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Did You Know... ? |
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Lessons from Economic History Long before I became president of the CMSDC, I was a practicing economist who had worked in the White House, the Rand Corporation, Brandeis University and UCONN School of Business. Also during that time I opened an economic consulting company with two colleagues, Gerry Jaynes of Yale University and Larry Bobo of Harvard University. We focused our economic consulting on housing finance, particularly the work of the Federal Home Loan Bank, Fannie Mae and Freddie Mac. During the over 10 years of working as a consultant to the Federal Home Loan Bank we routinely looked at developments in the housing market. Our client was always concerned about the political support they received from Congress and the White House, because the fact of the matter is until recently not many people knew what the FHLB was or what the difference was between them and Fannie and Freddie. So much of our work focused on how the FHLB contributed to access to mortgage finance for individuals who had more limited access because of discrimination, red lining and other practices of mortgage lenders. It was partially because of these practices that Congress enacted the Home Mortgage Data Act (HMDA). HMDA put in place a mechanism of recording every loan application made to a mortgage lender in the country (with a few exceptions). This treasure trove of millions of loan application records served as the raw material of our analysis over the years. The last time the FHLB experienced a major shakeup in the market was because of the S&L crisis of the 1980s. The cause of that crisis that led to the closing of over 740 savings and loan institutions was that there had been a dramatic change in market conditions and regulations. One regulation that led to the S&L crisis was the freeing up of S&Ls and banks to pay higher rates on certain types of insured deposits. In addition to this the inflationary period of the late 1970s created a problem for S&Ls who had most of their mortgage assets in fixed rate long term mortgages and had to borrow from depositors and institutions at higher market rates. This caused S&Ls to search for higher rates of return in markets that they simply did not understand. So S&Ls reconfigured their balance sheets to go after higher yielding commercial real estate loans, loans to high risk gas and oil drilling, and other even more exotic assets pitched by Wall Street convicts such as Michael Milken and other junk bond hustlers. The overmatched S&L bankers bet the ranch - and they lost. Congress set up the Resolution Trust Corporation (RTC) who then purchased the assets of the 740 plus S&Ls, at the tax payers expense. The RTC cost U.S. taxpayers over $150 billion to purchase the over $350 billion in S&L assets by the time they had closed down operations in the late 1990s. For the best of my knowledge, I do not think the U.S. taxpayers ever received a dime of that money back. So as Congress, the President and the candidates talk about the current crisis, I hope someone asks them about this experience and what was learned. As an economist who has followed this market for over 30 years, I would agree with the assessment of almost everyone that this is a historically unique crisis potentially of the order of the 1929 stock market crash and great depression. There are similarities in the S&L crisis, the Great Depression and this crisis. The common factor is the cycle of greed and fear fueled by changes in government regulation of financial markets. Before the Great Depression, commercial banks helped fuel the stock market explosion by lending money to their depositors at very low rates of interest so that those same depositors could buy stocks in the hot stocks of that day. Radio stocks were the internet stocks of the 1920s. They were going up in price daily and investors were becoming millionaires overnight by buying these and other stocks with little money down. The banks were making huge commissions and the money train seemed like it would never end. Well it did and when it did, the banks wanted their money back from their depositors for the loans they made. At the same time the depositors could not sell their highly leveraged positions for a profit so they went bankrupt. The depositors who had nothing to do with this speculative bubble were hurt because their deposits were not insured and they could not get their money out. (Remember the scene of a bank run in the Jimmy Stewart movie, "It is A Wonderful Life:) So the banks closed their doors and the financial system and the economy came to a halt. This is the fear that Treasury Secretary Paulson has. It should also be your fear, but there are some differences. We now have deposit insurance. So your deposits are insured up to $100,000.00. We now have a more knowledgeable Federal Reserve Bank that is prepared to provide liquidity to the market. But there are still some things that individuals and small business owners need to consider doing as this crisis unfolds to protect their wealth and their businesses. First it is a great time to review all of your financial assets. Where are they? Who manages them? Where is your last statement? If you have deposits in banks over the amount insured by the FDIC, you should consider moving that money into new accounts. By using multiple account names you can protect well over $100,000.00. Also businesses and individuals can put up to $50 million in a FDIC insured CEDARs account with certain institutions like The Community's Bank in Bridgeport, the state's only minority owned bank. It is not time to panic, but you should keep a little more cash on hand than under normal circumstances. For businesses, particularly MBEs, you need to place closer attention to your receivables and your payables. Banks have slowed their commercial lending across the country. (Maybe not your bank, but it is not a bad Idea to ask your banker if they have.) So as a result you need to stay on top of your receivables. Those who you have extended credit to might be trying to use you as their new bank of last resort. If they are, you need to have credit facilities in place to offset your new cash flow needs. If your receivables are with NMSDC corporate members, now is a good time to give Ron Williams a call at the BCF, 860-871-1385. The BCF can lend you money or guarantee loans on your receivables from NMSDC corporate members. Membership does have its privileges. In terms of your payables, if credit is getting difficult to get from your bankers, you need to have a serious meeting with them and do not be afraid to take your business across the street to someone who will treat you better. Also you should have some discussions with your creditors before there is a problem. Nobody likes surprises and in the interest of building long term relationships with vendors and others you should be as open with them as possible. Of course there are other things you should be considering, but I will save those items for another letter. The important thing to remember now is that this economic crisis will have its casualties and it will also create new opportunities for those who are smart and those who have their finances in order. Connecticut Minority Supplier Development Council - www.cmsdc.org |
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