Interview: Maria Fiorini Ramirez on unemployment and credit to small business

Maria Fiorini Ramirez is the CEO of Maria Fiorini Ramirez, Inc., (MFR), an independent economic consulting firm formed in 1992. Ramirez has been on the boards of various banks for the past 20 years.

IBT: For the U.S., can you speak about the risk of deflation in the short-term and inflation in the long-term?

Maria Fiorini Ramirez: Short-term and medium-term, we really don't believe that there are inflation risks as a whole, but I do think that there are certain factors in the economy like health care that have [experienced] huge inflation for a long time. And then there are [sectors] like housing [that have experienced] deflation, which is likely to continue.

Over the next three years or so, given the kind of global economic climate that we foresee, it's going to be difficult to get much momentum on the inflation front. We don't think there is a deflationary story out there we can substantiate.

IBT: Ok. So, absent government stimulus, how well do you think the U.S. economy will hold up?

Maria Fiorini Ramirez: We think growth is going to be generally soft. We're looking for next year to [show] about 2 ½ percent [GDP growth]. We are likely to stay in that mode for the next 1 ½ to 2 years. We don't really see any improvements in the job front to speak of. So we think unemployment will still be a big factor. The consumer will be limited in terms of their ability to generate disposable income and to spend.

IBT: So going forward, do you think consumer spending will be a smaller part of the U.S. GDP?

Maria Fiorini Ramirez: Yes. At the peak, it was about 71 percent. But it has been gradually shrinking. [And it will keep shrinking] unless one has a very optimistic outlook for job creation, which I don't really see in the cards right now.

From everybody we talk to and everything we see in the headlines, [we hear] the same story of [companies] trying to keep margins as wide as possible by cutting costs as much as possible. And the outlook from the multi-nationals I talk to is that if they are going to [hire], it's going to be outside the U.S. It's going to be where the markets are growing, and the U.S. consumer market is not a growing one.

I think the investments [companies] are making in technology are good for [them], but it's not necessarily good for the U.S. consumer. I don't really see it resulting in the kind of income-creation that U.S. consumers need in order support spending.

Another big factor [in the economy] is that credit is tight. If you need money, this is the worst time to borrow if you're an individual or small business. If you're a large company, then of course it's easier to borrow.

IBT: So do you think facilitating lending to small business is a good policy then?

Maria Fiorini Ramirez: Yes, but it's not happening and the banks are not going to do it.

IBT: So what policy do you recommend to address that?

Maria Fiorini Ramirez: The thing is that regulators are telling banks to increase their capital and to shrink their balance sheets. The financial institutions are being choked by the regulators because they have to have less assets, and loans are assets. So the natural liquidity they usually provide to small business is not there.

What banks are doing is calling in the loans they have outstanding to small businesses. So instead of lending more, they're lending less.

IBT: But big businesses have access to capital markets, so they don't face tight credit conditions?

Maria Fiorini Ramirez: It's a huge, huge gap. Small businesses have no access, and large businesses have plenty of cash. Microsoft (NASDAQ: MSFT) is sitting on billions of dollars. But small businesses that need a couple of million dollars, the banks are calling in their loans and lines of credit. These are some of the people I talk to and companies that I know.

IBT: Can regulators do anything to address the inefficient allocation of cash?

Maria Fiorini Ramirez: Not really, for the simple reason that banks are perceived to have bad assets on their balance sheets. [Regulators] tell these institutions that they have to clean up their balance sheets or provide loan loss reserves [for their bad assets].

IBT: What about alternative sources of lending to small business, like GE Capital or the Small Business Administration? Are they able to fill the gap?

Maria Fiorini Ramirez: Government [agencies] are usually bureaucratic. The amount of paper you have to fill out and the requirements you have to have makes people not want to even bother. I'm not saying there aren't instances where it does work. But for the masses, it does not work.

For GE Capital or CIT Group (NYSE: CIT), the securitization market is not functioning like they used to. A lot of things that were securitized like leases or other kinds of assets, that's not working.

IBT: It sounds like you're not too optimistic about credit conditions for smaller-sized businesses. Is that one of the reasons you are projecting a modest growth?

Maria Fiorini Ramirez: Yes. When credit is tight, you have a lot of uncertainties. There are also other issues like cleaning up banks' balance sheets and individuals paying down their debt. It just takes many years to fix all of this. I guess the good news is that this [process] started a few years ago. We probably have a few more years to go.

When you have an uncertain future, you do whatever you can to control your expenses and costs, especially fixed costs*. The only thing businesses can do is control their costs; they can't control their revenues, which is subject to many uncertainties. Companies use the recession to clean up and get lean, and you get lean by controlling your expenses.

IBT: What's the one thing you would say to the regulators, from the perspective of helping out small businesses and the recovery?

Maria Fiorini Ramirez: Talk to each other, so that whatever policies are implemented on one side would have a relation to what's been done on the other side, instead of contradicting each other**. That's the most general way I can tell you.

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*Employees are a quasi-fixed cost that employers are currently reluctant to take on.

**For example, the U.S. currently has policies in place that boosts liquidity to small business, but as Maria Fiorini Ramirez mentioned, there are also other policies that choke it.