On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss the Barack Obama’s ATM comments this week, and his administration’s failed outreach to business.
Erick Erickson: Barack Obama Thinks an ATM Ate Your Job
White House’s Daley seeks balance in outreach meeting with manufacturers
GLOBAL MARKETS: European Stocks Slip; Banks Suffer On Greece Worries
Merkel, Sarkozy Agree Greek Aid Must Involve Investors
Why the Sign Must Say: No UBS in the USA
Obama’s Failed Outreach to Business
June 17, 2011
Domenech: Jim Treacher writes this morning, Francis, “Alas poor Weiner. We knew him Horatio: a fellow of infinite jizz, of most excellent pantlessness.”
Jackson: Oh, my God.
Cianfrocca: All I want is hot dogs for lunch. I mean, give me a break here. How hard is this. I mean, this is, you know, the import of this major, major event in our national life is focused attention on how inadequate our diet is.
Domenech: You know I think –
Cianfrocca: You know, as I’ve said it before, every young woman in America loves hot dogs.
Domenech: Oh, lord, Francis. Well, I think it’s sad to see, I think, our political discourse reach a level where sex scandals without sex are going to be the norm for the future. I mean, if this is the real way things are going to go, it’s going to be a lot less interesting, I think going forward.
Cianfrocca: Look, go back 50 years. Okay. All the science fiction that is predicting a cybernetic future has anticipated this. All right. The more we get into Facebook and Twitter, the more our lives become electronic, the more the world becomes about information. We’re going to get this, it’s a big dent of the cake.
Jackson: And then we’re going to get the machines taking over the world and killing us all.
Domenech: Yeah. The ATMs taking your jobs.
Jackson: That’s right.
Cianfrocca: You know, I work with computers all day long, they’re not that smart. Don’t worry about that.
Domenech: Francis, what did you think about that comment from President Obama this week? I mean, the –
Cianfrocca: We have a president named Obama? Who knew?
Domenech: The thing that’s really interesting about it to me is that you have the President trying to be, he always gets into this sort of professorial, analytical arms-length role as if he has nothing to do with the matter in question when he’s asked about it. So, Mr. President, why do you think that companies aren’t hiring more people?
And so, you know, he puts on his little professorial hat, as someone who has never run a business, and never hired anybody within the private sector, and says well, you know, the real problem here is that we have an economy that, you know, where all the robots are taking over our jobs. And you’ve got ATMs instead of bank tellers. And you’ve got kiosks instead of people checking people in at the airport. The very idea, yeah, behind that seems to me to be one of the oldest leftist economic fallacies about the way of progress and the future that is still hanging around. What do you think of that, Francis?
Cianfrocca: First of all I’d love to. I can think of any number of ways to make fun of this, but on the off chance that you’re asking a serious question and perhaps our listeners are actually interested, for the President to say that the advent of ATM machines and banks had a negative impact on employment, you want to ask him okay. So, do you want me to go back to standing on line in the bank and taking a half an hour or 45 minutes to do that? And so what’s the value on my time? So he’s ignoring with this the most fundamental principle of increase and prosperity, which is to increase productivity.
Now, let me give you the other hand, the other side of this coin. It’s been a common place of economic analysis for decades now that when you use technology and when you use capital inputs to increase productivity, you do indeed displace a certain amount of labor.
Domenech: Of course.
Cianfrocca: But the idea is, and always has been, ever since Adam Smith, has been that the labor you displace then becomes available for higher value added activities. And I mention science fiction and another thing –
Domenech: It’s the fricking cotton gin. I mean –
Cianfrocca: Well, exactly right. Yeah. Yeah. And Adam Smith gave the example of safety tents. Right. So how much, I mean ultimately the purpose of a political economy is to, the basic purpose is to make sure everyone has enough to eat, and shelter, and clothing, and is warm and dry in the winter, right? I mean, everything else is gravy on top of that. So, when we were all 100 years ago and some most of America lived on a farm, your productivity was measured in terms of the food you could grow for yourself. But with an industrial economy we can do a whole lot more in terms of productivity and have, you know, an economically more prosperous life.
So, if we replace the ATMs and have all kinds of individuals working teller machines, can they produce that much economic value? We’re all going to step back. It’s absolutely silly. And frankly the French tried to do this a few years ago with legislatively changing the work week from 40 hours to 3t hours. They figured if people work less then there will be more jobs. Well yeah, maybe, but it also reduces economic productivity so you get less aggregate prosperity. It’s self-defeating.
