then the economy won't recover because, no, you're not spending enough. But at the bottom line, you have to keep the wolf from your door.

MARTIN: All right. Alvin Hall is a financial expert. He joined us from our bureau in New York.

Alvin, thank you.

Mr. HALL: You're most welcome.

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MARTIN: And if you have a question or comment about your personal finances, please feel free to visit our Web site: npr.org/tellmemore, or call our comment line: 202-842-3522.

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