Released September 26, 2008

LITTLE ROCK, Ark. - The same aggressive home lending tactics that helped stimulate the economy earlier this decade are part of the chain of events leading to the financial crisis now being tackled by the federal government, says University of Arkansas Division of Agriculture economist Bobby Coats.

"Mortgages that have become difficult to value or convert to cash are our financial system’s underlying weakness," he said. "This problem was caused by the housing contraction brought on by declining asset values."

Some parts of the U.S. have been harder hit, such as Florida and California.

However, "Arkansas has not experienced the rapid decline in housing prices that some large U.S. population centers have experienced," Coats said.

To put it simply, "these mortgage assets are simply choking off the flow of credit, they are freezing up the financial system," he said.

The federal government is "focused on maintaining a reasonable level of economic momentum in our economy by taking measures that will once again have money and capital flowing freely," Coats said.

Earlier in the decade, the housing market boomed with easy credit.

Coats said the "aggressive and lax lending practices became all too common, almost a normal operating procedure. They were one way to stimulate the economy and advance economic momentum.

"This ultimately led to both irresponsible lending by some as well as irresponsible borrowing," he said. "I point to a problem with both lender and borrower."

The market was buoyed by an underlying belief that real estate values would continue to climb as the global economy expanded.

"Global competition and softness in global economic activity rapidly reduced profit margins with one consequence being loss of U.S. jobs and declining income for many," Coats said. "This set the stage for families with mortgages, that in many cases, they could not afford in the first place to lose their homes. Today the impact is seen in government statistics with 5 million homeowners now delinquent or in foreclosure."

With these assets sitting on the balance sheet of a number of banks and other financial institutions, the government is working on a program to remove the "toxic assets that are compromising the viability of financial institutions and threatening the orderly economic day-to-day activity in this country," he said.

Coats is confident the situation is not insurmountable.

"The economic times are very bad, but they can and will be managed," he said. "This mistake will likely not be made again, but we will make other mistakes, because the process of learning goes on with each passing day."

To learn more about the economy and to hear Bobby Coats’ Podcasts, visit the University of Arkansas Division of Agriculture online at http://www.uaex.edu.

---30--

http://www.uaex.edu/news/september2008/0926economy_financialcrisis.htm

Contact: Lamar James, (501) 671-2187, ljames@uaex.edu