People want to know what’s going on with the economy — it’s as unpredictable as the walnut-sized hail was Monday night, just north of Garden of the Gods (vicious horizontal projectiles, in case you’re wondering).
As a sign of the times, a crowd of more than 500 people attended Integrity Bank & Trust’s Second Annual Economic Forum (about 175 people did last year). The venue was moved from Broadmoor West to the International Center after the RSVPs came rolling in.
Keynote speaker Dr. Tom Hoenig, who has been president of the Federal Reserve Bank of Kansas City since 1991, made several jokes about the economy.
After Randy Rush, Integrity Bank’s co-founder/executive vice president, introduced Hoenig and talked about his accomplishments, Hoenig reached the podium.
“I didn’t know you were going to mention that I’d been in Vietnam — but it has prepared me well for this economy,” Hoenig said. Much laughter.
“I’m overwhelmed and pleased by the crowd tonight — but I want to warn you this is not the Cash for Clunkers program.”
Well, after much more laughter, the audience was ready to learn about this capricious thing we call the economy.
Hoenig explained how the economic environment went from grandiose to dreadful in what seemed like overnight.
For several years, investments and the stock market were “doing as well as you could want.” The housing market was up, and housing was subsidized.
“Investors looked at this as a great opportunity, all across the board,” Hoenig said. “And people you hear about, who are very smart — but not good in the judgment category — were funding their purchases with short-term truly overnight funding, of questionable value. These subprime mortgages infested the portfolios of entire institutions, and so the crisis came and people started to lose confidence.”
Which put policy makers in an “awkward position.”
Even if their instincts tell them the market will work itself out, the lack of confidence — read, people were in a panic — has huge repercussions.
“Then when Bear Stearns started to fail, there was no mechanism in place for it to fail in an orderly fashion — so the precedent was set with Bear Stearns,” he said. “Then we made a switch and came to the conclusion that Lehman Brothers should be allowed to fail, which it was — and that will be debated for decades to come, whether it should have been allowed to fail or not — and that started a whole new set of programs, which is what TARP (Troubled Asset Relief Program ) was all about.
“And several institutions (were bailed out) that under normal conditions would have been allowed to fail — whether rightly or wrongly. But uncertainty kills economies — uncertainty kills optimism.”
Interest rates began to go out of sight, asset values began to plummet and people were fearful and talked about whether this would be the next Great Depression.
“So the Bush administration put together a stimulus package, and that was another $800 billion,” Hoenig said.
And, of course, each bailout has its “own set of consequences,” but they all helped somewhat.
“More importantly, they had a psychological impact on the market,” he said.
And the market is slowly recovering.
“No one knows for sure, but we’re probably at the bottom of the market.”
(Nowhere to go but up, right?)
“But the ingredients of this economic recovery will be different than others in recent history,” Hoenig said.
For instance, the last recession recovered because of consumer spending.
But this time, consumers are in no mood to spend and don’t have access to credit to be able to spend.
On the other hand, this time the economy has two “powerful tools to pull us out of recession — fiscal policy and monetary policy.”
Fifty percent of the stimulus has yet to take effect, and will next year, and “monetary policy is as highly accommodative as it’s been in history. The interest rates have been lowered to literally zero to 0.25 percent,” Hoenig said. “And we’ll start to see improvements next year in employment.”
That said, the “easy part’s over, as far as policy goes, because it’s been stimulative,” he said. “Now the hard part is withdrawing fiscal policy (raising interest rates) the right way so it doesn’t end recovery prematurely — and without sparking inflation,” Hoenig said. “But monetary policy is just as complicated. You have to pull the excess liquidity out of the market — but not too fast or interest rates go up.”
Whew. Maybe I’ll just tangle up with another hissing rattlesnake on Stanley Canyon — sounds safer.
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.