The Run on Greek Banks—Can the U.S. Stay Out of the Runners’ Way?

 By: Dr. Lynn Reaser

Events in Europe continue to spiral quickly downward.  The Greeks will vote in new national elections on June 17, which will be a referendum on the commitment to remain a part of the Eurozone.

Most Greek citizens want to remain a part of the Eurozone but are unwilling to make the continued sacrifices and endure the austerity that has been forced upon them to secure additional financial assistance.  Most Germans want the Eurozone to remain intact but resist sending even more financial aid to the weaker members.

 A run on banks has already begun in Greece, with about 800 million euros ($1 billion) being withdrawn a day.  As the June 17^th Greek election approaches, the outflow of funds is likely to accelerate.  Fears of a banking collapse might prod the Greeks and Germans to compromise.  Barring such an agreement, a Greek exit from the Eurozone would trigger bank runs in other nations, including Spain.

 In the U.S., the impact would be a stronger dollar, lower interest rates, lower oil prices, lower stock prices, and slower economic growth.  Preventing a deepening and widening of European bank runs will be critical to the world economy.

Filling California’s Budget Hole

 By: Dr. Lynn Reaser

This past week California’s Governor, Jerry Brown, delivered the bad news.  The budget gap for the coming fiscal year beginning July 1st will not be the $9 billion projected in January but about $16 billion.  As a result, he is proposing spending cuts of $8 billion along with another $8 billion of revenue increases and he hopes to see if voters approve sales and income tax hikes.

 Is there another way to fill the state’s budget hole?  The answer is clearly yes.  Many formulas exist for closing the mismatch between spending and revenues, although none will be painless.

 One simple framework might be a “5-10-15” plan.  Better job and income growth would be the best solution and might help aid a 15% rollback in the various government regulations that many businesses decry.  An across-the-board 10% cut in government spending would be a blunt axe but may be the only way to escape the political battles that could sabotage a web of more finite cuts.  Many enterprises have endured reductions of 10% or more.  Finally, a 5% increase in all revenue sources could be considered to achieve buy-in of other planks in the proposal. 

 Other mixes should be on the table, but our budget problem must be resolved.  Greece has shown the world the perils and fallbacks of “kicking the can down the road”.

INCOME INEQUALITY VERSUS PROSPERITY—DEFINING OUR FOCUS

By: Dr. Lynn Reaser

It has been nearly three years since the “Great Recession” officially ended, but many Americans are gripped by a sense of malaise.  Unemployment has eased but is still high.  Recent attention has also focused on the gap between the rich and the poor.  Some are asking the question:  “Is income inequality a threat to our prosperity?”

While the frustration of those asking the question is understandable, the answer is “no”.  America’s core values do embrace equal opportunities, but this does not imply equal outcomes.  Some will work harder than others, incur greater risks with new ideas and businesses, or just possess greater talents than others that will be rewarded.

A company where everyone is paid the same regardless of how well they perform would certainly give little incentive to be one’s best.  Taking such a model nationwide would be a recipe for mediocrity not prosperity.

America does need to do a better job in lifting the incomes of the poor by improving a woefully inadequate education system.  That should be the focus, not dissuading those who would strive for excellence. 

A Bittersweet Goodbye from the FBEI

As graduation arrives in a mere 3 days, I have spoken to many undergraduate and MBA students who are experiencing a strange mixture of joy at their accomplishments but also anxiety, concern and fear. Certainly, they enter into this next chapter of their lives in a challenging business, economic, and political era, but the source of this anxiety is something much more personal and touching.

Many conversations with graduating students have focused on the great relationship built up over these past years in school, either at our lovely ocean front campus or at Mission Valley. The rhythm and routine of the certainty created by an academic schedule is now being replaced, and often with something far less certain. For some, it means a move away and the knowledge that we will see each other again only if circumstances allow.

