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Minnesota’s economy: Far more than mortgages at stake

Panic-invoked efforts in Washington to bail out financial institutions in New York are missing the structural weaknesses of the Minnesota economy by a country mile.

That becomes clear from responses to a Minnesota 2020 request a week ago to hear how the nation’s financial crisis is affecting families, jobs, businesses and quality of life in Minnesota.

One unemployed Minneapolis resident sent in his résumé. He formerly worked as sales representatives for consumer, food and hair product companies that are seemingly distant from the housing and finance markets.

A southern Minnesota schoolteacher is considering a career change, with possible commutes to Rochester, to access more affordable family health insurance. Her family’s purchasing power is shrinking fast, and she’s spending $800 from the household budget to buy supplies for her classroom.

IRA, college savings have shrunk
A Waite Park woman, whose husband is now disabled, is putting the family home on the market for the second time in two years. An IRA account intended for retirement has shrunk from about $16,000 to $14,000, and a college savings plan for a daughter has fallen in value to where it will be lucky to pay for a year’s worth of books when she goes off to college.

“His (her husband’s) Social Security disability, along with our daughter’s portion, pays the mortgage and my income pays our other bills with little to nothing left over until the next pay day,” said Joni Specht.

“I worry about our (“my”) retirement and what will happen to Social Security. All kinds of questions go through my head (like) should I pull our money out of the IRA and put it into a regular savings account or savings bonds before we lose it all? … Where does it all end?”

Several people asked questions about the safety of different investment tools. What is safe, and what isn’t, may look different a week from now than at the time of this writing. Mutual funds are a worrisome example. And a recent graduate school student wonders if a “financial czar” will have the authority to break contracts and raise rates on her fixed-rate college loans.

“I figure, I had no money coming into this mess, and I have no money now, so I must be breaking even.” But, she added, that could change if the Treasury secretary changes her debt obligations “to take one for the team …”

Some costs, losses have already occurred
A lot of attention is focused on what the taxpayer obligations might be for the $700 billion rescue plan now before Congress. That doesn’t tote up costs people have already paid or lost with the financial crisis, notes a retired Maplewood homeowner.

That person has apparently lost a $10,000 investment in Freddie Mac stocks that weren’t government backed despite implied federally supported status for the lender. On top of that, typical first-ring homes on the east side of St. Paul appear to have lost as much as $30,000 to $40,000 in value during the past year to 18 months — a factor that will influence retirement plans and quality of life.

What all these voices show is that the nation’s mortgage and financial crisis is interrelated with other signs of economic weakness, made worse by the subprime fiasco and unregulated investment banking practices, but not the sole reason our economy is in trouble.  
It’s the driving force pushing what remains of the U.S. economy to a precipice, explains Cliff Larson Jr. of Edina. While that may be, he adds, the structural weakness taking its toll on Minnesota business and citizens is more like what happened in the inflationary 1970s.

“Back then, we had Vietnam. Now we’ve got Iraq, and like with Vietnam we’re not paying for it as we go. It’s a war on borrowed money.”

Rippling consequences
The consequences mean more government borrowing in capital markets. It means loss of confidence in world currency markets and the dollar keeps falling. That, in turn, drives up the price for American commodities including Minnesota farm products, but oil prices surge even more when the dollar slumps.

“Most of rural Minnesota is still in pretty good shape, but oil prices are making a recession for everyone,” Larson said. That is starting to hit rural Minnesota as well, and Larson knows why.

While Larson lives in the Minneapolis suburb, he is a farmer in the Litchfield to Willmar area west of the Twin Cities. He sold a commodity brokerage business to a son a year ago, and he remembers the inflationary market reactions of the 1970s and the subsequent agricultural market collapse of the 1980s.      
Interrelationship of markets
By springtime, Larson warns, the bloom may be off the rose for the farm economy as well. The interrelationship of capital markets with commodity markets shows itself with oil-dependent farm production costs. While corn prices have gone from about $2 a bushel in early 2006 to $6 a bushel earlier this year, farm production costs rise with oil prices. Corn trades under $6 a bushel in Chicago this week while oil prices hit a one-day record increase on Monday and continues to drift upwards.

“The way I see it, we’re going to need $5 a bushel corn or more next year just to break even,” Larson said. “All we’re doing is playing with bigger numbers.”

Put all these Minnesota observations in a bushel basket and the point is this: Rescuing the nation’s financial markets is urgent and essential, but it only saves the day. It is a temporary fix.

Minnesotans and Americans in general will still face an economy teetering on the brink of collapse, with some industries and households more affected than others. The road to recovery is still beyond the horizon. State and local service providers need to realize we’ve just begun the journey; the destination is out of sight. 

Lee Egerstrom is a fellow at Minnesota 2020, a think tank based in St. Paul. This article first appeared on its website.

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