McGuire Explains Crisis’ Impact – Hobart and William Smith Colleges \
The HWS Update

McGuire Explains Crisis’ Impact

Pat McGuire, professor of economics at HWS who is currently leading the Washington, D.C. semester program, was recently included in an article in the Daily Messenger about the local impact of the Wall Street crisis.

He is quoted as saying, “To say that no one will be affected here because we live in upstate New York where the lakes are nice and the wine tastes good, that isn’t true; this affects every town, everywhere.” He notes the stock market’s woes would impact all investments, 401(k) plans and assets linked to money market mutual funds. “If it hits the greater economy, you could see layoffs, falling wages and a major recession.”

In explaining the premise of the $700 billion plan offered by the White House the article quotes McGuire, “Does this mean that companies are going to be bailed out? No, the companies that are selling the assets are going to take a loss.”

The article goes on to explain, “No one is sure of the real market value of the properties, he said, so the government could theoretically see a substantial return on its investment.”

McGuire has been a member of the HWS faculty for more than three decades. He has co-taught the “Two Cities” bi-disciplinary course with Jim Spates of the sociology department for more than 20 years, has directed the Galway Ireland semester abroad and regularly leads the Washington, D.C. internship program (where he is currently studying).

The full text of the Daily Messenger story appears below.

Daily Messenger
“Wall Street tremors will be felt locally”
Mike Maslanik • staff writer • September 28, 2008

With politicians mulling an unprecedented Wall Street intervention into a crisis that almost derailed the first presidential debate, something big is going on.

Exactly how big it is and how much it can affect the local economy remains to be seen. Local experts, though, say the impact of the crisis could be devastating.

“To say that no one will be affected here because we live in upstate New York where the lakes are nice and the wine tastes good, that isn’t true,” said Pat McGuire, an economics professor at Hobart and William Smith Colleges in Geneva. “This affects every town, everywhere.”

McGuire, who is in Washington, D.C., overseeing a student internship program, said the tumbling stock market could spell trouble for anyone with investments, 401(k) retirement plans or assets tied to money market mutual funds.

“If it hits the greater economy, you could see layoffs, falling wages and a major recession,” McGuire said.

So far, the crisis is largely contained to the stock market and has yet to spill over onto Main Street.

“A lot of this is wait and see,” Michael Manikowski, Ontario County’s economic development director, said. “I wish I could say with certainly what Monday will be like.”

Fewer jobs
In August, the New York State Department of Labor reported statewide 5.8 percent unemployment rate, with 5.7 percent unemployment in the greater Rochester area. That’s up substantially from a 4.5 percent statewide jobless rate from a year ago – and an August 2007 local unemployment rate of 4.1 percent. It’s up from even a month ago. The jobless rates in July were 5.2 percent statewide and 5.6 percent in the greater Rochester region, which includes Ontario, Wayne and Monroe counties.

Brian Young, director of Ontario County Workforce Development, said those figures reflect the fact the companies have been hiring fewer temporary workers. He also said that there is a shortage of high-skilled manufacturing jobs.

But even those with jobs aren’t avoiding the pinch of the current economy.

Mike Mullally, general manager of Phelps-based ValveTech Inc., said many of his employees are panicked about their 401(k) retirement plans.

“Everybody here is frightened,” Mullally said, adding that he has tried to reassure them that the market will balance out over the long term.

Rob Vanas, owner of Starboard Asset Management Inc. in Canandaigua, said he hasn’t gotten any panicked calls from clients, but he believes the crisis “could get really ugly” if nothing is done to shore up confidence in the market.

“If this measure does not pass, we could be looking at the possibility that the economy could get worse,” Vanas said of the $700 billion government bailout plan to rescue Wall Street bankers from the bad loans that threaten to derail the economy.

The bailout debate
Lawmakers continued to work feverishly over the weekend to hash out a deal. Opponents of the measure call it a massive bailout for some of the wealthiest people in the country; supporters characterize it as a much-needed rescue attempt.

According to the plan offered by the White House and being reworked in Congress, the Treasury Department would buy up around $700 billion in toxic mortgage-based assets held by major investment banks, McGuire said. The federal government would then hold those assets and sell them off, with all of the money going back into federal coffers. Ideally, the infusion of capital would allow the troubled banks to stay afloat and begin to rebuild consumer confidence in the now-tumultuous stock market.

“Does this mean that companies are going to be bailed out? No, the companies that are selling the assets are going to take a loss,” McGuire said.

