Experts: Bank Crisis Risks Turning Recession Into Depression

WASHINGTON - People are starting to make nervous jokes about pulling their money out of shaky U.S. banks and stashing it under their mattresses instead.

But the banking crisis is no joke.

It is real - so real it risks turning the emerging recession into the biggest economic nightmare since the Great Depression of the 1930s.

``My own view of this tends to be apocalyptic - that we are on the threshold of a '30s-like experience,'' said David Cates, chairman of Ferguson & Co., bank consultants based in Dallas.

``The banking system is under tremendous strain. Should it begin to unravel, recession could easily become an economic disaster,'' said a recent editorial in Business Week magazine.

Not since the Great Depression have U.S. banks been so weak as the economy entered a tailspin. Banks are trying to strengthen themselves by cutting back loans to reduce their risks. But that is creating a ``credit crunch'' that makes the economy even weaker, because the crunch is denying many companies the money they need to conduct or expand their business.

``The risk here is it's going to feed on itself. As the recession gets worse, it compounds the banking problems,'' and vice versa, said Lawrence Chimerine, senior economic counselor to DRI/McGraw Hill, consultants of Lexington, Mass.

To be sure, the crash of the U.S. economy is not necessarily imminent, nor even likely. But for the first time in 60 years, the shadow of that fearsome specter is visible and growing.

How great is the risk?

To deposits, absolutely none, if they are in federally insured bank accounts. A senior Treasury official and a dozen independent financial experts that were consulted stressed that. Insured deposits are safe because they are backed by the full faith and credit of the U.S. government.

But ultimately that means they are backed by taxpayers - who unfortunately are at rising risk.

Taxpayers may have to bail out the sinking federal bank insurance fund, experts warn, just as they must pay up to $500 billion over the next 30 years to bail out deposits in failed savings and loans.

``The banking industry has not reached the dire straits of the savings and loan industry, but the potential risks are there,'' the Congressional Budget Office concluded earlier this fall.

Those risks are rising - both for banks and the economy. What is of concern are trends like these:

-- Almost 900 banks have failed since 1985, more than twice the number closed between 1934 - when federal deposit insurance began - and 1979.

-- More than 1,000 banks are on the Federal Deposit Insurance Corp.'s problem list - four times as many as in 1981, the last time the U.S. economy entered recession.

-- The emerging recession is driving loan defaults up and bank profits down.

-- The federal Bank Insurance Fund (BIF), which insures deposits, is at record low levels and sinking fast. It is projected to fall to $10.2 billion by Dec. 31, providing only 51 cents of coverage for every $100 in insured deposits, far below the $1.25 per $100 ratio prescribed by law. Failure of any one of the top 10 U.S. banks alone could wipe out the BIF, the Congressional Budget Office concluded.

-- Consumer confidence - the cornerstone of banking - is plunging, surveys show; experts fear public faith in banks could be shaken dangerously if any major bank should fail in this climate.

-- Stock values of the biggest U.S. banks, such as Citicorp and Chase Manhattan, have plummeted 50 percent since July.

-- To shore up profits, banks are cutting back loans even to credit-worthy businesses, shrinking the already-slowing economy.

When assessing these risks, most experts agree with James Barth, an Auburn University finance professor who witnessed the S&L debacle from the front lines as chief economist for the main federal S&L watchdog agency.

``There is no clear evidence right now that we are headed for a recession that would be anything like the one in the 1930s,'' Barth said, adding: ``Having said that, not too many years ago I would have simply dismissed (such talk) . . . I would have just said, never again could there be a Great Depression. Now I don't say that.

``We could have major financial failures that adversely affect the economy. . . . Now I might say that's on the order of 5 percent (probability) or so. Not very high, but high enough to concern me.''

High enough to also concern President Bush, Treasury Secretary Nicholas Brady and Federal Reserve Board Chairman Alan Greenspan. Each has met recently with groups of bankers, imploring them to boost loans to the credit-hungry economy before it starves and shrivels. In exchange, they promise regulatory relief for banks, which they already have begun to deliver.