Enjoy this year, economist tells franchise finance audience
The good news, according to the economist Paul Kasriel, is U.S. consumers should have a burst of activity the rest of the year, once the weather improves. They’ll spend on food, hotels and retailers because of heavy demand.
Economist Paul Kasriel had good news and bad news for luncheon guests on the opening day of the conference.
The bad news? Long-term interest rates will go up, too, raising borrowing costs for many businesses. In addition, the Federal Reserve is ending its bond-buying program this year, a program that has fed the lending environment since the recession. That will make 2015 more difficult.
“Enjoy it this year,” Kasriel said at the Franchise Times Franchise Finance & Growth Conference at The Venetian in Las Vegas in March. He noted it won’t be another recession, but “it’ll be challenging for everybody in 2015 and really challenging for the stock market.”
Kasriel, the former chief economist of The Northern Trust Company of Chicago, said the Federal Reserve’s bond-buying program in the past couple of years has been critical in keeping the economy from plunging into a depression. The Fed bought $85 billion in bonds a month—“Where did the Fed get $85 billion from? I think they pulled it from one of their orifices,” Kasriel said.
That $85 billion stimulated what he called “thin air credit,” which generates spending. In most cases, lending doesn’t stimulate any spending without cutting spending somewhere else. For instance, if you were to loan money to a friend, your friend would spend that money, but you wouldn’t. But lending from the federal reserves stimulates spending out of thin air because the Fed is the one that prints money.
The credit crisis that emerged after the Lehman Brothers collapse in 2008 did more damage to the finances of finance corporations than did the stock market crash in 1929 that unleashed the Great Depression. The Fed’s actions, Kasriel said, helped stimulate spending and kept the resulting recession from being worse. “When the banking system was unable to create credit, the Fed stepped in,” he said. “It created credit that the banking system normally would have created.” By the way, the Fed didn’t do that in the 1930s.
Kasriel said the end of the Fed’s program is a good thing, because keeping that “thin air credit” could generate asset bubbles, like the housing bubble that led to the credit crisis in 2008.