Western Independent Banker - July/August 2008 - (Page 25)

By Brian Westbury get out of control. Or, sometimes ‘we’ are not driving fast enough, so the Fed lowers the rates,” he said. It’s absurd, in Westbury’s view, that politicians get elected and then suddenly know enough about the economy to keep consumers’ spending under control. “We don’t go to bed one day misers and wake up the next day spendthrift s.” He said that with consumer confidence levels, we are trying to put the consumer on the couch, trying to fi nd out how he is “feeling.” He offered his best analogy as argument for his view point: “Sailboats move with the wind. The faster the wind, the faster they go, the slower the wind, the slower they go. If there is no wind, the sailboat doesn’t move. Does it matter how the sailors ‘feel’ about this? No. It doesn’t matter.” He said that if you review what is going on today with the housing market any measure of housing trends looks about the same until 2003 when there was a big leap way above trend. Did all America wake up one day and all decide to buy a house? No. “Alan Greenspan, in his last gift to us before he left office, dropped interest rates to 1% and people bought more houses! The Fed lifted them 17 times, and now housing is paying the price.” The reason housing started to fall was not because interest rates were ever too high, but because they were too low and encouraged a lot of crazy activity. The consumer did the behavior, but the government encouraged it. He pointed out that CRA forced banks to go into subprime neighborhoods. He fears that the problem is being compounded by driving interest rates too low again and believes we would be better off today if the Fed had not cut rates once over the past six to nine months. Wesbury says that one of the reasons he is not worried about the economy today is that housing is only four percent of gross domestic product (GDP). Exports are 12 percent of GDP and are up 17 percent over the past year and that offsets housing. He does not believe we will have one negative quarter of GDP growth at all in 2008. He pointed out that we produce seven times as much “stuff ” today as we did in 1950, Western Independent Banker July/August 2008 but with the same number of workers. The world has changed. “We don’t need as many people in manufacturing because they are more productive.” “We haven’t seen change like this since the industrial revolution, and it is a huge positive for the economy. We are in one of the greatest periods of change ever in history. I get exciting thinking about what the future will be and what we are in the midst of right now,” he said. “Everybody can get scared, but this is a temporary thing.” He shared his thoughts on the subprime situation, saying that there is about $1 trillion in subprime mortgages. If 50 percent of those mortgages go bad, and banks only recover 50 cents on the dollar, that is a $250 billion loss. Because of what the loans are selling for now, everybody is going to have to do write downs. He thinks the industry has done too many write downs and anticipates write-ups. He thinks the Fed should announce that they will not be lowering rates any more so people will stop waiting for the next drop and do something now. He thinks that the bulk of the losses in the housing market are done. He concluded, “We are really close to turning the corner in many, many places [in the country]. Once [the people in these places] realize that the interest rates aren’t going to get cut any more, I think we are going to see a lot of pent-up demand. The bottom line is that I think the stock market is more undervalued than it has been in 17 years. The correct value for the stock market is about 35 percent higher than we are today. “What we have today is not a liquidity problem in the sense that the Fed’s not added enough money, we have a pricing problem. We have a fear problem. But I have a feeling we are about to get over it. I am really optimistic that underneath all of this is the productivity growth and the technology, and you’ve got to remember – because we are in the midst of the second great industrial revolution – that people didn’t like it during the last one, but there was tremendous wealth made, and there is going to be tremendous wealth made now.” 382462_Belrad.indd 1 25 5/30/08 1:52:21 PM http://www.belrad.com

Table of Contents Feed for the Digital Edition of Western Independent Banker - July/August 2008

Western Independent Banker - July/August 2008 Contents A Message from the President & CEO Getting Creative and Competitive with Leaders' Incentive Compensation Financial Covenants - What Good Are They Really? Homes Within Reach Revisiting Credit Quality and Risk Management Loan Yield Shock Wave - What Can You Do? What Lending Crisis? - Community Banks Flex with Lending Strength How to Fine-Tune ALLL During Uncertain Times Productivity, Technology and Export Growth Trump Housing's Fall in the Long Run - The Economy According to Brian Wesbury Distressed Real Estate Loans and Their Property Tax "Kicker" WIB Calendar Welcome New Members Index to Advertisers advertiser.com

Western Independent Banker - July/August 2008

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