Cash, stock market troubles may cause loans to contract

Following the U.S. House of Representatives' rejection on Monday of a $700 billion economic recovery act and the Dow Jones Industrial Average's subsequent 778-point drop, some analysts believe Americans may struggle to obtain loans.

"The reality is banks aren't lending to each other," financial adviser Ken McDaniel said.

As a result, businesses will struggle to obtain short-term loans and cash for functions such as construction, accounts receivable and payroll, McDaniel said.

The Texas delegation in the U.S. House voted 25-9 against the economic rescue act. Midland Republican Mike Conaway, whose 11th District includes Lampasas County, joined eight Democrats and 16 members of his party in casting a "no" vote.

The U.S. Senate, however, passed an amended economic recovery bill Wednesday by a vote of 74-25. Texas senators John Cornyn and Kay Bailey Hutchison, along with presidential candidates John McCain and Barack Obama, voted "yes."

Because most Central Texas banks do not hold subprime mortgages, the region's real estate market has not suffered much from the mortgage failures plaguing other areas of the country, said Richard Procter, president of First State Bank Central Texas' Lampasas branch.

Financial institutions have become more cautious in their loans, though, Procter said.

"Credit has tightened everywhere," he said.

Although subprime mortgage failures and bank buyouts contributed to investor fear, the greatest disruption to the stock market came Sept. 17, when the value of a money market share dipped below a dollar for the first time in decades.

"When that happened, hundreds of billions of dollars fled from money market accounts to treasury bills," McDaniel said.

The surge in supply of 90-day treasury bills decreased the yield from 1.56 percent to essentially nothing -- 0.03 percent.

At the same time, the London Interbank Offer Rate -- the rate at which banks lend to each other -- has climbed to about 3.3 percent from its normal rate of 0.75 percent to 1 percent.

"That huge spread now is why money has just dried up," McDaniel said.

Although the Federal Reserve may drop interest rates, McDaniel predicted the cash market's struggles will make car, home and short-term business loans harder to attain.

"That will affect who can get a mortgage, even with good credit," the financial adviser said.

"Right now there's very little cash flowing from banks," McDaniel added. "Locally, what it means is we'll have less money to buy a car with and less money on shortterm credit."

Investment and retirement accounts likely will suffer in the short term, McDaniel added, and he said the amount of health care coverage provided may decrease, as well, until the cash market recovers.

Overall, Central Texas' economy remains in fair condition, Procter said, although he said homebuilding may suffer if the mortgage industry does not improve nationally. Although Lampasas County has not experienced significant trouble with mortgages, Procter said large drops in the stock market concern many residents. "I think what's at everybody's heart right now are retirement accounts and investments," the banker said.

McDaniel cautioned against rash decisions, particularly hasty stock sales or savings withdrawals.

"Look at the big picture," he said. "If you have diversification, there's really not a long-term worry. Those that are speculating on one side or the other and those that are acting out of fear on one side or the other are the ones who get burned."

U.S. Rep. Conaway on Wednesday said he supports an increase in Federal Deposit Insurance Corp. insurance from $100,000 to $250,000 per person per bank. The Senate approved the increase as part of its economic rescue plan.

"That's a needed reform, I think, that will calm people down and keep them from moving money around artificially," Conaway said.

Even if the stock market continues to struggle, bank patrons do not need to fear losing their savings, McDaniel added.

"Just don't panic," he said. "Don't go out and get cash from your bank. It's called hoarding, and it's just silly. That's exactly what happened in the Depression."

Although he said Congress needs to promote confidence in the stock market, Conaway -- who joined 227 other representatives in voting against the $700 billion proposal to buy subprime mortgage debt -- said he would prefer a plan that allows private-sector investors to purchase the debt.

"I think there's a significant amount of money on Wall Street waiting in the wings," Conaway said. "The private [investors] will exploit the value and wring every dollar from this. The federal government is not real good at buying low and selling high."

Conaway also said he supports five- to 10-year tax breaks for companies formed to buy mortgages and favors an insurance requirement on mortgage-backed securities -- two provisions he did not expect the Senate to include in its package. The Senate deal, however, included tax breaks for about 20 million middle-class taxpayers.

Conaway said he would reconsider how to vote based on the Senate's decision. A House vote about the legislation approved by the Senate is predicted for today.
Texas House members: How they voted
'Y' vote is in favor of bailout package
'N' vote against bailout

Democrats

Cuellar, N; Doggett, N; Edwards, Y; Gonzalez, Y; Green, Al, N; Green, Gene, N; Hinojosa, Y; Jackson-Lee, N; Johnson, E.B., Y; Lampson, N; Ortiz, N; Reyes, Y; Rodriguez, N.

Republicans

Barton, N; Brady, Y; Burgesss, N; Carter, N; Conaway, N; Culbertson, N; Gohmert, N; Granger, Y; Hall, N; Hensarling, N; Johnson, Sam, N; Marchant, N; McCaul, N; Neugebauer, N; Paul, N; Poe, N; Sessions, Y; Smith, Y; Thornberry, N.