Wall Street turmoil will hit local credit, economy

September 15, 2008

Local financial experts anticipate bank credit will tighten, the U.S. economy will slow down and investors will shoulder tough losses in the wake of this weekend's news that several of Wall Street's largest institutions are insolvent.

"This is going to be an extremely uneasy time for people nearing retirement," said Ball State University economist Michael Hicks. "And if you're not nearing retirement, I wouldn't even open your quarterly statements for a year."

Over the weekend, investment bank Lehman Brothers declared bankruptcy and Bank of America acquired troubled brokerage Merrill Lynch. As a result this morning, the Dow Jones industrial average dropped 300 points.

Indiana will suffer ripple effects from the turmoil as the U.S. banking industry is reshaped in the wake of this year's crises, which earlier included the meltdown of investment bank Bear Stearns and mortgage giants Fannie Mae and Freddie Mac.

In the near term, skittish businesses and individual investors will wait to see if more banks fail. Financial industry observers expect continued consolidation, as the largest, strongest banking institutions sweep up their smaller, troubled competitors. Until the shakeout ends, large Indiana businesses will struggle to access investment capital. And smaller firms will find loans more difficult to secure.

Over time, experts foresee far-reaching reform of investment banks. Money manager George Farra, a chartered financial analyst and principal with locally-based Woodley Farra Manion Portfolio Management Inc., expects a far less freewheeling Wall Street to emerge.

"Really, what's going on is a plain, old-fashioned slowdown," Farra said.

In the days to come, Farra said banks will return to the tighter credit standards that were common decades ago, when lenders required substantial down payments for mortgages and proven secured assets for business loans.

In the long run, however, Farra said the net result will be positive for Indiana's economy. He noted that Indiana mainly suffered ripple affects from the dot-com bubble, whose origins were based in California. The same was true for the real estate bubble, he said, which was primarily the result of speculation in Sun Belt states like Florida. National banking industry reform would prevent future crises and their resulting ripples.

Paraphrasing Winston Churchill, Hicks said the financial sector's troubles are probably closer to the beginning of the end than the end of the beginning. Farra noted that the situation is likely to significantly impact the presidential race, although exactly how remains to be seen.

On the one hand, it might bolster Sen. Barack Obama's message of change. On the other, it could increase the value of Sen. John McCain's age.

"In a period of higher uncertainty, the more proven, tested candidate may be the one who wins," Farra said. "Because there's a higher degree of confidence he's been around the block a few times."

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