Michigan Due For Paybacks
GRAND RAPIDS — The national economy is going through an adjustment due to excesses in the housing market, but there are other things going on in the external environment that will offset that and prove to be especially beneficial to Midwest economies.
“Things have been harsher on the
Glassman was in town Monday to address the Economic Club of Grand Rapids.
“We enabled sleeping giants across the Pacific to wake up and go to work. We did it by allowing our companies to go there, build factories, move operations from here to there and employ their people,” Glassman said. “A lot of people in manufacturing paid a price for that, but that process sparked a renewal in the global economy that is creating whole new markets and whole new economies. We enabled them to modernize like we did in the industrial age, and now they’re giving it back.”
The gap between the economy in the
The current gap is more severe than either of those, and it’s not hard to understand why, Glassman said. The world opened up, and countries with large labor forces started inviting everybody to build operations on their soil. As a result, the world has become more and more integrated: Domestic companies ship parts abroad, have them assembled and then bring them back home. But the ideas that constitute the real value of a product come from here, Glassman said.
“Creating the idea and figuring out how to make a product out of it — the design and the circuitry and all that stuff — that process is still going on here.”
All that globalization is creating new markets for this country, particularly in the agricultural sector. The
“As the national economy starts to slow a little bit more, regions like this are going to start to feel better,” he predicted. “It’s still speculation, but I really think that a year or two from now we’ll look back and realize that Michigan was turning while the rest of the country was still going through a slowdown.”
What was once the “real advantage” of
Other things have changed recently, as well. The dollar has come back down to normal levels, in Glassman’s estimation, and the nation is right back where it was in the late 1980s. What that means for the
“Anybody who is in manufacturing, in agriculture and energy services are noticing that their business is starting to improve,” he said. “The reason it’s getting better is because the dollar isn’t hitting them anymore, and partly because our trading partners around the world are doing better for the first time in a long time, and because there are new economies being created in India, China, Latin America and Eastern Europe.”
Glassman doesn’t anticipate a recession. In mid-January, Congress and the president proposed $145 billion in tax relief as part of a plan to stimulate the economy amid fears that the subprime mortgage bust and waning consumer confidence would push the country into a recession. The Federal Reserve responded two weeks later by lowering its target for the federal funds rate by another 125 basis points — and it may lower it further, he noted. The fiscal stimulus package, on top of lower interest rates, will likely help cushion the economy from the housing market slump, he said.
“That’s not going to help in the first half of the year, but it’s going to be getting traction by summer and in the second half of the year,” Glassman said.
On Wall Street, people are thinking and hoping that most of the bank losses related to subprime mortgages are largely recognized and behind us, Glassman noted. In many cases companies have already written down some of the securities they held that were backed by subprime mortgages, he said.
According to Glassman, the only way to address and diffuse the credit crunch is for the Fed to lower interest rates and create more incentive for the banks to step in and take on the loans, which is what’s taking place now. That’s why the Fed’s recent move was so important, he said.
“Now we’re starting to see the beginnings of how that healing will work,” he observed. “By pushing short-term interest rates well below what long-term rates are, there’s now more incentive for financial institutions to step in and hold more of those loans.”
But Glassman expects it will take longer to get credit moving at the pace people had become accustomed to because the subprime implosion did a lot of damage to investor confidence. When there’s that kind of damage to a financial system, it takes a long time to get the credit flowing, he said. Wall Street has created a lot of vehicles that securitize underlying loans, and investors have lost confidence in those vehicles.
“We need to figure out how to recreate security vehicles that are more transparent, easier to understand, and that investors can have confidence in.”
On the commercial loan side, he said, this is an interesting and unusual time. There aren’t too many businesses complaining about a lack of funds, and the reason is that corporate profits are at all-time records as a share of GDP.
“What that tells you is that public companies and smaller companies are generating a lot of cash, so they have a lot of resources internally and are not as dependent on the bank system for credit. If you’re a good credit and you have a good project, you’re going to find that there’s an investor that’s willing to put money in your business.”
Richard Haslinger, West Michigan president for Chase, said that in the West Michigan market Chase’s loans to companies with annual sales of $10 million to $500 million grew from 1 to 5 percent, and he expects similar growth this year.