The first year I sat as a faculty member in graduation, I was profoundly moved by watching the festivities around me but even more so by the embraces, photos, and introductions to families and friends who were there to celebrate a great accomplishment. Those are great memories and for those whom I stay in contact with, across many industries and parts of the world, these relationships have grown even deeper. Ultimately, graduation proves to be a very bittersweet experience for us all.

So to all of our pending graduates I say to each of you ‘well done!’ Finish strong in these final days and know that many of us are praying, supporting, and hoping the best for you both now and in the future.

Sincerely,
Randy Ataide
Executive Director

Cathy Gallagher – Director
Commencement truly is a bittersweet moment for us as we have been blessed to get to know many of you in different settings and on varying levels. We are so excited at what the future has in store for each of you, yet saddened by the thought that life may somehow get in the way of continuing the relationship we have worked so hard to build. Please know nothing give us greater joy at the FBEI then when we reconnect with our alums, whether it be a week, month, or year after they graduate. We want to maintain contact with you, have coffee, lunch, take a moment to catch up on what is going in your life, and celebrate accomplishments with you. We want you coming back to give a bit of yourself, share your experiences with those who are following behind you, and provide connections within your own network, or tap back into our network. So as you go on your way, wherever life is taking you beyond PLNU, take a moment to look over your shoulder now and again and say hello to those who remember you, brag about you, pray for you, and wish you well.

Lynn Reaser – PLNU Chief Economist
You are entering a world that holds both unprecedented opportunities and challenges.  Stay true to your values and you will never go astray.  Strive for excellence and work for a better world.  We are extremely proud of you.  Stay in touch and know that we will be here for you.

Dieter Mauerman – Economic Research Assistant
We are proud of each of you. In your future careers make the most of each opportunity you are presented with.  Don’t be afraid to go against the norm and be yourself.  Relationships made in school are often times the most rewarding, so come visit us and don’t forget to stay in touch.

Emily Gallentine – Manager
Over the past year as Manager of the FBEI, I have gotten the sincere pleasure of walking with many of you through opportunities, successes, trials, stresses, fears, and professional growth. At the FBEI, we get the distinct joy of completely understanding what our business partners mean when they say to us, “There’s just something about those PLNU students.” “That something” they are speaking of will take you far in life. We are proud of you and are honored to know you. Although this time is bittersweet for us all, we continue to be your biggest fans and will be here to support you today and in the future. Best of luck and congratulations PLNU Class of 2012!

Q & A with Dr. Lynn Reaser

Student Loan Rates—The Clock is Ticking

By: Dr. Lynn Reaser

Student loan rates on Stafford loans awarded to college students of low and middle income families could rise sharply in less than three months unless Congress takes action.  Under a law passed in 2007, interest rates were set at 3.4%, with those rates set to double to 6.8% at expiration of the law on July 1, 2012.  That date is now rapidly approaching.

The current debate over whether to extend the lower interest rates is set against an acrimonious scene on Capitol Hill, where arguments are raging on how to reduce the nation’s deficit.  A serious cost benefit analysis of various federal spending programs certainly is appropriate and $1 trillion deficits cannot be sustained.  Ways to contain the rapid rise in college costs also need to be explored.

A strong argument, however, can be made that this year’s estimated $6 billion cost of extending the lower borrowing rate is indeed a good investment in educating the next generation of American workers, especially compared to a total budget of $3.7 trillion.  The worst policy would be to double rates in less than three months, imposing hardship on students, families, and colleges throughout the country.

Structural or Cyclical? Or does it even matter? (#2)

By: Randy Ataide

A recent post provided some initial thoughts upon our return from the National Association for Business Economics annual policy conference in Washington D.C. I have enjoyed my times at these conferences the past few years, but am enjoying it much more since we have been joined with energetic, fun and very intelligent PLNU MBA’s. There is something about young professionals and executives walking into a business or economic seminar or event that electrifies a room.

I wrote of my great fear of long term unemployment and the toll it is taking on our nation. Listening to Fed Chairman Ben Bernanke, I firmly agree that in moving forward towards prosperity, the economy must grow more rather than only focusing upon cutting and trimming. If not, we risk the vicious convulsions racking much of Europe these days. And I think this is true not only of nations but of many other organizations, for profit and nonprofit alike, small, medium or large in size.

