Despite handsome profits among some banks lately, local financial experts say the impact of the recession will be felt for years, even though the Capital Region avoided the worst of the mortgage meltdown and is well positioned for recovery.

President Barack Obama has repeatedly encouraged banking officials, with or without the benefit of bailouts, to increase lending in order to fuel fledgling economic growth. Yet consumers, humbled by diminished wealth thanks to stock market turmoil and millions of lost jobs, are paying down debt rather than borrowing more, while companies are paying off loans rather than aggressively taking out credit.

As a result, “deleveraging” is the watchword of 2010 and beyond, according to financial seers, a term for the process of reducing debt in order to stay ahead of loan defaults. It’s the unintended consequences of this process that give some experts pause.

“Deleveraging is big news. It helps the balance sheets of the banks and the individuals, but it does little to stimulate growth,” says Pete Bush, a certified financial planner and founding partner of Horizon Wealth Management. “While the economy may be inching its way out of the recession, significant growth will not take place again until the money is flowing.”

Bush says in a recent local real estate loan he worked on, a bank required 30% equity. “That gives you a sign right there of the approach they’re taking, which is lowering their risk of default and being conservative with who they loan money to,” he says, noting that a million-dollar deal two years ago might have required 10% down but now would mean hundreds of thousands more up front.

“Deleveraging really kind of chokes off the banks’ bloodline because they’re not making loans,” says Steve Stahler, a certified financial planner and president of The Stahler Group.

Small businesses, challenged by tough lending standards encouraged after the credit bubble and housing market collapse, might also face higher taxes and a mandate to provide medical insurance, which Stahler says could stymie job growth. although he agrees that locally the effect of international deleveraging could be muted for now, he suspects it will catch up with local businesses.

Nationally, he says, consumers are not purchasing as they used to, which he blames partly on credit card companies that have lowered limits, creating a domino effect whereby production declines, which can lead to inflation.

The Federal Reserve recently reported that consumer spending in November fell by a record $17.5 billion, an adjustment that reverberates through a national economy that depends by 70% on consumer demand.

In summarizing its latest Senior Loan Officer survey, in October, the Fed said demand weakened for most major loan categories at domestic banks over the prior three months. “About 35% of domestic respondents reported tightening standards on [commercial real estate] loans,” Fed analysts said. “About 25% of banks, on net, reported in the latest survey that they had tightened standards on prime residential real estate loans.”

Edward Clarke, a financial analyst and senior partner at Lohengrin Group, says a credit contraction is part of the natural cycle of finance. A proponent of the “classical or Austrian school of economics,” he says deleveraging is not part of the business cycle but essentially is the cycle. “An economic expansion is an expansion of credit, and a recession is a contraction of credit,” he says. “We’re typically two years behind the cycle. The first wave of this may be reaching Baton Rouge in force now.”

Comparing Capital Region housing demand with that of the Southwest, he says: “We did not go up as much. The level of exuberance was not as high, so certainly we do not have as far to fall. We never got as far as the Californians did. they assumed double-digit housing price increases would continue every year.

“For a very long time, they were correct. Companies were willing to make a loan on first and second mortgages that were not based on the current value of the property but the prospective value of the property. It worked for 20 years.”

Robert Taylor, CEO of the Louisiana Bankers Association in Baton Rouge, says there is a dichotomy between the highly leveraged federal government, which has taken on sizable debt through its bailout moves, and the private sector, which behaves rationally and is reducing risk.

“People who are lending the money, those who kind of got away from the traditional underwriting standards, they are now back to the more traditional underwriting,” he says. “Banking in Louisiana really never left that.”

Yet, he says, regulators are scrutinizing Louisiana banks along with everyone else to ensure that tight lending standards are adhered to, which could further slow growth.

“I was with a banker today who was talking about his last exam,” Taylor says. “He’s been in banking his whole career, and he’s never seen anything like this. That overreaction on the part of the examiners is going to carry forward to the bank.”

A well-reported study from the McKinsey Global Institute recently said belt-tightening is the unavoidable consequence of the run-up in global credit prior to the recession.

Although the study says debt levels in the United States are lower than in France, South Korea and elsewhere, the history of deleveraging of the kind now being seen shows a debt-payoff trend that begins two years after the onset of a financial crisis and causes a shrinking economy for two or three years, with an overall slow-growth period of six or seven years.

Clarke takes an even more pessimistic view. “I’m a raging-bull optimist by nature, but I can’t ignore the numbers in front of me,” he says of job carnage. “If the country as a whole recovers at the rate we [have] since World War II, we’ll gain 50,000 new jobs per month. Still, it would take 11 years to recover. That’s a rosy view.”

As for the notion that the United States could pull off a “V-shaped recovery,” he says that would necessitate 400,000 new jobs per month, a growth rate not seen since the 19th century, when the industrial revolution led farmers to move to cities for factory work.

Meantime, even with the strength of the local economy, the Capital Region bled about 8,000 jobs last year.

Clarke is advising his local clients to buckle down for some hard years after a lengthy period of expansion that ended with the recession about two years ago. “These things do come sometimes in decade-long cycles,” he says. “We had a contraction in the ’70s after the expansion of the ’50s and ’60s. There are trends in everything.”