Wall Street
Professor Ray Hill talks about Occupy Wall Street and the economy. PHOTO: Sunfox/Flickr.com

Few people would argue that the rapid spread and continued presence of the “Occupy Wall Street” movement signals unease over the general slump in the economy, while targeting big-bank and other corporate bailouts. But Emory University finance professor Ray Hill says the anger may be displaced.

“The government put taxpayer capital into banks — all of which has been repaid according to the U.S. Treasury. But there is a lot of unease over reduced bank lending and a lack of jobs,” says Hill, who teaches managerial economics and finance at Emory’s Goizueta Business School. “But the bailout achieved its purpose which was to avoid a collapse of the financial system. That would have produced a far worse economic outcome than the situation we’ve got now.”

Much of the discord centers on allegations of corporate greed; with companies bulking up their cash reserves even as they hold off on hiring employees. Bailout critics also complain that banks aren’t doing much about lending expansion capital to small businesses, which typically account for many jobs.

Hill, however, says the critics haven’t considered the deeper cause-and-effect relationships.

“Many banks report that the demand by businesses for loans is down, and while the Federal Reserve can create a low interest rate environment, the government can’t force a rise in loan demand,” he explains. “As far as corporate hiring, the fact that companies are hanging onto their cash is a sign that they’re uncertain about the future course of the economy and are not really constrained by a lack of bank lending. Similarly, banks are also building up their capital because they’re uncertain about the economy and about the regulatory environment.”

Hill acknowledges the fact that some people are rankled because corporate executives are raking in big salaries even as the unemployment rate stays stubbornly high. But as he sees it, government policies helped to usher in the recession.

“In an effort at social engineering, the federal government bullied banks to extend mortgages to people who really weren’t good credit risks,” he says. “Then the government relieved them of the consequences of their actions by having tax supported entities like Fannie Mae and Freddie Mac there to buy up those loans. So it’s not surprising that many banks made the risky loans, and Wall Street firms got involved in securitizing, or repackaging and reselling them. We economists call this a moral hazard.”

Fannie Mae and Freddie Mac are government-sponsored enterprises that own or guarantee a hefty number of U.S. home loans. Both agencies nearly drowned in red ink in September 2008, when they were placed under conservatorship by the federal government. Since then, the Treasury department has pumped a total of more than $130 billion into the organizations. Unlike the TARP funds given to banks, these cash injections are unlikely to be repaid and will grow larger over time.

There’s no simple answer, Hill argues.

“It’s senseless to call corporations greedy, because businesses are in place to make money,” he says. “And more government interference could make things worse. Dodd-Frank Act, for example, requires a multi-year effort of writing detailed regulations which prolongs the uncertainty faced by financial institutions.  In addition, the Act, which was supposed to reduce the likelihood of another financial crisis, may instead have created a whole new set of ‘too-big-to-fail’ institutions.”

Instead, he’d like to see the tax code overhauled.

“Right now, for example, the U.S. has one of the world’s highest marginal corporate tax rates, but in practice, many firms pay little, if any income tax because of special deductions or credits,” he says. “If we streamlined the tax code, perhaps with a kind of flat tax, the government would likely collect more money. I can understand why the Occupy Wall Street participants are upset. But they’re aiming at the wrong target.”


Hill (bio) joined Goizueta  in 2003 and teaches managerial economics and finance. Hill began his academic career by teaching economics at Princeton University, before leaving in 1982 to become an investment banker. In that role he worked around the world.  Hill returned to his native Georgia in 1993 and worked for ten years at Mirant Corporation and its predecessor, a subsidiary of Southern Company. During that time he served as the company’s chief financial officer, except for an eighteen month stint as a CEO of one of the largest independent power companies in Asia, which was owned by Southern. His expertise includes project finance, monetary policy and energy economics and finance.