By Joe Wilhelm Jr.
Staff Writer
The good news is economists are predicting the downturn in the U.S. economy will level off. The bad news is that these same financial experts can’t provide an estimate on when that is going to happen.
That was one of the issues discussed at the Economic Roundtable of Jacksonville’s “Investment Update” with Dr. Thomas Cunningham, vice president and associate director of research for the Federal Reserve Bank of Atlanta. Cunningham discussed the current state of the economy and made it clear he was only offering his opinion and not the official word from the Federal Reserve Bank.
“I’m here, unfortunately, at very grim times,” said Cunningham. “There is nothing I can do about the economy right now.”
What he could do was to explain how the country got into the current financial mess.
“We had some really clever advances in mortgage financing in the 1990s.We were able to utilize credit scoring theory in a useful way,” said Cunningham. “Credit scoring had been around forever, but it wasn’t until we got really cheap computing equipment that we could do it, and we did and that worked out great.”
The group that benefited the most from this innovation was people who had a couple of “mistakes” on their credit history.
“Before credit scoring, there wasn’t any really good way to lend in a sub-prime market,” said Cunningham. “Credit scoring solved that problem. It developed a mechanism to help people with blemished credit records to buy homes.”
The economy prospered with the help of the credit scoring until about a year ago when payments began to come up short and people didn’t know what they had.
“This developed a lack of confidence in finance,” said Cunningham. “If I don’t know how to value my assets in real time, and you don’t know how to value your assets in real time, then how do we know what we have?”
This dilemma affected the lending institutions because the lack of payments reduced the amount of collateral they could operate with to clear transactions.
“For 80 years, no one has had to think about the backwards flow – if the checks are going to clear.”
Cunningham used the example of someone writing a check. The entity that the check is presented to believes that the person issuing the check has money in the bank to cover the transaction and that the banking institution where the check was issued will still be in business when the check is cashed.
These factors have contributed to where the economy currently is headed, but Cunningham did have some words of encouragement.
“We are in a recession, so if any of you has something productive to do, do it,” said Cunningham. “If you don’t, go buy a television.”
Any estimates that could be given on the timeline for an upturn in the economy were vague, yet still promising.
“A bottoming of the downward trend in the economy is potentially in sight,” said Cunningham. “Look at the housing industry. You know the decline in that industry isn’t going to last forever.”
Members of the Federal Reserve Bank in Jacksonville and Economic Roundtable of Jacksonville were pleased with this meeting’s speaker.
“We like to hold events like this to get people talking,” said Christopher Oakley, vice president and manager of the Fed’s Jacksonville Branch. “It’s educational and the speakers help to foster dialogue between attendees.”
The speaker also serves on the Bank’s Information Technology and Risk Management Committees, and is a member of the Federal Reserve System’s Information Security Group as well as the System’s Technology Steering Council.
The next meeting will be held on the campus of Jacksonville University at the Davis College of Business for lunch on Feb. 24.
356-2466