Financial crisis not close to home yet

Editor’s Note: This is the first of two stories about the impact of Wall Street on Main Street.

The United States is not heading for another Great Depression, even with the failure of investment giants Bear Stearns, Lehman Brothers and Merrill Lynch and continued turmoil on Wall Street. On Monday stocks fell sharply and investors sought safety in hard assets such as gold and oil, which closed at $120.92 a barrel.

“It’s nothing like the Great Depression,” said Rick LeCompte, Heskett Chair in Finance at Wichita State University.

In this crisis, stocks have fallen roughly 20 percent. Following the terrorist attacks in 2001 they fell 35 to 40 percent. In 1929 stocks were down 95 percent and a third of the nation’s banks failed, he explained. Bank deposits insured up to $100,000 and Social Security provide safety nets today that did not exist in the 1920s and ’30s.

“There is still a lot of uncertainty in the economy and the market, but for most people in Pratt and western Kansas, unless they have significant investments in some of the financial institutions that have gone under, there has not been a big impact,” LeCompte said. “In Kansas our banks are probably in better shape than most of the banks and savings and loans anywhere else in the country.”

Last week the Federal Reserve provided a line of credit to shore up the financially troubled American International Group’s financial holding company. The 71 insurance companies within AIG did not receive a bailout; they are financially solvent, said Sandy Praeger, president of the National Association of Insurance Commissioners and Kansas Insurance Commissioner. In a press release, she assured Kansans that insurance policies written by subsidiaries of AIG are sound and will be able to pay claims. If an AIG-affiliated company gets into financial trouble, state regulators have a variety of tools to protect policyholders.

Anyone who has questions about an AIG policy may contact the Consumer Assistance Hotline of the Kansas Insurance Department at 800-432-2484.

The U.S. is such a diverse place, that what’s true on the East Coast or in California may not be true in Kansas, LeCompte said, noting that housing prices were down 30 percent in San Diego, but less than 3 percent, if that, in Kansas.

Employment is strong in Kansas and a dollar that is weak in comparison to foreign currency creates strong demand for agricultural products and oil and gas resources that are plentiful in the state.

That said, LeCompte advised, “hold your hat. I think we will see some serious ups and downs in the stock market and the bond market.”

He predicted that if more financial institutions fail, and possibly even if they don’t, the lending market could “get real tight” — small businesses and individuals could find it more difficult to get a loan and interest rates could go higher, The federal government’s as yet undeveloped proposal to buy $700 billion in banks’ mortgage debt is supposed to loosen the credit market, allowing people to borrow money for business and personal expenditures.
The economy is a self-fulfilling prophesy, he said.

“If people believe government has this under control, I think it will level out,” LeCompte said, noting that continued spending following the terrorist attacks helped resolve the market crisis at that time.

The economy may not stabilize quickly, however, because the situation that created the current uncertainty did not happen overnight, LeCompte said. Since 9/11, the Federal Reserve has put money into the economy to try to get interest rates down and allow more people to own homes. It started with good intentions but too many home mortgage loans were made to people who could not meet their obligations. When housing prices went down, lending institutions could not recoup their losses.

Part 2 brings the story close to home.