Property Hunting
The Daily Reckoning
London, England
Tuesday, February 22, 2005
We found what we believe was a typical ratio in today's news. Our dimwits were found, as might be expected, on the editorial page of the International Herald Tribune. Today's Einstein, by contrast, comes out of the pages of a private newsletter, Grant's Interest Rate Observer.
Mr. Vernon W. Hill is a small town banker...and rarer than a banker with a heart, Mr. Hill has a brain.
"We feel the United States is in trouble, with major weaknesses and unpleasantness ahead," he says. "Whether inflation or deflation lies ahead, or some kind of both, we believe many borrowers will be unable to repay their loans as scheduled." None of the reasons Mr. Hill mentions will be new to Daily Reckoning readers: little savings, little investment in productive industry, (much of what is invested is sunk into short-lived software), and the illusion of wealth that accompanies rising house prices. With little real investment in new factories or new methods of production, few good-paying new jobs are created. In such an economy, a banker without a brain walks lightly and lends heavily. For the president of Monroe County Bank, on the other hand, you get the impression that every step towards a new loan is uphill. He lends almost reluctantly, wondering how borrowers will be able to repay.
These insights are not new to us, but neither are they profitable - either to Mr. Hill or us. While other bankers move more and more of their money into real estate loans, Mr. Hill is warily reducing his bank's exposure - especially to residential property. Home mortgages were less than a third of commercial bank loans in 1980. Now they are nearly two thirds. Other bankers will lend to anyone who can sign his name, provided he is buying a house. Mr. Hill wants to know how the borrower will be able to pay back his loan if - heaven forbid - his house doesn't go up in price by 20% this year.
These are not the sorts of practices that would make Mr. Hill's establishment the "Bank of the Year" or get his photo on the cover of Business Week. Not in the year 2005. His is not the Bank of the Present. It may be the Bank of the Past. That it may also be the Bank of the Future is the guess that keeps us going.
The Monroe County Bank is not only out of step with most of today's lending institutions, it seems to be marching in the opposite direction - back to the future. We have never met the man, nor never visited his office in Forsyth, Georgia. But were we to enter the bank we would expect to find a man behind an old-fashioned ledger on an oak desk...and a spittoon in the corner. If we were to ask for a loan, we would expect a disapproving look, followed by a polite, but severe inquiry into our personal finances. No, these are not the methods of the typical banker in the 18th year of Alan Greenspan's reign.
Nor is Mr. Hill's approach to the credit industry particularly profitable. He admits he would earn more money by doing what other bankers do. Most bankers borrow short and lend long. As long as long rates are higher than short rates - and he does his math right - he will make money. Mr. Hill's approach, borrowing long and lending short, is a curiosity in the banking industry. It forgoes current profits, he believes, in favor of a more solid balance sheet. And when long rates rise, which they will do, sooner or later - both Mr. Hill and we here at the Daily Reckoning are sure of it -- Mr. Hill will have the last laugh. Compared to most bankers, it will be far easier for him to collect his credits and pay his liabilities.
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