Recession has many causes

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By Rick Rand

Early this month, the National Bureau of Economic Research confirmed what many of us have long suspected: That we are officially in a recession, and have been for a year.

There is no doubt that it has been a tough time for our economy, but that doesn’t mean the news has been bad for every sector.  One of the brightest spots, in fact, has been our community banks.

They have become a safe harbor for many wanting a stable place to ride out the economic storm.  During the first three weeks of October alone, for example, community banks saw their deposits rise by 1.1 percent, while the nation’s 30 largest chartered banks saw a 1.2 percent drop.

Kentucky’s community banks are experiencing similar success, according to the leader of the Kentucky Bankers Association and two economists from the University of Kentucky and the University of Louisville.  The three of them recently appeared before the General Assembly’s Banking and Insurance Committee, of which I am a member.

My legislative colleagues and I were told that none of our 200 or so banks has failed, while only one out of 14 is losing money, which is far better than the national average of one out of six.

Perhaps the chief reason for their success was our banks’ refusal to jump headlong into the subprime mortgage market.  As it is, our housing market is down – new home construction is half of what it was in 2005 – but the value of our homes has not dropped, according to the U of L economist.  We didn’t have the bubble, he told us, so we aren’t experiencing the bust.

I believe the stability of our community banks is due in part to state government’s long history of working closely with the industry to ensure everyone on both sides of the teller window has a level playing ground. We created what was then known as the Department of Banking nearly a century ago, and added oversight of state-chartered credit unions a decade later.

State banks had about $110 million in assets in 1912.  It took them nearly four decades to cross the billion-dollar mark, and almost three more to top $10 billion.   By the end of 2007, state banks held almost $40 billion, and our credit unions had $1.39 billion more.

Just as many banks across the nation are being hit hard by the financial crisis, state governments are feeling more than a pinch as well.  Late last week, the National Conference of State Legislatures (NCSL) said that about $140 billion has been or will need to be addressed by the end of 2010 to make sure each state’s budget is balanced.

Kentucky is looking at a short-term deficit of nearly a half-billion dollars.  NCSL says we are one of 26 states that are pessimistic about revenues for the rest of the fiscal year, while most of the remaining ones are “concerned.”  Just six say their revenues are stable, and none are optimistic about growth anytime soon.

As bad as this recession is, it is unlikely to be worse than the one this country suffered through during the early 1980s, according to the U of L economist who spoke to the Banking and Insurance Committee.  Back then, he reminded us, inflation, unemployment and interest rates were all in the double digits.

That may be of small comfort to those having trouble making ends meet now, but I want to emphasize that help is available for those in need.  If there is any way I can be of assistance during this time, or if you have questions regarding any aspect of state government, please feel free to write to me at Room 351C, Capitol Annex, 702 Capitol Avenue, Frankfort, KY 40601.

You can also leave a message for me or for any legislator at 800-372-7181. For the deaf or hard of hearing, the number is 800-896-0305.

I hope to hear from you soon.