No toothpaste commercial here

A recent address by the Chicago Fed president to bankers in Fond du Lac offered a refreshingly honest perspective

Editorial by Sean Fitzgerald

As a business journalist, I’ve come to learn that when times are tough, it’s generally the practice of local business and economic development officials to sweep the bad news as far under the rug as possible and always look for the silver lining.

Whether it’s a layoff at an employer or a poor ranking on some economic indicator report card, burying the facts to keep an optimistic outlook is dishonest at best, and rarely sits well with a journalist who then has to shovel the message off to an unwitting media audience. We refer to such situations as a “toothpaste commercial,” where sparkly white smiles abound, even though the taste can be a bit unpleasant.

Look, I completely understand that bad news isn’t easy to report. I know it’s not pleasant, and sometimes can even be a bit embarrassing.

So I have to admit that I found it refreshing this past month when I attended a speech from a member of the Federal Reserve Board of Governors and heard the straight smack. No polished news releases, no making lemonade from rotten lemons, just the cold, hard honest truth. And in the end, it was perhaps that refreshing, forthright approach that didn’t make the message unbearable or seem as if were foreshadowing doom and gloom. 

Hosted in Fond du Lac by National Exchange Bank & Trust and Marian University, Charles Evans, president of the Federal Reserve Bank in Chicago and the deserved owner of a doctorate in economics, painted a picture of the national and regional economy that was, well, sobering.

Sure, Americans spent the previous few weeks wrestling with congressional bailout packages for the financial industry and watching Dow Jones bounce up and down on a trampoline. We’ve heard housing reports, seen plummeting employment figures and stood on the shore to watch the coming tidal wave of business bankruptcies and reorganizations.

But to hear from one of the country’s chief economists that there exists “disruptions in worldwide credit not seen since before World War II.” I was simply…impressed. And still listening attentively.

Evans comments during the course of his nearly 60 minutes of speaking and answering questions from the audience lightly touched on housing starts, the home foreclosure and mortgage situation, and the concerns of the Fed regarding the current status of inflation. However, the most resounding message Evans delivered was that the price of risk has been, and still remains, too low.

The price of risk – whether that risk is owning and securing debt assumed by others, or providing insurance toward any kind of loss – is simply going to have to increase in order to bring greater price equilibrium to the value of such a service. The recent crisis in the financial industry is accented by the fact that risk had been easy to sell off because of its low price, driving the market to purchase risk to become larger than ever before. Many who speculated on risk have now lost.

As a result, the lending capacity of many financial institutions has dried up. Financial institutions are recalling lines of credit issued to many of their business clients, only to find that so many of the businesses that use a line of credit have them tapped out.

Evans recognized the congressionally approved bailout of the financial industry wasn’t a pleasant decision for the country to make, but was necessary to help existing financial institutions unlock the lending capacity they have in the market. And in doing so, they’ll inject more capital into the local marketplace to keep economic momentum moving forward.

It’s going to be a difficult haul through the remainder of 2008, Evans said, and the economic strife is likely to continue into at least the first half of 2009, he projected. Evans projected that conditions won’t improve until the housing market bottoms out completely, allowing previously inflated home values to find equilibrium with the rate of housing starts.

Highlighting components of the economy where the sun is still shining, Evans noted exports continue to demonstrate positive growth, and the demand for U.S. goods and services could enjoy additional success in the near term.

Given recent export growth in Wisconsin and in the New North, that was good news to hear. And Evans didn’t make the news at all sound like a toothpaste commercial, which in turn, made this journalist delighted to make an honest report.