Dr. Mark Maggio

Des Moines Area Community College professor Mark Maggio says desperate Wall Streeters looking for a $700 billion bailout recall the story of the boy who cried wolf.

The bailout package, pounded from the political left and right, failed in Congress Monday.

“I thought yesterday was a great day for American democracy,” says Maggio, who teaches economics at several DMACC campuses around the state.

Maggio said Wall Street elites, who he believes have spent careers talking down to Iowans and others, should absorb the pain of their own poor decisions. He thinks their threats about economic calamity in the form of predicted depressions and recessions ring hollow.

“It’s not going to be as bad as the little boy who cried wolf said,” Maggio said. “When people cry wolf I think it spooks people.”

Maggio said that when the question of the bailout is put to regular Americans, outside the corridors of congressional leadership offices and Wall Street boards, the reaction is outright hostility.

“I’ve never heard such unanimity of opinion,” Maggio said.

In fact, Maggio said, this watershed financial question is a rare time where liberals and conservatives are both correct with their reasons for opposing the bailout.

In Iowa, Democratic Congressman Bruce Braley opposed the package because he thinks it’s a life preserver being thrown to money men who have fallen off their financial yachts. Meanwhile, U.S. Rep. Steve King, a western Iowa conservative, blasted the bailout as fundamentally at odds with American free-market philosophy.

Maggio agrees with both lines of reasoning.

“It is a rare day,” Maggio said.

Some financial analysts argue that issues of morality should not be injected into the market, that actual outcome is all that matters and people shouldn’t be so concerned about fairness.

“That’s an old economics philosophy,” Maggio said. “People like me are moving away from that.”

Maggio said Americans see what is really going on with Wall Street.

“They privatized the gain and now they want to socialize the losses,” he said.

Maggio said it is not a radical idea to do nothing for the troubled companies now seeking a taxpayer rescue.
He believes the credit crunch may have a needed punishing effect on large financial institutions that carried much too high debt-to-asset ratios, and sought easy paper wealth associated with poorly backed mortgages.

“We’ve been living high and wild,” he said.

Maggio says both presidential candidates, U.S. Sens. Barack Obama, D-Ill., and John McCain, R-Ariz., have been but bit actors in the debate over the bailout.

“I’m going to argue that both have been insignificant players,” Maggio said.

In terms of more localized impact, Maggio said community banks still need to make profits and will be able to loan money to people for cars and homes.

“The bank is still going to want to make money,” he said.

And average investors who are seeing their mutual fund portfolios and retirements dive should hold their hands, Maggio said.

“It’s only logical to do nothing because if you get out now, you get out at the bottom,” Maggio said.

He said farmland will remain a strong asset.

“I see nothing to indicate that that is going to go down,” Maggio said.

In the end, Maggio said, a collaboration of wealthy Wall Streeter and congressional leaders of both parties and President Bush, have falsely portrayed the bailout of troubled companies as a bulwark against financial Armageddon.

“That’s an essentially strong characteristic of America that we don’t do what out leaders tell us to,” Maggio said.

Tom Gronstal

Although he thinks the United States is clearly in a recession, Iowa’s Banking Superintendent, Tom Gronstal, says there’s no need to for Iowans to hit the economic panic button.

In the near term, he said, it may be harder for all Americans to borrow money as major assets in the economy are liquidated to bailout companies that found themselves mired in trouble largely as a result of connections to the sub-prime debacle.

Gronstal, formerly an executive with his family’s Carroll County State Bank, said Iowa’s 323 state-chartered banks are in solid shape. That’s because banks here have “very little” exposure to the sub-prime mortgage problems — stemming for lenders reaching out to homebuyers with enticing interest rates for properties they ultimately couldn’t afford — which have damaged (and, in some cases, destroyed) financial institutions elsewhere.

“All we can do out here is rejoice in the fact that the events that are taking place will have at most a trickle-down effect,” Gronstal said. “I think for the most part Iowa is going to be unscathed.”

The New York Times reports today that the A.I.G. bailout came just two weeks after the Treasury took over the quasi-government mortgage finance companies Fannie Mae and Freddie Mac, and days after the collapse of Lehman Brothers and the sale of Merrill Lynch.

Amid the current financial crisis, Gronstal has stayed in touch with federal banking regulators and is monitoring the positions of Iowa’s banks.

Iowa banks aren’t permitted to own equity securities, Gronstal said, so community banks around the state wouldn’t have had, for example, Lehman stocks.

What’s more, community banks have more personal interaction with customers, unlike some of the national lending organizations that used the Internet to ink deals with people they never met.

“Most of the community banks develop a relatively long-term relationship with their customers,” Gronstal said.  They therefore aren’t looking to finance homes people can’t afford.

Gronstal admitted that Iowans with investments in 401(k)s and mutual funds aren’t generally liking what they see on the computer screen now, but most will ride out the current storm.  “The value of that today is less than it was a week ago,” Gronstal said. “You don’t have to take a loss. Most of us can afford to wait.”

But this doesn’t mean there won’t be more bad economic news to weather.

Construction of new housing just reached a 17-year low and the crippling of financial giants may over time make it more difficult for Iowans to finance their business and personal endeavors, Gronstal said.

“It will make it harder to borrow money for business and agriculture,” he said.  While he’s optimistic for the long term, Gronstal said a recession is likely if it isn’t already here.

He thinks the world’s central banks understand the gravity of what’s happening with some of the key financial institutions.  “My guess is that they will be able to prevent a depression,” Gronstal said.

He added, “We should feel fortunate where we are. There’s no reason for people to hit the panic button.”

The provocative progressive editor of the Storm Lake Times, Art Cullen, has penned a piece that simultaneously blasts the Bush Administration’s stimulus package and calls attention to some remarkable growth in his northwest Iowa community.

Back in Storm Lake Woebegone, things are above average. Last year saw $42 million in new construction, much of it commercial. But there were 133 housing unit starts in The City Beautiful in 2007, a boomlet like we have not seen here in many years – if ever in our lifetimes.

We did not see the housing boom that other markets had since 1990. Dickinson County enjoyed a surge in construction that was steady over the decade. Now there are 400 housing units on the market in the wake of the housing bubble burst. Omaha and Des Moines are hurting. Storm Lake is not. As a banker from Estherville told one of his chums, “We’ve been in a recession for the last century, so we are immune from it.” There’s a grain of truth in that.

And here is Cullen on the Bush stimulus package:

The subprime housing mess has the world financial markets in a roil, and Congress has jumped in to make things worse. The latest news is that Washington wants to cut everybody a check for at least $300, so they can make a down payment on some electronic gadget that is made in China. This should rescue us, for sure.