We went back to the White House this week, for our second interview with Obama Administration Senior Economic Advisor Austan Goolsbee. In a wide-ranging talk with Consumerist Co-Managing Editor Meg Marco, Goolsbee discussed the Administration’s plans to help small businesses get credit, said that the battle against bank lobbyists is on, and expressed amazement that people in Washington use the weather as an excuse to miss meetings. “I’m from Chicago,” he said, explaining that even blizzards don’t stop normal activities there. “We aren’t wimps in Chicago.”
Consumerist: Okay, so the first question, it’s kind of a general question. Consumerist readers come from a variety of political backgrounds but they share a common value and that’s a love of fiscal responsibility. A really genuine enthusiasm for it. So in his recent speech the president said that one of his administration’s central goals was restoring fiscal responsibility. So I guess what we’re wondering is, with all this talk about infrastructure spending and more loans, why is this the most fiscally responsible course of action?
Goolsbee: Well, you gotta separate the short-run from the medium- and long-run obviously. It’s not the time to tighten the belt in the middle of the deepest recession since 1929. And that’s, that’s where we’ve been. And everybody knows when the economy’s really down in the dumps the deficit explodes ’cause your tax revenue goes down and you, you got a bunch of automatic stabilizers. In addition to that, we took a bunch of actions of, which, which are government spending but were designed to try to jumpstart and restart the private sector in a number of, of industries. So I think in the short-run the focus has got to be on recovery and getting the unemployment rate down and things of that nature.
In the medium- and longer-term, that’s where the president has said, and continues to say, we have to put a key focus on, on fiscal responsibility. And anybody who looks at that I think you can’t help but note that the most important thing by far for the long-run fiscal health of the country is dealing with healthcare costs. Who, the growth of healthcare costs is the most pressing long-run fiscal challenge facing the country. And that’s certainly been one of his big motivators in the health plan.
Needs of Small Businesses
CONSUMERIST: So when the president says he gets a lot of letters from small businesses who say they are creditworthy but they really aren’t able to get loans, like I believe that because I get the same letters. And basically, this is, this is one – it’s from a reader named John – and he’s about to lose his business because he can’t get a loan. All the banks he’s talked to say that they’re not doing SBA lending. And he says, “The irony is that I have to pay money tomorrow to a subsidiary of a huge bank that received tens of billions of dollars in support, but I can’t borrow $500.” And he goes on to say that a bank told him that they wouldn’t do SBA lending if you put a gun to their heads. So I’m assuming that’s not the plan…
GOOLSBEE: [laughs] Well…
CONSUMERIST: …but what is the plan? [laughs]
GOOLSBEE: Well, look, I, John, if you’re watching this, there are thousands of small business owners that are in that same style of position. You get letters from… the president does get those letters and he reads it and he marks them up and then they send them out to, to us and to the agencies and say, “Can you look at…” you know, in some of them there’ll be specific issues, sometimes the value of the collateral. You know, they will have gotten a loan with the collateral being the machine that, that they’re gonna use and the bank then says the collateral’s worth less so they’re gonna pull their line of credit. Nobody can overstate how important this is for the broader economy. Historically, small business tends to be the first thing hurt in a, when the recession begins and they tend to be a big engine of recovery when recoveries start. And there is a great fear, as you look at the economy broadly, that this engine of recovery might not be firing on all cylinders because the banks are, are gun-shy about getting involved in, in taking any, any risk. At the jobs forum last week some of the CEOs of the largest businesses in the entire country said that they thought one of the most pressing issues facing the economy in 2011 is the lack of credit to small business. Which I was a little startled by and I said, “Well, wait. As a big business, why is that your foremost concern?” And they said, like the CEO of Boeing said, “Well, look, we’ve got tens of thousands of suppliers and if, by the time there’s really sustained demand and they want to buy planes, if our suppliers can’t meet those demands we’re gonna be facing a, a big hurdle.” So I think if there is a bank somewhere that says they wouldn’t make SBA loans if there was a gun to their head, we, we should pursue what the motivation is behind that. SBA is a program that, in the Recovery Act, there was a dramatic, temporary expansion of SBA lending. And the president has called for extending that further. And for what that is I think it’s been fairly effective but we need to do more. I mean, we, we, we have not done enough and the system itself has not facilitated enough credit to small business. That’s really foremost on the president’s plate.
