Economics, Banking and Education: What to Expect in 2009

Interview with Dr. Stephen Happel of Arizona State University
Economics, Banking and Education: What to Expect in 2009
Not only is it an interesting time to be in banking; it's an interesting time to be learning about banking.

Dr. Stephen Happel is Professor of Economics at Arizona State University, and he's also a longtime instructor at the Pacific Coast Banking School in Seattle. In this exclusive interview, Happel discusses:

The likely impact of the recent election on the banking industry in 2009 and beyond;
The types of new regulations banking institutions can expect from their elected leaders;
The potential impact of Gen Y as banking practitioners and consumers.

Happel has been a Professor of Economics at the Arizona State University W.P Carey School of Business since 1975. He grew up in Quincy, Illinois, received a B.A. in mathematics and economics from the University of Missouri in 1969, an M.A. from Duke in 1972, and a Ph.D. in economics from Duke in 1976. In addition to visiting appointments at North Carolina State University, the Australian National University and the University of Waikato in New Zealand, Happel is founding director of the ASU School of Business Honors Program and served as Associate Dean of Undergraduate Studies from 1991 to 1999.

His research focuses on applied microeconomics and population issues. He has written two textbooks and over 100 articles in both professional journals and popular outlets, including the Wall Street Journal, the New York Times, the Christian Science Monitor, and the Arizona Republic. This work covers arguments for free-market ticket scalping, student academic dishonesty at universities, U.S. fertility rates, the rationale for slotting fees in supermarkets, and the snowbird lifestyle among retirees.

Happel has received a host of teaching awards at ASU, including the ASU Distinguished Teaching Award, the Burlington Northern Award, and Arizona Professor of the Year selected by the Council for the Advancement and Support of Education. He teaches large undergraduate classes in macroeconomics and MBA classes in managerial economics. Happel is also a long-time instructor at the Pacific Coast Banking School in Seattle and the Arizona Tax Institute. He speaks throughout the U.S. on the domestic economy and international trends, paying particular attention to generational spending patterns, to recent Federal Reserve policy, and to current tax/spending proposals by the White House and Congress.

TOM FIELD: Hi. This is Tom Field, Editorial Director with Information Security Media Group. The topic today is economics, banking and education. We are privileged to be speaking with Dr. Steven Happel, Professor of Economics at Arizona State University. Steve, thanks so much for joining me today.

STEVEN HAPPEL: Glad to be here.

FIELD: Just for context, tell us a bit about yourself, and your current work, both at ASU and at the Pacific Coast Banking School.

HAPPEL: Well, I've been at ASU since 1975. My primary teaching responsibilities at ASU have been principles of macroeconomics for undergraduates, and managerial economics in the MBA program. I consider myself an applied microeconomist, as much as anything, a demographer. My research focuses on demographic issues, and I also do a lot of work on ticket scalping. At Pacific Coast Banking School, I spend a significant amount of time talking about generational effects and the impacts of those effects on the banking industry, and also being a Friedman economist, I like to talk a lot about the Federal Reserve.

FIELD: There's a lot to talk about these days, too, isn't there?

HAPPEL: Yes, there certainly is.

FIELD: Just for a little more background, tell a little bit more about these generational differences that you're talking about.

HAPPEL: Well, I like to talk about five US generations since 1910. The first group that I distinguish is the group born from 1910 to 1927, the Bob Hope Generation, a relatively small generation, about 52 million people. Then, the next group that I identify are a group that I like to call the Sinatra/Elvis/James Dean Generation, the crowd born from 1927 through 1945, a very small generation, only about 47 million of those people. And then, where I put a lot of my focus is on the Baby Boomers, born 1946 to 1964, some 77 million Baby Boomers, of which I am one, a generation that loves to spend money, focus very much on ourselves. Then comes the next crowd, Gen X, born 1965 to 1982, about 58 million of those people, the first of the latchkey kids, a generation that we Baby Boomers have kind of beat up, and are a bit upset with us because we've kind of blocked the promotion ranks for them. And then, finally, in many ways, the most interesting of all the generations, the crowd born 1983 to 2000, the Gen Y crowd, the Rainbow Generation, that numbers about 76 million, about the same size as the Baby Boomers, the crowd that is now rolling into their early 20's and having a profound impact on American society.

FIELD: Well, it's interesting, because we've got that generation, and we now have a Democratic President and a Democratic Congress. With this sort of convergence, what do think this means to the banking industry over the next year, or so?

HAPPEL: Well, you know, I've thought a lot about that, Tom. And you look at what the Democrats have done, and so you go back to Carter, because here you had a Democratic President coming in with a Democratic Congress, and what did you get from them immediately? The Community Reinvestment Act, in which banks were expected to, you know, help socially engineer. And so, you know, what have you seen the Democrats do with the banking industry? And it's not only the Community Reinvestment Act, but to report people with transactions more than $10,000. So, banks are kind of the extension of the liberal philosophy that the government can make the world a better place through extensive involvement, and I just think about what this implies for, you know, Obama and the Democrats now, and I think there is going to be a lot of pressure on banks to do good deeds, you know, and we will see what happens.

