It has been 35 years since Felix G. Rohatyn, then a top investment banker at Lazard Frères, pulled New York City from the brink of financial collapse.
Today, after serving as U.S. ambassador to France and then running his own firm, Rohatyn is suddenly back at Lazard and the whole country is being rescued from the brink of collapse.
Déjà vu?
“What we had in ’75 was very difficult but relatively easy compared to what we have now,’’ he responds, sounding none too cheery about the current economic recovery.
As he approaches his 82nd birthday, Rohatyn has more flesh-and-blood experience with fiscal crises and out-of-control deficits than all but a handful of people in Washington. But even though he is now an elder statesman on Wall Street and in the public arena, Rohatyn is also an unapologetic iconoclast.
At a time when countless Republicans and many Democrats preach about the urgency of reducing the $1.3 trillion federal deficit, Rohatyn worries that the federal deficit is too small. Where Republicans and Tea Party activists campaign for smaller government, Rohatyn campaigns tirelessly for massive new investment in infrastructure. And where many of his Wall Street colleagues bristle at government efforts to rein in their pay, Rohatyn talks about “fairness’’ in executive pay and the need for higher taxes.
“I do believe in big government,’’ he said in an interview at Lazard’s offices on the 62nd floor of 30 Rockefeller Center. “Big countries need big government and smart government. You can quote me on that.” As President Obama’s fiscal commission meets next week for the first time, Rohatyn sounds generally frightened that the deficit is too small to keep the United States from slipping back into a recession. “It sounds counterintuitive, but I think we may have to increase the deficit because we should be more concerned about making a mistake by not providing more stimulus spending for economic growth.”
Rohatyn is not alone in that view. Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, has made the same case. And Mark Zandi, chief economist at Moody’s Economy.com, has argued that another stimulus bill might be necessary. But Rohatyn’s views are out of sync with the political consensus in Washington. As President Obama’s bipartisan deficit commission gets underway next week, Republicans and Democrats are competing fiercely to establish their bona fides as deficit hawks.
Rohatyn comes to the issue with a special history. When he was recruited to sort out New York City’s financial mess, the city was running a shortfall of $1 billion a month and had hit the wall after rolling over ever-larger volumes of short-term debt. A blue-blooded investment banker, he became a hero of New York City by hammering out enough deals with banks and labor unions to let the city stretch out its debt, avoid bankruptcy and gradually get back on a stable footing.
After that epic experience, Rohatyn remained a top dealmaker on Wall Street while striking out on other fronts as well. A strong Democrat, he nonetheless supported Ross Perot’s third-party presidential quest in 1991. That act of party disloyalty probably stopped President Clinton from naming him Treasury Secretary, though Clinton did name him ambassador to France.
For much of the past decade, Rohatyn has been a passionate champion of big increases in spending on highways, bridges, airports and other public infrastructure. In 2009, he published a book celebrating epic government projects from the Louisiana Purchase to the GI Bill of Rights. The title wasn’t subtle about his point: Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now.
Despite the government’s soaring deficits and debt as a result of the financial crisis, Rohatyn argues that this is exactly the time to ramp up the government’s capital spending. “I think, rightly or wrongly, that the economy should be given another boost if we’re going to avoid more serious problems,’’ he said.
Current efforts to stimulate the economy are too cautious, he says. Trying to cut the deficit now, or even hold it steady, could cause the anemic recovery to stall and bring on a new recession. “Unemployment is not being reduced significantly,’’ he said. “Investment is not being pushed enough when I look at what’s happening. If you were going to cut the budget now, you would have not available the things you might need to get a bigger move in the economy.”
As bad as New York City’s crisis was in the 1970s, when the city was running $1 billion shortfalls every month until banks suddenly refused to roll over its loans, Rohatyn says New York then had one big advantage over Washington today: The key players could actually work together.
“We had the people around the table who could essentially make all the decisions and carry them out,” he said. “That meant the governor, the mayor, the legislative leaders, the business leaders, the union leaders. They all understood what we were trying to do, and they all supported it.
And now?
“The people are at the table, but they have different objectives. They are not as frightened as I think they should be by the direction we’re taking.”
