Will the economy ever recover?

Regardless of where interest rates are, what the value of your home is, how much money the government heaps on the problem or which “too big to fail” financial institution is bailed out next, attaining some level of stability is the key to halting the current downward spiral and getting us on the road to recovery. That is a certainty. What is currently uncertain and being debated daily is how we bring back that stability, how we promote public confidence, how we get banks lending and consumers spending. Is the current stimulus package the answer? Solving a credit crisis with massive amounts of additional debt seems counterintuitive, but there is no question something has to be done. Is nationalization of some banks the answer? Maybe. As the nation’s largest banks continue to seek and receive federal capital injections Uncle Sam is slowly becoming a majority shareholder. But, there are strings attached to government ownership. For instance, restrictions are being placed on the payment of dividends by those banks accepting TARP funds. Will that make it more difficult for those banks to attract and retain capital and will they ultimately be challenged to repay TARP? Is the creation of a “Bad Bank” or “Aggregator Bank” similar to the old Resolution Trust Corporation the solution for moving toxic assets off of bank’s balance sheets? This strategy, while expensive to tax payers, worked in the 1980’s with failed S & L’s. There are troubling differences today, though. The assets taken over from failed S&L’s were relatively easy to price and sell. The toxic assets affecting bank performance today are substantially different--countless types of credit derivatives—which are dizzyingly complex. What’s more, today the proposed agency would be taking over failed assets of existing banks rather than simply selling off the assets of failed institutions. A protracted negotiation process between the proposed agency and the banks whose troubled assets it is attempting to buy could lead to endless delays. Finally, are auto makers, investment bankers and mortgage lenders really too big to fail or is it time to endure the pain of an overall economic adjustment rather than masking the problems with massive debt that may have much larger, more long lasting effects on our economy a few years from now?

Given these issues and the uncertainty about what will work, attempting to predict exactly where the banking industry and the national economy are headed is impossible. Exacerbating the effort is the fact that besides all of the unanswered issues and questions in order to know where it is we are going, we really need to know where we are, and where the economy and the financial industry are changes almost daily. Obviously, then we need to find a point of stabilization, we need to identify the “bottom” of the market and apparently we aren’t there yet. And no one is speaking out to venture a guess about when we will be.

To the contrary, the closest we seem to get in terms of defining the end of the problems and the beginning of recovery are daily comments such as those offered by Newt Gingrich in his remarks recently at a breakfast with reporters and columnists organized by the Christian Science Monitor in which the former House Speaker suggested we are “going to go off a cliff”. “This is a much more profound problem than people think” said Mr. Gingrich. He went on to reference sources who predicted $4 trillion in bailouts before it’s all over and…another three to five years, at a minimum, of working our way through this”.

Whether a cliff or $4 trillion in bailouts is in our future remains to be seen. (It feels too many people that we leapt off the cliff months ago) The more important issue now is where is the bottom of this crisis? Clearly, creating confidence and stability is the key to finding the bottom and moving toward a recovery. Some analysts are clear about the importance of restoring faith in the system but very careful about predicting when it will happen. George Van Horn a senior analyst with IBIS World (a market research organization specializing in long range forecasting of industries and the business environment at large) was quoted in Chief Learning Officer Magazine saying, “Stability is the first issue…”. He went on to say “If the stimulus plan does help add stability, maybe you’ll see it by the second half of this year. [And] with stability will come confidence, and the economy will start to recover as we go through 2010”. As with most predictions today stability is the answer but when and how this will happen is filled with “if’s” and “maybe’s”. We will have to wait and see.

Stability, though, is the key and an industry that has continually contributed to that stability and holds the financial answers for most small businesses is community banking. Community banking has expanded even in this recessionary economy. Unfortunately, the negative headlines lump all banks together. Many of the troubled “banks” are actually not insured depository institutions, but rather Investment Banks, or Mortgage Banks. And those insured depository institutions that are failing comprise a small segment of the industry usually made up of “too big to fail” megabanks. What isn’t reported enough is that community banks make up 98% of all banking institutions, that these banks are locally owned and operated and that they are well capitalized. "Community banks are locally owned, and their assets are being put to use in the community in such products as loans to small business and consumer loans," explains Aleis Stokes, director of public relations for the Independent Community Bankers of America (ICBA). "They are competitive in rates.., understanding [of] the marketplace, and willing to support the local community in challenging times."

So, if you want more detailed information about the state of our economy and the prospects for and timing of a recovery stay tuned. But, if you are looking for a place to conduct your personal and business banking and for banking professionals who care more about relationships than simply accepting financial transactions look to community banks.