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FINANCING TOMORROW'S CAPITAL
Outline of Remarks Made
by
Bruce K. MacLaury
President
Federal Reserve Bank of Minneapolis
to
Federal Land Bank Managers Conference
Medora, North Dakota
July 15, 1976
Does this country face a shortage of capital over next decade?
A.
Two years ago, universal answer seemed to be "yes."
1.
2.
On demand side, saw tremendous demands for investment.
a.
New energy resources (N.D.)
b.
Electrical generating facilities
c.
Pollution control - agri.:
d.
Public transportation
e.
Rebuilding of cities
f.
Raw material producing industries - "bottlenecks"
Reserve Mining
On supply side, pointed to "low" rate of savings in U.S.
compared to many industrial countries, especially Germany
and Japan.
a.
3.
Consumption oriented society
Bleak outlook spawned some "radical" suggestions.
a.
New emphasis on national planning - setting of
priorities and guidance by government of private
investment.
b.
Government ownership of model firms.
Credit allocation - efforts to have Fed. induce
or penalize bank credit for specified end users.
c.
Tax reform (e.g., enhanced investment tax credit,
accelerated depreciation, pro-rated capital gains
tax, ending double tax of dividends, even inheritance
tax deductions).
B.
Today, much of the furor has subsided.
1.
Magnitude of problem exaggerated by panic over
energy crisis. For time being, we've weathered that.
2.
Scaled down expectations: N. Y. City; housing.
3.
Problem also greatly magnified by double-digit inflation people - businesses.
a.
Nominal profits greatly overstated because of
inventory gains.
b.
Depreciation schedules didn't reflect replacement
costs.
c.
4.
Capital base of industry and banking system eroded.
The threatened "crowding out" of private borrowers by
needs to finance government deficits failed to materialize.
C.
a.
Savings increased
b.
Private borrowed less - also govts.
A more sober assessment of the capital shortage issue today
puts it in more manageable perspective:
may need to increase
savings rate in the U.S. economy by 1/2 to 1 percentage point
over next decade.
Not insignificant, but not terrifying.
1.
Whether we can achieve depends in substantial measure on
budget performance of federal govt.
a.
Optimistic:
budget committees; gen'l public; candidates
What's the outlook for long-term int. rates over next year or so,
and what role will Fed1! Reserve play in the outcome?
A.
Obviously, depends very much on speed of recovery and ability
to hold down inflation.
1.
B.
Personally, optimistic on both counts.
Optimism based in part on better performance by Fed itself:
contrast between ‘
72 and '76.
1.
Reflects our own learning process, but also a different,
more conservative, temperament in country.
C.
Conclusion - long rates not likely to rise much over next year;
could decline modestly.
1.
Partly reflection of extent to which economy - businesses,
banks, consumers - have become more liquid over last 18-24
months.
What about trends in ag. credit?
#1 - no expert.
#2 - am concerned about some of the trends.
A.
Increase in agri land values over last four years disturbing.
Basic question: are crop prices likely to sustain the net
income stream necessary to amortize the debt incurred to
finance or refinance land acquisition purchased at today's
prices.
1.
No prophet, but history does not offer much reassurance
that booms of the kind we've recently experienced in
agri land prices can be sustained.
B.
Tied directly to the boom in land values has been the rapid
rise in loans by land banks.
1.
Loans outstanding for system rising at compound rate
of 15-23% over last four years.
End - 75 value double that of end - 71.
a.
One of surest signs of trouble in commercial banking
is very rapid increase in balance sheet totals.
2.
Also significant that land banks are carrying more of the
risk today - in several ways:
a.
% of total credit extended to finance agri-real
estate:
b.
land banks 12% in 1970; 33% in '75.
owner equity has been dropping as debt/purchase
price ratio rising somewhat.
1.)
(75% in '75)
Presumably reflects in part the liberalization
of law in 71 to allow loans up to 85% of current
market value.
c.
Program to extend loans to young farmers consciously
means lower equity positions.
d.
Ratio of net worth to loans outstanding 16% (’
65) -»■
12% ('75).
Question:
to what extent is agri financing repeating a few
years later the excesses that plagued the commercial banks and the rest of the econ. - a couple of years ago.
i.e.,
agressive lending, over-leveraging, banking on inflation bailout.
1.
Capital for agriculture.
Real problem - how accumulate equity; not how obtain more
credit.
@FedFRASER