He is incensed by the willingness of Republican lawmakers to vote en masse against President Obama’s stimulus bill last year and against other emergency measures this year. “What can I say?’’ he said. “It seems to me the Republicans are playing with dynamite, because it’s impossible to think they really don’t know what the situation is. Gambling the future of this country in this way is really something that I think will hurt them.”
Perhaps. But Rohatyn is hardly ready to present his own neat and tidy policy prescriptions. He says it is essential to have a ten-year plan for both reducing deficits and investing in capital projects. But asked how his own ten-year plan would work, he says he doesn’t have one. Likewise, he acknowledges that the major credit rating agencies have begun warning that the United States’ AAA rating could be at risk in the years ahead if it doesn’t stabilize its finances. But he is uncertain about how to deal with tax revenues. He supports higher taxes on people with higher incomes, and he supports taxes on energy. But he is nervous about how quickly to impose them.
Couldn’t a massive new capital spending plan be reckless, coming on top of the huge existing deficits and soaring projected costs for old-age entitlement programs? Isn’t it possible that big new infrastructure spending could divert scarce resources to wasteful projects?
“There’s a risk to everything,’’ Rohatyn said. “I’d rather take an active risk in terms of investment risk than the risk of not doing anything.”
Below is an edited transcript of my conversation with Mr. Rohatyn—E.A.
The Fiscal Times (TFT): We have a national fiscal crisis, but we also have state and local budget crises all over the country. Based on your experience in New York City, how much trouble would you say some of these states are in?
Felix Rohatyn (FR): It’s hard to generalize, but by and large I think we’ve come about as close as we can to having a national crisis. The states and cities have big problems, but it’s the overall national crisis that worries me more.
I think the first thing we have to do is bring our finances more into sync with the economy. It sounds counterintuitive, but I think we may have to increase the deficit, because we should be more concerned about making a mistake by not providing more stimulus spending for economic growth.
TFT: Why do you think we’re being too cautious?
FR: Unemployment is not being reduced significantly. Investment is not being pushed enough when I look at what’s happening. If you were going to cut the budget now, you would not have available the things you might need to get a bigger move in the economy. I think, rightly or wrongly, that the economy should be given another boost if we’re going to avoid more serious problems. If I’m right, then we won’t have so many problems. If I’m wrong, which is entirely possible, then we’ll have to do whatever has to be done –just as we in New York had various ways of approaching the problem, and when we did it worked.
TFT: The more thoughtful debate going on now isn’t about whether to cut the deficit right now. It’s between those who say we still need to keep the pedal to the metal and those who say we need to agree on a plan for reducing deficits in the future.
FR: It would be good for public confidence to show a long-term plan, a 10-year plan for the deficit and for investment.
TFT: How should we go about bringing down the deficit, after we’ve increased it?
FR: If you had a viable plan, which involved increasing the deficit in the early stages in order to bring it down in later stages, together with the capital programs, I think you would be in a better situation with the rating agencies. …
FT: So the key thing is having a plan.
FR: Having a plan is the first thing.
FT: How would your ten-year plan work?
FR: That would have to be negotiated. That’s why I think we should have one. So people can begin to look at what the elected officials are thinking of doing, what the administration is thinking of doing, and what the markets are doing.
Union Cooperation
TFT: What does the experience of the New York City crisis [in the 1970s] tell us?
FR: The first thing we had to do was have a plan. The plan involved getting [debt] market access as early as possible. We were in the red by a billion dollars a month, month after month, and we kept trying to raise this money. But in order to do it, we had to understand what the unions wanted, we had to make agreements with the unions, and we had to make them understand our position. We had to get the banks on board and refinance some of those billions of dollars we needed, and they finally came along. We tried to get the president [Republican Gerald R. Ford] on board – and we failed. But that may have been good from a political point of view.
"We were in the red by a billion dollars a month,
month after month."
TFT: How so?
FR: It made Republicans look bad. When [NYC Mayor Abraham] Beame came out with that headline in the Daily News [“FORD TO CITY: DROP DEAD”], it made a huge difference. It improved our morale and our relationships with the unions. Even though the banks held City notes, the real heavy investment was in union pension funds. It was a very gutsy thing for the union leaders to commit their pension funds in this situation. We provided them with indemnifications, but it was still a very gutsy thing for them to do.
