On Friday the VCU School of Business hosted an economic panel featuring Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond; Steven A. Markel, vice chairman of Markel Corporation; and John R. Nelson, executive vice president and chief technology officer of Altria Group. The panelists answered questions from students and fellow executives about navigating the recession.
Below is an edited transcript.
What indicators should we focus on when we are looking for signs of economic recovery?
Jeffrey Lacker: I’d start with gross domestic product. Two weeks from now, we’ll get the numbers for the first quarter. It was a pretty large negative number in the fourth quarter. It will be a pretty large negative number in the first quarter, but it will be a number kind of close to zero in the second quarter. Look for that to be a positive number for the third or fourth quarter. When you see a number over three, the recovery has been done.
Steve Markel: The frequency of automobile and magnitude claims because of fires, or motorcycles and boats that somehow end up at the bottom the lake are much higher when people are having problems with their mortgage. Claims go up in a recession; one of the things we’ll see hopefully is that claims will go down. The good thing is we haven’t seen a huge influx of claims, so it may be more of a lagging indicator than a leading indicator.
Nelson: When people feel good about the future, they tend to look towards premium-branded products. It’s a real concern to me that consumer confidence is where it is. I’d like people to feel like they have the money to buy these products and [are] not just looking for whatever is the cheapest. Things get really desperate when Kraft mac and cheese sales fall because people are not switching up but switching down.
What strategies should a new or upstart business use during periods of low consumer confidence?
John Nelson: I think the most important thing any business can do is focus on its customers. Understand the consumer, understand the product or service you are offering them, understand whether it is something they are willing to pay for and how much they are willing to pay for. You don’t build a successful business unless you understand your customer
Markel: In building a business, it is important to build a team of people to execute it. To build that team of people, you need a common mission, common culture, goals and objectives. To build that value system within a business can add a lot of strength, particularly when things aren’t going so well. If everybody is pulling in the same direction all the time, the chances of being successful is a whole lot better than when you have different factions pulling in different directions.
What is the best piece of advice you have for those who are graduating college this semester?
Lacker: This is an adverse job market, especially for entry level. I’d focus on what you are going to learn. You are evaluating options; some of them might not seem as thrilling as you were anticipating a year or two ago. Just focus on skill development because it is more important than money at this stage in the game.
What risk do mortgage-backed securities represent to federal dollars in the future?
Lacker: The Federal Reserve since about December has been buying mortgage-backed securities, guaranteed by the agencies Fannie and Freddie, and we’ve been buying agency debt. In addition, since a month and half ago, we’ve been buying U.S. Treasury securities as well. We’ve driven interest rate to zero. Increase the supply of money, the price of money goes down, and interest rates go down. When you get interest rates to zero, people wonder if the Fed can do anything else. We can. We can still increase the supply of money. So we’re increasing the monetary base by buying mortgage-backed securities. In principle we can sell them when the time comes to withdraw monetary stimulus and draw down our balance sheet and reduce the money supply. When we get down low enough, we’ll be able to raise rates pretty easily. There is a possibility that it will be politically unpopular for us to sell them when the time comes to do it.
What is a sustainable rate of home ownership? To what extent should the federal government promote home ownership?
Lacker: The rate now is about 67 percent. It was about 64 percent in 1995. We got up to 69 percent at the peak of the housing market in 2005. It seems like 69 percent is unsustainably high, it isn’t clear if 67 percent is sustainable, but it may be. I think as a society we ought to think about promoting homeownership. It puts people in an asset, but it’s not the best asset for everyone. There is a bit of a push to increase homeownership among lower income households. Lower income households are more susceptible to financial shocks; I really question whether we have been over-promoting homeownership.
How has Markel Corporation invested insurance premiums today in order to hedge against future inflation or probable hyperinflation as a result of devaluation of the dollar?
Markel: It is a concern, and it’s not easy to figure out how to dodge the bullet. We’ll pray the Fed is successfully managing our way through it. One thing we do is continuing to invest in very high quality things that are fairly short term in duration. If we have high interest rates, we won’t be locked into long-term assets with low yields. Secondly, in buying shares of businesses in the form of common stocks, we are more conscious than ever about business and companies that inflation would be more adverse to. Companies that are highly leveraged and would be suffering if they had to pay high interest rates or companies that have more difficulty in increasing their prices. Companies that have the ability to increase their prices, those could in fact be an inflation hedge.
What inflation concerns does Altria face?
Nelson: We are in a little bit of a unique situation because tobacco is a largely inelastic commodity. Say for a 10 percent increase in price, you might get a 2.5 percent decline. What we do face, that is a big challenge, is what I would call political inflation, or what other people call taxes. I don’t know if you noticed the CPI was essentially flat last month, with the exception of tobacco — went up the most it has ever gone up in history. That’s because there is now a 62 percent per pack excise tax. Whatever you think about smoking and taxes, I do think there is a certain disingenuous of taking a health program that’s going to grow and linking that with a revenue source this is declining. I would say taxes for our products are more of an issue than general inflation.
Al Harris is a BizSense reporter. Please send news tips to [email protected]