Despite similar origins, today’s financial crisis isn’t a 1980s repeat

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The November economic forecast released on Friday filled in some of the numbers. The findings themselves, that Minnesota’s economy is weak and slipping behind the national average, were already well known. So, a projected state budget shortfall of $373 million for the current biennium only told us by how much – based on projections that assume economic conditions won’t get much worse.

The numbers are merely a starting point for policy makers, business managers and public administration officials, such as school district officers, to appraise what may happen in the months ahead. Some remember short-lived recessions in the early 1980s and early 1990s. Some remember the farm financial crisis and broader natural resource industries depression that lasted most of the 1980s in rural Minnesota.

Minnesota 2020 today offers a word of caution to those leaders at state and local levels who think an immediate response to the Friday state budget forecast is necessary. Economic conditions today are not the same as in the early 1980s when both national economic downturns and official policy responses ripped the rural, resource based Minnesota economy to shreds.

At the same time, reminds former St. Paul farm credit banking official Jim Ruen, state and institutional responses developed in the 1980s may need to be revived in the months or year ahead to ward off a similar crisis. This time around, however, interest rate and mortgage loan restructuring programs may be needed to help homeowners, not farmers, and their financial institutions.

Such programs two decades ago shored up the Farm Credit System banks that are best-known now as AgriBank in St. Paul – the nation’s largest farm lender. They saved countless community banks as well, despite Minnesota having 29 agricultural bank failures in the 1980s and the forced consolidation of more than 100 others, based on Federal Deposit Insurance Corp. data.

Minnesota state economist Tom Stinson warned reporters on Friday that the impact of today’s economic conditions on future credit availability and, by extension, on financial institutions isn’t yet known. That is what makes forecasting the future health of the state budget so difficult.

What economists do agree on are the sensitive areas of the economy that are certain to cause slumping sales for Minnesota businesses and falling tax revenues for state government. Energy prices, stagnant job growth, the sinking housing market and pause in new home construction, and worsening credit problems all play a role.

These are not “made in Minnesota” problems, just as the 1980s financial crisis was a hand-me-down from national and international problems as well. That is yet another reason why state responses need to be carefully thought out this time around.

Let’s quickly compare the early 1980s experience with today’s economic difficulties.

Heading into the 1980s, former Presidents Nixon, Ford and Carter all struggled with inflation problems largely caused by federal debt associated with the Vietnam war. All three presidents tried different schemes to combat inflation that ultimately failed and led to “stagflation,” a stagnant economy with inflation, by the late 1970s.

The weak U.S. dollar pushed exports even when inflation neutralized any economic gain from the enhanced trade. Farm exports jumped 5.9 percent per year from $26 billion in 1973 to $44 billion in 1981 – the peak year that wouldn’t be duplicated for nearly a decade. Farm debt jumped even greater during those raucous years, growing from $52 billion in 1970 to $162 billion in 1979 – shortly before the farm finance bubble burst.

Financial problems can’t be kept down on the farm, or in residential housing markets. FDIC data show more than 109 agricultural banks in the Midwest states failed in the 1980s where farm debts was built on assumption of farm export earnings. Minnesota lost 29, Iowa lost 39, Nebraska lost 33, Kansas lost 48 and Texas lost 36 such banks. Bank groups and regulators describe agricultural banks as banks with 25 percent or greater of assets in farm loans and leases.

The stress wasn’t limited to just those banks that failed. Again, the FDIC, it its “Banking and the Agricultural Problems of the 1980s” report notes that the U.S. had 4,316 agricultural banks and 8,543 small, non-ag banks in 1980 that were mostly in rural communities. After failures and consolidations, FDIC found 3,093 ag banks and 6,360 small, non-ag banks in 1990.

Where is the economy at today?

The U.S. economy is stagnating again, partly under the weight of federal deficits built around wars in Iraq and Afghanistan and partly from public policy negligence in maintaining a stable fiscal policy. The housing market today looks as fragile as the farm real estate market did in the 1980s, with enormous debt built on nonsensical assumptions, such as “deficits don’t matter,” coming due with rising interest rates.

The U.S. dollar is again slumping, ever though China is trying to inflate the dollar’s value so U.S. consumers can keep buying massive imports. Lack of confidence in the dollar and in U.S. policies, however, has the dollar falling against nearly every other world currency. The effect makes energy prices from 10 percent to about a third higher for American buyers, who use the U.S. dollar, than they are for Europeans and others who convert stronger currencies into dollars for oil and other world commodities.

The weak dollar should push Minnesota exports. It appears it did in the third quarter, although most of the reported gain was an anomaly created by Ford Ranger truck sales to Canada from the St. Paul assembly plant that is scheduled to close. The second quarter should have shown gains as well, but those numbers were negative. The uncertain future for manufacturing and exports are linked with the stagnant job growth rate for the state.

Looking across the two decades, parallels can be found. But market reactions aren’t identical, and as Stinson said, the impact on credit is not yet known nor predictable.

This is where caution must be used by state officials who can, at most, attempt to doctor to economic symptoms and not the underlying disease.

There will be strong pressure from some quarters to try to jump-start the faltering Minnesota economy by investing in infrastructure and remedial programs for neglected education and transportation. Similarly, the anti-government forces are already calling for more tax cuts and infrastructure neglect.

To paraphrase the late Vice President and Minnesota Sen. Hubert Humphrey, such attempts at “trickle down” economics rarely works, although, he noted, “If you give the horse enough oats, the horse will feed the crows.”

Minnesota may need the capability to react to the emerging economic crisis in more thoughtful ways than throwing oats at well-fed horses. It may need to help homeowners and their financial institutions restructure loans and interest rates, just as Minnesota did for agriculture in an earlier time. Ultimately, it may need to use the state’s financial capacity to create jobs in wisely-targeted economic areas.

This, then, is a call for action for policy makers to set aside old theories that may play well to constituent groups but contribute little or nothing to the state economy. The first action should be careful assessments of where we in Minnesota are at, what groups are being hurt, and what spillover effects can be expected.

From such a careful and bipartisan approach, policies to strengthen Minnesota and nudge an economic recovery should begin to reveal themselves.

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