Since the onset of the credit crisis last summer, bank executives have continually said that credit markets will quickly return to normal.
Veteran bank consultant Bert Ely disagrees. In an exclusive interview with Moneynews, Ely said the credit crunch will probably last another year or two.
“All of us have been surprised by the severity of it, and the fact that it’s turning out to be longer than people thought was the case nine months or a year ago,” says Ely, president of Ely & Co. in Alexandria, Va.
“Housing prices in many markets still haven’t bottomed out,” Ely notes.
Meanwhile, the problems have spread far beyond the real estate market.
“There are a lot of consumer credit problems — credit cards, car loans, student loans — that haven’t fully worked themselves out,” Ely says.
“The sense is that we may have another year or two of working through this. It’s not that we will necessarily dive down further, just that it will be a long, bumpy road,” he says.
“It will be a slow recovery from the economic slowdown and all these credit problems.”
On the bright side, despite the takeover of IndyMac and the government's efforts to shore up Fannie Mae and Freddie Mac, Ely doesn’t foresee a massive wave of bank failures, as occurred in recent financial crises.
“The problems are nowhere near as severe as in the 1980s and early ‘90s. We’re not going to see anywhere near the number of bank failures as those periods.”
Rather, he says, “We’re seeing the inevitable consequences of the credit correction in the economy, particularly on the consumer side, with regard to home mortgages, credit card loans and the like.”
And what accounts for the rosier scenario this time around?
“One of the reasons why the banking industry is so much stronger than 20 years ago is that banks have been under pressure to raise a lot more capital,” Ely says. “So they have the cushion to absorb losses and not be crippled by a decrease in earnings.”
Regulators should push banks even further on this score to prevent failures, he says.
“One thing I hope happens a lot more this time than in the past is that regulators do what Congress told them and basically lean on weak banks to raise capital or be acquired by a stronger bank before they become insolvent and have to be closed by the FDIC.”
Ely offers implicit support for the Treasury Department’s attempt to gain the authority to invest in and lend to Fannie Mae and Freddie Mac. But he would prefer they close down in time.
“In the short term, to keep the housing and mortgage market going, they need to stay in business,” Ely says. “They just need to operate in a much safer manner and smaller scale than in the past.”
But that is only a temporary fix.
“I think we don’t need Fannie Mae and Freddie Mac and hope that eventually they get put out of business,” Ely says.
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