We’ve reached bottom…

…what do we do next? 

In the March 2^nd Invaluable Leader blog, Will Stimulus Package Work?, I said that there were three signs that would let us know when the economy reached bottom.

1. We achieve price stability
2. We achieve employment stability
3. The banking community finds a bold leader

Two of the three have occurred.  News reports no longer carry announcements of huge price cuts or massive layoffs.  These are strong signs that the economy has reached bottom.  Once price stability is achieved people resume spending.  When spending rebounds, employment stabilizes then rises modestly as confidence in the economy returns. 

The one missing element, based on news stories and Obama administration reports is that we haven’t yet found that bold banking leader.  Indeed, I attend a meeting last week in which a panel of bankers admitted to having been to aggressive in their lending practices, so much so that many of them wouldn’t renew their own customers’ loans.  That attitude does not indicate the strength of leadership we need in the banking community.

• Step 1 of the 7 Steps to Becoming INVALUABLE is to understand and acknowledge your contribution to the problem; then change your behavior to eliminate the problem.  I implore the banking community to take that final step.  They’ve already admitted their contribution to problem, now it’s time to become part of the solution.  How?

1. Work with the borrower to identify a loan program that is economically sound
2. Agree on a plan to move them from the current loan arrangement to the economically sound version over the course of 12 to 18 months
3. Jointly set milestones for the borrower to achieve every 90 days
4. Renew their loan for 90 days; assuming they achieve the agreed upon milestones, renew the loan for another 90 days at terms that are closer to the economically sound version, but still affordable for the borrower
5. Within 12 to 18 months, the bank will have a fiscally sound customer who appreciates the bank that helped them survive bad decisions made by both the banker and borrower

In addition, this program will prevent or minimize further losses in employment, spending and economic stability.

It’s counter-intuitive, but when banks just walk away from a difficult situation they not only irreversibly damage the borrower, they slow their own economic recovery. 

If the leaders at the major banks don’t adopt this approach, I recommend that the Obama administration stop giving TARP type money to these banks and, instead, offer it to the smaller local and regional banks at a rate that allows them to refinance the problem loans using the approach outlined above.  It’ll be a more effective use of the money.

Please share your thoughts with our readers by posting a comment.  If there are topics you’d like me to address, send me a note at dale@furtwengler.com.

The 7 Steps to Becoming INVALUABLE program is now available in print and electronic formats.  Click on http://www.furtwengler.com/7steps.htm to learn more.