ShoreBank Blog
The ShoreBank Blog is your place to find ShoreBank news, new product information, and our insight into the banking world.
Posts Tagged ‘financial crisis’
Tuesday, May 4th, 2010
Humanity has been using money as a means of exchange for about 5,000 years. For millennia, “money” meant coins whose gold or silver content was equal by weight to their assigned value. It was a common device for over-indebted rulers to debase their currency by reducing its gold or silver content while ordering the coins’ nominal value to remain the same. Thus, they could repay borrowings of say 60 pounds of gold with coins now weighing just 50 pounds. Needless to say, this annoyed their creditors, but it pleased another group whose economic influence has expanded over the centuries: tourists.
Tourists love a bargain, and the best places for bargains are countries where your dollar goes a lot farther than at home. Greece is a wonderful place to vacation. Its rulers would love to make it even more wonderful by debasing the currency. Today that’s done, not by reducing its gold content, but simply by revving up on the printing presses at the mint. Tourists would flock to the country and Greek restaurants, hotels, and resorts would be booming. But, the Greeks don’t control their currency, which is no longer the drachma, but the euro. Instead of Greece trying to inflate its way out of trouble, the International Monetary Fund and the European Central Bank have pledged a €110 billion bailout loan. The price of the loan, and ultimately the price Greeks must pay for being part of the Western European euro zone, are drastic economic austerity measures that are bound to depress their standard of living.
The relative situation of Greece and the richer nations of Western Europe is not unlike those of relatively more or less affluence within the same country. Poorer communities have a hard time making themselves more economically attractive by offering cheaper amenities. Worse, poorer communities cannot tax themselves as heavily as their more affluent neighbors and so fall even farther behind during hard times. Debasing the currency, which is another name for state-managed inflation, is a tool, not a cure-all. But it’s a tool missing from Greece’s tool-kit and from the tool-kits of struggling American communities.
Tags: currency strength, economic predictors, exchange rates, financial crisis
Posted in Banking Industry | 1 Comment »
Tuesday, April 6th, 2010
The financial crisis began with too much borrowing, and it won’t be over until the debt burden of American households is manageable. The chart below shows household debt payments as a percentage of disposable income on a quarterly basis since 1985.
Back then, the country had just emerged from a harsh “double-dip” recession and households were just starting to borrow again. The 1991 recession brought on another retrenchment. But, as the long expansion of the Clinton years took hold, we built our debt burden back and then some. By the first quarter of 2008, nearly 14% of our disposable income went to pay debts. The percentage has been falling ever since, but it still has a long way to go before reaching a more reasonable level.
What is a reasonable level? The table below also covers the period 1985 through 2009. It slices and dices households and their debts into several groupings. The first two columns, in yellow, cover all households. The next column, in green, covers renters only, while the three blue columns reflect the debts of homeowners. The first row of percentages shows the ratio of debt service to disposable income for the fourth quarter of 2009. The next two rows show the averages and medians for the whole period. The last two rows show the variances between the last quarter and the long-term trends.
The story is compelling. All households have reduced consumer debt obligations, which are now below historical levels as a percentage of income. Mortgage debt payments have been reduced but are still almost 1% above long-term trend. Looking farther back, the difference is starker. For the 10 years 1985 through 1994, mortgage debt absorbed 9.79% of disposable income. It actually dropped to 9.11% in the following ten years.
It’s taken about two years for mortgage debt service to drop from a peak of 11.30% to 10.55% as a percentage of income. Assuming—and it’s a big assumption—the same rate of decline going forward, the percentage will fall below 10% in two years more. That’s not a bad proxy for how long it will take for the economy to return to full strength.
Tags: debt payment, economic predictors, economic trends, financial crisis, household debt
Posted in Banking Industry | No Comments »
Tuesday, March 9th, 2010
One would assume that energy lending is suffering. Lenders are not only lending less, but actually reducing average balances on credit cards, home equity loans, and lines of credit. In fact, the contrary is true – energy lending seems to be growing by leaps and bounds. Many people ask me why I believe energy finance is poised for explosive growth.