Jackson: If they’re unionized ATMs they would go on strike.
Cianfrocca: The last thing I want, okay –
Cianfrocca: — is to go up to an ATM and have him say listen, I’m on strike.
Domenech: You’ll have to come back at some future date to get your money.
Cianfrocca: Yeah. And rather than charging you 50 basis points for 200 bucks, they’re going to charge 300. That works for me, sure.
Domenech: So Francis, there’s a piece in the Washington Post from yesterday about the White House’s attempts to get along with corporate America. To sort of mend some of these relationships.
Domenech: And the Chief of Staff, Bill Daley, talks within this article about bureaucratic problems as being one of the reasons that this whole situation has gotten worse. So let me ask you something Francis, correct me if I’m wrong but there’s this place called the White House where Bill Daley is the Chief of Staff, doesn’t that in our system, in America, put him at the top of the chain in terms of what these bureaucrats do and don’t do? Am I wrong about this? Can you help me out?
Cianfrocca: Well, he was speaking to an, and it’s interesting. Bill Daley he not only has a background as a Chicago machine politician which makes him a perfect fit for the Obama White House, but he also is a banker. I mean, he used to work at, was it Morgan Stanley? Was he an outside guy or was he working in a commercial bank? I can’t remember. It was either J.P. Morgan Chase or Morgan Stanley that he spent a few years working at. So, he has some credibility on business issues and he was speaking to the National Association of Manufacturers. And among the things, and I wanted to point out some of the things he said.
It was an interesting meeting. Basically he comes out of it with nothing. He’s telling assorted CEOs of various manufacturing companies that he can’t defend the indefensible. These are his words. To your question, he was speaking about the bureaucratic and particularly the environmental regulations that government puts up. Well damn it, these people work for you. If you really wanted to solve this problem you could do it this afternoon. Right. And instead what he comes back with –
Cianfrocca: — is on environmental issues, that’s a lot of bureaucratic stuff. It’s not that easy for us to cut through those things. On trade and taxes he said, and this is an interesting quote. Very regulatory. What can you do to help us on trade? I mean, we’re getting killed here. He says that there are people who lose from these agreements. Okay. That can only mean unions. That’s what he’s saying.
Cianfrocca: What he’s saying is that his government is not willing and/or able to expand free trade which is going to be beneficial for businesses in their objective. I mean businesses, their objective is to make more money. Okay. The social benefit, the reason the government and the White House should be interested in fostering businesses making more money, is because that creates jobs. Quite directly. I mean, there’s a pretty, pretty, you know, direct linkage. And so what Bill Daley is saying with his comment, there are people that lose from trade arrangements, is that he doesn’t want, and his administration does not have the ability to stand up to union pressure. And then on taxes –
Domenech: Yes. On taxes. This was great. Go ahead.
Cianfrocca: Yes. That’s the third one. He goes, perhaps, businesses are looking for a rationalization of tax rules, a reduction in tax rates, which is going to, you know, this is basic supply side. You increase the return on invested capital and that just means you get more investment, and you get more business activity. Right? Which translates to more jobs. Daley says, you know, we can’t really do that. We’ve got political realities involved here and I, you know, the coded language suggests that he doesn’t have the ability to go back and push for tax cuts. And he actually said, literally, some small business people may be looking at a tax increase. Okay great, thank you. I’m glad that you told me. Now I know that I need to cut back on my (unintelligible) for expansion, because you’re going to be raising my taxes. Thanks for making that clear.
Domenech: I think that one of the things that you walk away from, you know, something like this saying is that when the White House comes to these people, when they talk to them, they understand to some degree that there’s concern there, that there’s frustration there, but the White House is sort of throwing up its hands. And this is the thing that I think is so damaging about the claim that Obama made back in ’09 that, you know, I’m happy to own the economy. Give it to me. I’ll own it.
Cianfrocca: Wow. Yeah.
Domenech: You know, I think that claim, when you put it up against not just the job numbers, not just you know, sort of the tangible things that we talked about on Monday’s show about Debbie Wassermann Schultz and things like that. I think that when you put it in, from the business perspective, from the entrepreneurial perspective, there’s just a complete lack of ownership on their part of any of these problems. They basically are saying, you know, the problem here is you’re not hiring enough people. And then the business say –
Domenech: — well, we’re not hiring enough people because we’re concerned about our future and we’re concerned about the economy. Because we’re concerned about our tax burden. We’re concerned about, you know, what the bottom line is for us. We’re not thinking about your political future, because we don’t care.
