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12:13 P'.M. EST
JANUARY 28, 1991

Remarks by
John P. LaWare
Member, Board of Governors of the
Federal Reserve System
at the
Massachusetts Economic Development Conference
Boston, Massachusetts
January 28, 1991

It is always a great personal pleasure to be in Boston and
to be among so many friends and former colleagues and associates.

I am here today at the invitation of Senator Kerry and
Governor Weld to share with all of you some personal observations
about the difficult problems facing New England.
deeply concerned New Englander myself.

I come as a

Although I am a New

Englander by adoption rather than birth, I go back a long way
with this wonderful part of the world.

My first visit was in

1936, before most of you were born, on a vacation trip by car
with my family.

I came to college here in 1946.

I traveled all

over New England as a representative of the Chemical Bank from
1956 to 1964, during another period when the economy of this
region was sorely challenged and structural changes were being
engineered which contributed to the boom of the 1980's.

And, the

happiest ten years of my life were those spent at the Shawmut
Bank from 1978 to 1988 before I moved on to the Land of Oz, down
on the Potomac.

New England is now in an economic downturn which has been
well publicized, thoroughly analyzed, and discussed to the point
of boredom.

The conjunction in time of general economic

contraction, commercial real estate collapse, consumer confidence
evaporation, commercial bank malaise, and general Mid-East
anxiety have made an otherwise easily manageable business cycle


phenomenon into what seems like the end of the world.

The media

have, perhaps unwittingly, contributed to this blue funk by over­
publicizing the negatives and headlining the imminent demise of
banks, small businesses, state and local governments, and the
economy of the entire region.




I would argue that the fundamentals of the New England
economy are sound and that New England will join the national
economy in the beginning of recovery as we move through 1991.
Barring an extended military stalemate in the Middle East, the
end of a short war should see a dramatic return of consumer

Lower interest rates as a result of demonstrated

monetary policy combined with a stronger demand for goods will
energize the economy.

My personal projection, on the basis of

those assumptions, is a national return to positive growth in
real GNP no later than the third quarter.

The recovery of the New England economy may be somewhat
slower than for the United States as a whole, because the lending
and speculative excesses here were somewhat greater than those
which preceded problems elsewhere in the country.

In my opinion the most serious problem, and the one most
difficult to deal with, is psychological.

We are faced with a


partial paralysis of the New England economy caused by a loss of
confidence which has become endemic among bankers, businessmen,
government officials, and consumers.

I believe this dangerous

attitude is inhibiting consumer spending, bank lending, business
investment, and government innovation.

If this paralysis is allowed to continue, and perhaps grow
more severe, it could sabotage early recovery and limit
participation of New England in the opportunities of the 1990's.
The opportunities of the 1990's are many in my view and they are
well suited to the special characteristics of New England.

Electronic, biological, medical, environmental, and defense
technology will be key elements in the economy of the 1990's.
New England is uniquely suited to profit by those developments.
It is a center of education, research, technical manufacture, and
environmental activism.

It is symbolic (and John Kerry may have had something to do
with the choice) that we meet today in the World Trade Center.
New England has the highest percentage of its private sector
employment related to manufactured exports of any region in the
United States, and dollar depreciation over the past 18 months
has improved the price competitiveness of U.S. goods in world

New England should have a real advantage as the


expected further improvement in our trade balance develops in the
years ahead.

Higher education and health care are industries in which New
England has a preeminent position with a concentration of
colleges, universities, medical schools, teaching hospitals, and
research facilities unmatched anywhere.

While the numbers of 18-

year-old potential first-year college students will decline for a
time, the general excellence of higher education in New England
will tend to attract better students and keep classrooms full and
faculties fully occupied.

Health care is a boom industry.

Indeed, we must find better ways to contain the growth of costs
related to health care without in any way dampening technological
progress or discouraging initiative as has happened so often in
countries which have turned to socialized medicine.

In the

meantime, employment will continue to grow in health services

The related growth in research at the magnificent

teaching hospitals, particularly here in Boston, is attested to
by the expanded facilities at leading institutions such as New
England Medical Center, MGH, Brigham and Women's, and the
Children's Hospital where we have just completed the doubling of
our research laboratories.

The likelihood is for continued

employment growth and research grants over both the short- and
long-term periods.


Defense cutbacks, or the prospect of cutbacks, unnerved many
who saw defense production as an important binding fiber in the
fabric of the New England economy.

But, current developments in

the Middle East have underscored the importance of military
preparedness even in tranquil times.

More important for

New England, much of the sophisticated technology which has been
the key to events there so far is a New England product.


missiles designed and manufactured by Raytheon are an excellent

And even with defense spending being pared as part of a

budgetary discipline, Raytheon recently got a $500 million
contract and Bath Iron Works a contract to build two destroyers.
Moreover, New England defense contractors are diversified
companies, far from being solely dependent on defense spending.
Again, Raytheon, General Electric, and United Technologies are
good examples.