Here are my five reasons for this growth:
- As credit is so difficult to obtain for any kind of project, the federal government is extremely focused on creating new loan programs, like energy finance, that expand credit in all sectors.
- The credit crunch is forcing many in the energy efficiency community to reach out to new types of partners to create these loan programs. In the past, the efficiency community concentrated on developing partnerships with very large commercial banks for easier replication and escalation. The problem is that pilots require experimentation, a willingness to develop new processes and procedures, and, often, an assumption of added risk – elements that do not easily mesh with these large banks’ established lending platforms, especially for lending products, such as residential mortgages, that highly value routinization, efficiency, and standardization. The credit crunch has meant that smaller, mission-driven institutions, which are eager to pioneer new types of loan structures and quite adept at pulling in philanthropic partners to leverage public dollars, such as our colleagues in Portland, are now courted more routinely as partners.
An increasing number of states are legislatively mandating that utilities create on-bill financing mechanisms. As a result, utilities are being thrust into the finance business. Consequently, they are now more eager to develop partnerships, explore leveraging models, use their expertise in measurement and verification of savings, and, with contractor oversight, to develop effective energy lending programs.- The severe economic downturn, budgetary shortfalls at all levels of government, and growing discontent with government (and elected officials), puts a premium on programs that promote job growth, are revenue neutral, and are open to a wide swath of the electorate. Energy financing programs are among the few policy options that offer all of these elements.
- The extreme run up in energy prices in 2007 and 2008 has altered perspectives on where future energy prices are headed. Most people now believe that energy prices will rise over time and that escalation will greatly outpace overall inflation. Indeed, rising costs for energy, like death and taxes, is now seen as one of the few certainties in life.
All of these reasons have thrust energy finance into the national spotlight and to much higher prominence in the financial services industry, especially if the Department of Energy is successful in its efforts to create a new secondary market for loans tied to residential energy efficiency improvements. Naysayers look out: energy finance is poised for growth.
Tags: energy efficiency, energy finance, financial crisis, on-bill financing, ShoreBank, triple bottom line
Posted in Green Collar | 1 Comment »
Tuesday, March 2nd, 2010
Times are tough all over. This month’s Atlantic Monthly magazine carries a thought provoking and thoroughly dispiriting article by Don Peck called, “How a New Jobless Era Will Transform America.” Peck quotes Kathryn Edin, who teaches public policy at Harvard, describing her recent research in South Philadelphia. “These white working-class communities—once strong, vibrant, proud communities, often organized around big industries—they’re just in terrible straits. The social fabric is just shredding. There’s little engagement in religious life, and the old civic organizations that people used to belong to are fading. Drugs have ravaged these communities, along with divorce, alcoholism, violence.” That’s an ugly picture, but the worst is yet to come. “I hang around these neighborhoods in South Philadelphia, and I think, ‘This is beginning to look like the black inner-city neighborhoods we’ve been studying for the past 20 years.’”
Edin’s comments unintentionally point out that many people have long-ago written off mostly-minority neighborhoods. Except, of course, the people who live in those neighborhoods. Despite the tremendous stresses of lost jobs, tumbling home values, and growing neglect from the larger community, the residents of the minority neighborhoods ShoreBank serves continue to care deeply.
The reason is that people in our communities can put down roots. Unlike in wealthy suburban areas, several generations can afford to live in the same neighborhood. There are few “For Sale” signs because homes are often passed on to the next generation, other relatives, or friends. There is a vibrancy and cohesion that ShoreBank recognized from the beginning and continues to value, and indeed, to rely on.
