Economic Outlook

George D. Behrakis, 25th Anniversary Celebration Conference Chairperson with his wife, Margo, moderated a Business Panel on Important Economic Issues that included Leadership 100 members John G. Pappajohn from Des Moines, Iowa, and Charles H. Cotros from Memphis, Tennessee. Cotros was President, Chairman and CEO of Sysco. Pappajohn is very successful as a venture capitalist, putting together small companies, innovative companies, bridge loans and mezzanine start‑up companies in the biotech and in the high‑tech industry. Following are excerpts of the discussion.

Behrakis: What do you think of the 7 percent unemployment that the news media, television and the Administration has been discussing recently, that this is really — we're hitting rock bottom?

Pappajohn: I'm not an economist. I think we'll go up to 10 percent. Probably 2 percent or 3 percent are unemployable anyway. They're people that really don't want to work, they draw unemployment compensation. But it's going to get very difficult. In my opinion, part of the problem is the press. Every newspaper you pick up, things are terrible, and people are being let off. As a result of that, it compounds the problem. But I think this country will turn it around. Our country always has. We've been through this before and I think that we will get back on our feet.

Cotros: I think that we're already above the 7 percent. We're probably more at 9, probably going to 10 to 11 percent before we reach the bottom. You know, we're in uncharted territory. I don't think anybody in this room — I know I don't — has any idea how we got here, why we're here and how we're going to get out of it. But there are certain things we can do know. The vehicle that's going to drive us out of this recession — and I don't want to use the word depression, but recession — is the banking industry. It's imperative that we get these banks back solvent and liquid and strong. Now, that's going to require some investment, not so much giving but investing, for them to get into the process of being banks again, loaning money, and making capital available to entrepreneurs. That's the engine that's going to drive us out of this recession.

And, you know, right now we look at the country, and we say, my God, we are really in bad shape. Well, we're not as bad as the world is. Believe me. Europe is in worse shape than we are. Their banks are in rougher shape and the economy is in rougher shape. The thing that scares me that I saw last night, and I think this might be an overreaction that we need to be very careful about — I believe in buying American, I'm all for that, but I think we need to be very careful that we don't become isolationists. We cannot live by ourselves and not recognize that the rest of the world is hurting also. And if the rest of the world doesn't get out of this like we will, we're going to still be in trouble. So this protectionism, I think, can be a real problem for the country if we say just “Buy America,” because the rest of the world is watching that. And when we start saying “Buy America,” they're going to say “Buy Europe” and “Buy Russia” and buy this, and then the whole network of the economy is going to clog down and we're not going anywhere. So we've got to be very careful there.

Behrakis: What could happen if we became isolationists and to the rest of the world — what would happen to the employees who would lose many jobs in America if we were to stop purchasing steel from overseas?

Pappajohn: I think that what most of the economists are saying today, that they hope that China continues 5 or 6 percent growth, because they've been buying all of our paper, they've been buying all of the U.S. bonds and paper as a result of that. That will help us get back on track. So I think whatever we do today, we have to keep an eye out for every other country. We have to be fair, just like we want them to be fair with us. And sometimes they're not fair with us, but it's a delicate problem.

Cotros: I think there's another issue that we need also remember, that Europe, particularly the Asian and Eastern countries, they own all of our debt. You know, China and Japan owns all of our paper, so therefore we cannot say we're going to buy America over here, yet, by the way, keep buying our bonds, because we need you.

I'd like to bring up another issue. You mentioned fruits and vegetables as part of a concern we've got. You know, there's an effort out there to make ethanol part of the energy solution, and ethanol is driven by corn. That one decision that was made by the Department of Agriculture has created turmoil in our industry, because all of the farmers today are raising corn because it's easy to raise and it's a ready‑available market for the purchase of corn, which is going into making ethanol.

Now, you have all these farmers that are switching from soy beans and all of the other products that they were growing, and now they're growing corn. Well, corn also happens to be one of the biggest commodities that we use in our industry to raise cattle. Cattle eat off of corn, so therefore the price of beef has just gone crazy as a result of that one issue of putting corn into ethanol. So the whole industry is in somewhat of a turmoil because of some of the things we're doing there, so that's some of the reason why the cost of food has gone up.

Behrakis: Secondly, I think what happened there was they sent a group to Brazil, and Brazil uses a lot of ethanol in their automobiles, but Brazil is not a cattle country like the U.S. is or Argentina is or Uruguay, so they looked at it in a different light than we would look at it. And as Charles said, that's the biggest feed for cattle in America is corn, and they diverted the farmers in the Midwest from going from soy bean and barley into corn, which was a big mistake.