TFT: Is it possible to make all the really painful choices necessary for a fiscal correction, without having a crisis?
FR: I doubt it, but it also depends on the kind of sacrifice you’re asking for and how it’s allocated. By that I mean you have to try to be fair in your allocation of pain, especially since the vast majority of the people being hurt are certainly not very wealthy…
We had to be fair, so in our dealings with the unions we had a formula. As long as they could deliver cost reductions of six percent a year through attrition, there would be no penalty in the form of layoffs. Then we went back to the banks. They were note holders and we stretched out most of those notes -- all except for the last $1.8 billion, and then we just couldn’t raise another penny. So we told everybody, we told the banks and the unions, that we were going to have to have a moratorium. We had to produce $1.8 billion, and we told them we were confident of getting it if we have a couple of years’ time. But right now, we said, we don’t have it and we’re going to have to have this temporary moratorium.
TFT: A default.
FR: We never called it that.
France Gives a Second Gift to New York
TFT: It sounds as if the unwillingness of the Ford administration to jump in gave you more leverage.
FR: Absolutely. They were so brutal. It was also our good fortune that the economy was coming back and secondly that we had a fairly heavy rate of inflation. Since we had a frozen rate of expenses, our costs were fixed but our revenues were not fixed. We had another unexpected windfall. The president of France, Mr. Giscard D’Estaing, and the chancellor of Germany, Helmut Schmidt, were so concerned that we had an administration dumb enough to consider a bankruptcy for New York City that they went public. Giscard and Schmidt gave a big press conference and said we cannot have the city of NY go bankrupt. Two weeks later, Ford came through with the loans.
TFT: What do you think now when you see the debates in Congress and Republicans voting en masse against any stimulus bill and against further extensions of unemployment benefits?
FR: What can I say? It seems to me the Republicans are playing with dynamite, because it’s impossible to think they really don’t know what the situation is. Gambling the future of this country in this way is really something that I think will hurt them. If you had a viable plan, which involved at the early stages increasing the deficit in order to bring it down in later stages, together with the capital programs, you would be in a better situation with the rating agencies.
TFT: So the key thing is having a plan.
FR: Having a plan is the first thing.
TFT: How would your ten-year plan work?
FR: I don’t know. That’s why I think we should have one. So people can begin to look at what the elected officials are thinking of doing, what the administration is thinking of doing, and what the markets are doing
TFT: Do you have any sense of déjà vu?
FR: Oh, what we had in ’75 was very difficult but relatively easy compared to what’s happening now.
TFT: But the United States hasn't lost its access to credit, at least not yet. In that sense, the crisis facing New York seems more acute. Why do you say it was not as bad or difficult?
FR: Because of the people. We had the people around the table who could essentially make all the decisions and carry them out. That meant the governor, the mayor, the legislative leaders, the business leaders, the union leaders. They all understood what we were trying to do, and they all supported it. We had for the first time Jack Bigel, [the top pension advisor for New York City’s labor unions], sitting together with the chairman of Morgan and trying to figure things out. That couldn’t happen in normal times.
"The United States hasn’t lost its access to credit,
at least not yet."
TFT: And by contrast now? We don’t have the people?
FR: I don’t think we have the people. The people are at the table, but they have different objectives. They are not as frightened as I think they should be by the direction we’re taking. We took risks, but we never took risks beyond our capacity – except maybe with the moratorium.
TFT: What kinds of risks do you see them taking now?
FR: The risk of a mistake in this financing, of not providing more stimulus.
TFT: Moody’s, Standard and Poor’s and Fitch have all warned that if the United States doesn’t begin to get its fiscal situation under control, then its AAA rating really could be in danger a couple of years down the road. Wouldn’t that suggest there’s a risk in not tightening sooner?
Investing in Infrastructure
TFT: Why wouldn’t a big capital spending plan be fiscally reckless? If you had massive infrastructure spending, you could be directing money into projects that aren’t the best use of our resources.
FR: There’s a risk to everything. I’d rather take an active risk in terms of investment than the risk of not doing anything.
TFT: What is it about our infrastructure that’s so alarmingly under-maintained?
FR: Everybody agrees that it is badly maintained and will require a significant investment in terms of our economy, in terms of our energy needs. The reports by the American Society of Civil Engineers, every two years like clockwork, reveal that the shortage of investment has increased by another $2 trillion. Bridges fall down, levies fall down, and roads aren’t kept up correctly.
