Steve Forbes Interview: David Malpass On How To Fix Corporatist America? (2) ~ MAKE MONEY BLOG$

Forbes: Now, before we get back to the dollar, that leads to a point that you’ve made which in all the talk about big government really isn’t fully grasped.

What is the result of this surge of government power is the government, you point out, is becoming a silent partner, or not so silent partner, in businesses in more and more ways. We’re sort of becoming a corporatist state.

Malpass: That’s right. And you see if affecting how CEOs operate. More and more, they want to align their company’s interest with the government interest. They see the government as a customer. And it also means that when we have a downturn, the government suffers with the corporate sector.

It’s particularly big corporations that are the beneficiaries of this right now. The government provides, is designating through the Fed, very low interest rates. But only big guys can really get that. And so that’s transforming our country more and more into a corporatist state, aligned with the government interests.

Forbes: Can you give some examples?

Malpass: Well, one that comes to mind is General Electric, who’s been rather explicit that their strategy globally is to align their products with what governments need around the world. For them, they want to be profitable. And that’s what they have to do. But I think it also means the criticism – for example, well, the whole academic community aligns itself with the government. Because the grants come through the federal government, whether on global warming or on the way monetary policies should operate.

You don’t see much dissent over the Fed taking over the whole interest rate structure of the United States. The academic community isn’t going to complain about that, because the grants flow through. Remember, the Fed has become one of the most profitable institutions in all of recorded history. They made $80 billion. The Federal Reserve.

Forbes: Sort of Fannie on steroids.

Malpass: It’s Fannie on – Fannie and Freddie never made that much money. So, the Fed’s making $80 billion last year in 2010, and looks to me like it will make well over $100 billion in 2011. They can use that profit. Now, they return what they want to, to the federal government. But they first get to use all they want internally to promote their view of monetary policy, of inflation, of how good a job, how great a job they’re doing.

Forbes: Now, in terms of smaller businesses – first, the defenders of the Fed will say, “Well, small businesses or medium size businesses, they’re not borrowing.” And you’re saying, well, if they did they’d have to pay too much. What’s the truth?

Malpass: We basically shifted from a price based monetary policy, where companies could borrow if they were willing to pay what the bank asked, to more of a regulated or rationed credit policy, where the safest guy gets the credit and gets the loan. And so the regulators take a look and say, “That’s a small business loan. That gets a double check mark danger on our list.” It encourages the bank to stay away from the small guys. In addition, taxes have gone up hugely. Here in New York State, we small businesses pay what’s called an MTA Payroll Tax. So the State of New York has put an extra tax right onto however many people you hire and pay.

And it’s going on in a 12 county region that is just decimating the profitability – or it’s discouraging people from hiring and from being a small business. So, it’s going on. It’s this federal regulatory level, the tax regime, and all of it going against expansion plans by small businesses.

Forbes: Now we see it, too, connecting the dots on personnel. The banks will go in and say, “We don’t like this loan officer. The bank has to get rid of that individual.”

An Intrusion Going On

Malpass: Yeah. Well there’s an intrusion going on. Remember what happened. First, in 2001, Sarbanes-Oxley created a giant regulatory structure. And then in 2010, Dodd-Frank was over 2,000 pages, and it’s generating – and they’re not done yet – generating tens of thousands of extra pages of intrusive regulations. And so a lot of banks have permanent examiners that just have an office there.

It reminds me of what the IMF used to do with Central Banks in the developing world. They would have the best office at the Central Bank in Jamaica, in Kenya, and so on, in countries around the world. And that’s what we’ve created, or recreated, in our own internal system. The offices are permanently manned by the Washington regulators, looking over the shoulder of small banks.

Forbes: We see it, too, on the drug side. They will tell you, “Remove a CEO.” They’re doing it, seemingly, in more and more areas. It’s not just policy, it’s personnel.

Malpass: Yeah. I haven’t followed that as much, but it follows that if you’re a regulator then don’t you need to regulate behavior as well as just – it’s not going to be dry financial regulation, it’s going to go into the behavior. And very quickly, in states like California, the government regulators also then express views about political leanings: “Oh, your company is putting too much money into political campaigns for the other party.”

Forbes: Well, the administration has a proposal to make you reveal not just potential contributions, which you have to do anyway, but to private institutions.

Malpass: That’s right. And so, as we think about where investors want to put money, structural reforms around the world matter – my view is that markets are quite efficient at allocating capital to countries that are allowing more market oriented systems. More systems oriented on profit and merit, rather than on government dictate. The U.S. is getting aced out of that, as money goes toward Asia. This is a long run problem.

Forbes: Which means two things. One is: even though the stock market has done well on paper in this country since we amended mark-to-market accounting in March of 2009, started the process, vis-à-vis the rest of the world we’re laggards. And you also make the point which gets to the dollar, of that capital leaving this country, going to Asia. Do you have any numbers on that?

Malpass: Let’s talk about the economics and the finance. In economic terms, the U.S. runs a capital account surplus that matches the trade deficit.

Forbes: Right.

Investment Money Leaving

Malpass: So we have to get our terms right, of what’s happening. We still have a net flow of capital into the U.S. that pays for the trade deficit. And that’s in the form of Asian ownership of U.S. bonds. But that money goes to the government, basically. It doesn’t create growth and jobs in the U.S.

In contrast, the U.S. is putting investment dollars into Asia – building factories, buying equities, helping with the IPO financings going on in Asia. The number, the data that we want to pick up, is in the portfolio flows. And those show this huge expansion of emerging market funds. I don’t have aggregate numbers. But billions of dollars are moving from American equity investments into foreign. And it’s going portfolio by portfolio, pension funds setting up a bigger allocation of capital to international investing. And that means a higher cost of capital here, relative to what it is abroad.

Means that China is flooded with risk-taking capital that wants to find a factory to build or an equity to buy. And here we can’t find exit strategies for the venture capital funds that are choked up in the U.S. Not enough IPOs, not enough new capital wanting.

Forbes: So would it be accurate to say, then, it’s not only private portfolio money that’s leaving the U.S., but what you might call direct investment money leaving the U.S. and going overseas?

Malpass: Yes. And that’s sizable. So the U.S. corporations are able to issue bonds almost at will now, at low interest rates, longer term bonds. And what happens is they are expanding their operations largely in Asia or in emerging markets, in general. So they borrow in dollars and then they wire transfer the money to their branch in China and say, “Build me a factory. Build me a something.” And then China takes those dollars, and invests them back in U.S. government bonds.

Forbes: Government.

Malpass: So we have a ready market that low yields –

Forbes: So it feeds the corporate state.

Malpass: Feeds the corporate state.

Forbes: Drains the private sector and bloats the public sector.

Malpass: And we can’t complain. It’s not right to complain that the U.S. corporations that are doing that. They have to do that to stay profitable. They’re going where the productivity is, where the regulatory policies –

Forbes: Well, as the late Walter Wriston said, “Capital goes where it is welcome, and stays where it is well treated.”

Malpass: Yes.

Gambling With Gov’t Money

source:forbes.com
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