Richmond Fed president details financial crisis during speech at WVU

    MORGANTOWN – As he constantly consumed information on the financial crisis that recently pushed the country into a recession, Richmond Federal Reserve Bank President Jeffrey Lacker saw a lot of reports that placed blame on economists for failing to predict the factors leading up to it.

    “I’m going to attack that notion for you today,” Lacker told his audience of mostly business and politics students at West Virginia University on Wednesday (April 14). “I’m going to try and demolish that notion.”

    Calling the assumption that economists should have predicted the details of the recession “unfair,” Lacker pointed to the ways in which economists had tracked and predicted in the last few decades the forces that led to the financial crisis.

     As he gave the audience a background of economic research, Lacker brought up points of concern that the researchers had noted. As far back as 1977 economists noticed that depository insurance had an influence on the risks taken by banks and consumers. If the bank was insured, it took on more risk and its consumers were less likely to monitor the bank’s practices.

    Lacker spoke of other economists who noted that as banks became insured, oversight on their behavior would relax. Also, with the insuring of banks, panic attacks of bank runs were rewarded by the promise of a 100 percent return immediately. An alternative strategy proposed was that of offering something like an 80 percent return on investment after a certain point, which put a penalty on panicking.

    But what may have been most telling about the most recent financial crisis was that the government took on a role of rescuing large financial institutions, those “too big to fail,” fueled by an undefined perception by the public that these banks would be shepherded by the government in the event of a crisis.

    “This is a huge problem,” Lacker said.

    He pointed to two of the biggest names in news in the last two years as an example. Fannie Mae and Freddie Mac, both mortgage insurers, were not regularly financially supported by the government, but they were bailed out due to a public perception that they would be bailed out.

    “Fannie Mae and Freddie Mac have been more expensive than anything else in this crisis,” Lacker said. “Over $100 billion and still there’s more losses to come for us taxpayers. They were able to borrow at much lower interest rates than competitors in the mortgage securitization market because they were perceived to be too big to fail.”

    Lacker pointed to how the recent bailout precedents have only enlarged this undefined safety net. In 1999, economists at the Richmond Federal Reserve Bank found that 45 percent of the liabilities in the country’s financial community “enjoyed explicit or implicit government support.”

    Following the last round of bailouts, that percentage has climbed to 59.

    The problem, Lacker believes, is ambiguity and “a lack of clarity.”

    What policymakers can do to change this is define who is in the safety net and who is not, and to make the safety net smaller in an effort to encourage individual responsibility.

    And institution failure doesn’t have quite the consequences that some feared, Lacker said. When Lehman Brothers Holdings Inc. filed for bankruptcy protection, the only firm that failed as a result was a money market investor engaged in fraudulent activity.

    Lacker said bills are in both the Senate and House side of Congress now that are attempting to fix this problem, but which offer government leeway with an option for bailout funding to use at Congress’ “discretion.”

    “That to me just sets up this dynamic, just perpetuates this dynamic that gave us ‘too big to fail’ to begin with, and so I think it would be a mistake,” he said.

    After discussing the hows and whys of the recession, Lacker underlined his belief that economics has a positive role to play in the discussion.

    “I hoped to have convinced you not to give up on economics if you ever did,” he said.

    Lacker’s division of the Federal Reserve oversees Virginia, Maryland, North Carolina, South Carolina, the District of Columbia and West Virginia, except for the northern panhandle.

Richmond Fed President to address West Virginia business leaders April 13

    MORGANTOWN — Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, will address business leaders in Morgantown at an Economic Outlook Conference on April 13.

    The event will take place at the Waterfront Place Hotel the evening of April 13. A dinner is expected to begin at 6:30 p.m. and Lacker is expected to speak at approximately 7:15 p.m. 

    On April 14, Lacker will address West Virginia University economics and finance students.

    The Richmond Fed is one of 12 banks that make up the Federal Reserve System. It serves the District of Columbia, Maryland, Virginia, North Carolina, South Carolina and most of West Virginia.

Federal Reserve Bank of Richmond releases Beige Book report

RICHMOND, Va. -- The Federal Reserve Bank of Richmond this week released its Beige Book report detailing economic activity in its region, which includes most of the state of West Virginia. The report is released eight times a year and serves as a snapshot of the economic activity of the region.

Following is the report:

Most sectors in the Fifth District reported either mixed or improving business conditions since our last assessment. Manufacturing continued to lead most other sectors, with solid increases in orders and shipments and even a small gain in employment. Services firms also strengthened, although employment tended to be flat. Finance and real estate (both residential and commercial) firms reported improvements over the last four-to-six weeks, but weaknesses were noted especially in industrial real estate. In contrast, the retail sector tended to be either flat or down in recent weeks.

Temporary employment was more evenly mixed between reports of strengthening and weakening, but with more optimism expressed than earlier. Reports of wage and price changes among sectors indicated little change, although manufacturing and retail price growth slowed slightly.

Retail
Retail contacts generally reported flat or declining sales in recent weeks, although a few reported an uptick in late September and early October. An executive at a sporting goods store said unemployment was keeping his sales flat, while department store executives in some locations reported that sales had dropped. In contrast, several store managers at chain department stores indicated that sales had strengthened. A Charlotte store manager reported strong sales of electronics, especially larger flat screen televisions, but he added that, "we're not coming out of the downturn yet." A contact at a large bookstore said sales were up, but the store was continuing to reduce hours in order to contain expenses. Dealers told us sales of cars and light trucks declined, though not markedly, since the cash-for-clunkers program ended. Merchants continued to cut jobs in recent weeks, but reductions were less widespread than cited in our last report. The rate of retail price increases slowed slightly, while the pace of wage increases edged up.