But, all the economic data—national, state, and local—lead inexorably to the same conclusion: the downturn has hit minorities much harder than white Americans. For blacks as a whole, this is not a recession, but a full-scale depression. As a general rule of thumb, the numbers show that, however bad things are for whites, they are twice as bad for blacks. However good things are for whites, they are half as good for blacks. The ramifications of racism live on.
Tags: community development, economic predictors, financial crisis, ShoreBank, triple bottom line, unemployment rate
Posted in Banking Industry | No Comments »
Tuesday, September 1st, 2009
Last week my wife and I took a leisurely drive through Wisconsin to visit our son in Minneapolis. 
We avoided I-94, taking mostly state and US highways. We saw lots of cows and even more corn. It seemed an idyllic rural scene. But all is not well in farm country. Our hostess at a bed & breakfast in Reedsburg told of the woes of two recent guests. “We had two young women who just graduated as large-animal vets. It used to be that farm veterinarians could write their own tickets, but not anymore. They both were desperate to get jobs here. And dairy farmers are struggling too. I know one farmer who is borrowing $40,000 a month to stay afloat.”
The US Department of Agriculture confirms these on-the-ground observations. In a just-published report, the USDA projects 2009 farm profits will be 38% lower than last year. In dollar terms, income is projected to be $54 billion, compared to $87 billion in 2008.
The chart at left shows that total farm income will fall below its 10- year average. The culprit is falling prices caused by slack domestic and global demand. The recession strikes again. And, as we learned in Wisconsin, dairy has been particularly hard hit. Income from dairy products is expected to drop from $34.8 billion in 2008 to $23 billion this year. Many dairy farmers are being forced to cull their herds to reduce costs.
But the most interesting statistics I found digging through the USDA report, can be seen in the second chart: The average farm-owning family earns less than $6,000 a year from farming. According to the USDA, “In 2009, average family farm household income is forecast to be $75,895, down 5.2% from 2008, and 8% below the five-year average of 2004-08. In 2009, the average family farm is forecast to receive 7.6 percent of its household income from farm sources, with the rest from earned and unearned off-farm income.” Amazing!
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | No Comments »
Tuesday, June 9th, 2009
As an ordinary American, wondering if you can keep your job or make your mortgage payment, you may be surprised to learn that the recession is almost over. But, this is what the economists are telling us. All the indicators, they say, now point to recovery. One on the key data series showing better days ahead is Personal Income and Outlays, released monthly by the Bureau of Economic Analysis. Earlier this week, the BEA reported that American’s disposable personal income rose 1.1% in April to $10.91 trillion on an annualized basis. That’s a big jump, but let’s look at the details to see if it really is a harbinger of spring.
Collectively, personal income has five components, shown below as percentages for April:
As you can see, the biggest contributor by far is employee’s compensation, but that’s not the source of April’s increase. Rather it can all be found in higher government transfer payments and lower taxes.
According to the BEA, “Provisions of the Federal Additional Compensation Program of the American Recovery and Reinvestment Act of 2009 boosted the level of personal current transfer receipts by $11.8 billion at an annual rate in April.” What a mouthful, but, hey, $11.8 billion is a lot of money! Except what it actually translates to is an extra $25 a week if you are collecting unemployment insurance.
Much bigger contributions came from tax reductions. The Making Work Pay Credit provision of the Act reduced personal current taxes by $49.8 billion at an annual rate in May. This provision allows a refundable tax credit of up to $400 for individuals and $800 for working couples. Reductions in payroll taxes added $63.6 billion (again, annualized) to May income.
What did we do with this bounty? Answer: We saved it; that is, we didn’t spend it. The BEA calculates the savings rate by subtracting personal outlays from disposable personal income. Putting $100 in the bank counts as saving, but so does paying off your credit card bill. Using this definition, the rate of US savings as a percentage of disposable income rose to 5.7%, the highest since 1995. Spending actually decreased 0.1% from March, and spending, not saving, drives the economy. Also, a little suspicion about the permanence of tax reductions might be warranted, with the Federal budget deficit spiraling into the trillions and only a handful of states able to balance their budgets.
