Hindsight and Foresight: Predictions for 2001

Like all television commentators, I make predictions for the new year. To review my track record, the following includes my forecast for the last year:

• Republicans would win the presidency but lose the House of Representatives (half right).
• Dot-com companies would begin to collapse in large numbers (right).
• The Dow Jones Industrial Average would end the year within 10% of its starting point in the year, and more likely, it would be down (rightu00e2u20ac” it ended down by 6%).
• Interest rates will trend downward, not up (right).
• Our booming economy would continue until the influence of exuberant market enthusiasts and the overreactive Federal Reserve pushes it to a sharp downturn (mostly right).

Predicting the future is always impossible (though four out of five for year 2000 isn`t too bad), but still we all try; television commentators for entertainment, and bank directors, to help guide their bank`s policy in the year ahead. So, with the usual warning that predicting the future is not a science and comes with no guarantees, here`s my effort for 2001 (be especially careful, since I was unusually lucky in 2000):

• Despite the Fed`s near panic action on January 3 (a .50% rate cut without a meeting) the economy still will have one and perhaps two quarters of negative GDP growth.
• Interest rates will continue to fall until at least midyear.
• The Dow Jones average will end within 10% of where it started, and most likely it will be down. The Nasdaq will be down for the year by as much as 20%.
• George W. Bush will be more popular at the end of the year than he is now.
• Special items for bankers: u00e2u20ac” Bad loans will increase.

  u00e2u20ac” Service income will not grow as rapidly as last year.

  u00e2u20ac” Interest spreads will improve.

  u00e2u20ac” Real estate lending losses will be on the increase for some banks, as overbuilding, both commercial and residential, show up in the usual places (such as the Sun Belt cities of Phoenix, Houston, Atlanta, and Tampa.).

Comparatively, almost all of the rest of the world will have more economic problems than the United States, especially, Japan and Asia, Latin America, Russia, and central Europe. Much of Europe will resemble the U.S., with worse unemployment. (This is a society is still based on protecting jobs for those that have them at the expense of creating new jobs for those who don`t.) Yet despite the economic downturn on our side of the world, the one thing U.S. bankers will be better prepared to deal with this time around are loan losses. Unlike the disastrous era of the eighties, marked by massive loan losses that weren`t caught or, worse, covered up by management, most commercial banks have learned their lessons. Their portfolios are more diversified and they are better capitalized: They`ve learned not to keep all their eggs in one loan basket. They can turn to noninterest income sources, such as insurance and brokerage, to smooth out revenues. Moreover, with technological advances in credit scoring and database management, potential losses are being identified sooner, creating more chances for the banks to cure what ails them. There are, however, plenty of things for bank directors to worry about in the year ahead. One major threat is the way technology change is going to continue to affect the financial services marketplace. Trying to keep up with it is not just difficult, for older bankers it`s almost impossible. Youthful “techies” are essential to a bank`s success and they are tough to find. Technological change continues to accelerate, and will drastically affect banking in the year to come. Keeping up with its demands will be bankers` biggest challenge for the future. The first year of the twenty-first century will be a period that reminds us that even the best economies are fragile, that peace is not a natural state for mankind, that markets fluctuate, and that a perfect society without prejudice or the poor does not exist. However, compared to all others, the United States produces a better life for more of its citizens than any other country now or in the past. Remember the Regulators Creedu00e2u20ac”when the tide goes out, you see who swims without a bathing suit. The tide of the economy is receding in 2001 and we`ll soon see which banks are embarrassed. Happy New Year