TFT: In your recent book, Bold Endeavors, you talk about some of the great projects the U.S. has undertaken. Which offer the best lessons for what we face today? You can’t say the Louisiana Purchase.
FR: The Louisiana Purchase – I beat you to it. Clearly, it involved these issues of deficit financing, productivity, of expansion through trade and growth. To me, it’s always seemed like the Number One achievement. The next in line would be the GI Bill of Rights. And the third would be Abraham Lincoln and the western railroad.
TFT: I’m not sure I understand the analogy. The Louisiana Purchase seems so different from anything that people would be contemplating now.
FR: Well now, certainly. But it was just a capital asset that was enormous.
TFT: You’re saying the lesson from that experience is that a big investment, financed with deficit financing, can have a big payoff.
FR: Yes. Long-term financing at a reasonable interest rate.
TFT: But their situation was different. They weren’t rolling in money back then, but we are still in the middle of an economic crisis and we have these huge long-term fiscal problems that we haven’t figured out how to deal with. To be adding on top of all that a major capital program sounds…
FR: Unreasonable?
TFT: Well, it sounds scary.
FR: It’s scary because we have built into our present economic situation a collapsing dollar, a debt structure that is more and more overloaded, a couple of wars and an unemployment situation that keeps getting worse. This is basically a question about what you are going to do with the money. How are you going to deal with wars that cost more and more? With health care, educational spending? Look over at the Chinese and see what they're doing in terms of their investment. They're going to be our competition.
"Look over at the Chinese and see what they’re doing in terms
of their investment. They’re going to be our competition."
TFT: The Chinese aren’t in the same situation. They’ve had these massive savings. They’re trying to figure out what to do with all the money they’ve accumulated.
FR: Our competition with the Chinese industrially is so massive that I think our competitive position would be improved if we increased the deficit.
TFT: You’re basically a big government guy.
FR: Yes. I do believe in big government. Big countries need big government and smart government. You can quote me on that.
Spend and Tax
TFT: You said earlier that the key is how to allocate pain. But I don’t hear any pain allocation so far. All I’m hearing from you is we ought to be investing more in projects. It might be true, but there’s no pain in that.
FR: Look, I may be wrong. But I think we should really look at all the alternatives. When we talk about a 10-year plan you really should look at all sides of the problem – of expenditures and entitlements, and those that involve capital investments. We should have an operating plan with a goal of creating a million jobs. If we adopt this sort of plan, we are going to distribute pain. Part of it would involve an energy tax for capital spending. We are going to also do it through tax increases, plus budget cuts in other areas. In a situation like this, taxes almost always have to fall most heavily on those who can afford it.
TFT: But people in the upper income brackets already do pay a very high share of overall taxes. It’s still true that people in middle-income brackets and at lower income levels have very low tax rates right now. Even some Democrats say we can’t address all the problems going forward if we insist on not raising taxes for people with incomes below $250,000.
FR: When Ronald Reagan was president my tax bracket was 77 percent, and it never occurred to me that my tax bracket was something I should protest. The notion of taxing excessive income was absolutely accepted….
"My tax bracket was 77 percent, and it never occurred to me
that my tax bracket was something I should protest. "
TFT: Do you think Democrats may end up leading the charge in both raising taxes and also trimming entitlements?
FR: I don’t see how you avoid it.
TFT: Do you think Democrats are up to it?
FR: I have no idea.
The Inevitability of Financial Regulation
TFT: I feel obligated to ask what you think about the battle underway over financial regulatory overhaul.
FR: We need legislation. We need securities legislation. What’s happened over the last couple of years proves it. But I don’t want to go into details. It’s just not my field.
TFT: Oh, but it is. You’re the ultimate guy in this field.
FR: There are two fundamental issues in the securities business. One is transparency, and the other is fairness. This is a huge industry we’re all part of. When it’s run right, it’s a huge asset to this country. At the same time, there is no question in my mind that what’s happened over the last decade in this area has had a very negative impact on our image and on people’s confidence in these markets. The image of American capitalism overseas has been damaged by recent behavior and investors overseas are asking if it's safe to invest in America.
