MOUNT VERNON — As the U.S. Senate prepares to vote this evening on its latest version of an economic rescue package, American citizens are left wondering what will happen next. The question that doesn’t seem to be asked enough, is what has been learned from history?
What is known today about failed financial institutions was largely learned back in the 1980s, when Savings and Loans institutions began failing. There are many similarities in the S&L failures and subprime lending failures the country is now facing.
Back in the ’80s, according to William R. Melick, economics professor at Kenyon College and former economist for the Federal Reserve Board, commercial real estate loans were skyrocketing, especially in oil-rich areas of the country like Texas, to build strip malls and shopping centers in areas that were changing dramatically based on oil speculation. What made these loans seem so lucrative was the idea that land values and oil prices would continue to rise.
According to the FDIC’s Web site, www.fdic.gov, in 1987, “Losses at Texas S&Ls comprise more than one-half of all S&L losses nationwide, and of the 20 largest losses, 14 are in Texas. Texas’ economy is in major recession, crude oil prices fall by nearly 50 percent, office vacancy is over 30 percent and real estate prices collapse.”
When those with commercial real estate loans began to default on their payments, Melick said, the property the S&Ls were recovering were no longer worth the money on the note, leaving the savings and loan with less in capital and assets.
Today, it’s pretty much the same story, only loans are dealing with residential properties. Lenders, according to Melick, were making subprime loans to those who typically would not qualify for a conventional loan.
“Lenders thought if the housing values went up, they could just sell the house and still make a profit [even if it went into foreclosure],” Melick said. “But when the merry-go-round stops, the loans aren’t as valuable. The parallels are quite obvious.
“Clearly some wealth is being destroyed as equity values are down,” said Melick.
In the meantime, America, and the world, sits and waits for Washington to agree on the best plan to rescue the banks and economy.
While the credit crunch has yet to put a tight squeeze on American consumers, businesses, especially financial institutions, are finding it harder and harder to find the cash assets they need.
“Lending between firms is getting more difficult. As credit becomes less and less available, it is getting harder for businesses,” Melick said.
Although Melick foresees a period of economic “shrinking,” he feels the country probably won’t be able to avoid a recession. Even if the country went into a sharp recession with 10 percent unemployment, 90 percent of the people would still have jobs, he said.
“The pain in a recession is unevenly distributed,” Melick said. “For those with a job, they still have a paycheck. Prices will fall and they will have great buying power. It will be horrific if you loose your job, but you’ll have a good life if you have a job.”