In any organizational context, it is important to realize the difference between prudent stewardship and resource accountability and leadership vision, strategy and action. While these practices are related, too often the former dictates the latter. It is analogous to allowing a Human Resources Department to have disproportionate power in a company. While the standardization of practices, policies and procedures is a worthy goal for a company, HR must be there to support the organization rather than drive the organization. Too often, constraints placed by bureaucrats stifle and choke off innovation, entrepreneurship, creativity and in the final analysis, company growth. When stifling agents and activities choke these critical activities off in companies, we find that it matters little if a downturn like we are currently experiencing is structural or cyclical. It matters little if it is a large nation, public corporation a university or a micro-enterprise—the diversion of personal and organizational energy into such activities leads to low growth.

Last Wednesday night, I had the pleasure of hosting the 2011-12 PLNU Entrepreneur Enrichment Program, and listening to 12 young entrepreneurs and their mentors and advisors speak of the transformative process of taking an idea through the project and planning stage.  (For more details see). Entrepreneurs care less about cyclical or structural patterns and cycles, for they seek to create their own opportunity, win or lose. Entrepreneurs such as Arthur Cachero, Jamie-Lee Kwai, Ryan Baer, Ashton Runyon and all of the others who completed the EEP are inspirations to us all. All of us, including Mr. Bernanke and the rest of our political, business and economic leaders, should take a cue from these aspiring change agents, for they seek to create their own opportunities, rather than to ponder the questions of cycles or structures, or make time for the bureaucrats and technocrats. I say to each of them, forge ahead into the positive and prosperous future you seek.

HAS WALL STREET BEEN PUT BACK IN ITS CAGE?

By: Dr. Lynn Reaser

Two years ago, the Dodd-Frank bill was signed into law to prevent another financial collapse that nearly engulfed the world in 2008.  Today, two years after the historic legislation was enacted, 400 rules remain to be written by 20 regulatory agencies.  Even as the specific rules are being written, firms such As BlackRock and KKR are moving even faster to avoid the regulatory net as part of the so called “shadow banking” system.

The Federal Reserve Bank of Atlanta hosted a conference last week, titled, “Financial Reform:  The Devil’s in the Details.”  Indeed, that is true.  Whether financial risk can truly be controlled in Wall Street remains to be seen.

Federal Reserve Board Chairman, Ben Bernanke, indicated in his remarks at the conference that regulation has risen as a priority for the Federal Reserve to the same level as monetary policy.  This represents an historic change in direction and focus for our central bank.  Mr. Bernanke also indicated that the Fed may try to conduct regulatory policy on a counter cyclical basis in the same way as it conducts monetary policy.

This will be no mean feat.  “Leaning against the wind” by tightening monetary policy when the economy is overheating and easing policy when the economy is cooling has always been difficult as turning points are very hard to identify.  “Leaning against the wind”, such as by imposing higher capital requirements, higher down payments, or more stringent “stress tests” at the peak of a cycle may also be difficult as bubbles in various markets are not always obvious.

Sheila Bair, former Chairman of the Federal Deposit Insurance Corporation (FDIC), spoke of the importance of not making rules overly narrow and detailed.  Financial institutions can often find ways to skirt even the most specific rules.  Rather, it would be better to define more general principles that can encompass changing conditions and innovations.

My view is that we have not eliminated the risk of another financial crisis.  There are still institutions on Wall Street that are “too big to fail.”  Large banks are successfully lobbying to prevent regulations they view as particularly harmful.  Meanwhile, many small banks will not be able to endure the costs of more intense regulation.  The view of regulators that they will be able to gauge all of the macroeconomic risks in a timely fashion and take appropriate countercyclical steps appears overly optimistic.

In sum, regulation is unlikely to prevent Wall Street abuses.  An embracing of ethical principles and a greater reliance on trust is what we need.