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Economists offer unvarnished economic view

“Scary and different.” That’s how one commodities trader, quoted in a recent issue of the Chicago Board of Trade Commodity News for Tomorrow newsletter, described the new and uncharted territory the markets now find themselves in, thanks to the global credit and financial crisis.

Much like an unanchored sloop trying to ride out a nasty hurricane, traders and farmers alike are just trying to hang on, waiting and hoping with elevated anxiety to see how this is all going to end up.
So, hats off to Purdue University for putting on a panel discussion Oct. 6 featuring five economists who gave their unvarnished views of what lies ahead for our economy. As I viewed the event via an Internet video connection, I got the distinct impression that these five economists, all coming from diverse areas of expertise, had given this problem some serious thought.

“We are going to go into a recession, regardless,” said Professor Philip Abbott, a specialist in international trade and macroeconomics. “It’s just a question of how severe and how long-lasting it will be.”

Abbott added that we focus too much on the daily movements of the Dow Jones Industrial Average. The credit crisis is the more short-term problem, and he said we need to watch whether banks begin trusting each other, and lending to each other again.
David Hummels, an economics professor at Purdue’s Krannert School of Management, agreed and gave what was arguably the cleverest line of the panel discussion when he quipped: “You can lead a bank to liquidity, but you can’t make them lend.”

He explained that it was “absolutely necessary” for Washington to enact the $700 billion bailout bill, because the issue now is to get cash flow, in the form of credit, moving again through the economy.
But, he cautioned that the United States will still be dependent on foreign investors, especially in Asia, to continue to lend us money. Whether they do so will depend on the interest they can get, as well as the value of the dollar.

It’s becoming clearer every day that before our economy can resume significant growth, the housing market must stabilize. Professor Larry DeBoer, who spends much of his time in the arcane arena of property taxes and government finance, gave his perspective on the housing situation – that housing markets nationwide have been declining since 2002, but could rebound in the next 12 months.

“It looks like we’re about two-thirds of the way back to where we were at the end of 2001 and the beginning of 2002,” DeBoer said. “At the rate that the real price of housing is declining, it will take another year to get back to where we were in November 2001 when the last recession ended.

“If we have a recession, however, people may not be able to pay back their mortgages.”

Sugato Chakravarty, a retail and consumer economist, said on the consumer side it will be more difficult and expensive to borrow money. Anyone with a retirement account has watched helplessly as the value of many such accounts have taken severe hits.

Workers who have 10 or more years until they retire stand a much better chance of recouping some of those losses, he said, if the market rebounds from a recession as it has done in the past.
All in all, agriculture is still a pretty good business sector to be involved in right now, according to Purdue extension agriculture economist Mike Boehlje, who moderated the panel discussion.

“So far, the availability of credit is not a big concern,” he said. “At this point, we don’t have the freezing of credit markets for the ag sector. The more serious issue for agriculture is the potential recession.”

Any global recession could reduce the demand for American farm goods, putting pressure on prices, he added.

Still, a bountiful grain harvest is now coming in. The banks, grocery stores and gas stations are still open. Gas prices are even coming down.

Maybe we need to spend less time watching and reading the news and more time listening to and lending a helping hand to each other, as we make our way through this rough financial patch.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments may contact Lew Middleton by writing to him in care of this publication.

10/16/2008