Vermont’s conservative financial ethos spares state, so farBy Kevin KelleyThe conservative financial practices of Vermont banks and of many individual Vermonters appear to have spared the state, so far, from the full impact of the financial crisis besetting much of the country.Banks doing business in Vermont have “no liquidity problem,” says state Banking Commissioner Thomas Candon.”For qualified borrowers, there’s no difficulty in obtaining credit in Vermont now.”Rather than pulling their money out of the state’s financial institutions, some Vermonters are funneling more funds into their local bank accounts, Candon notes. That can be seen as an expression of public confidence in Vermont banks’ record of prudent management.Their continued stability amid the storms buffeting many financial firms reflects most Vermont lenders’ avoidance of the subprime mortgage market. Its collapse is seen as the prime catalyst of the turmoil on Wall Street.”I’m impressed with how Vermont banks have adhered to traditional practices,” says Middlebury College economics professor Scott Pardee. “They didn’t engage in the same kind of sleaziness and excesses we’ve seen elsewhere.”Pardee is well acquainted with US banks’ performance and with financial markets generally, having worked for many years as a foreign-exchange manager at the Federal Reserve in New York prior to taking a teaching post at Middlebury in 2000.The Vermont state employees’ pension funds are also in sound condition, says Treasurer Jeb Spaulding. The three retirement funds with a combined $3 billion in assets have suffered a loss of about 8 percent of their value over the past 15 months, Spaulding notes. But he adds that they had grown by about 9 percent annually over the previous few years.A number of states have filed lawsuits against banks and other financial institutions on the grounds that some of the losses of public employees’ pension funds can be traced to malfeasance or dishonesty on the part of the money managers. Vermont has an arrangement whereby it automatically becomes a party to certain class-action suits initiated by other states, Spaulding says. But he adds that he’s unaware of Vermont having so far joined any of those actions.The pension funds that cover 40,000 current and retired state employees are “big and diversified,” Spaulding says. “I think they’re going to be fine.”He says he’s actually more concerned with the financial situation of individual Vermonters than with the state pension funds he oversees.Those who had invested substantial amounts in Lehman Brothers or AIG have already been hurt, and additional Vermonters could experience major losses in the coming weeks if other once-steady financial institutions collapse. Candon says his office has received several calls from worried Vermonters whose pensions are managed by AIG.The state is being affected by events on Wall Street in other ways as well. About half of the mortgage lenders operating in Vermont a year ago are no longer doing business in the state, Candon notes. That outgrowth of the subprime debacle is making it harder for some Vermonters to obtain mortgages, while the loss of competition could also cause rates to inch upward, Candon says.Vermont’s status as the state with the second-oldest population means that its economy could take a disproportionate hit from a steep and sustained drop in investment income, notes St Michael’s College economics professor John Karvelas.The actual effects on individual Vermonters will depend on how they have responded to the financial crisis, Spaulding says. And Pardee adds that state residents and businesses alike will probably not experience much pain if they haven’t gotten caught in the credit squeeze. Farmers, however, have long been dependent on lenders, which could cause Vermont’s agricultural sector to contract at an even more rapid rate, Pardee points out.Vermont’s entire economy will certainly suffer if the country as a whole slides into a recession. And would it likely be a long and deep downturn?Karvelas commented in mid-September that two weeks earlier “I would have said any recession would be fairly mild. Now, neither I nor anyone else has any idea of where the bottom might be.”Kevin Kelley is a freelance writer for Vermont Business Magazine from Burlington.