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. 

When will we know that we’ve hit bottom?

There will be three indicators.

One of the questions we hear repeatedly in the press is “When will we know that the stimulus package is working?”  I think the media is asking the wrong question.  Don’t get me wrong, we need a stimulus package; the recovery, however, lies in the hands of small business and regional banks. 

The keys to the economic turnaround have less to do with the stimulus package and more with an understanding of human nature.  Economic recovery will begin when:

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

When companies stop lowering prices in a futile attempt to salvage market share, the public will begin spending again.  It’s counter-intuitive, but buyers postpone non-essential purchases when prices are falling in hopes of finding the lowest price possible.  When prices stabilize consumers reallocate their dollars and resume spending.

Similarly, buyers return to “normal” buying habits when the fear of lost employment declines.  Companies would be well-advised to make their layoff and early retirement offers all at once instead of spreading the announcements over months and years.  Even with 10% unemployment, 90% of the workforce is still employed and has money to spend.  Let’s help them regain the comfort they need to start spending again.  That’s the quickest way to stop spiraling unemployment.

Finally, what we need from bankers is a leader who says “this loan customer’s balance sheet isn’t strong and their profits are non-existent, but you know what, they’ve never missed a loan payment. They’re still generating positive cash flow.  We’re going to lend them the money they need to grow their sales and profits.”

We need a bank leader who, instead of foreclosing on a loan then renting that same home back to the original borrower at an affordable rental rate, says “Let’s let them keep the home and we’ll restructure the loan so that their payment is the same as the rent they would pay.”

It’s unfortunate, and counter-intuitive, but the banking community’s lack of trust isn’t in the borrower, it’s in themselves.  It’s impossible to trust others unless we trust ourselves.  Hopefully this week’s blog will reach those in the banking community so that they can discover the leadership this economy so desperately needs.

If you agree with my assessment, please pass it along to those in the business and banking communities who can effect the changes that will drive our economic recovery.

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