FIELD: Uh-huh. What sort of short-term impact do you think we can expect to see in what has been a volatile market over the past couple of months?

HAPPEL: Well, I think a lot depends upon, you know, what Obama finally decides on tax policy. I think it's interesting that here's Nancy Pelosi, who I'm not a supporter of, by any means, but in The Wall Street Journal today, she is talking about how she wants a permanent tax cut, rather than these kind of rebates. Well, I'm certainly in favor of a permanent tax cut rather than rebates, but whether Obama goes along with that is another question, entirely. Certainly, the statement that he made back in early 2000 and 2001, whenever it was, that the Supreme Court has not done enough in terms of redistributing income is kind of an indication, I think, of where they are headed. And certainly, Charles Rangel is talking about this massive redistribution of wealth. So, you just wonder what is going to happen, in terms of kind of, oh, I don't know what you want to call it - a "more level playing field" - I don't like that term, but, you know, less disparity, in terms of income distribution, and helping out the bottom rung of society with more government engineering, social engineering.

FIELD: Sure. Now, as you know, Obama is meeting today with a group of economic advisors, and he is expected, maybe even today, to nominate his Treasury Secretary. How important is that selection?

HAPPEL: I think it is really very, very, very important. Um, because I think the Secretary of the Treasury really kind of sets the tone in a lot of ways. Bush One had Nicolas Brady as his Secretary of the Treasury, a man that I thought was just absolutely lost in time and space. Clinton had Rubin, and I'm not wild about Robert Rubin, in a lot of ways, but I thought he was a pretty good Secretary of the Treasury, because he recognized the importance of low interest rates and stabilizing capital markets. And now you have Paulsen, who I don't have a lot of faith in. So, I think it's real important who he selects. If it were Paul Volker, I'd be moderately happy. Another name you hear is, you know, Timothy Geithner, the President of the New York Fed - I think that would probably be a pretty good appointment. If it's Warren Buffet, I'd just shudder. I'd just, you know, I'm sorry, I don't think Warren Buffet has ever met a tax increase he doesn't like. And, so, I think you want somebody that will stand up and argue for a strong dollar, and fiscal responsibility, and not be traveling around the world with Bono, and doing things like that.

FIELD: Yeah.

HAPPEL: You know? And so, you know, like Snow did when he was Secretary of the Treasury. You want somebody that has credence in financial markets, and that's why I think Rubin was such a good Secretary of the Treasury, all things considered.

FIELD: Now, Steve, one of the things that Paulsen has recommended is a complete overhaul of the banking regulatory agencies. Do you think that whoever replaces him will take up this same torch, maybe go in a different direction, but with the same objective?

HAPPEL: Oh, I think that's coming. There's no doubt that's coming. I think there is just a lot of pressure. And what concerns me on this, Tom, is, you know, the talks that you heard from Paulsen was kind of the consolidation of power, and putting, you know, regulation in the hands of one superagency. And I know how bankers feel when the OCC comes in, and the FDIC, and state bank regulators, and it just drives them crazy, but I'm a free market economist that likes diversity and to not use concentrations of power, so I worry. And, I mean, you know, when you really look at it, one of the major causes of the downturn was the lack of regulatory responsibility at the Fed, letting people get mortgages that didn't show income statements, and doing all these stupid things. And it's just a tremendous lack of oversight on the Federal Reserve at the time, and now you're going to give the Federal Reserve more power? I don't know. It bothers me.

FIELD: You've been critical of the Fed. I believe the quote you gave to me is that "It's had only one good period, in the 1950's."

HAPPEL: Yes.

FIELD: What does the Fed need to do now, to sort of step up and be counted?

HAPPEL: Well, the Fed, since it's very inception, the more I think about it, has been behind the 8-ball, because the Fed's main policy instrument, as you and I both know, is the Federal Funds Rate, and that's a price. And I'm a free market economist that believes that nobody can determine what is the right price. Markets determine that price, and yet here you have probably the most important price in the economy, the single most important price in the economy, the Federal Funds Rate - it sets the tone for the entire yield curve - every time the Federal Funds Rate changes, other interest rates change, which recalibrates the financial system. People shift from bonds to equities, or whatever. And so, if the Fed is going to continuously try to control the Federal Funds Rate, I think you're going to continuously have financial crises. I would like the fed to pursue some of the suggestions that Friedman and others have proposed, where it, it either stabilizes the growth of some monetary aggregate, maybe the monetary base, or it inflation targets, or does something like that, so that it doesn't have all of this discretionary power. Because, you know, I'm not a wild supporter of Ben Bernanke - I think in many ways he has been a disastrous Chairman of the Fed, and he politicized the Fed even more so with his recent comments that he likes the bailout proposals, and so forth, that are coming forward. I don't think that is what a Fed Chair should do. I think the Fed Chair should be trying to create a sound dollar and low inflation, and that is where the emphasis should be at the Fed.

FIELD: We spoke a few minutes ago about new regulations. We all have the sense that more regulatory oversight is coming. What new types of regulations do you think banking institutions should expect from this particular President and the Congress coming in?