Still, there are powerful signs that a recovery has begun. The Dow Jones Industrial Average has gained more than 2100 points or 33% since hitting its low early in March. Globally, commodity prices are soaring as is industrial production in China. In the US, long-term interest rates are rising because bond traders have started worrying about inflation, which can accompany strong economic growth. As result, the average rate for new 30-year mortgages jumped to 5.29% last week, from a low of 4.78% a month ago. I’m feeling better already. Aren’t you?
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | No Comments »
Tuesday, March 17th, 2009
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” – Winston Churchill, November 10, 1942, describing the Allied victory at El Alamein in North Africa.
The Census Bureau reported this morning that retail sales in the United States, excluding autos and gasoline, rose sharply for the second consecutive month. The percentage increases were 1.4% in January and 0.5% in February. Sales of electronic equipment, clothing, sporting goods, books, and general merchandise have all risen this year. Gasoline sales are up as well, though mostly because of rising prices following the steep fall late last year. Automobile sales remain in the doldrums. Total vehicle sale in the US fell to an annualized rate of 6.4 million units, the lowest since 1981. 
Separately, the Labor Department announced that first-time applications for unemployment insurance remained above 600,000 for the sixth consecutive week. Initial claims of 654,000 brought the total number of Americans collecting unemployment compensation to an all-time high of 5,317,000.
The two-month rebound in retail sales marks one of the first hopeful economic signs in many months. Retail sales are the main driver of our economy and shopping is our national pastime. But, until initial unemployment claims begin to slow down, we won’t know if today’s report foreshadows a real or a false dawn.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line, unemployment rate
Posted in Banking Industry | No Comments »
Monday, January 26th, 2009
Why aren’t banks making more loans? Hasn’t the Federal Reserve lowered the cost of overnight, unsecured loans between banks virtually to nothing? Since banks can borrow no-cost money, they should surely make low-interest rate loans to borrowers. In fact, and contrary to the daily headlines, banks are lending. Consumer loans at US banks increased 8% to more than $860 billion in 2008. Banks would like to lend more. That’s what they’re in business for. One reason they aren’t, is that the United States is in a liquidity trap.
“A liquidity trap occurs when a country’s nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to keep assets in short-term cash bank accounts rather than making long-term investments. This makes a recession even more severe.”
From: Wikipedia: The Free Encyclopedia
When the economy stumbles, the Fed lowers interest rates in order to stimulate spending. Very low rates of interest make borrowing cheap. They also make savings unrewarding. Normally, the combination is enough to kick start the economy. But 2009 isn’t normally.
Question: Who in their right mind would put $1,000 in the bank just to earn $5 a year? Answer: Someone who put $2,000 in the stock market a year ago and now has $1,000 left.
A liquidity trap is born when enough people decide to protect principal, no matter how little it earns. Once the trap is sprung, low interest rates lose their power to revitalize the economy. Fear of the future trumps the willingness to take risk.
In our economy, the trap has an added barb. Over the last few decades, the demand for consumer credit expanded exponentially. Banks had nowhere near enough money to meet the need. The result was the invention of loan securitization, which is the sale, aggregation, and re-division of loans into bonds that are sold to all sorts of investors all around the world. Unfortunately, these investors no longer have the risk appetite to buy pools of securitized loans, except those guaranteed by the Federal government. They too have fallen into the liquidity trap.
It takes a long time to build a liquidity trap. It will take a long to climb out. But, with “imagination joined to common purpose and necessity to courage,” we will get out.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | No Comments »
Friday, January 9th, 2009
Ethnographers like to study those few remaining peoples so deeply ensconced in the vast Amazonian rain forests that their lives still resemble our hunter-gatherer ancestors. Some of these groups are so primitive that they only have three counting words: one, two, and many. The financial debacle of 2008 may have us all yearning for such simplicity. Instead, we are being subjected to a grisly post-mortem as statisticians and economists count the cost.
