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Charles Ortel is a managing director of research firm Newport Value Partners. Previously he was a managing director of Dillon Read, followed by leadership roles at The Bridgeford Group and The Chart Group.

Harlan Levy: What’s your take on housing?

C.O.: Home prices are still high even now, and I think are headed lower. And I don’t think the housing situation can be fixed, everything being equal, without some kind of structural change. If we encouraged immigration, we could sop up some of the excess supply. Absent that, you’re looking at Warren Buffett’s solution, and I think he was kidding, but he suggested that we burn down a bunch of houses.

H.L.: What do you see for the global and U.S. makets?

C.O.: We have to get through the next few years. This year you’re hearing a lot of aggressive chatter out of the Middle East, which scares me. We have the specter of sovereign debt defaults in Europe and the pressure on the U.S., so I think we’re going to go through a transition period here, and the soonest we’ll begin to get a sense of how the 2012 election might go might be in October of 2012.

If it were perceived that gridlock for another six years is our future, the one safe prediction is that the level of volatility in the markets will rise.

I think people on the right and the left are growing increasingly upset with government. It reminds me of the period 1859 to 1860 in American history. You’re going to see more and more complaining, jostling, protesting, suggesting that risks are going to rise.

H.L.: What do you think of Washington?

C.O.: What I see happening in Washington, D.C. is that the Republicans and Democrats have basically come to resemble one another. We don’t seem to have in Washington the kind of giants who walked around when the country was founded or in key past moments. We have people who can’t really see past the lobbyists on either side. What I fear is that both parties think they have enough time to sort this out. But in reality we may be in a place where the bond vigilantes come rushing in and maybe our enemies strike, and we don’t have the time to do what in theory are painless cuts. We have to with vigor address this problem with a cleaver, and I don’t see this happening.

Neither Paul Ryan’s plan of $4 trillion in cuts over 10 years or the President’s plan of $4 trillion in 12 years, which is really $2.5 trillion over 10 years, go deeply enough. If you go back to 2007 and remember the way this crisis seems to have evolved, we had one panic when a hedge fund set up by UBS faltered. Then we teetered back and forth, and the people in power said that we have this fail-safe mechanism or that fail-safe mechanism. Then we turn to Ireland or Greece, and you see the fixes that don’t really fix things, blow up. That’s when the real tough people come into it, and the cuts you’re talking about are not these theoretical Washington, D.C.-style cuts, which are often simply just a reduction in the growth rates. You’re talking about massive cuts that will be forced upon us.

So my fear is that instead of taking the kind of pain that we should take, we are going to delay the day of reckoning, so that when it comes it will be that much tougher to bear.

H.L.: What should be done to fix the economy?

C.O.: In order to solve this problem we have to redefine the mission of government. We can’t tinker around the edges the way each party wants to do.

Let’s start with the military. We have been at war 2 ½ times as long as we were in World War II, and we have to ask ourselves if it’s broke, let’s fix it. What are we doing in Libya? It seems to me we should immediately stand down in Libya. What are we doing in Afghanistan and Iraq? We have to define what we need by “victory,” and if we don’t think victory is possible, we have to reluctantly retreat. Now in 2011, 56 years after the end of World War II we should be asking ourselves why we have so many bases in Japan, Germany, Italy, and the U.K., when we can’t even control our Southern border. This to me is the obvious readjustment. We need to reduce our foreign commitments and protect our borders.

We then need to think through on the spending side how much spending is enough. If you look at total government spending, federal, state, and local, and compare that to the total amount you spend in this country on non-durable consumer goods, things you really need to live on, you will see that the actual level of government spending is way too high.

It’s not a question of eliminating programs. It’s a question of saying to people in government service, “We can’t pay you what you’re being paid. You have to take a pay cut if you want to stay in this job.” And I don’t mean 5 percent; I mean a 25 to 33 percent pay cut, the kind of pay cut that people have seen in the private sector.

And then we have to confront the number of people. We just have too many people working in the public sector. We then have to think through the level of entitlement debts. We have to cut back.

