Economic outlook mixed, lessons learned from the crisis

Although there are signs that the economy is improving, an economist who specializes in the rural Midwest said bankers should expect higher taxes, higher interest rates and inflation. Ernie Goss, professor of economics at Creighton University in Omaha, Neb., spoke to bankers participating in the Day with the Superintendent event in West Des Moines, Iowa, conducted April 29.. Goss, whose monthly Main Street survey of community bankers is widely read in the Upper Midwest, said the new health care legislation and talk of cap and trade legislation is creating uncertainty for business owners and investors. Spending levels, coupled with record levels of debt, further add to the uncertainty.. He said debt troubles in places such as Greece and Spain will increase financial scrutiny on other countries, including the United States. The federal government will raise taxes or create new taxes to bring in more revenue, he said, citing interest in a European-style value added tax. "I oppose more taxes without addressing the main problem, which is spending," Goss summarized.. As the government continues to spend almost without control, Goss said it will become more difficult for the country to realize productivity gains. As combined tax rates rise (already 60 percent in Colorado, Goss said), fewer people will decide to work longer. "If people get to keep 40 cents or less for every dollar they earn, they will soon decide working simply isn't worth it," he explained.. Goss said he expects the value of the dollar to weaken, which he said will be good for the Midwest, citing the impact on agricultural exports. "Iowa is more dependent than ever on the value of exports, so we want a weak dollar and no barriers to trade," he said.. Goss said he expects long-term interest rates to rise, given the country's growing debt. Short-term interest rates, however, are likely to remain low. Goss noted the three new appointees to the Federal Reserve Board are likely to work to keep interest rates low because they will want to fuel the economy. . Tom Gronstal, Superintendent of Banking for the Iowa Division of Banking, hosted the 17th annual event. Gronstal has been the state's top bank regulator for eight years and has three years remaining in his current term.. Meeting at the Sheraton West Des Moines, Gronstal brought in Neil Milner, former Iowa Bankers Association executive who runs the Conference of State Bank Supervisors, and other speakers. Milner provided an update on industry reform legislation.. Gronstal reviewed statistics revealing the condition of Iowa's banks. He noted areas of concern but said, for the most part, Iowa banks are weathering the economic storm better than banks in other parts of the country. . He said there are five lessons to learn from the financial crisis:. • Asset values do not always rise.. • Abusing customers by setting them up to fail is a bad business model, and probably means that the business will fail.. • Selling risk does not reduce risk; it only transfers it to someone else. And when that sale is achieved with huge amounts of leverage, it expands the amount of risk in the system.. • Safety and soundness regulation of financial institutions is the cornerstone of consumer protection. "We had millions of consumers who got hurt by subprime mortgages, mortgages that never should have been made. But we have hundreds of millions of consumers around the world who were damaged by the collapse of that market. And it collapsed because we didn't regulate it and we didn't control it," he said.. • A global economy that operates with fiat currency requires strong prudential regulation of financial institutions. "I am dismayed that in our current lexicon, the word 'bet' has become synonymous with 'investment.' Bets are for casinos and bars. We all know that when you are betting with borrowed money it is a sign of serious trouble," Gronstal said. "Investments are made to produce goods and services that are sold to earn a profit. Financial institutions should be making investments and not bets.. "Bankers and bank regulators have a lot of work to do," Gronstal said. "We must regain the confidence of the public. Confidence is rebuilt over time by strong financial performance, and a commitment to customer success. Iowa banks have a long tradition of working with their regulators, to maintain strong financial condition, and to serve their customers. The current conditions present many challenges, and it is up to us to prove that we are worthy of the confidence of the public. I believe we are, so now let's get to work."