When I started traveling in New England, referred to as "The
Cold Country" by my colleagues at Chemical, the traditional
regional manufacturing businesses were under heavy pressure.
Many, like textile machinery, were being driven out by foreign
competition; others, like textiles and shoes, were moving to
parts of the country where the tax and wage cost climate enabled
them to make products at prices which could meet competition from
foreign manufacturers.

There was genuine concern in some

quarters that the region was in permanent decline.


At the same time, the electronics industry as we know it
today was being born right here in Eastern Massachusetts.


quantum leaps in the physical sciences, many of which had their
roots in World War II, made the area around MIT, Harvard, Tufts,
and Boston University ideal for the germination of new
applications and new companies to develop and market them.


Wang, Prime, Data General, and a myriad of others were to become
the great growth industry of the 1960's, 1970's, and 1980's.
Recently, product development problems and market timing have
plagued the industry, including Big Blue, but there are now signs
that those problems may be behind.

Growth in the future may be

less explosive and more sedate, but the outlook remains

Similarly, biotechnology and genetic engineering are
flourishing in the shadow of these same great universities.


will probably never be employers of the same large numbers of
people but they are nonetheless a positive and growing element of
vitality in the economy.

You may well ask:

"If all of these relatively rosy

evaluations are accurate, what is wrong?"

Well, New England is like a high performance car on a cold,
damp morning with a rundown battery.

It doesn't want to start.

The engine is ready to go, but the spark to get ignition is



Any of you who have lived in New England very long will

say we need a jump start.

I think that jump start has to come

from government, because the other elements
business, the banks —



are out of gas.

These are the times for bipartisan cooperation to find the
best public policy solutions to problems which threaten the
fabric of the regional economy.

We cannot afford to shun

workable solutions simply because they are politically unpopular.
It is my belief that the electorate will rally behind bold
initiatives to restore the region to prosperity.

We insult the

electorate when we assume that they are unable to see beyond
negative short-term implications of public policy to a brighter
economically more balanced future.

We should not let the propensity for political compromise to
compound the deep economic problems of New England.

This is the

time for bold action to restimulate the economy, and if that
sounds like Keynesian economics I make no apology.

I believe

that when free market forces are in stalemate, then it is the
duty of government to break the log jam and restore the flow of

There are many approaches which might be tried and some have
already been discussed this morning.

I have some modest

suggestions which may well offend or anger almost everyone in the


I also have some gratuitous advice for my former

colleagues in the banks which will make them think I have taken
leave of my senses.

So be it.

Here goes.

My premise is that it is thoroughly appropriate for
government, in a time of economic stress, to act in a fashion
which will stimulate economic activity and increase private
sector employment.


First, export sales growth is a real tangible and

significant opportunity for New England.
world wants, particularly Europe.

We have products the

But we are often at a price

disadvantage in competition with producers in other countries
with lower production costs or weaker currencies.

In recent months the dollar has depreciated significantly
against the mark and the yen as well as sterling. This has made
U.S. goods cheaper in international markets, but we still run a
significant trade deficit.

How can we give New England export

manufacturers an additional advantage in pricing their products
against competitors in the world market?

Senator John Kerry has long been an advocate of stimulus for
this segment of the economy and has contributed significantly to
simplifying export licensing procedure and championing the role


of export trading companies.

He has an instinctive appreciation

of what is good for Massachusetts and New England.

My proposal is that the New England states exempt from
taxation for five years the profits New England firms earn from
their export sales.

The additional margin available to New

England companies would give them pricing flexibility that could
materially enhance their competitiveness.

The relatively small

direct revenue losses would tend to be offset by greater business
activity, increased employment, and even new business formation
in the region to take advantage of this material tax incentive.
An enhancement to this program might be the creation of "trade
enterprise zones" in which manufacturing facilities engaged in
making products for export would also be exempt from property
taxes and other local levies.

An approach of this kind, while targeted at a specific
business sector, is really an investment in the vitality of the
whole economy since increased business investment results in
higher employment, more retail sales, greater housing demand and
ultimately a broader tax base over all.

In the late 1950*s and early 1960's, when New England was
struggling with another kind of general economic slump, new
businesses were attracted to the region by locally created and
financed speculative industrial parks and tax incentives.



tactics ultimately worked in the long-term best interest of the
communities which sponsored them even at significant short-term

Burlington, Vermont successfully attracted major

manufacturers in the late 1950's by this kind of a program and it
was the beginning of the economic rebirth of that city.


My second proposal may raise some partisan hackles but

try to consider it objectively.

