State, broader economy will be fine, experts say

Stocks tumbled, credit markets quaked and fears percolated on Wall Street Monday. But experts are skeptical that the ripples to hit Minnesota will be either large or lingering.

This week's developments, however, are just the latest in a string of blows this year to the U.S. economy, from skidding home prices to subprime mortgage failures to a faltering job market.

In the months ahead, consumers from coast to coast may have to put up more money to buy a house, and businesses may find borrowing more expensive, with loans for acquisitions harder to come by.

Nevertheless, the U.S. financial markets trade trillions of dollars worth of paper daily and aren't likely to buckle as a result of the latest two giants to tumble, Lehman Brothers and Merrill Lynch, said University of Minnesota economist V.V. Chari, an adviser to the Federal Reserve Bank of Minneapolis.

"The airline industry has gone through dramatically difficult financial restructuring," Chari said. "Yet we have an airline industry. You buy your tickets, you fly and life goes on."

The same will be true for banks, brokerage firms and investment banks in the wake of the latest shakeup in the New York financial markets, he said.

"I don't see much of a fallout into the real economy," Chari said. "It's a problem for the people who work for Lehman and possibly the people who work for Merrill."

The state's financial sector added 1,250 jobs in July, the latest month for which figures are available, even as the nation lost 116,000 finance jobs that month.

"We've really been bucking the national trend in terms of financial sector employment changes," Hine said. "It indicates that our financial sector has been able to sustain itself despite what's been happening nationally."

In Chari's view, the fact that the federal government stopped short of putting public money at risk should be the start of a financial market recovery rather than a new era of peril.

"These things will blow over," he said.

One reason financial firms like Lehman and Merrill got so large was that so many such firms have failed over the history of Wall Street, said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.

Unraveling bad debts, at a discount, is part of correcting past excesses, based on the premise that real asset prices -- from homes, to apartment buildings to shopping malls -- only would rise in value, he said.

"Wall [Street] is eliminating some of the primary hurdles of moving on by getting Lehman and Merrill out of the way," Paulsen said.

To be sure, individual investors and pension funds took a big hit when the Dow Jones industrial average skidded more than 500 points on Monday. But Paulsen sees that as a temporary setback.

"If you're a long-term investor in stocks, this is a time to buy," he said. "If you're living on Main Street, why bother worrying about it?"

Keith Hembre, chief economist at First America Funds, doubts the Midwest economy will escape unscathed, however.

That drought parching mergers and acquisitions this year will stretch for months to come, Hembre predicted.

"You're going to pay through the nose to borrow that capital," he said.

In contrast, Paulsen noted that the interest rate on a 30-year, fixed-rate mortgage has fallen three-quarters of a percentage point in the last two weeks -- a move he doesn't expect to see reversed.

"You're going to get a percent or better drop in mortgage rates from where we were," Paulsen said.

Mike Swanson, chief economist at the Minneapolis office of Wells Fargo & Co., said the tens of billions of dollars lost on Wall Street this week will have consequences for some borrowers, but not all.

"If there are any ripples, it will be when you go to refinance or borrow for a business," Swanson sad. "Some of the capital that we thought was there isn't there."