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Conservative lending climate could pay dividends amid turmoil

When it comes to banking, it is now more apparent than ever that it pays to be conservative.

“Most of the lenders in Mississippi tend to be conservative lenders,” said Dr. Phil Malone, chair of the Department of Finance at the University of Mississippi. “They do credit checks more carefully. They are careful about collateral and down payments. I don’t think we have had the problem like states such as Florida and Arizona with second homes and vacation homes where the default rate has been high.

“Mississippi is a conservative state, and in this case it serves us very well. If we are conservative and frugal in lending, and institutions are very careful, certainly we won’t feel the impact seen in other areas where they have been less rigid in enforcing requirements for loans.”

Still, clearly there is an impact in the state, which is home to a significant amount of fairly large banks. Malone said the difficulties with the nation’s financial system have ramifications throughout the whole state, but the financial sector has been the hardest hit, at least initially. Longer-term ramifications affect consumers and especially smaller businesses and those who need capital the most to expand.

“The financials are large in our state,” Malone said. “We have a lot of fairly large banks. Apparently most of them are in reasonably good position. All of them are going to suffer from having mortgage loans in portfolios to the extent those loans that are not current are going to create some issues for them. I hope the problems are those of reduced profitability and not necessarily solvency.”

Obviously, the mortgage industry is going to be impacted. Credit will be checked more carefully. But Malone said if proper underwriting procedures are followed, banks in Mississippi should do okay.

There could be an impact on small business loans. Small businesses can often find it difficult to raise money. Malone suspect interest rates will increase for small businesses.

“The problem is small business loans are going to become more expensive,” Malone said. “That is a definite blow to small businesses. They will have to develop the cash flows to make higher interest rate payments.”

Malone feels the government has been “a day late and a dollar short” in reacting the national financial crisis. He said when situation like this arises, the easiest way to fix it is before it snowballs.

“I felt like it would have been prudent to step in and have taken smaller corrective action earlier in the process,” Malone said. “The problem was exacerbated by failure to recognize the need to do that. While I understand reluctance on the part of government to step in and do a bailout, I also recognize this was so widespread there should have been a recognition of that need earlier.”

Political fallout?

Dr. Marty Wiseman, director of the John C. Stennis Institute for Government at Mississippi State University, said he understands why many people aren’t keen on the proposed $700-billion bailout of the nation’s financial institutions.

“I guess the good thing about it is the worst of this is not impacting Mississippi that much,” Wiseman said. “But when you talk to the average hard-working fellow in Mississippi, the part they are picking up on right now is that crooks in Congress are fixing to write a big check that fat cat bankers are going to stick in their pocket. So much has been said about the evils of government and Washington, but now even conservatives are asking we have faith in the government and Washington to provide the answer to the problem. Some of the same folks who have been cussing the government now want to pass the bailout legislation. But they have poisoned the well.”

Politicians continue to claim Washington is the problem, and less government is better. So it seems counter-intuitive to now ask for a huge government bailout.

“I don’t blame people for being confused because they have been told government can’t solve the problem,” Wiseman said. “How many times have I heard, ‘If I ran my business the way they run government, I would be bankrupt.’ Candidates on both sides have trained people to hate and distrust the government. Now we are saying the only thing you can do is embrace a government solution and trust government to solve the problem. You can’t blame the guy who works all day to be confused. Haven’t you been telling us to hate them?”

Wiseman said that explains a lack of confidence many people have about the proposed bailout. The crisis has also, of course, eroded people’s desire to invest their money for retirement.

People have more at risk these days than in the past. Many companies have gone from a defined pension plan to individual 401(k) plans that can vary greatly in value.

“That explains people’s lack of confidence,” Wiseman said. “Folks are nervous now and think, ‘Why would I give my money to fund a 401(k) if it may not be there?’ I think they will end up straightening it out, but it is making people nervous. We are looking for someone to blame, but probably don’t blame the right folks. There is a lot of nervousness and anxiety out there.”

While a bailout may be distasteful, without it there could be a calamity the likes of what most people have never seen.

Wiseman is hopeful that the bailout will free up money for projects including a big development in Starkville planned to take advantage of GO Zone tax incentives.

“I’m hoping that development doesn’t get ditched,” Wiseman said. “I think the buyout is going to free up money. Having money for investment in developments could have an immediate impact on a lot of places in Mississippi.”

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.

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