AABP Award 728x90

Lovell editorial: Deficits? My worry is debt and home loans


Last week the Federal Board, led by Reserve Chairman Alan Greenspan, fired off another interest-rate cut, supposedly a magic bullet to cure an ailing economy. In response, the stock and bond markets declined. We’re living in strange times.

There is little technically wrong with the U.S. economy or with our money supply. First-quarter gross domestic product growth figures, released last Thursday, were a little sluggish at 1.4 percent. Still, at least growth is fairly safely into positive territory. The Japanese and the Germans, who make up the world’s No. 2 and No. 3 economies respectively, can only wish they had it so good.

The Iowa and national unemployment rates, at 4.1 percent and 6.1 percent, respectively, are high compared to recent levels, but entirely normal when viewed from further out.

Why then lower rates? To boost confidence. This is tricky territory, however, and it would appear as though Greenspan has engineered a little bit of deflation himself in terms of investor expectation. The market fell because investors expected a deeper reduction. When confidence returns, vibrant growth will follow.

Meantime, what troubles me is mounting personal debt and an increasing reliance by policy makers and economic experts on the housing market to save us from any further weakness.

Some banks, including a few in Central Iowa, have begun increasing the amount of money, as a percentage of home equity, that they will lend to homeowners.

West Des Moines State Bank recently upped its limit. Executives there said they felt the bank might have been losing home equity loan business to rivals that were willing to lend more.

There’s obvious incentive here. Most people still have their jobs and defaults haven’t spiked. With investment income so difficult to come by, banks and financial institutions have been relying on their mortgage and home equity loan portfolios for growth.

But what if a homeowner borrows against the home’s full value, and then real estate prices fall? There’s no cushion. That’s exactly what happened in Japan more than 10 years ago, kicking off a decade of deflation and other economic nastiness.

Adding to the risk, homeowners are increasingly tapping the equity in their homes to buy cars, pay down credit card debt and send their kids off to college. The federal government encourages this practice because home equity loans are tax-deductible.

I am not suggesting the United States, or Iowa, experience Japan-style woes. That country has shown a staggering inability to confront its problems head on, choosing instead to continue bailing out hundreds of companies that should probably be allowed to die.  

It’s a situation that bears monitoring.

On a state level, I am growing more troubled by the Iowa Values Fund. On its face, a chunk of money that size can help the state attract some nice businesses and go far toward helping existing businesses grow and prosper. My worries lie in who chooses which companies will receive funding.

I have no confidence in the government’s ability to do it well. That’s not a shot at public officials. I wouldn’t trust any single person, business or other entity to make wise investment decisions 100 percent of the time. It doesn’t happen.

A market solution works better. Risk gets spread out. Diverse options flourish. Winning ideas have a way of making it to the forefront.  

americanequity web 040123 300x250