LAS VEGAS — Dr. Peter Navarro gave ACUMA's Fall LeadershipConference attendees a lesson in Do-It-Yourself Economics.

Navarro, associate professor of economics and public policy atthe University of California, Irvine, Paul Merage School ofBusiness, likened it to the “learn to fish” analogy. “If you teacha man to forecast, you feed him for a lifetime,” he joked. Alifetime of understanding the rate of growth in real GDP (whichallows one to understand the business cycle, which is linked to theinterest rate cycle) may seem esoteric for many, but isn't as nerdyas it seems, given the reality of making mortgage payments. Theimpact can be very personal, and CU mortgage officials here weredeeply interested in Navarro's plain-speaking presentation.

First, he shattered the iconic image of former Fed Chairman AlanGreenspan. “I'm not a fan. He caused the last recession. He causedthe tech bubble and he caused the present housing bubble. TheFederal Reserve screws up more times than they get it right.” Healso bashed current Fed honcho Ben Bernanke. “I didn't thinkBernanke would do it. I think 50 bps was the wrong thing to do.Only three weeks ago he was saying that the Fed wouldn't bail outspeculative real estate investors and irrational lenders. But thisgame is about perception, and the perception he left with this cutis that we're really in deeper trouble than anyone wants to admit,”said Navarro.

Like the old shell game, Navarro advised to keep an eye on thebond market and the value of the dollar. Therein lies the tale, hesaid. “Listen, credit unions can't do sophisticated hedgingstrategies and you are in a very interest rate-sensitive industry.You are in the crosshairs and are vulnerable to recession. So youmust cultivate economic and financial literacy. That means, in realterms, being aware enough to take advantage of the business cycle.”(See Business Cycle Graphic.)

“The Fed cuts rates in a recession and raises them in peaktimes,” said Navarro. But how do you know peak from trough? Usingthe simple John Maynard Keynes Equation, anyone can do it and noPhD is required. It goes like this:

GDP + C + I + G + (IM — X)

That's Gross Domestic Product plus Consumption plus BusinessInvestment plus Government Spending plus Imports less Exports. TheFed's hold on monetary policy isn't absolute, however, assometimes, well, things like recessions happen. Mountains of paperare written to explain why the Fed's actions or inaction caused orprevented it, but in the end it's not unlike the gaming tables inthe casinos, Navarro posited. Still, it's a science labeled dismalfor a reason; that being that people get very hurt by the wildswings and businesses crumble or soar on timing the cycles toborrowing and lending prudently.

Recession Fever?

The perception that people are wealthier than they really aremay be at the core of what causes a recession. But first somethinghas to happen to light the spark, like a real boost in technologyand productivity (like that brought about by the computerrevolution).

“Consumption went way up during the tech boom. People's stockportfolios hit the stratosphere,” said Navarro. Home values soaredafter that and McMansions were built like Levittown subdivisions.Government went on a tax holiday and spent billions running up hugedeficits in the process. “Greenspan said nothing about the secondround of Bush tax cuts and now tries to deny he favored them in hisnew book. Those Bush deficits were fed by those tax cuts, the Iraqwar and the Medicare Prescription Drug Benefit. Do you rememberPaul O'Neil, the first Bush Treasury Secretary? He wanted to usethe surplus Clinton left to fix Social Security, but they firedhim.”

People buoyed by home values used their houses like ATMs to fundtheir children's college tuition (which also soared) or installedmarble kitchens and baths and the “irrational exuberance” alarm

clock was set to buzz American consumers awake with a start.

Oil price shocks and war on terror spending and drought andfamine are the wild cards in the deck no one ever expects to pick,but these “exogenous shocks” also contribute to a possiblerecession,

said Navarro.

“Now, consumer spending is at a low and retail sales are down.But credit card spending is way up,” warned Navarro. The importanceof consumption is key, because it is two-thirds of the GDPequation. GDP + Consumption plus Investment plus GovernmentSpending plus Net Exports.

The American savings rate is negative, so there's no softcushion to fall back on and home values are decreasing (except in afew areas). “Here in Vegas you have the speculative foreclosurecenter of America,” he said. “There's a wave of forced refinancingscoming your way,” Navarro said. That's an opportunity ofunprecedented proportions for credit unions. It'll be a seller'smarket for new home mortgages and as other lenders dwindle, you canstep in.”

Soft or Hard Landing?

Here's where the guessing gets tougher, Navarro stressed. Theeconomy may have a “soft landing” if business (which pocketed lotsof profit in the boom) takes up the slack left by consumerspending. “Business investment must replace consumer contraction.”The “hard landing” will be likely if businesses opt for mergers andacquisitions over reinvestment in plant and equipment and savescash by off-shoring more jobs. That landing will come with a realthud if the Fed's strategy leads to stagflation, Navarro said.

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