CONSUMERIST: So is the president gonna do anything to sort of wean the small businesses off their reliance on credit cards? Because a lot of the…
CONSUMERIST: A lot of the things we get are people saying, “No, my business depends on a credit card because I can’t get an unsecured line of credit for my small business.”
GOOLSBEE: The goal I don’t think should be trying to wean them off of credit. If small business are getting driven to certain credit products that are not as good for them precisely because there’s not enough conventional lending to small businesses, that argues even stronger that, let’s try to get the lending going, traditional lending to small businesses through small banks, community banks, etc. So you saw the president call, in his speech, for let’s use some of the TARP resources which, let’s remember that TARP was designed to prevent economic crisis, facilitate restoring credit markets to kind of a more normal circumstance. Through good management and through improving conditions most of the big banks are paying back the money with a profit to the, to the federal government. And so the president’s called for using some of that money specifically to be repurposed to help small business lending. And I think we should do that, and if that gets small business away from unsecured, super-high interest rate credit card loans, you know, all the better.
CONSUMERIST: Some critics have suggested that the reason for this lack of credit, sort of credit freeze, is that there just really aren’t enough creditworthy individuals. Do you find that credible?
GOOLSBEE: Look, that is certainly an issue, at some banks. You know, there are places where we need to be a little careful I think just trusting the phrase, “Well, there’s nobody that’s creditworthy so let’s not… that’s why we’re not engaged in it,” because you have seen kind of a systematic deleveraging and derisking of the banks. And so they say, “Well, small business is risky.” I think that’s a little different than saying they’re not creditworthy. But there is an issue that in some parts of the country that have been the hardest hit by the economic downturn, fewer people are applying for loans because they’re in a tough spot. And a second related issue is a lot of times the collateral… what’s happening now is there’s an argument about what’s the value of the collateral that a small business has. If they have their, say, they own, mom and pop own their store and they say, “We want to be able to get a loan to finance our inventory based on the value of our store,” and then they’re kind of in a dispute with the bank about is their store worth 50% less than, than they say it is. So.look: We should listen to what the banks say. We should look up the data ourselves. You know, “trust but verify” is probably the right motto in this circumstance. But I hesitate to say they’re uncreditworthy when, in fact, in a lot of these cases I think they’re creditworthy but more risky than what the banks want to engage in right now.
Battling Bank Lobbyists
CONSUMERIST: Okay. So the president had some real strong words for banking lobbyists yesterday.
CONSUMERIST: He said, “I have no intention of letting these lobbyists… reform’s necessary to protect the American people. If they wish to fight common sense consumer protections, that’s a fight I’m more than willing to have.” So I guess we want to know is, is it on?
GOOLSBEE: You know, it’s on, if they want to get in a fight then I guess it is on. We’ve talked about the, the, the financial reg reform efforts and consumer protection before, here in this very room. And, it’s pretty cheeky I think for guys that got their bacon saved by the U. S. government in the worst crisis since 1929, to turn around and then dump millions of dollars to try to prevent any change to the status quo, because the status quo was very lucrative for them. You know, and the president’s not gonna stand for that and they’re gonna, he’s gonna keep raising the issue of protecting consumers, holding financial institutions accountable, and streamlining the government so we’ve got one body of tough oversight regulation that they can’t arbitrize, they can’t figure out who’s the one agency that’s gonna treat them the lightest and try to pipe all their business through that. Because that was extremely detrimental. And I… look, taking a step back, what the last year and a half have shown us is that getting rid of regulatory oversight, that is not good for the free market system. It deeply undermined the free market system. That the public could not trust the information it was getting and banks could not trust each other’s balance sheet. That totally undermined the, the free market capitalist system. And so it doesn’t make you anti-market to be for oversight and proper regulation. And so if, if people are gonna argue for that, for, for that kind of role and they’re gonna sort of forget and say, “Hey, let’s forget the last eighteen months. Let’s go back to what was making us money,” you know, “in 2006,” I think history is not on their side.