Let me ask you a question. Is it on boards — now, we saw it happen with the insurance industry, with the housing industry, even with some companies. Where are the board of directors when all this was happening? Why were the CEOs, presidents and officers of these corporations allowed to continue, and didn't anyone have any due diligence with what was going on in the financial area? John?

Pappajohn: George, ethanol is a subject I know a lot about. I've been in the business. It's 101 Economics. It's very simple. Everyone thought that it was a solution to the oil market, and it ended up not being a solution, because what happened — and, again, 101 Economics — price of corn got too high. We have 28 ethanol plants in the state of Iowa, and every one of them is for sale today. You can buy them for 25 cents on the dollar, and nobody wants to buy them. So, again, regulation would have been wrong. Economics takes care of it. If it doesn't work economically, it solves itself.

Now, things aren't as bad as you think in ethanol, because the farmers are smart enough today — they read The Wall Street Journal and they know what's going on — they're shifting back in soy beans and corn's going back into the food space. So ethanol wasn't a response. But what is happening, there have been in the last year some major breakthroughs in using cornstalks and switchgrass, and they are now creating oil, they are now creating ethanol out of waste material, and that's what makes sense. Again, you know, you have to leave it up to the entrepreneurs.

Cotros: George, you were asking a question about where were the boards and the CEOs when these problems were coming up. This thing happened so quickly a period of time that nobody really knew how bad a shape we were really in in terms of subprime lending. And that was the biggest issue that caused us to really have a problem, which was we were loaning money to people who could not afford to buy the house, we were loaning money to people who couldn't afford to pay the loan; however, as long as the value of that real estate was going up, it didn't make any difference, because they could always borrow and refinance a loan that they weren't paying back in the first place. What happened is when the value went down, now there's no equity in the house, they can't borrow against it, so now we've got all these defaults hitting us, and that has caused turmoil.

The banks got greedy. Fannie Mae, Freddie Mac and all these lending institutions were making a lot of money packaging these mortgages and selling them all over the world. Nobody even knows where the mortgages are. And this thing has just become so gigantic that that's where we are today. The banks don't even know what the value of the property is that they have just foreclosed on. So we've got a problem that we've got to resolve, and that's why I'm saying that it's imperative that we get these banks up and running again, being banks again and trying to figure out what they're going to do with those mortgages that they own.

Pappajohn: On the housing, I absolutely agree, but I think that in the last week or two the housing market is starting to turn in certain areas where they didn't overbuild. I think Charles is right, probably in Miami — but economics, it's the law of supply and demand. It's pretty simple. That's what it takes to solve the problem. That's what it always has taken to solve the problem. And so when we overbuild, then you have to slow down and you can't build for a while. And we don't need the government to bail out every business, and that is a problem. So how much they have to do in order to keep the banks solvent — and I agree with Charles there. Whatever it is they're going to decide, that is where it starts.

Behrakis: Now, we all have congressmen and senators in our states. What do you people think about Washington? Do they know what's going on? Do our congressmen know what's happening? Do our senators know how to solve these problems?

Pappajohn: I'm in a perfect state. I have two senior senators, one Republican and one Democrat, and they cancel each other's votes out. One is quite liberal and the other one is quite conservative. We have Senator Harkin and Senator Grassley, and they're both fabulous. They look out for the country and the state, and it's a very difficult job. I'm not sure why anybody would really want to be there. But I'm very pleased with the ability of our senators and our congressmen, and they're doing the best they can, and, you know, sometimes there is no perfect answer.

Cotros: Right now I think that Washington is in gridlock. I have never seen an environment like we have today. You have the Republicans on one side and the Democrats on the other, and they're continually fighting each other. We have just gone through a presidential election where we probably had one of the most charismatic candidates running for office I've ever seen. I didn't vote for him, but I'll tell you what, he was a very impressive man. I didn't think he had the experience that he should have, and time will tell what kind of job he does, and I hope like heck that he does a good job.

But what's bothering me about what's happening today is we're having what I call ready‑shoot‑aim mentality. We're just reacting. This $700 billion bailout that we had for the banking industry, Congress gave Paulson a blank check for $700 billion with no controls, with no restrictions, do what you want to do. I just don't understand. I think Washington right now is in serious trouble. They need to figure out how to get things done. I think that probably a result of this downturn in the economy is going to make them work together, because if they don't, we're going to really have some serious trouble.