We also can attract a tremendous amount of capital to this country if we do one simple thing: Cut the corporate tax rate to 10 percent from 35 percent, and say we will keep this one regime in place for at least ten years. Reward companies for hiring people in the private sector, because as bad as things are around the world, the U.S. has the ability to restructure in a way that Europe does not.

So if we cut the corporate tax rate and controlled our borders, and if you compare our population size to the amount of land that can be used for agriculture and other reasons, we could absorb a lot more people into this country. We could say, “We’re extremely pro-immigrant, and we’re going to bring in 15 million new people from around the world.” But the people we would want are people who have business ideas, capital, are educated, who are going to have children. That would be a wonderful move, only if we control our borders.

H.L.: What about education?

C.O.: We are operating on an agrarian schedule, one that made sense in the 19th century. There have been enormous productivity improvements which simply don’t seem to be happening in public education. We need to ask ourselves, should students go through high school in three years or four years? What should they learn in high school? Should they learn how goods and services are made? Should they get trained to enter the workforce? Should they learn basic citizenship skills – how the government works, how to balance your checkbook, basic things that don’t seem to be taught anymore. Do we really need to keep kids in college for four years? In England they do it for three. Should we move to a system where we have three years of college and another year of service? These are the kinds of things we need to think about.

Unfortunately, the approach taken of having Republicans gathered together in settings where they speak to other Republicans and Democrats speaking to other Democrats just leads to polarization. We’re not having a serious inquiry.

H.L.: Is continuing the tax cuts for the wealthy a good idea, and can the deficit be tamed without raising taxes, as the Republicans contend?

C.O.: The amount of spending is ridiculously high -- $5.6 trillion in government spending for 307 million customers in the U.S. is larger than in any other economy in the world. So it’s not a taxing problem we have. It’s a spending problem. And when we think about taxes it’s very clear the higher the rates, the smaller the total take collected. Raising income tax rates is not going to lead to collecting appreciably more revenue. Instead what it’s going to provoke is capital flight, and we are a hair’s breadth away from capital flight.

The problem we have is that we have become addicted to unaccountable government spending. We need to move from a system where the bottom 50 percent of all households basically has no wealth. We need our brightest minds to sit down and think about our grandchildren and ask, “Do we really want to leave a country behind that’s bankrupt?” In bankruptcy, you have to change your spending, and it’s just very clear that that’s what we need to do.

H.L.: But do you think Congress will do what’s needed on its own?

C.O.: I think that to fix this crisis, external hands will have to force them. We have to see clear signs that we can’t sell 10-year debt at current prices. I think you’ll start to see continued increases in prices for essential goods and services, and that’s going to start priming our central bank to raise interest rates. And when interest rates start going up, and economic activity starts slowing further, and asset prices, home prices start plummeting, that’s when the crisis will really bite. And it will be in those moments when we’ll see if there are any grown-ups in Washington, D.C., or what we’re seeing out of the president, class warfare. That is the last thing that will work. It will never work.

H.L.: But aren’t the Republicans doing just that, trying to eliminate services for the poor, cut Medicaid, eliminate regulation of polluters, and block more financial regulation that hurts big business?

C.O.: I think the U.S. needs to set the standard for regulatory clarity in reporting on businesses and corporations. I think the budget of the Security and Exchange Commission should be dramatically increased, and that all government and all publicly traded corporations should have very strict penalties for sloppy reporting.

But let’s get real about this: The financial crisis that bit in 2008 that is upon us again is a crisis that was allowed to happen because the voters in did not rise up and demand transparency.

On the environmental side, we need to have a grown-up discussion about our energy usage, resources, and exploitation, and we do not have that. We consume per capita way too much energy, and we have to be sensitive about how we go forward. We can’t continue to be hostage to a volatile region of the world, the Middle East, for our potential energy needs, so we need to have a discussion about that.

On education, we spend an enormous amount per student and produce atrocious results, so it’s not a question of money. Whatever we’re doing isn’t working.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Interview: Newport Value Partners' Charles Ortel's View of the Economy