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Panic attack: RappVoice poll finds gloom and doom, but local banker Mike Leake is not that pessimistic
By James P. Gannon
The economic outlook has become so dark that more than half of those responding to a current RappVoice poll expect nothing less than “an economic collapse like the Great Depression.”
The view from Rappahannock County’s local banker, Mike Leake of Rappahannock National Bank, is not nearly that gloomy, though Leake believes that 2009 will be a difficult year and the amount of economic damage ahead depends largely on how long the current recession lasts. In an interview, he said he’s not counting on any recovery next year, but perhaps in 2010 or 2011.
One point made by Leake is that consumer confidence is at a low ebb. That point is dramatically reflected in the responses to the RappVoice reader poll, which indicates confidence is not merely low, it is obliterated. The survey, which began Sept. 22 and had drawn 135 responses by Oct. 16, is remarkable for its overall sense of gloom and doom.
The poll asked RappVoice readers their reaction to the “ongoing credit crisis, Wall Street turmoil and Federal bailout plans.” Fully 53% of those responding chose the most extreme possible outcome as their answer of choice, checking the response that predicted “an economic collapse like the Great Depression.”
Another 36% chose the response forecasting “a recession in 2009, but not a Depression.” Only 10% of respondents said they thought that “the government’s actions will stabilize the economy soon.” And two voters said they don’t care because it won’t affect them (which makes one conclude that they are already broke and homeless and have nothing to lose).
This is all the more remarkable because–even with a 40%-plus plunge in the stock market, a freeze-up of lending by the banking system, and some slowdown in the economy–conditions are not even remotely approaching those of the Great Depression that stretched from 1929 to the start of World War II in 1941. During those years, unemployment rose to 25% of all American workers (vs. 6.1% now), the stock market lost 90% of its value (twice the loss to date) and the public was largely unprotected by any safety net, such as today’s bank-deposit insurance, unemployment compensation, Social Security and government-paid health care for seniors.
Leake, in an interview this week, agrees that people here are worried sick about the safety of their savings. “We have been spending a lot of time just having some good conversations with our customers,” Leake said, trying to reassure them. People have been coming in with questions about “the safety and soundness of the bank” and about whether their money is protected by FDIC deposit insurance.
But the Rappahannock bank is benefiting from the worries, as customers turn to local community banks–which usually are operated on a more conservative, risk-averse basis–from some of the fast-growing and now troubled big institutions that needed Federal bailout help.
“We have seen an influx of deposits from other institutions,” Leake said, “from situations like Wachovia where there are questions about soundness.” Depositors began fleeing Wachovia Bank when fears of its possible insolvency sent its stock into a tailspin, leading to a shotgun marriage with Wells Fargo Bank.
Others moved money to Rappahannock National Bank because their deposits in other banks exceeded the FDIC limits for deposit insurance. In an emergency move, the government just raised the FDIC insurance protection from $100,000 per depositor to $250,000, partly to stem the flight of money from bank accounts.
“It has worked out well for us,” the Rappahannock banker said. “It has helped us acquire new customers.” Rappahannock National Bank has more than $135 million in deposits, and loans outstanding of more than $110 million. It takes a conservative approach to lending, making most loans in its local community, and has avoided risky loans, such as the sub-prime mortgage loans to home buyers who put little or nothing down and have sub-par credit histories.
As a result, the bank hasn’t been hit with loan losses that undermined the soundness of many large banks. “Our total past-due (loans) are less than 1% of our total outstanding,” Leake said. Still, he added, “we are not immune to what’s going on” in the overall economy.
While the bank has had only one foreclosure on a mortgage loan, some borrowers are having difficulty making payments. “We are willing to work with people” to ease the payment burden, Leake said. “We meet one-on-one with them and work out a plan so they can retain their home or vehicle” on which they have borrowed money.
Looking ahead, Leake sees a difficult year in 2009. Despite the historic moves by the U.S. Treasury and Federal Reserve to rescue the banking industry, he said, “It’s not over–2009 is going to be a very challenging year for the banking industry. We don’t know where the bottom is. That’s all the more reason we need to keep our consistent, conservative approach at the community banking level.”
As for how bad the recession may turn out to be, Leake said “it all depends on how long the the economic difficulty is going to be.” People and small businesses can fall back on their cash reserves and make it through a short recession, but a long recession is another story. “It’s all about people’s financial ability to go on. We have seen some depletion of cash reserves” underway, he said.
Bankers watch for depletion of cash reserves, and increasing use of existing lines of credit, as signs of growing economic distress for businesses or customers, he explained. “People use their cash reserves first, and begin drawing more on their lines of credit second.” After they hit their limits on credit lines, the third stage is inability to make payments and defaults. That’s why duration of the recession is so important.
The longest recession in post-World War II era occurred in 1973-74, when the economy sank for 16 months before hitting bottom. If the current recession started in September (we won’t know until the economic historians tell us years from now), it would be January 2011 before the bottom is hit–and then it would take many months, if not years, to return to prosperity again.
Of course, if the gloomiest respondents to the RappVoice poll are right in expecting a collapse like the Great Depression, you can look forward to a return to prosperity in the year 2021.
-- James P. Gannon
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