Economic Definitions & Steamboat Springs Economy...

Market issues hit home
Experts expect fallout from crisis to affect construction, credit
By Blythe Terrell (Contact) - Steamboat Pilot & TODAY Reporter
Thursday, October 2, 2008

Definitions
Assets: All the entries on a balance sheet showing the entire resources of a person or business, tangible and intangible, including accounts and notes receivable, cash, inventory, equipment, real estate, goodwill, etc.

Capital: Wealth (money or property) owned or used in business by a person, corporation, etc.

Leverage: To speculate in (a business investment) largely through the use of borrowed funds, or credit, with the expectation of earning substantial profits; also, to mortgage (oneself or one’s assets) in this way.

Recession: A temporary falling off of business activity during a period when such activity generally has been increasing.

Subprime mortgage: Generally, a mortgage loan made to a borrower with a weaker credit profile than that of a prime borrower. As a result of the weaker credit profile, subprime borrowers have a higher likelihood of default than prime borrowers.

Sources: Webster’s New World Dictionary, Fannie Mae

Steamboat Springs — Make no mistake, experts said: The economic problems battering the nation are coming to Steamboat Springs.

Construction projects are being put on hold, and credit could be tougher for businesses and residents to get. The city is behind national trends but not exempt from them, Carl Steidtmann and Steven Hof­man said Wednesday.

“The idea of some who are in denial, who think that somehow those in a resort town are immune, is really denial in its most dreadful form,” said Hofman, former director of research and policy for U.S. House Republican leadership.

The subprime mortgage crisis has thrown lenders and banking industry behemoths into a tailspin. The federal government has bailed out several financial institutions, and lawmakers are pursuing a package that they hope will bring relief.

Steidtmann, who is giving a talk to businesses Friday about the 2009 economic outlook, is chief economist at Deloitte Research. The crux of the issue, he said, is that banks need enough capital to be able and comfortable to lend money.

“The banks do need to be recapitalized, and that’s going to happen one way or another through private sector or public sector action,” he said. “The faster we can get the banks recapitalized, the quicker we can get economic recovery.”

But Hofman fears that the proposed $700 billion bailout plan won’t accomplish that.

If banks’ assets continue to lose value, the bailout money “won’t be used to capitalize for more lending — it will be used to chase the value of their assets,” Hofman said. “That’s the fundamental problem, and I don’t believe that has been sufficiently wrestled with at this point.”

He said it was understandable that the House rejected the plan this week. Lawmakers are dealing with economic issues that few understand, Hofman said.

“The irony here is that the sophisticates on Wall Street have no better handle on this than small-business owners in Steamboat or a nurse at the hospital,” he said.

Local impacts
Regardless of the success of the bailout package, the economic upheaval could impact areas such as Steamboat Springs’ work force, Hofman said.

“If the recession does hit the town, and a lot of the trades people can’t get work and leave town, then what does the economy look like?” Hofman asked. “And once the economy starts turning around, do we have the capacity to attract the kind of work force that we need to be a growth economy again?”

He also said the people buying second and third homes in Steamboat have helped drive construction. Those often are the people affected by struggles at institutions such as Lehman Brothers, AIG, Fannie Mae and Freddie Mac, Hofman said.

Those people won’t return to the market for a while, he predicted.

Although the shake-up will affect Steamboat, Steidtmann said it was important to remember that the U.S. economy has been weathering the storm. Through the end of last year and early this year, the economy grew 2 percent, he said.

“It’s always very interesting in times like these to try to track the economy,” Steidtmann said. “But I think the volatility of the economy is much less than what it appears to be. It’s like a huge battleship — it just takes an awful lot to change it off its course.”

Steidtmann said he thought the country was in a mild recession that would continue to next year.

“I think when we get to the second half of 2009, we’re going to start seeing a slow and modest recovery,” Steidtmann said.

So, what should the average person do? Hofman and Steidtmann offered advice.

Folks should be “starting to take some of the nonessential things out and creating greater savings, creating a greater cushion,” Hofman said.

Consumers will see credit costs increase, Steidtmann said. Credit limits are likely to decrease, and interest rates and penalties are likely to increase, he said.

“Pay down your credit card, pay down your own debt, save more and spend less,” Steidtmann advised.

Hofman reminded Steam­­boat residents to watch the unfolding events carefully.

“Take them seriously,” he said, “because they’re one wave away from hitting the town.”
END OF STEAMBOAT TODAY AND/OR STEAMBOAT PILOT ARTICLE (STEAMBOAT'S DAILY NEWSPAPER)
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