Middlesex County Community Foundation holds forum to answer tough economic questions

In an effort to bring clarity to complicated matters facing the economy, the Middlesex County Community Foundation sponsored a forum, "The Economic Debate: Where is the recovery and what does it look like?" It was the foundation's intention that dialogue, an open-ended discussion and guest panelists with different perspectives on the financial sector would stimulate the Nov. 12 program at the Wadsworth Mansion.

The large audience asked the questions they've been wanting to know, but got the answers they've been dreading to hear.

For instance, no doubt the most disconcerting thought on every American's mind these days is: When will the economic meltdown be over? Just the faces of the expert panelists gave the answer. At first Chandler J. Howard, president and chief executive officer of Liberty Bank, and Thomas P. Kannam, vice president and chief investment officer for Wesleyan University and a Durham resident, distorted their faces, preparing the audience for what was coming, then melted into sighs before Kannam finally replied, "At a minimum, it's going to be a very tough 2009 for all of us, and at the earliest, we'll get out of this in 2010."

Howard added that corporate earnings are taking a hard hit, but more importantly, the crisis won't be over until we see confidence return, the bottom of the housing market and the beginning of a turnaround.

While the gentlemen spent plenty of time discussing what needs to happen down the road, they first addressed frustrating questions having to do with the past.

"How did this mess (in the economy) happen in the first place?" asked Deborah Moore, executive director of the Wadsworth Mansion.

According to Howard, the meltdown goes back four to five years ago when there was unlimited construction of new homes but essentially no demand, or at least an unrealistic demand.

"Public policy was saying that every person in America should own a home and that the government ought to find a way to make it happen," Howard said.

At the same time, both panelists added that part of the problem can be chalked up to the fact that people don't know who they're banking with anymore or who they're getting their loans from. This can explain how improper practices started going on, such as when the definition of "prime," as in sub-prime loans, became creative and enabled what Howard describes as "liar loans."

Liar loans are basically loans in which anything goes. "In other words the person asks, ‘How much can I afford?' and the answer is, ‘Well, how much do you want to afford?' or ‘How much should I put down?' and the reply is, ‘How much do you want to put down?'"

Five percent of the loans in this country are liar loans, which doesn't sound like much, but coupled with other factors, it magnifies the problems in the economy.

One of these problems is the number of layoffs due to the financial crisis. Howard said that in Connecticut, there were 12,000 individual real estate brokers operating in the state at the end of September, down from 25,000. "And just today," Howard continued, "retailer Circuit City has announced layoffs." This comes on top of gloomy employment news from Pratt and Whitney and several local insurance companies.

When the topic of the bailout came up, one audience member asked why there was a discrepancy in what the government said they were using the bailout money for. She remembers the government insisted that it was not buying the banks, rather it was buying bad loans at the beginning of "all of this." Now, the government said it's the other way around.

Kannam supposed that the government was rushing to restore confidence, and Howard agreed they "did it fast to get it done."

"It's unprecedented for Washington to have just seven days to pass the $700 billion bailout," he said, stating that normally it takes months to pass the smallest bill. "I don't think they knew what the right prescription would be, but they knew they had to do something," he said.

Chandler added, "The changes that have occurred over the last 60 days, let alone the last six months, are unprecedented." In other words, it may seem suspicious that the government has changed their minds on what they're really buying with the bailout money, but it is actually smart to adapt immediately if something looks like it's not going to work.

One question from the audience was whether or not there was a contract for the bailout. The answer was a definite "Yes." In fact, Howard said, the contract is still being formulated.

He explained that the original bill was 600 pages long, and people don't realize there is a legitimate procedure that is being followed. He also said most people don't realize that the banks that are receiving the investments are paying for them.

"People think the bailout money is being doled out, but this is not the case," he said. "The $700 billion really is a loan, not a hand-out."

Howard added: "Here's the real question. If the investment banks have come to the table, why can't the auto industry, or any other industry you can think of, for that matter?"

"Where does the $700 billion come from?" demanded one audience member, who was appropriately confused by the government's ability to simply come up with an enormous sum of money if, in fact, the country is so badly in debt.

Kannam agreed it is mind-blowing to people but that it can be done.

"The United States Treasury is the strongest and most sophisticated treasury on the planet and has the unlimited ability to sell bonds or print paper," he said.

It sounds like the treasury can solve all problems, but unfortunately there is a consequence of having to rely on this means: four to five years down the road, relying on the U.S. Treasury will make a $1 dollar loaf of bread cost $3. Ideally, he hopes, the growth of the economy over time will pay for the deficit spending.

"In the meantime, the magnificence of the bailout proves the devastation of the system," he said, adding, "But you cannot let the country's (financial system) fail."

This brought up the question, "Will changes in the structure of the economy affect consumer confidence?"

Structure is a political hot potato, as Kannam put it, and structure will be very hard to change. Howard added that the country is starting to see a turnaround in some areas. For instance, in the housing market, inventories are not growing because construction has halted, but there is still a long way to go to fix it all and it will be a bumpy road.

Kannam added, "Leadership, talented individuals and the ability to see the greater good in all of this is what really matters. With the election of smart people coming in, these should be hopeful times."