EDITOR’S NOTE: This is the second in a two-part interview. In this edition, BancorpSouth CEO Aubrey Patterson gives the Mississippi Business Journal his perspective regarding what happened when the housing bubble burst and the market collapsed..
Interview by Liz Blankenship
This past year as a member of the Financial Services Roundtable, comprised of the country’s 100 largest financial institutions, Patterson and the board provided formative input toward the drafting of President Obama’s stimulus package. He shared his insights on the potential effects of the bailout policy and what consumers can expect in the rocky months to come.
Q: You said we have the history of the Depression on our side when it comes to making decisions this time around.
A: During the Depression, the fed went backwards, they tightened the money supply instead of loosening it. But, the recovery under Roosevelt didn’t come from the public works programs like the WPA and TVA. Those programs were good, they put people to work, they let people have clothing and food and shelter, which was desperately needed, but that didn’t start the recovery. World War II did.
Now, we’ve loosened the money supply and the feds are buying Treasury notes. But, this just dulls the pain and in the long run we will all pay an inflationary price.
We’ve never seen the sort of economic time we’re living in. It’s gonna get worse before it gets better and no one can predict where the end of the trough will be. The dreaded U-shaped recession is where we are and we’ve got to have a lot of things go right before it gets better. We have to have consumer confidence. We’ve got to have some business response saying it’s finally time for us to invest some money and we will gradually recover.
Q: So we’ve had an economy which has been essentially driven by a war machine or arms buildup (post-Cold War). Are you saying we have to rely on that model to get out of the hole we are in? Do we have to have a war to have a good economy?
A: That has been the cycle and what history has shown. However, the things which came out of those times don’t have to be generated by conflict. You have to have investment, capacity generation, production, job development and economic capacity. Here’s where our current leaders come into play.
Bernanke (Federal Reserve chairman Ben Bernanke) is a student of the depression and a very bright guy. They’ve doubled the size of the fed’s balance sheet; in other words they’ve created enormous amounts of monetary units by taking on assets onto their books and creating the money to do it. That’s got an inflationary impact, too, but that’s what the central bank is supposed to do, it’s supposed to be concerned about the money supply and not about politics.
Q: What about the stimulus package? Can it break this vicious cycle?
A: That’s the age old partisan argument. Break down the stimulus and it’s essentially two components. Tax policy and direct payments.
Democrats wanted two-thirds of the stimulus to be direct benefit to consumers and one-third tax policy. Republicans wanted two-thirds tax policy and one-third direct payments. This represents the philosophical polarity of the two. You need both if you’re trying to do what the government desperately needs to do. Bernanke understands this. The Treasury sort of understands it. Obama really understands it. You have to have the tax component, investment tax credits, accelerated depreciation, no taxes or lower taxes on capital gains, the things that make businesses make decisions. This helps build confidence. It lets the business know, “Hey it’s time for me to build the new plant, I can write off most of my front end cost in 10 years instead of 20, and if I need capacity, this is the time the tax benefits give me an incentive to do what we did in World War II, to build up to be the most productive economy in the world.”
The stimulus needed now to get that same kind of focus has more to do with tax policy than fiscal policy or government spending. Government spending halts or minimizes the pain, it doesn’t create anything. Expansion of the money supply chases the same amount of goods and services. The bailout doesn’t do anything except give short term benefit to the recipients. Long term it creates inflation and will have a significant inflationary impact on the value of our currency — we’ll all be paying the bill for a long time.
Q: There’s a tendency for many Americans to view the stock market and the economy as one in the same.
A: For many it can be confusing. We’ve seen BancorpSouth’s stock price go down, but that doesn’t mean we’re not making money. It’s just the market value in general has been pushed down.
Q: So what should consumers be watching and what should they be doing?
A: Again, consumer confidence is the key to unlocking spending and spending drives a big chunk of the American economy. If I were Barack Obama, I would hope everyone would go out and buy something. But, if it’s your best friend, the advice is to save and be prepared for a protracted downturn.
Q: Sort of conflicting statements?
A: Over time, small businesses will decide they have to spend when their inventories have been drawn done, consumers will spend on needs versus wants. In the meantime, it’s time to minimize debt and marshall savings.
Q: Like in a bank?
A: Well, no one’s ever lost a penny in an FDIC-insured bank as long as they were within the insurance limits.
Q: People assume banks aren’t making loans, credit isn’t available.
A: We’re looking for new loans every day. We have plenty of capital and we want to make loans. Obviously, we will only underwrite them if we think they’re good credit loans that meet our standards. Most new jobs are created in small business. It’s the bell weather that drives our economy. We make loans to main street America and small to mid-size business and individual consumers that’s our focus.
Q: In Mississippi, small business is the key. How are we faring compared to other states?
A: The unemployment rate is going up in Mississippi as industries and companies respond to pressures on their profitability. People are eliminating jobs where they can, cutting back salaries, tightening their draws, managing inventory tightly, all the things they need to do to limit their exposure. The longer this goes on, the more pervasive the job loss will be. The downward spiral will break by function of markets, when people determine that house prices are at a level they ought to buy, then some people will start to buy. When businesses determine their inventories have gotten to the point where they’ve really got to build their inventory back up some, then they’ll start buying again. When consumers feel more confidence. they’re willing to spend more. Right now, individual consumers are making the intelligent choice to say, “I’m not gonna make variable expenditures that are unnecessary.“ Mississippi’s not any worse off than other areas. Recovery will happen, the question is, how deep will the recession be?
Q: So your advice to consumers is the same as the advice you gave your board when deciding not to accept any of the government bailout funds?
A: Yes. If you don’t need it, don’t take it. I made the recommendation to the board, and I think it was the right thing. One of the reasons — we have high asset quality and strong capital and we didn’t need it. Yeah, we got a little criticism from some of the analyst/investor community saying, “Why didn’t you, it’s a relatively inexpensive form of capital.” We didn’t want to be in a situation where the rules might change in mid-stream.