HAPPEL: Well, that's a real tough one. I don't know exactly what's coming in that regard. You know, probably cracking down on banks, the types of assets that banks can hold, the types of social responsibility that banks are engaged in. One thing that I would like to see, obviously, as all free market economists would, and I know it's a kind of generalized statement, but more transparency. And so, you know, probably greater pressure on banks to be more open about just what they are doing, and so, you know, I think, a lot still, the devil is going to be in the details, and there is going to be a lot of wrangling over all of this, but certainly the financial system, overall, is going to be restructured, and banks are going to be part of this.

FIELD: Something tells me there is going to be a lot of talk before we get to some of those details.

HAPPEL: Yeah. There's going to be a lot of talk, because, you know, some of the proposals will come from left field, and will be, you know, attacked significantly in pro business publications, like The Wall Street Journal, and predicting doomsday if particular proposals are passed. But, I certainly think you are going to see, you know, again, even though there has been kind of this backlash against the community reinvestment act, and the subsequent refinements in 1994, but still, you know, there is this kind of feeling that, "Boy, we need to help the poor, and we need to do things, and help people gain home ownership." And so, you're going to have a lot of, probably as much as anything, you know what I think may be coming, Tom, is just, maybe, higher taxes on, on bank activities.

So, I'm a bit worried. And certainly, with Charlie Rangel, among the others leading the parade on this, it just, you know, it sends shudders up and down my spine.

FIELD: To bring you back to the classroom for a second, I'm sure you've heard this from your students, but I'll ask you the same. Bottom line, how is the banking industry different today, as a result of this week's election?

HAPPEL: Well, I think bankers are just going to be more careful and cautious in what they do. They're going to be, you know, the, the spotlight's going to be on the financial sector, and doing the right thing. And so, I think you're going to see a bit more caution. I'm not sure if that's a good thing or a bad thing. Probably a bad thing, because I think the net effect would be less risk-taking, and I like risk-taking. And, you know, there's probably going to be more pressure to bring lawsuits when things go sideways, and bad decisions are made, and, you know, more emphasis on, kind of the criminal side of the activity. So, I think bankers are probably going to be a bit more cautious, and many of them, maybe even running scared now, you know.

FIELD: Now, it's just in time for your students to be in class, because, you know, I've said this before, what we are watching right now -- it's a college degree in the making, just the history that we are seeing made. So, I'm curious, what are the types of banking careers that your students are thinking about, watching history be made in front of them?

HAPPEL: Well, you know, my students today, the undergraduates, some of them talk about banking, but that's not number one on their list at this point. Many of them want to go on to law school, you know, which is interesting to me. Uh, you know what I hear at the banking school, though is that - and I've seen it, certainly, it's stepped up after the 1991 recession - but, you know, so many people got out of banking, just got frustrated by banking. When I first started teaching at Pacific Coast Banking School in 1985, I used to argue that being a vice president of a bank was analogous to being a tenured professor at a university, it was a nice lifestyle. But that radically changed. And I think, you know, bankers today feel tremendous pressure, long hours, mergers and acquisitions that mean that they're going to be booted out, you know. And, of course, what I do admire bankers, you know, it puts tremendous pressure on them, they're supposed to be a civic leader, be heavily involved in the local community. And so, I just think a lot of people in the banking industry that I've known have decided to get out. There are greener pastures elsewhere.

FIELD: It's interesting, though, this generation you spoke about, the Gen Y, sort of converging, the consumers converging with the Gen Y people that want to go into banking, I think we've got some radical new types of services and delivery coming forward.

HAPPEL: Oh, I agree with you completely on that. And, you know, I think that there are people, some of my students, that see this opportunity with the banking industry, to do a lot of good in the world, under the right conditions, new products, new technologies, and, you know, all this stuff with the Internet, and, and web-based kind of banking. That appeals to this younger generation.

FIELD: Sure. Steve, we'll have to catch up in six or eight months, and see how we've progressed, if we've progressed.

HAPPEL: I'll tell you, I'm keeping my fingers crossed, Tom. You know, Obama selected Rahm Emanuel as his Chief of Staff, a very strident individual, and when I heard this yesterday, my reaction was, "Oh, my goodness gracious," you know? Why, why would somebody that's arguing bipartisanship choose somebody that is so obviously strident. But, it's interesting, The Wall Street Journal had an editorial today that said they actually like the pick, because they think that he will protect Obama from the more crazy Democrats. So, I'm keeping my fingers crossed. I'm hoping that Obama turns out to be much more like Clinton than he does to be like Carter. So, that, that will be the issue in six months, I think, Tom.

FIELD: Steve, I appreciate your time and your insight today.

HAPPEL: Alright. Nice talking with you.

FIELD: We've been talking with Steven Happel, Professor of Economics at Arizona State University. For Information Security Media Group, I'm Tom Field. Thank you very much.


About the Author

Tom Field

Tom Field

Senior Vice President, Editorial, ISMG

Field is responsible for all of ISMG's 28 global media properties and its team of journalists. He also helped to develop and lead ISMG's award-winning summit series that has brought together security practitioners and industry influencers from around the world, as well as ISMG's series of exclusive executive roundtables.




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