Local experts: Don't bail, but stay cautious

These are trying times for investors, real-estate agents and bankers alike, as Americans struggle to make sense of the economic turmoil quickly unfolding on Wall Street and Pennsylvania Avenue. In an effort to digest the effects of recent events and calls for massive federal bailouts, the News Tribune asked a handful of local business people and experts to share their thoughts with readers.

Don't panic

Curtis Teberg, manager of aHermantown-based mutual fund, urged investors to exercise restraint.

"At this particular time, telling people to panic would be the wrong advice," he said. "Assuming their portfolio is diversified, I would advise people to stay the course."

Todd Fedora, vice president of M&I Bank's commercial banking division and a Duluth city councilor, agreed, saying that now may even be a good time for people to increase their exposure to the stock market.

"If I had a lot of extra cash sitting around right now, I'd be looking. There are a lot of good buys in the market and good companies that have been battered," he said.

Don't eat your nest egg

Teberg said retirees and others who planned to live off the proceeds of their stock investments run an especially large risk of seeing their nest eggs badly eroded.

"People living off their portfolios are getting creamed," he said. "If you can, you should quit taking money out of your portfolio right now."

Since January, the Dow Jones Industrial average has dropped more than 20 percent. And as stocks decline in value, people have had to sell increasingly large quantities of shares to maintain the same quality of life they have enjoyed in the past.

"You never want to sell during an ebb in the market," Fedora said.

Instead, he advised people to rein in spending and draw on cash reserves if possible, waiting for the market to improve.

"There are a lot of unknowns out there, including what will happen to heating costs, gas prices and employment prospects in the coming months," Fedora said.

Hard for home sales

Economic uncertainties are having an impact on home sales, too.

Mike Peller, owner of Gables and Ivy Real Estate, said business usually wanes in September, but this year has been particularly slow, with sales probably off 15 to 20 percent.

He's concerned that the situation could become even more difficult if lenders clamp down on would-be borrowers.

"If people are having a problem getting money, that really shuts down what we're doing," he said.

Peller is particularly concerned about first-time buyers, as the majority of these people typically are able to provide down payments of less than 5 percent of a home's purchase price.

"If banks pushed that requirement up to 10 or 20 percent, it would have a huge impact," he said.

Not to worry, said Dale Lewis, president of Park State Bank.

"Lenders are going to be more restrictive than they've been for the past 5 to ten years, but I don't think you'll see a return to the days when people needed to make a 20 percent down payment to get a loan."

"Good, qualified buyers will always be able to get good loans. But some of the fringe lending of the past will not get done," Lewis said.

Caution in Congress

In an effort to shore up shaky markets, the federal government recently has stepped in to right two home-finance giants, Freddie Mac and Fanny Mae, at an anticipated cost of $200 billion. Last week, it also came to AIG's rescue with an $85 billion investment and takeover. And now, the Bush Administration is trying to usher a $700 billion relief package through Congress that would lift bad loans and battered mortgage-related securities off financial institutions' balance sheets.

Bob Hoffman, an assistant professor of economics at the College of St. Scholastica, gives federal authorities high marks for many of these interventions, which he views as necessary. But he's less certain about the proposed mortgage bailout now being considered in Congress.

"To suggest that if we don't act quickly there will be an economic collapse seems to overstate the danger," Hoffman said.

"We're talking about a huge amount of tax money, and it amounts to a subsidy for all the banks that got caught up in activities such as sub-prime lending," he said.

But Hoffman said the dire picture being painted by members of the Treasury Department could make it difficult for congressional leaders to stop or significantly modify the proposed aid package.

"The Treasury Department has almost created a self-fulfilling prophecy because, in describing the danger of the situation, they've created the potential for market panic if Congress doesn't go along," he said.

Ultimately, taxpayers will be left on the hook if the bailout goes through, Hoffman said.

Lewis said she doesn't pretend to know how necessary the mortgage bailout is, but she remains hopeful Congress will examine it with a critical eye.

"It should not be rammed through without significant oversight, especially when hardly anyone knows whether it's truly necessary," she said.

PETER PASSI covers business and development. He can be reached weekdays at (218) 279-5526 or by e-mail at ppassi@duluthnews.com .