Domenech: We’ve been here longer than you have, and we’ll be here, hopefully, after you leave office. You know, we’ve got to think about the long term and I think that –
Cianfrocca: And I –
Domenech: Go ahead.
Cianfrocca: I was just going to say, I think it’s an important point in here. You’re right. The rhetoric changed this week. You know, it kind of perked me up to see Obama saying things like well, you know, you business people need to step up and start creating jobs. Well, I mean, that’s kind of what we do. You know, why should we do that in order to make you happy? But there’s a split between large businesses and small business. And you know, the National Association of Manufacturers as an entity, and the business roundtable as well, they are more focused toward larger businesses. There are small business groups, somewhat less organized. I mean, they are a huge number. There are millions of small businesses in America, you know, and thousands of very large ones. You know, and the usual way to split them out taxonomy (phonetic sp.) is you figure half of, something like half of the people work for very large companies and half of the people work for small companies. All right.
So, even though numbers of firms are small they employ that many more people, but large companies as a rule with many exceptions, as a rule they are, if you look at the way they run their business. They are typically publically owned so they’ve got shareholders, hedge funds, pension funds, insurance companies, calling up their management teams all the time saying, what are you going to do to increase revenue growth? Top line. Because the top line translates, not the bottom line. The top line is what translates into higher stock prices which is what drives them. They do not care all that much about hiring new people. They will hire in business cycle, parts of the business cycle and market environments in which they have opportunities to increase the top line.
If they don’t have those opportunities, which is the case today in most of the world, then they’re just going to cut costs. All right. They will improve their stock value by cutting costs which means cutting jobs. It’s the entrepreneurial companies, the smaller companies, the small and midsize companies and there’s quite a taxonomy there. Okay. To me a small company is anybody with, you know, less than 3,000 employees. That’s about $1 billion in revenue. You know, to a lot of people a small company is what I would call a nano-business. You know, five to 10 people working on some, you know, a candy store for instance. I mean, it could be, or a 50 person law firm. Right?
So, there’s no way to talk coherently about what faces a small business because there’s such a wide variety of them, but it is the case that in general, on the whole, they are the job creators. Okay. They are the people who are actually going out taking major risk to expand markets. Big companies don’t need to take that risk. What they need to do, and what they feel, how they manage themselves in general, is to avoid risk and maintain market share. But it’s the small companies, you know, especially ones where the, that are run by a founder or an owner. Okay. They are the ones that are looking for the opportunities. They take the risk and they make them, and they create the jobs, and they produce economic dynamism (phonetic sp.), and they are the ones that are getting killed right now. Because A, number one, they don’t have access capital because the banking system is still frozen. And there’s no, you know, we are no closer to solving that problem.
And the fact that higher taxes for higher earner is essentially baked into the cake and is something you can’t escape in every statement that comes out of Obama, or out of Daley, or out of their mouths. Somewhere along the line, or you know, the other people in the Administration and then half of Congress, somewhere along the line half of, what you get out of it if you listen carefully is, your taxes are going up. Well, Nicky Haley (phonetic sp.) made a very interesting point in a town hall meeting on CBS that that is precisely the thing that kills jobs. Because small businesses do not have access to capital markets like large businesses do.
Cianfrocca: The most important and least expensive, most readily available source of capital, growth capital for a small business, is retained earnings, is the profits they made last year. If you cut profits by increasing taxes, you’re just going to get less growth. They’re killing us. It’s inescapable. I mean, it’s like perfect, if you’re on the ground seeing it from the inside, it makes perfect sense. I don’t know why it is that someone like Barack Obama who doesn’t see it. And the only thing I’m left with thinking is maybe he’s a robot already.
Jackson: Francis, I also wanted to talk about Greece today. Global markets have been just up and down all week over this situation in Greece. They rioted. There were things burned. The drudge headline at one point yesterday was, the fall of Greece.
Jackson: Things over there are a total, total mess.
Cianfrocca: That’s good to see that they’re taking a long sweep view of history.
Jackson: Yeah. What do you think is going to happen here? There’s, you know, fear that it’s going to spread in the Euro-zone. Banking stocks are afraid that, you know, they’re going to have exposure over this debt and it’s going to tank? I mean, how do you see this?
