Economic recovery slow to emerge
“We didn’t get into this economic crisis overnight. We won’t get out of it overnight.”
David Bochnowski pulls no punches when discussions turn to the local, state and national economic situations.
“Community banks, traditional bankers in communities across the country, did not engage in the practices that caused the meltdown of our financial system,” says the chairman and CEO of Northwest Indiana Bancorp and Peoples Bank. “That was caused by the practices of unregulated mortgage originators and mortgage brokers.”
The consequence of this upheaval is the deepest, longest-lasting recession in American history, he says.
“This is taking much longer, and we haven’t seen the rapid recovery of other recessions of the past, particularly those of the 1980s, when we emerged stronger,” Bochnowski says, adding that changes will come slowly if current circumstances are any indication.
During his recently-completed tenure as chairman of the government relations committee of the American Bankers Association, Bochnowski had a unique perspective on the recession and how the federal government is handling it.
He witnessed the U.S. House and Senate pass a federal financial reform bill that sets up the Consumer Finance Protection Agency to regulate those kinds of brokers and loan originators in the future. However, although the bill was signed by President Obama, the chief executive hasn’t appointed anyone to permanently oversee that regulation process, Bochnowski says.
“The financial reform issues are real and deserve serious discussion,” he says. “The regulations haven’t even been written.”
A number of other components tie also into this economic downturn, Bochnowski says.
The default on sub-prime and other mortgages and the resulting foreclosures has precipitated a housing crisis. The result has been a deep decline in housing values and a glut of homes on the market.
Much of people’s wealth is tied to their homes’ value and the equity they have in it, which is the difference between the home’s value and the amount of the mortgage on it, he says.
“We did not see the huge run-up in housing values here like they did in Arizona, California and Florida,” Bochnowski says. “But, we have seen a decline in home values, and people’s net worth has been diminished.”
An oversupply of homes for sale on the market has caused prices to fall, he says.
That would be a silver lining for those who can qualify for mortgages because they’ll pay less for a home, Bochnowski says.
“This would be the best time to buy because mortgage rates are at the all-time lowest, the lowest in 50 years,” he says. “It gives people a lot of buying power.”
However, “what’s hindering that is that, in order to purchase a new home, they have to sell their current home,” Bochnowski says.
And those low interest rates won’t last forever, he says.
“Interest rates are going up,” he says. “We have seen in the last week a slight uptick in mortgage rates.”
Despite current low interest rates on loans, consumers have become cautious because of the economy, and are saving now at a rate unseen for decades, Bochnowski says.
“People are now saving in excess of 5 percent of their income. That’s both a blessing and a curse,” he says.
“Consumer buying represents two-thirds of our economy. People saw the financial bubble burst. They are trying to get their own financial house in order, and they don’t want to be burdened with credit card debt,” he says.
What that means is that Americans are going back to a mentality of “pay as you go,” Bochnowski says. “Saving for the future is good for tomorrow’s economy, but it hinders growth now.”
When consumers don’t purchase goods and services, one consequence is the loss of jobs and the slow-down in new job creation, he says.
Bochnowski says the banking industry doesn’t expect much from the lame-duck Congress that convened earlier this month, especially since the major financial overall bill was passed during the previous session.
“We experienced a major upheaval, an earthquake, during the elections earlier this month,” he says. “Now we hope that those who were elected to represent us, instead of arguing with one another, can work together.”
And despite the negative reports on President Obama’s trip to Asia and the G20 Summit, Bochnowski says, “America is still the leading economy. Our jobs and products need to be treated fairly in the global marketplace.”
He says there will likely not be any major legislation affecting business and industry coming from the Indiana General Assembly when it begins its biennial budget session in January.
“The legislature has done a very good job creating a climate for businesses,” Bochnowski says.
The caps on property taxes were already law when voters approved a referendum enrolling those caps into the Indiana constitution. “It’s not clear what will be the immediate impact on businesses deciding to move to Indiana,” he says. “Taxes are one part of the puzzle.”
Whether the U.S. is heading in the right direction to pull the economy out of the recession is unclear, Bochnowski says.
“We have to be careful,” he says. “We are in unchartered waters.”