Norwest's Sohn: U.S. Couldn't Stand a Boom
If Sung Won Sohn, Norwest Corp.'s chief economist, had to choose between a roaring recovery and a double-dip recession, he'd take the second dip.
"The last thing we need is a booming economic recovery, given our weak balance sheets," said Mr. Sohn, who also is chairman of the economic advisory committee of the American Bankers Association. A boom "would lead right into a significant, serious recession."
Mr. Sohn was predicting a double-dip slump long before it became fashionable, and he held fast to the forecast even as most colleagues proclaimed the recession over. Now, last Thursday's glum economic data have many economists rethinking their rosier forecasts.
Mr. Sohn said the key to pulling out of the recession is "what we are seeing right now -- basically sideways movement -- and to repair and liquefy our balance sheets."
New Rate Cuts Needed
Although he praised Federal Reserve Board Chairman Alan Greenspan for reducing interest rates, he said the Fed could do more to spark the economy by cutting rates again.
Mr. Sohn said he wants to see the fed funds rate drop to 4.5%, from its current 5.25%, and the discount rate cut to 4.5%, from 5%.
"That would buoy the stock and bond markets and would increase wealth for consumers," he said. "You feel richer, so you might be willing to spend more. This could encourage more big-ticket buying."
Growing Up in Poor Country
Mr. Sohn, 47, knows firsthand the meanings of recession and depression. He grew up in Kwangju, South Korea, when the country was very poor, and he became a student of banking as a youngster because his father headed a government-run financial institution.
"Even when I was in grade school or high school, I learned about loans and workouts. In a poor country, the bad loans are very common," said Mr. Sohn, who played inside the bank and is one of six siblings.
He also learned a few things about money from his mother, who was born into an affluent family but had only a grade school education. Over the last 60 years, she invested her savings in gold and real estate. When Korea's economy boomed, she became a multimillionaire.
Mr. Sohn now is considered one of the top bank economists in the country.
Calling the Turns
"Sung Won Sohn is an enormously prescient economist," said Robert H. Dugger, chief ABA economist. "Last summer, when he said the economy was in a recession, he was a relatively lone voice. Last spring, when he said the recovery was going to be very slow, he was very much a lone voice. His assessments have been very accurate."
Mr. Sohn said the U.S. is paying for its sins and the biggest sin is the debt it chalked up in the 1980s.
"If you look at the debt in relationship to GNP, it has never been this high since the Great Depression," he said. "This, I think, will limit economic growth literally for years."
Mr. Sohn acknowledged that some companies are making "significant" progress in trimming debt and converting junk bonds to equity, which bodes well for sustained growth. But the economy will continue to drag, he said, and he sees several reasons it could plunge back into recession -- giving that outcome a 30% chance.
Lenders are afraid to lend, he said; borrowers are afraid to borrow; consumers are worried about their jobs; high taxes have crimped consumers' buying power; and interest rates are too high.
Hard Times Ahead for Banks
This means that the worst is yet to come for banks and real estate companies.
At June 30, commercial banks had amassed a record $847.8 billion in real estate loans, up 64% since 1986. Noncurrent real estate loans also rocketed to a record -- $41.4 billion, up $13.9 billion, a 50.5% increase, since 1986.
"I think the real estate problems that we are having right now will get worse, not better, in the near term," Mr. Sohn said. "If you look at the East Coast and the West Coast, there is really no evidence that commercial real estate problems are getting better. In fact, I think they are getting worse.
"This lenders' caution will remain intact for quite some time," he said. "Banks have every incentive to keep down bad loans."
Bank Reform Bill Could Help
The administration's proposed bank reform plan would help, he said, because many current industry problems can be traced to outdated laws that restrict competition.
Mr. Sohn remained pessimistic about the economy even after the Persian Gulf war ended, when many others were more sanguine.
"I cautioned that this could be a euphoria after the end of the war," he said. "I urged people to look at the fundamentals. So far, my predictions have been correct. I have been in the minority in terms of my views. I think I have been right on track."
Mr. Sohn immigrated to the United States in the 1960s at the urging of American missionary friends.
Seeking Wider Horizons
"I was interested in what was happening around the world. I felt Korea was too small; opportunities were very limited for me," he said.
In 1966, he was graduated from the University of Florida with an economics degree. He earned a master's degree from Wayne State University in Detroit, and in 1972, he received a doctorate in economics from the University of Pittsburgh. The same year, he became a citizen.
A former economics professor at Slippery Rock State College in Pennsylvania, Mr. Sohn became senior economist on the President's Council of Economic Advisers under Presidents Nixon and Ford.
Mr. Sohn said he is happy at Norwest but some day would like to return to Washington. His goal: a seat on the Federal Reserve Board.
PHOTO : Sung Won Sohn Events validate his pessimism