Cianfrocca: Yes. This is, we’re speaking on Friday morning and some very important news just came through. What is, there has been a break in the tension this morning. What is happening is that Merkel (phonetic sp.) and Sarkozy (phonetic sp.) are having a sit down in Berlin and they, Merkel has basically agreed, she blinked. Okay. She came around and announced that her government would be in support of measures to enable bondholders, mostly banks, people who are loaning, people who lent the money to the Greek government over these last 10 years, all right, to take a voluntary adjustment in repayment schedules. Now, let me just dig into this a little bit. You provide some context.
The basic fight in Greece, in Europe over Greece is between the European Central Bank and people like France and all of the large banks throughout the Euro-zone on one side and the government of Germany on the other side. And the conflict comes down to this, the ECB and all the other states very much want to find a way to keep bailing Greece out. They’re trying like crazy to avoid a default event in which German and French banks primarily are going to have to take, recognize capital losses through a default event on the debt that, that Greeks owe. That the Greek government owes them. You see? It’s a Lehmann (phonetic sp.) kind of, they’re afraid of a meltdown. Okay.
Jackson: But Francis, isn’t this kind of a worthless cycle? Are they just going to keep bailing Greece out and Greece is going to keep failing and –
Cianfrocca: Well, I haven’t gotten there yet. Hang with me here. Yeah, your right. Even Alan Greenspan came up and said well, it’s absolutely inevitable that at some point Greece defaults, but here is what they’re trying to avoid. They’re trying to avoid another Lehmann Brother’s event. Because if we have a sudden default of that now, and default is defined as (unintelligible).
Jackson: Greece is too big to fail.
Cianfrocca: Well, yeah. I mean, we could have a very major problem in the European banking system and possibly a global, another late 2008 event. Nobody wants that. But the problem comes in Germany because Merkel’s party has been losing elections. Because the people that are going to have to put up the cash to guarantee the additional bailouts to Greece are basically the German taxpayers and they are letting the German government know they want no part of this.
So, she’s been saying, the only way that we can agree to any kind of a settlement is to force the bondholders to take a change in, most likely repayment charges. She’s been talking about forcing them to accept a seven year delay in getting their principal back. Okay. That’s a technical fault. That materially changes the terms of this debt. And if you are your average rating agency looking for headlines you would call it that way. And that, enough, that in itself could be enough to trigger a crisis. All right. So, what she did this morning is she announced, with Sarkozy at her side, that, hold on a second.
Jackson: They’re coming for you.
Cianfrocca: No, they’re not. They’re coming for somebody else. So, what Merkel just did this morning is she announced with Sarkozy that she is relaxing her demands and she is going to work with the ECB to allow voluntary restructurings with the consent of bondholders. That’s a huge breakthrough. Because that means, you know, everybody wants to have an agreement in place another bailout of Greece before the end of June because the Greek government has to roll over some maturing debt pretty soon, coming up, over the rest of the summer.
So, they wanted to get this in place before then. But you’re right. You’re right, Brad, when you say that it’s a never ending problem. This is, you know, what we’re really doing is stretching this out. It’s like a nuclear explosion. They want to stretch out over a few years instead of happening in one millisecond.
Jackson: What’s the end game here, because if we just keep going on this cycle, when does the cycle end? When do people just throw up their hands and they’re like okay, great, just you know, let’s just let this go.
Cianfrocca: Well, the answer ought to be very familiar from US politics, sometime after the next election.
Domenech: So, what about this write-up that Mr. Hoenig (phonetic sp.) had in the Financial Times this morning? I picked a couple interesting nuggets out of it, but you know, the essence of what he’s saying about Dodd Frank, I think, is something that is worth hearing your response to. I would point out that I thought that Newt Gingrich had a good line the other day, that conservatives shouldn’t have any qualms about responding to Dodd Frank because the name alone indicates that it ought to be repealed.
Cianfrocca: Well you know, again, yeah. I mean, Frank, it brings me right back to hot dogs.
Domenech: God, Francis. Well, it is Friday.
