Friday, October 24, 2008

Drop That Stone, Rural Citizen

Remember the column on the bailout that I told you was coming this week? It ran yesterday. We'll talk about it tomorrow. Click below to read it.

Omaha World-Herald
Oct. 23, 2008

Recall when farmers needed a bailout

BY JOHN B. CAMPBELL

The writer, of Omaha, is senior vice president at Ag Processing Inc. He was a deputy U.S. secretary of agriculture from 1989 to 1991.

Something historic happened in Washington, D.C., on Oct. 3. Twenty-six Republicans and 32 Democrats in the House of Representatives defied the mob — even though it endangered their political prospects just four weeks ahead of Election Day.

These 58 courageous politicians changed their vote on the $700 billion bank rescue package. The bill was different than the one they voted against on Monday of the same week, but that really did not matter to angry constituents telephoning and e-mailing against the rescue package by about 100-to-1.

The rescue votes were especially difficult for conservatives pledged to balance budgets and limit government: Do you appear to violate your principles and anger your constituents by voting “yes,” or do you vote “no” and risk global economic meltdown?

I spent that week working with members of Congress on the rescue package. It reminded me of the wisdom of our Founding Fathers. They established a representative republic — not a direct democracy. Some founders, led by Alexander Hamilton, established an early form of an independent central banking system.

As the consequences of living beyond our means unfold, we see representative democracy awkwardly rising to the occasion — but rising nonetheless.

The financial trouble we see today, in hindsight, was predictable. It’s very similar to the farm crisis of the 1980s, when 328 rural commercial banks failed. Trouble in the Farm Credit System peaked in 1985, with $15 billion in toxic debt and $2.7 billion in losses. That led Congress to craft the $4 billion Agricultural Credit Act rescue package, signed in 1988. Write-offs in the U.S. Department of Agriculture’s $33 billion portfolio totaled $1.8 billion that year.

The 1970s were an inflationary period. Rural bankers happily lent farmers as much money as they wanted, assuming land prices would keep going up.

The Carter administration’s Russian grain embargo, high interest rates, a rising U.S. dollar and falling farm prices combined to bring the agricultural house of cards crashing down. Just like in today’s housing market, more land was put on the market than could be absorbed at original purchase prices.

Cash flow to pay debts fell, and farm foreclosures followed. Each time a farm sold at auction, the discounted price cycled back into the balance sheets of all farmers and their bankers. Panicked lenders forced farmers and ranchers to sell herds to pay back loans. Distressed selling created a downward cycle that “froze up” agricultural lending.

Congress forced the USDA to directly loan or indirectly guarantee a higher portion of commercial debt for overleveraged famers and bankers. A downward cycle followed, requiring more taxpayer intervention.

Legislation was passed that required loan restructuring and rescue of the government-chartered Farm Credit Administration. Farmer Mac was created to facilitate a secondary market for agricultural loans, but with stricter oversight than Fannie Mae and Freddie Mac.

The taxpayer rescue of the Farm Credit System, along with a 1985 farm bill totaling $100 billion, stabilized the farm economy. Taxpayers ultimately recouped their investment in the Farm Credit System rescue.

Fast-forward to today. Members of the House Agriculture Committee, on a bipartisan basis, overwhelmingly rejected the first bank rescue package. By the end of that week, many changed their minds and voted in favor of the second package.

Do rural legislators and their constituents remember when it was our assets on the line? Urban members of Congress stepped up on behalf of rural states like Nebraska and Iowa — as they have done many times.

We can point fingers all day about how we got into our current mess. Before getting too sanctimonious about the bank rescue package, people in agriculturally dependent areas should heed the old adage, “Don’t throw stones when you live in a glass house.”

1 comment:

OmaSteak said...

I have some news for Mr. Campbell. There is a second bubble in the US economy and guess where it is??? In agriculture mainly due to a major market distortion mandated by farm state senators/representatives and that distortion is corn-based ethanol. Tillable farmland values have skyrocketed and farmers are borrowing for/against that in a rush to serve the ethanol industry either directly or indirectly. The corn-based ethanol induced bubble is about to burst. Commodity prices and input costs are well above inflation-adjusted historical norms and are now entering a period of self correction as the world economy slows. As crude oil prices fall, ethanol becomes uneconomic to produce from corn. When, not if, the corn-based ethanol bubble pops...likely due to removal/reduction of Federal production mandates...farm foreclosures are going to start happening again as falling crop prices will no longer cover cropland mortgage payments. Then you'll see the ag industry back begging DC for another bailout but maybe with a different response this time as there won't be anything in the cupboard left to give.