Fed Reserve VP blames bubble in housing prices, slump in financial sector for RI economic woes

Fed VP: Housing bubble, finance slump hurt RI

PROVIDENCE, R.I. — A bursting bubble in housing prices combined with one of the nation’s worst financial meltdowns since the Great Depression likely caused a recession in Rhode Island that has been longer and deeper than most of the country, a federal official said Tuesday.

Robert Tannenwald, vice president of the Federal Reserve Bank of Boston, offered state lawmakers his theory on the reasons for the state’s unique financial woes during an economic forum convened by House Speaker William Murphy, D-West Warwick. Unemployment stood at 12.9 percent in October, worse than every other state besides Michigan and Nevada.

Rhode Island weathered a recession earlier this decade on much better footing and managed to expand its economy, Tannenwald said. But it has suffered since employment hit a peak in early 2007.

Housing prices have been one major factor in the state’s recession, he said. Home prices soared during the past few years because the state had little new construction, which reduced supply. At the same time, easy lending standards enabled more people to qualify for mortgage, putting upward pressure on prices.

State leaders were also aggressively courting financial firms by offering them incentives to relocate to Rhode Island. For example, Fidelity Investments announced in 2006 that it was moving 1,500 jobs from Massachusetts to a campus in Smithfield.

As a result, Rhode Island fell hard when housing prices plummeted nationally, foreclosures soared and a crisis caused major job losses in the financial industry.

“You put your bet on the financial sector and you had a serious housing bubble. And the combination of the two set off a very serious contraction,” Tannenwald said.

Stephen Lane, CEO of Ximedica, a Providence-based company that helps firms develop new medical devices, suggested that Rhode Island establish a $200 million seed fund to support new companies and entrepreneurs.

Despite starting the year promising to focus on the state’s moribund economy, Murphy and other Democratic legislative leaders have embraced few specific fixes for the economy. Besides soaring unemployment, lawmakers also face a budget deficit of nearly $220 million, a shortfall equal to 7 percent of the income the state expected to receive.