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(Click to enlarge) Chandler Howard is president of Middletown-based Liberty Bank, Connecticut's oldest and largest mutual bank. Previously he held executive positions with People's Bank. Fleet Bank, and Bank of America.

Harlan Levy: You're a community banker. How does the economy look from the Main Street level?

Chandler Howard: I would say the economy is stable but still struggling from where we were two or three years ago. We're not seeing the patterns of growth of a strong economy, but we're also not seeing the same level of weakness that we saw for two or three years.

H.L.: When do you think the economy will get robust for not only corporations and their executives?

C.H.: The biggest issue we have right now is confidence. With unemployment levels being what they are and with questions on what will happen with income taxes, particularly with small businesses, these businesses are uncertain what their obligations will be in the future. Add to that a stable but slow economy, and that creates a reluctance for these businesses to want to expand.

In Connecticut, 90 percent of the businesses that exist are micro and small businesses, so until there's a sign that the local economy is going to be more stable and possibly growing, I don't think you're going to see a lot of growth. My sense is that it will take a year or two before we see things getting back to more of a normal economy.

H.L.: How do you rate the health of U.S. banking for large and smaller institutions, and what's ahead over the next year or two?

C.H.: Generally speaking, and particularly in Connecticut, the banks are strong. The problems that the banks have had, both nationally and locally, have been dealt with. Locally, most of the banks, and particularly the community banks, have strong capital and strong loan quality, so they're on stable footing.

The biggest challenges that we face are the level of regulation and the cost of that regulation. If you add that additional burden on top of an interest-rate environment where rates are historically low, that creates a situation where you have very thin operating margins and increasing expenses.

I foresee going forward, particularly some of the smaller banks will have trouble absorbing the additional costs, and that will mean trouble for them.

H.L.: So do you expect a new wave of consolidation?

C.H,: Consolidation across the country will continue. Primarily the smaller institutions will realize that it's too difficult to absorb the costs of all of the regulations, and that will force them to seek partners.

So consolidation will continue, and institutions will get larger, and eventually it means they will lose touch with the local economy. It means credit will be a little harder to obtain if you don't fit the criteria that will be used over large geographies. There will be less reliance on what is going on on Main Street. If credit is more difficult to obtain it just makes growth in the economy that more difficult to occur. But I don't think it will significantly hinder growth. It'll just make it more difficult

H.L.: Next month the Federal Reserve will stop its second round of quantitative easing, the $600 billion purchase of an estimated 70 percent of all the U.S. Treasuries that are for sale. Who will pick up the slack and what do you think will happen to the economy?

C.H.: Quantitative easing essentially has been forcing liquidity into the national economy, and there are differing opinions about how effective that program is. One argument is that forcing liquidity into the marketplace makes credit more available. But when you talk to the local banks and look at local economies, you find that we have credit available and have had credit available. Rather it's a matter of having good credit-worthy applicants. So I don't think ending QE2 will make that much difference from the point of view of what it was supposed to do. Banks still have money to lend. The real issue is finding qualified borrowers.

Who will buy Treasuries when QE2 ends is an open question. But ending it will promote a more normal economic environment. I don't think there's such a need for quantitative easing. Initially there was, but banks are now stable and have money to lend.

H.L.: The Republican House Leader John Boehner says unless the Democrats agree to trillions of dollars in spending cuts his party won't vote with the Democrats to let the debt ceiling be raised. Will Boehner's idea damage the recovery?

C.H.: I don't think the debt ceiling should be raised. This is a political issue. I don't believe the government will shut down. I think the parties are using this issue for leverage. The Republicans are holding the Democratic party hostage on this issue, and the Democrats are holding the Republicans hostage on the government shutting down. At the end of the day there has to be a compromise so that our country can get control over the level of debt that we have.

It's one of those balancing situations. A lot of government spending eventually makes its way down to local economies, although it is extremely inefficient as opposed to the same programs being done by the private sector. So on the one hand you have the situation where cuts in government spending can translate into less local spending, and on the other hand the deficit is out of control and absolutely must be brought under control. But I think it will be good in the long run.

H.L.: What would you recommend to fix our economy?

C.H.: The government should be spending more on infrastructure programs. We need to be looking at transportation projects. It makes so much sense. It's more spending, but creating more efficient transportation systems will put people back to work. That alone will create a level of confidence, and those people buy shoes and washing machines and cars, and it create tax revenues and gets the economy going again.

Source: Chandler Howard: 1-2 Years Before Normal Economy, Don't Raise Debt Ceiling