Clinton Era Starting Off With a Wellspring of Cash

The Little Rock economic conference opens Monday with roughly 200 business executives and economic thinkers gathered with President-elect Bill Clinton to mull over the business outlook.

It will be an occasion undoubtedly for high-level chin scratching and solemn recitations of the obvious--that the economy is burdened by budget deficits, job losses and bank failures, not to mention fears of rising interest rates and higher inflation.

But Clinton might be laughing secretly. For he knows that whatever else lies in store for the economy in the next four years, there will be plenty of cash around. And abundant cash can finance business without straining deficits, raising interest rates or boosting inflation.

“He’s so lucky,” said one economic expert last week, “he’s in the right place at the right time again, just as he has been all his life.”

To understand that remark, think about the broad economy as Clinton takes over. Many changes are underway--innovations in financing, a fading of traditional patterns. It’s no accident that Clinton last week gave key posts in his Administration not to academic economists but to shrewd politicians--such as Sen. Lloyd Bentsen, the new Treasury secretary--and Wall Street investment bankers Robert Rubin and Roger Altman.

Already, things are happening. Small business is willing to borrow and banks are willing to lend--at least in most sections of the country. “The astute small business owner realizes now is a good time to borrow,” says James P. Menzies, executive vice president of KeyCorp, a holding company with banks in eight states. “We’re growing 10% in Oregon.”

Even in Texas, which went through devastating credit problems in the ‘80s, the trend now is to borrow for expansion, not merely to hang on.

Clinton is getting the flip side of the economy that sank the Bush Presidency: Where business under Bush was trying to pay down heavy debts, now many companies have excess cash.

In the Bush years, 1,600 banks were classified as troubled by the Federal Deposit Insurance Corp., and most stopped making loans so they could restore their balance sheets by investing in government securities. Now banks, on the whole, are showing the highest profits in four years and reviving their loan departments.

But the true indications of available credit lie beyond commercial bank loans--which total less than $300 billion in the economy. Consumer installment debt--at $720 billion currently--has been falling for two years and should go on doing so. A population of aging consumers, borrowing and buying less, may be hard on retailers, but it does make household savings available for investment and other purposes.

Mortgage debt at $4 trillion is a big number in the economy, but it too is unlikely to grow in the ‘90s. Again, with an aging population there is less demand for housing--although many low-cost homes will be built. But, overall, mortgage needs will exert less demand on capital markets.

The upshot even now is that investment funds are available, and being funneled to small companies by investment bankers, stock brokers and pension managers. A new mechanism of small business finance is growing up outside traditional banking. For many years, big companies have borrowed directly from the money markets through commercial paper.

Now, even small family companies are being financed by wealthy private investors and pension funds, working with brokerage and accounting firms that check the small company’s numbers. Big Wall Street firms, such as Merrill Lynch and Bear Stearns, finance small business these days. And brokerage houses far smaller than Merrill, such as Stern Fisher Edwards in Los Angeles, are able to raise millions of dollars for companies.

“I believe we are the vehicle for raising equity money in today’s environment,” says Theodore C. Rogers of American Industrial Partners, who invests $200 million on behalf of pension funds.

Business may not be booming as Clinton takes office, but clearly the system is adapting.

Still, if that is so, why are the Little Rock conferees meeting with furrowed brows?

Because when the economy is changing, troubles are most visible. Employment has been slow to recover because small business has been hurt, particularly in California and the Northeast, by falling real estate prices.

The FDIC, sources say, has classified 80% of the banks in California as problem institutions, and, in effect, told banks that real estate is no longer good as collateral. This shuts off a lot of credit to small firms, which depend on the value of a home or business premises as backing for loans.

The FDIC’s concern is a healthy one--it wants to avoid a banking system rerun of the savings and loan debacle, which so far has cost taxpayers more than $200 billion. Still, its rigorous regulation of bank lending hurt the economy under Bush--and it could threaten the Clinton Administration’s plans. “Clinton needs success in small business to create employment and realize the economic promises he’s made,” says Michael Morrow, of Morrow, Murff & Co., a bank advisory firm.

And that’s just where rising availability of investment funds will make a difference. Knowledgeable people are betting that the Clinton Administration will find a way to get money to small business without straining the budget deficit, perhaps with government-backed small business loan certificates, similar to the Government National Mortgage Assn. certificates that now help to finance housing.

The Little Rock conference may not discuss such innovations, but you can bet Clinton, Bentsen and their Wall Street aides are thinking of them.