Services
Revenue growth at services firms strengthened since our last report. Most hospitals and other healthcare facilities had slightly higher consumer demand for services in recent weeks; however, flu outbreaks were not extensive and contacts said they have not had to enact emergency pandemic plans. Executives at telecommunications firms told us their revenues were up. Employment was generally flat, with the exception of some financial services and technical firms where employment increased. An architect in Baltimore also said hiring increased at his firm. Price and wage inflation at services-providing firms was relatively stable since our last report.

Manufacturing
District manufacturing activity continued to advance in September. Contacts reported solid increases in shipments and new orders, and indicated that employment had increased for the first time since December 2007. A contact at a tire plant reported that positive sales transferred into increased production after inventory projections were achieved. Moreover, a machinery parts manufacturer said that automotive demand was tremendous because original equipment manufacturers were rebuilding their inventory. A door manufacturer observed that over the last several months precipitous year-over-year drops in new orders had abated, with new orders now only slightly lower than last year. He was concerned, however, that the firming of new orders would only be temporary due to the ending of the new homebuyers' tax credit. Contacts reported that both raw materials and finished goods prices increased at a slower pace than in our last report.

Port authorities in the District reported stable-to-moderate gains in both import and export activity, but expressed concern about their sustainability. One official saw "light at the end of the tunnel," with month-to-month changes flattening out. Auto imports picked up as auto companies replenished dealer stocks. Another official thought that modest gains over the last month might reverse once the early holiday importing was completed, especially if businesses kept a tight rein on inventory.

Finance
Lending demand around the Fifth District was mixed since our last report, although banks reported modest signs of improvement. Consumer loan demand picked up "modestly," according to several bankers from areas least affected by the economic downturn. However, most borrowers with excellent credit and an established relationship received loans. Some of the gains were attributed to the recent jump in new car sales, but increased borrowing for other consumer durables was also noted. Demand for C&I loans was about evenly split between reports of recent improvement and further weakening. Several banks reported that local businesses with relatively healthy balance sheets thought their markets had finally hit bottom and they were ready to start investing again. However, a number of banks reported sharp declines in loan demand in recent weeks, noting weakness in the energy, auto parts, and metals markets. Finally, mortgage lending in most areas of the District saw a pickup that was widely attributed to first-time buyers and bargain hunters, with both concentrated at the low end of the market. The middle and upper ends of the market remained weak, but one banker noted slight increases in sales to second- and third-time buyers.

Real Estate
Fifth District residential real estate agents generally reported stronger traffic and actual sales of houses priced in the low-to-middle range of their markets, citing first-time homebuyers and the government's tax credit program as the driving force. Several agents reported strong sales in September, based on not only gross sales revenue but also unit sales. One agent expected October to be equally as busy, based on the number of visitors at his open houses. Another agent reported that sales were "up a tad," and that the number of properties that went under contract increased in recent months. In contrast, Realtors in North Carolina reported slow housing markets, due partly to people taking their time to look and others being cautious because of their credit status. Indeed, one agent told us that, "pristine credit is practically required to get financing." Most Realtors reported that the low- to middle-priced houses were their best sellers, and the higher-end properties showed very slow sales in many areas.

While commercial real estate activity in the District remained depressed, most real estate agents reported signs of improvement over the last month at least in terms of expressing interest in long-term expansion. One agent noted an increase in foot traffic from retailers interested in developing new sites next year. Few were willing to commit yet, but an increasing number were revisiting earlier expansion plans that had been put on hold over the last year. Industrial real estate activity in most areas of the District was often described as "dead," and new construction of industrial or office buildings was further deterred by difficulty obtaining financing. Small business startups in Northern Virginia were also having trouble getting financing, often due to an inability to meet higher down-payment requirements.

Tourism
Assessments of tourist activity varied in recent weeks, but were generally on the positive side. Contacts along the coast reported firmer bookings since our last report, facilitated by good weather and increased short-term stays. A contact from Myrtle Beach told us that occupancy rates had risen and were much improved over last year. He noted that, although the average length of stay had declined, more people were traveling to the destination. A contact on the Outer Banks of North Carolina indicated that bookings for the Columbus Day holiday weekend were somewhat stronger than a year ago, which she attributed to "visitors being a little more positive." In contrast, other hoteliers on the coast described business as somewhat weaker compared with our last report. A manager at a mountain lodge in West Virginia reported a 10 percent increase in group bookings over last year, crediting its proximity to neighboring urban areas. Similarly, a manager at a mountain resort in Virginia characterized bookings for the Columbus Day holiday weekend as much stronger, due to warm weather.

Temporary Employment
Fifth District temporary employment agents gave generally mixed reports on demand for workers since our last report. One agent reported stronger demand for his workers, citing the economic recovery and a renewed confidence. In contrast, several contacts reported somewhat weaker demand for workers. However, these contacts expected stronger demand over the next few months because companies were beginning to see increases in activity again and, therefore, would need additional temporary support. Indeed, an agent in the Raleigh, N.C., area was very optimistic for stronger demand over the next several months due to an increase in manufacturing in preparation for the holiday season demand and a temporary increase in businesses hiring office workers.

Agriculture
While agricultural harvesting and field preparation were on schedule, farm income projections weakened somewhat since our last report. Recent weather conditions allowed Fifth District farmers to make steady progress in harvesting, with the corn harvest in full swing in North Carolina and winding down in South Carolina. The corn harvest in Virginia was nearing completion with yields described as good to excellent. In addition, the apple harvest was 80 percent complete in Maryland and 60 percent complete in West Virginia. Farmers in Virginia and South Carolina were harvesting early soybeans, which were in good-to-excellent condition. Results of our recent survey of agricultural credit conditions indicated that farmland values were above both the previous quarter and year-ago levels, but income projections weakened as a result of continued lower commodity prices and weaker demand.