I urge you to revisit the

underlying concept of the highly controversial proposal of the
early 1980's to deal with the decaying infrastructure in

Governor Dukakis called it at the time "Mass-

The concept was to create a separate agency with a

dedicated revenue stream and the sole mission of rebuilding the
highways, bridges, and tunnels which were deteriorating rapidly.
With the general exception of the turnpike, that deterioration
has continued into the new decade.

We should consider establishment of a regional authority
supported and financed by a 5 or 10 cent per gallon gasoline
tax in all six states.

Such an authority could issue revenue

bonds serviced by the gasoline taxes and other revenues possibly
derived from tolls, parking fees, and other infrastructurerelated services.

The program would be self-financed through

It would not only improve the quality of life for New

England residents and increase the safety factors, but it would
tend to improve New England travel for tourists.



highway transportation would also make New England more
attractive to business investment, particularly manufacturing

In the process, jobs are created and otherwise idle

construction capacity is utilized.

Furthermore, undertaking a

program of this type through a regional authority assures a
coordinated approach which will tend to make the individual
projects complement each other.

In addition, a regional

authority based on revenue bonds will probably fare better in the
capital markets than would individual state authorities or even
the states themselves.

I believe that attacking the infrastructure problem with a
user-financed regional authority could be both a short- and long­
term shot in the arm for New England and a morale builder as


My third recommendation is directed at the bankers.

have deliberated long and earnestly over this one.

I want very

much to be taken seriously in what I am about to say.

I don11

want to sound like I am preaching self-righteously to a
congregation of sinners.

In fact, where borrowers don't repay

loans you can argue that the bankers are more sinned against than

In any case, I believe that, more than government, more than
consumers, more than businessmen, bankers have in their power the



ability to turn this regional recession into a regional recovery.
Thirty years ago banks and venture capital entrepreneurs like
American Research and Development and General Doriot created the
regional electronics industry.

Raytheon as it exists today might not be there if Dick Hill
and the First National Bank of Boston hadn't held together a
group of bank lenders in New York and Chicago at a time when the
company was having some serious problems.

Sanders Associates in Nashua, New Hampshire might never have
seen the light of day if the New England Trust Company and a
wonderful banker by the name of Eliot Hedge hadn't had the
courage to finance Sanders' receivables when they were building
sonobuoys and wiring harnesses on the third floor of an old
Textron mill in Nashua.

And DEC got its seed money from General Doriot and a loan
from Shawmut at a time when the very concept it was pursuing was
essentially unproven.

Ladies and gentlemen, that was gutsy lending.

Not all the

loans and investments were as successful as the ones I have

But without the entrepreneurs who conceived those

companies and the bankers who nourished them, where would the
economy of New England have been in the 1970's and 1980's?


In this uncertain world, made more uncertain by war and
economic slack, some bankers at the top have lost their nerve and
ordered a retreat from their basic business —

lending money.

Other bankers, the more junior members of the team, are getting
confusing signals about their bank's willingness to lend and,
insecure in their jobs if they make a mistake, they avoid loan
opportunities rather than seek them out.

If we hope to bring New England out of this recession and
this slough of despair in which it finds itself, the banks must
meet the legitimate credit needs of the regional economy.


the very thought of a commercial real estate loan makes bankers'
stomachs heave, but I would argue that, even in this environment,
sound real estate loans can be made if we revert to basic lending
principles which recognize the importance of equity in deals,
capital strength in borrowers, realistic cash flow projections to
service the debt, and a properly conservative appraisal of the
market projections.

Especially in times like these, small businesses may need
more bank credit to help them deal with slower receivables and
unforeseen inventory build-ups.

These are legitimate working

capital requirements, and small businesses, unlike larger firms,
may not have access to credit sources other than banks.

It is a

proper role for banks to help their customers work through these
times and in most cases it can be done without compromising sound


lending standards if the banker knows the borrower and his
business well.

Consumers are probably less likely to be clamoring for
credit during a recession since they tend to slow spending and
borrowing when they are uncertain.

But lending practices which

discourage or deny credit to qualified consumers only aggravate
the general situation and prolong the downturn.

If banks refuse to lend, they abandon one of their
fundamental roles in the economy —

that is as the intermediator

between those with excess funds and those who need funds.

I urge bankers here in New England to examine their current
lending policies and practices and search out ways to reassume a
leadership role in reviving this faltering economy.

Bankers can

play a decisive part in recovery just as they did in the 1950's
and 1960's.

This conference is an exciting initiative in the best
traditions of Yankee culture. A Yankee culture that says:


is a job to be done; let's do it."

Governor Weld, Senator Kerry, Senator Tsongas, Mayor Flynn,
President Syron, thank you for giving me an opportunity to