My vote for most gruesome statistic is the world-wide loss of market capitalization of all publicly-traded corporations. (Market capitalization is a company’s net worth calculated by multiplying the number of its shares outstanding in the markets by the price per share. For example, if a company has 200,000 shares of stock outstanding with a stock price of $30, the company’s market capitalization is $6 million.) On October 31, 2007, the total value of publicly-traded companies around the world was $62.6 trillion. By December 31, 2008, their value had fallen nearly in half to $31.7 trillion. The difference, $30.9 trillion, is approximately the annual Gross Domestic Product of the United States, Western Europe, and Japan combined. (Gross Domestic Product of GDP is the total market value of all the goods and services produced within the borders of a nation during a specified period.)
I don’t know about you, but I can’t count to a trillion. For me, a trillion is the equivalent of the Amazonian “many;” it’s just too big a number to grasp in any real-world way. So, what does it mean to lose $30.9 trillion? In one sense, it’s frightening real and exact. The market capitalization of a stock (or a market or all markets) at any given moment can be calculated down to the penny. But that does not mean in practice that all the investors in the stock (or the market or all markets) could, at that moment, turn that value into cash. One investor could; two investors could; but if many investors started to sell that value would very quickly deteriorate. That’s essentially what happened to the US stock market on October 19, 1987, when the Dow Jones Industrial Average lost 22.6% of its value. To this day, nobody really knows why the market fell so hard and so fast. The best explanation is simply that there were more sellers than buyers.
It took the Dow about a year to recover the losses of October 19 and about two years to top the record high it reached in August 1987. With some luck, the worldwide stock markets will recover this time too, although probably not so quickly. In the meantime, have fun amazing your friends and neighbors with that $30 trillion stat.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | 1 Comment »
Tuesday, December 23rd, 2008
Happy Holidays! This season is a time for giving, especially to those in need. In the midst of our last-minute holiday preparations, it is easy to overlook the gift that the Federal Reserve has recently given. I know that varying opinions abound regarding the Federal Reserve’s past performance and decisions. Let us momentarily set aside those evaluations. I feel that the Fed’s recent decision to cut the target for the federal funds rate to a range between zero and 0.25 percent can be perceived as a gift. Many of you might have expressed, as I initially did, “A gift? From the Fed? In the midst of this economic crisis? But I’m a saver! What does this mean for my interest rate?” While a rate cut isn’t something you can wrap or put a name card on, this rate change does give the gift of hope to those stricken by the credit crunch and on the verge of homelessness.
Mortgage rates are at their lowest level in 37 years. This is great gift to almost all homeowners, even those to whom the recession has not financially impacted. Even a small decrease of 0.5 in your mortgage interest rate can make a financial impact.
The Fed’s rate cut enables ShoreBank to give, through its Rescue Loan program, the gift of increasingly affordable continued homeownership. As our SVP of Mortgage Lending and ShoreBank Voices blogger Michelle Collins said on Chicago’s abc7 News “The rates are coming down, so we’ve lowered our rates at ShoreBank three or four times over the last three or four weeks, and the fed’s continuing to cut rates to let us offer more affordable interest rates, so the time is great.”
For when mortgages become unaffordable, individual homeowners begin losing their homes and property values plummet. Since many of these affected borrowers are concentrated in a handful of communities, the impact of these cascading foreclosure is amplified. The net result can ignite a cycle of community deterioration.
That is why the Fed rate is a holiday gift to our economy. For those of you in need, all you need to do is to ask. I can think of few better gifts than one that prevents homelessness.
On that note, I wish you all a very Happy Hanukkah, Merry Christmas, and Happy Kwanzaa.
Tags: community development, economic predictors, financial crisis, green banking, Rescue Loan program, ShoreBank, triple bottom line
Posted in Banking Industry | 2 Comments »