Cianfrocca: I mean, you know, it’s like you’re talking about, what I get from Tom Hoenig is, you know, dollops of mustard and relish. I love his piece. I mean, Tom Hoenig is great. He’s a retiring president of the Kansas City Fed. He’s a known hawk on inflation and he’s been a banking regulatory for 40 years. This, he’s saying, it’s great because, you know, while we’re talking about Greece, it is true that regulators in both the United States and Europe have been struggling mightily to get a grip on some improved regulations for the banking system, that it will prevent outcomes like 2008. And you know, it’s kind of predictable, what he is saying here is something we’ve known for years, which is that when you get an institution that is in, like a large bank that is in so many different businesses, and he specifically makes the point that they are expanding the core business of taking deposits and making loans and that’s a key part of his point. That whenever a financial institution steps beyond those basic boundaries and gets into other businesses, fine. Let them do that. I mean, that’s market freedom.
But recognize that as they grow the amount of systemic risk that they present grows as well, but more importantly not only does it grow, it becomes too complex to analyze. So, part of what Hoenig is saying, and he makes a great point about the Union Bank of Switzerland. Switzerland just announced a 19% capital requirement for systemically important large banks, two big failed banks. UBS, of course is a bank that is, Switzerland has two major global megabanks. UBS is one and Credit-Suisse, the former Credit Swiss First Boston is the other, and of course they’ve got hundreds of other banks. I mean, Switzerland is all about banking. But they have this one bank, UBS that has an asset book that is twice the size of a Swiss economy. I mean, I don’t see how you bail them out.
So, Hoenig says well, the Swiss authorities as part of restructuring their risk management and their bank supervision, increased the capital requirements to 19%. Okay. Normal banking is around 8%. So, you’re talking about huge, huge hits of profitability. So, needless to say UBS wants to find another home. They want to start expanding their asset management and investment banking businesses outside of Switzerland. And what Hoenig says is, don’t come to the United States, please. Don’t come here. And here’s why, because at this point our banking and regulatory structure is much, much looser than it is in Switzerland. Okay. If the Swiss authorities figured that just raising capital requirements to 19% would solve the risk management problem, they would be lobbying to keep UBS in Switzerland rather than trying to push them out.
But if they come here, they benefit immediately from federal, US Federal Deposit insurance and from the Federal Reserve discount window. So, you’re talking about attracting a huge global bank to expand operations in the United States which may be systemically risky, benefitting from the taxpayer guarantee of US taxpayers, that’s a great deal for the Swiss, right, because they’re shedding this risk. They’re dropping it on us. And Hoenig says, don’t do that. It’s a false, you know, you might want to import the business, but no you don’t because it’s too much risk.
Now here’s the opposite, the other hand. The opposite side of the coin. Okay. With Tom Hoenig very, very much he is willing to accept the tradeoff of lower profitability in the banking system in order to get stricter regulation. That’s the conflict. That’s why, that’s what makes this a fundamentally difficult question. You saw Jamey Diamond (phonetic sp.) who was the CEO of JP Morgan Chase pop up this week –
Cianfrocca: Yeah. I mean, he basically gave a tongue lashing to Ben Bernanke saying don’t raise my capital requirements. If you do that then my profits are going to go down and you’re not going to like that. Here’s where I’m more sympathetic with the regulators and less sympathetic with the free market types on this. It’s because big time banking, too big to fail banking, is already so guaranteed by the two big to fail doctrine, and by, fed by deposit insurance, and by all the, everyone knows in the next crisis Jamey Diamond’s bacon is going to get saved by the US taxpayers. He is therefore free to engage in all kinds of risky behavior. And as Hoenig points out we have no way to understand and to predict the effects of that risk.
That’s his point, okay. Alan Greenspan will kind of come down in the middle on this and he’ll say, well there’s babies in that bathwater. If you throw this out you’re accepting, if you just go to a higher level, a dumb level of regulation which acknowledges we don’t understand how risk works in these institutions, but if we just step the risk up, we step up, you know, their reserve levels arbitrarily high, just to cover what we don’t know, to cover the uncertainty, then you get less economic growth and you get less financial activity. True enough.
And that, of course, is the tradeoff with, you know, we have to debate this in the context of Dodd Frank. Why it doesn’t wash with me is because the banks right now are, we go back to our discussion about small businesses. Banks are not, in the US, are not making capital available for business expansion. We might as well not even have them. They’re sitting there just getting fat and happy on zero interest rate reserves, turning them around and lending them to the Federal Government for five years, or ten years, and getting fat and happy off the spread. They’re not doing anything for the economy at all. I don’t care if they go away.
(End of Podcast)