No one is sure of the real market value of the properties, he said, so the government could theoretically see a substantial return on its investment.

Amendments added to Treasury Secretary Henry Paulson’s original plan call for greater oversight and stipulate that government funds will not be used for excessive executive compensation, or “golden parachutes,” for the executives of companies receiving the money.

The plan seemed to be on track for passage Thursday, when Congressional Democrats and Republicans announced they agreed on a “statement of principals,” which included provisions on oversight and executive pay.

However, talks broke down later that day when a faction of House Republicans declared the deal unacceptable and offered their own, free market-centered plan.

On Friday, local representatives weighed in on the plan.

Rep. James Walsh, R-Onandaga, offered his tepid support for the compromise proposal.

“While I cannot say with absolute certainty that I know that this plan will work, I can say that I believe that it will restore confidence in the system,” said Walsh, a senior member of the House Finance Committee who will be resigning from Congress at the end of this year. “If the federal government fails to reduce this risk, to remove troubled assets and to restore confidence to the system, who will?”

In a break with the White House, Rep. Randy Kuhl, R-Hammondsport, said in a prepared statement that he opposes the Paulson plan in its current form.

“This cannot and should not be a taxpayer bailout,” said Kuhl, who is running for a third term to represent a district that includes Yates County, all of Ontario County except Geneva and southern Monroe County. “Congressional action must be centered on protecting those who have done the right thing.”

The crisis led to a dramatic series of events on the presidential campaign trail, with Republican nominee Sen. John McCain of Arizona Wednesday declaring that he would “suspend” his campaign and he and Democratic nominee Sen. Barack Obama of Illinois meeting with President George W. Bush and Congressional leaders on Thursday.

In a statement released by her office Friday, Sen. Hillary Clinton, D-N.Y., a supporter of the compromise, warned against politicizing the issue.

“The crisis that has seized our markets and millions of families across the nation demands our swift action,” Clinton said. “Any further delay motivated solely by partisan politics and posturing risks deeper financial crisis and catastrophe.”

Fewer concerns locally
As the big investment banks, like Lehman Brothers and Washington Mutual, collapse or get swallowed by the competition, old-fashioned community banks will remain strong thanks to their traditional business models, said George Hamlin IV, president and CEO of Canandaigua National Bank and Trust.

“We raise deposits from people we know in a market we know,” Hamlin said. “We’re not subject to Wall Street, so the market doesn’t have any impact on us.”

Investment banks got into trouble, he said, when they began buying up toxic sub-prime mortgages and relying on exotic financial instruments, like “credit default swaps,” which even they could barely understand.

As housing values fell and it became clear that some people couldn’t pay for their mortgages, the financial markets began their downward spiral.

Hamlin chafes when people blame the crisis on “the banks.” The real problem, he said, started when mortgage brokers, not affiliated with any bank, made irresponsible deals with would-be house buyers.

“Seventy-five percent of mortgages were gathered by mortgage brokers who did not work for banks,” he said. “The process somewhere along the line in the last three to five years changed the standards that had been going in since the 1940s.”

Hamlin said a lot of people got caught up in bad mortgages in the midst of the housing-market boom. Some were low-income workers enticed by dreams of owning their first home; others were investors who hoped to make a quick buck on rising home prices.

While the current crisis has its roots in the housing bust of the last few years, the Rochester-area real estate market has remained fairly steady, said Peter Stoller, director of communications and government affairs at the Greater Rochester Association of Realtors.

“Personally, I’m not concerned to the extent that we’re going into a depression, at least on the real estate side,” Stoller said.

The percentage of home sales has decreased around 23 percent from last year, Stoller said, but the median sale price, a key indicator of the market, remains steady at $125,000.

The decline in home closings may have less to do with the local housing market than a persistent stream of bad news about foreclosures, he added.

“Real estate is local, just like many other issues,” Stoller said. “People may just be reacting to all the negative reports in the national media.”

One measure of the economic anxiety growing in the area is the amount of people who attend basic home finance workshops at Cornell Cooperative Extension, said Pat Pavelsky, executive director of the Ontario County extension center.

When the center first introduced a free, three-part series on personal finances several years ago, it canceled as many sessions at it held, she said. In the past year, though, more than 20 people attended each workshop.

If there can be any silver lining to the situation, it may be that more people want to be involved in their own finances.

“People want to be informed,” Pavelsky said. “This is something that is impacting people on every level, this is our retirement, our children’s education, our homes.”