Confidence
by Jeffrey K. Bagby,
Regional Examiner, Oklahoma State Banking Department
How can the Federal Reserve Board lower interest rates nearly 500 basis points and not unleash a mad rush of capitalism? If you are like me, you have stood by and watched attempts by the various powers that be to jump-start the economy to little or no avail. What's the catch? Why hasn't the national economy come roaring back?
Confidence is a key. Granted, maintaining confidence has long been the hallmark of banking. The lack of consumer confidence in the early years of the twentieth century prompted the government to develop "confidence in a bottle" a/k/a deposit insurance. I've been a bank examiner long enough to remember the large number of bank failures in the late 80's. If consumer confidence hadn't been properly supported, the banking landscape would be dramatically different today.
But, the current state of the economy is exposing how confidence - or lack thereof - permeates the way things work and how long it takes to recover from damaged trust. Local calamities such as drought, homespun terrorism or the demise of a large business obviously have had an immediate impact on a state. The global marketplace, however, no longer is a faint drumbeat in the distance. Dramatic events have a distinct trickle-down effect. With the current state of technology, there really aren't any distance barriers.
The web of cause and effect is convoluted, and significant events often intensify trends, such as the downturn of the stock market. By September 2001, the stock market was listing due to factors such as the technology sector implosion. Add to that, the institutional investors stay on the sidelines of the stock market - waiting for the economic climate to change. They lack confidence.
Just like Elvis' death or the space shuttle explosion, we all know where we were on September 11. Of course, it will always seem like yesterday. These twelve months of reflection and ever improving hindsight shows that terrorists are aptly named. Their weapons may be airplanes and anthrax, but their aim is to inflict terror or destroy confidence. Al Qaeda's intent was to deal a body blow to the American lifestyle and change it forever. Confidence was sidetracked to be sure.
In our country, the post-September 11 trickle-down effect started with the airline industry. What was already a weakened industry now was a full-blown disaster. Only a few folks were willing to jump on a plane and go somewhere during the remainder of 2001. Now, a year later, the biggest carriers are losing billions, and some will go bankrupt. Confidence to fly will return, but will the industry be able to wait that long?
Many folks do not perceive that the current market environment affects them. They do not have a mutual fund or any direct investment in the stock market. They could be the darlings of the downturn. Stable, liquid investments and the ability to borrow at amazingly low interest rates. But, there is a reasonable chance those individuals also have insurance of some kind. Certain insurance premiums are notably higher this year from last. The media has finally reported recently what has been rumored for months. Some insurance companies are raising premium rates to offset the losses THEY experienced in the stock market. The lack of confidence has a decided trickle-down effect.
Add to that the exposure of corporate executives that have been living well off their companies and manipulating the books to fool investors and analysts. One has to wonder if anyone is telling the truth. Confidence takes another hit. The Bush Administration finally came out and required corporate CEOs to attest to the accuracy of their companies' financial statements. A reasonable attempt at - restoring confidence.
The nation's poise has been shaken, but the evidence of it in the banking industry in states such as my own is not as obvious. As I go from bank to bank in our state, the mood appears to be business as usual. Good banks are still making loans to good borrowers, and marginal banks are continuing their attempts to get back on track. The catch seems to be that bankers lack the willingness to take that extra bit of risk on an untested borrower. Why? Maybe confidence is a little less sure today than a short time ago.
Did you think you would hear a bank examiner wonder why lenders are shying away from the riskier loans? I concede that examiners are only happy with loans supported by certificates of deposit, but I'm human like anyone - no really. I want to see that level of confidence return as much as the next guy. The current downturn in the economy can be relatively painless for all - especially those in the banking industry. As long as lenders take a bit more time to assess the risk in the loans they are making, to increase ever so slightly the margins on their collateral, and keep in touch with their borrowers. When the outlook is not quite as bright, it's the little things that matter most. Sort of manufacturing your own confidence, I guess.
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