CONSUMERIST: So just to play psychologist, why do you think they’re doing it? Why do they say one thing and then pour money into… if it’s really bad for the free market system why are they…
GOOLSBEE: Well, it’s bad for the system as a whole. I have no doubt that there’s some individual institutions who profited greatly from being able to exploit various loopholes and they don’t want anybody down there, you know, putting the, stronger oversight on, on their line of business. It’s not to say on any, on any given issue the president’s totally reasonable. Let’s have a content-based debate about various aspects of reform and what’s the best way to make the system stronger and get rid of institutions that are too big to fail. That we must end the notion that somebody’s too big to fail and therefore they can kind of hold the government hostage. That we need resolution authority. That we need to protect consumers. We need to hold these guys accountable. To do that is better for the system as a whole but playing psychologist – which I’m not -I think there are some guys who just say, “Well, for the next year that would have some negative impact on my profit margins and therefore I’m gonna try to oppose it out of the public view.” And I think that’s the key element is that venues like this, or when the president goes out in public, when people talk to their congressmen, we’ve got to maintain a focus on not forgetting what went wrong and how important this issue is. Because the second everybody says, “You know what? Financial regulatory reform is boring and who cares,” now it’s back to the situation where the banks are writing the rules for themselves. Which is what happened last time. That’s exactly what went wrong.
New Regulatory Bodies
CONSUMERIST: So do you feel with this new agency that you want to create, do you feel that will stop banks from innovating around the regulation if one central body is really paying more attention?
GOOLSBEE: Well, it certainly helps a lot. It’s an interesting use of the word innovation. That kind of the sneaky, sneaky arbitrage, I don’t consider that an innovation. You know, that’s what we’re trying to avoid. Certainly streamlining it into one agency is a way to centralize the rules. But you’ve seen it, it doesn’t have to be – depending on the circumstances – it doesn’t always have to be in one agency. So the, in some of these, there are multiple agencies but the, the president’s plan calls for… they have to coordinate the rules and they have to operate on one set of rules with the same enforcement. That can work, too. But on the Consumer [Financial] Protection Agency, it’s taking stuff that’s stuck in seven different bodies of government without comparability across those, too, and with a lot of bureaucratic hassle and saying, “Let’s streamline and have one set of rules.” And it, to me that, I think that does make sense.
CONSUMERIST: Okay. The Atlantic recently had an article that said the administration’s mortgage relief program only had a 1% success rate. At Consumerist we hear from homeowners who qualify but are being told by their mortgage servicers that they don’t or that they programs don’t exist. Are there plans to improve the effectiveness of this program?
GOOLSBEE: Yes, but let me, let me just clarify. The administration has done a whole lot of things in the area of the housing market. And compared with where we were a year ago when the housing market was in complete freefall – we were looking at the meltdown of the mortgage financing system in general – we’re in a much better place than that. In this one component of the housing program, which is mortgage modifications, there have been almost 700,000 people that have qualified for preliminary modifications on the part of their bank. Where there has been trouble is getting the, both the borrowers to produce the documentation, the official documentation, and the banks to get their people down and do the work to qualify to make these modifications permanent. And you see Treasury, the NEC, the Council of Economic Advisors, the administration in general, pressing hard on the servicers, on the lenders, trying to get these modifications in place permanently to prevent foreclosure. Now it’s never gonna prevent all foreclosures, by any means. And in a world where the unemployment rate is over 10% you know there are gonna be a lot of very difficult situations for homeowners. But look, I’m hopeful by the massive take-up of that program… off the bat, we got 700,000 people engaged in the preliminary modifications. I’m hopeful that with continued pressure on the implementation of that that, that we will see progress in that area.
CONSUMERIST: Okay. One last question. Three of the twelve bankers missed Monday’s meeting with the president because of fog and cancelled flights. And of the ones who made it down here, one drove and stopped at Wendy’s, another took a private jet, and one took Amtrak. And I guess we were just wondering is this why we need to spend more on infrastructure?
GOOLSBEE: [laughs] You know, I’m from Chicago and…
CONSUMERIST: Me, too.
GOOLSBEE: And we aren’t wimps in Chicago.
GOOLSBEE: I mean, it can be a blizzard. None of the, our kids’ school was not, I don’t know if it’s been cancelled in the last 50 years. I have noted in Washington, D.C. there’s a lot of, you know, the fog. Nobody can travel in the fog.
CONSUMERIST: Oh, no.
GOOLSBEE: I don’t know. But on a separate topic, you look at the roads and bridges and you look at the traffic congestion. At Thanksgiving we drove up to my in-laws in New Jersey and we spent 9 hours on the New Jersey Turnpike. Look, we got some needs in the infrastructure area in this country and it’s not just a matter of convenience. The economic infrastructure of the country’s really quite important and, you know, we can’t forget that in the midst of our other stuff.
CONSUMERIST: All right. Thank you very much for your time.
GOOLSBEE: Great to see you again.