(Changes the quarter in the first paragraph.)
Give us an update on GDP here. You guys (GS) have been cautious.
I think we are still looking at around 3.5 percent growth in the second quarter, maybe a touch slower in the second half of the year. Overall, the first quarter was certainly a disappointment.
Is the slowdown of stimulus going to drag the economy to lower GDP?
Yes. We do need a very large fiscal adjustment. At least 6 percent of the budget deficit is structural—that is, growth alone won't solve the problem. The research in this area has generally shown that fiscal adjustments that rely more on spending cuts tend to result in a better outcome than adjustments that focus on taxes. Yet there is no doubt that in the short term—the short term being the first few years of budget cutting—you will see a growth hit from a big budget adjustment. We are assuming that this takes about a point off GDP growth.
What is the dynamic of mortgage finances now?
In the years of the boom, people were borrowing cheaply against their houses to buy SUVs, new plasma TVs, or whatever the case may be. That has clearly ended. Now, in part because of the drop in home prices, you actually have a paying down of mortgage debt. So that particular fuel for consumer spending is gone. Going forward, the fuel for consumer spending growth is going to have to come from the labor market, from employment growth, from wages growing, and so forth.