The current financial tailspin is the worst economic crisis to hit the country since the Great Depression, and it will take a New Deal approach to fix it, according to Robert Shiller, an economics professor at Yale University and author of the recently released book, “Subprime Solution.”
Shiller gave the keynote address at the annual securities conference sponsored by the Connecticut Department of Banking in Stamford late last month. In his speech, he said the next president would have to make comprehensive changes to the financial system, just as Franklin D. Roosevelt did during his first 100 days in office.
He said the bailout plan offered by U.S. Treasury Secretary Henry Paulson, approved by Congress and signed into law by President Bush, was necessary but did not cure the root problem.
“We have not done enough to help homeowners,” Shiller said. “As long as people can’t afford to pay their mortgages, the crisis will persist.”
Shiller said the crisis was “a colossal failure in risk management.”
The housing boom, which ended late in 2005, made people mistakenly think that home prices would continuously rise. That led many lenders to flood the market with adjustable rate mortgages to subprime homebuyers thinking that “they were doing people a favor by giving them homes that would make them wealthier in the long run,” Shiller said.
Fannie Mae and Freddie Mac, the quasi-government entities that finance most of the nation’s mortgages and were bailed out by federal regulators in September, were also under pressure from legislators to make mortgages more affordable to low income people, Shiller said.
“Both lenders and lawmakers had accepted the idea that home values were going to continue to go up,” Shiller said.
But when home values began to decline, homeowners fell behind their payments, and in many cases, people owed more on their home than it was worth. Rather than try to repay the loan, thousands of people have walked away from their home instead.
Shiller said human psychology has deepened the crisis. “Markets are fundamentally psychological and driven by the people,” he said.
The public has now focused its attention on the crisis, and that has eroded confidence and led to volatility in the market. “The economy was fundamentally sound, but our psychology changed,” Shiller said.
Young And Profitable
Connecticut River Community Bank in Wethersfield, which opened in 2002 and is planning to open its third branch in West Hartford, reported that its third quarter net income rose 360 percent compared with a year ago.
That’s a sign the young bank is not only weathering the current financial storm but is also finding a way to grow in it.
The bank’s net income for the third quarter was $120,553, up nearly $95,000 from the $25,838 it earned in the same quarter last year. Earnings per share, loans and deposits were also up during the quarter.
“We continue to grow,” said William Attridge, the bank’s president and CEO. “We have avoided some of the problems that other banks have gotten into.”
For weeks, state officials and local bankers have worked hard to reassure depositors that community banks are safe and sound. While some banks may experience poorer than usual third-quarter results due to soured investments in Fannie Mae and Freddie Mac, they are still healthy and ready to lend, officials have said.
Connecticut River Community Bank is better off than most. Attridge said his bank has not made subprime loans or invested in securities backed by them. It also did not own common or preferred shares in Fannie or Freddie, which are now nearly worthless. The bank avoided such investments because they are relatively new and wanted to build an investment portfolio that was fairly liquid.
Since opening six years ago, the bank has been battling hard to get to the break-even point where revenues finally outpace expenses. For smaller banks, that usually takes three to five years. Connecticut River Community Bank became profitable in its eighth quarter, Attridge said. Part of that growth was spurred by the competitive rates the bank offered to depositors early on.
To continue its expansion, the bank will focus on commercial lending, Attridge said. He said underwriting standards have remained the same at the bank, but they do look at certain deals more closely.
“Certain segments of the economy are being affected, so we have to look at appraisals very closely,” Attridge said.
Greg Bordonaro is a Hartford Business Journal staff writer.
