Research Finds Correlation Between Political Connections, Federal Reserve Loans

Professor Ben Blau

By Steve Eaton

Banks that have better political connections and invest money in lobbying are more likely to get emergency loans from the Federal Reserve System, according to research done by a Huntsman professor.

One might expect lobbyists and politically-connected companies to win favor in the nation’s capital, but the Federal Reserve is a non-partisan entity, independent of political considerations. Ben Blau, an associate professor in the Finance and Economics Department, said he was surprised to discover the correlation when he did a study of 677 banks and their dealings with the Federal Reserve during the recent financial crisis.

“In theory there should not be any political incentive for the Federal Reserve to provide emergency relief to banks that are politically active or connected,” he said.

His research found, however, that some 15 percent of the banks that got loans had politically-connected employees, compared to 1.5 percent of those who could boast no such advantage. Blau found those who borrowed from the Fed were five times as likely to spend money on lobbyists and ten times more likely to employ politically-connected individuals than banks that did not borrow from the Fed.

Blau said it’s possible that if a bank is more politically-active, it is also more prone to seeking government help, and that may explain the correlation.

“I think the most compelling explanation for why this happened was politically-connected banks were buying what they perceive as synthetic insurance,” he said, explaining they may have believed they would be able to fall back on emergency Federal loans in hard times.

“If political connections somehow represent perceived insurance to banks and they believe that if times get rough the government will provide them with some bailout, then they might be more open to engaging in financially risky behavior,” he said. “And yet, often, it is that very mindset that leads a bank to getting in trouble and eventually seeking emergency loans.”

Blau said he did a paper a few years ago with Huntsman professors Tyler Brough and Diana Thomas that established an even stronger correlation between banks that had connections and invested in lobbying efforts, and banks that got help from the Troubled Asset Relief Program or TARP. Blau said he expected, however, when it came to the Federal Reserve there would be no such correlation.

Blau’s working paper is already posted on the website of the Mercatus Center at George Mason University. The research has sparked the interest of several national publications that have cited it or quoted him, including Bloomberg, American Banker and Politico.

Governor’s New Budget Outlook: Addressing Lingering Problems Through Taxation Isn’t a Move to the Dark Side

By Rhett Wilkinson

“Do what must be done.” – Chancellor Palpatine (Darth Sidious) to Anakin Skywalker (Darth Vader)

That was the instruction the Sith Lord gave to his new apprentice. Palpatine took advantage of Anakin’s desperation for the powers of the dark side.

Raising taxes may not be an act of the dark side. But sometimes, I believe they are a necessary evil. At times, elected officials should “do what must be done,” and call for new revenue through higher taxes. 

Rhett Wilkinson says more money should be budgeted for education.

I think that’s the reality in Utah for education and roads. That was clear after Nov. 25, when Utah Governor Gary Herbert forecasted the state’s budget for fiscal year 2014-2015. He declared no new taxes for the time frame. 

As a member of the Finance and Economics Club at the Jon M. Huntsman School of Business, I take great interest in the governor’s outlook. 

Education spending is still an emphasis, Executive Director for the Utah Department of Workforce Services Kristen Cox told the Deseret News. I believe Gov. Herbert largely seems to reflect that this year, having committed $60 million in this year’s budget to education due to an anticipated 10,500 increase in student enrollment. 

Also, House Speaker Becky Lockhart told The Salt Lake Tribune that paying for the education growth will again be a top priority.

"That’s one of the things we look at very first," she was quoted as saying. “We’ll be looking at that right away.”  

The rankings show me that the governor’s pulling from the state reservoir isn’t enough, and that Speaker Lockhart’s words aren’t convincing. This year, Utah remained 51^st – dead last – among the 50 states and the District of Columbia in per-pupil spending. The Beehive State won’t be near the middle, or higher, since it routinely ranks at or near the top in class sizes. But in a state and legislature where the majority says it believes “the glory of God is intelligence,” among other reasons, it undoubtedly should do better than dead last.  

Gov. Herbert is promoting an initiative to raise the percentage of Utahns with college degrees, or certificates, to 66% by 2020. But, I believe that focuses attention at the wrong end of the education channel. Investing in early-childhood education would encourage more long-lasting results, rather than trying to make up for pre-elementary school shortcomings after high school. By then, one-quarter of Utah kids have already dropped out.

It has been reported that the state allocates effectively 25% of sales tax collections to roads. But, money must be found at some point to account for what will be an $11 billion deficit in roads funding by 2040. I think it makes sense to increase the gas tax. That has not been raised since 1997.

The Salt Lake Chamber of Commerce endorses the measure. It has indicated that it’s a good option, because then, those people who are actually using the roads are the ones who pay.

Senate President Wayne Niederhauser is a solid Republican, but he acknowledged the dilemma: “We need to look at ways to either cut the cost of roads, or you are going to have to have some additional revenue in the future,” he told the Deseret News.

Ultimately, the problem is that politics might get in the way. In the election year that is 2014, I believe most lawmakers may not consider tax increases. Both Speaker Lockhart and Pres. Niederhauser acknowledged the same to the Deseret News.

I think it’s disappointing that the legislature would shy away from helping children, and assuring safe and efficient transportation, at the expense of maintaining power.

It is time to “do what must be done”—but in this case, by forgetting power, as opposed to the desires of Sith Lords in a galaxy far, far away.

Students invest real money in finance course

Fred Dickson, the Chief Investment Strategist from DA Davidson, spoke at USU tonight. He emphasized the importance of gaining experience in the field before you graduate from college. In fact, one of the big reasons for his visit was to reward the Jon M. Huntsman School of Business as a result of investments by a group of students.

Students in Paul Fjeldsted’s Investing Practicum class have a unique opportunity to invest real money. DA Davidson donated $50,000 for this purpose. When the investments work out, DA Davidson cuts a check to the school. Tonight, Mr. Dickson presented the school with a check for $1,500. Before presenting the check, Mr. Dickson praised the efforts of the school in promoting real-life involvement.  

Did everyone get the August edition of the Huntsman Post?

Three months ago, Steve Eaton wrote that students who read the Huntsman Post are 22 percent less likely to engage in pointless discussions or to be irritated when they drop their keys repeatedly.Well, at the beginning of August, a new edition of the Huntsman Post was sent out, and the benefits of reading our online newsletter have only gotten better. For example, a recent unpublished study shows that students who read the August edition of the Post are 3 times more likely to not get stuck in rush hour traffic with no air conditioning on a 90 degree day.


The August edition is filled with valuable information and stories for anyone with connections to the Huntsman School of Business. You can learn more about three major additions to the Huntsman School's faculty: Jim Davis, the new head of the department of management; Michael Glauser, the new director of entrepreneurial programs; and William Shughart II, the J. Fish Smith professor in Public Choice. 


Find out what brought governors, presidents and senators to Utah and to USU. Check out how close the Huntsman School is to its goal of awarding $1 million in scholarships. Read more about what Huntsman students did to help a charity work more efficiently at feeding the hungry. All these things and more can be found in the August edition of the Huntsman Post.

Miles Kimball talks about the economics of happiness

I just got back from hearing an economist, Miles Kimball, talk about happiness and economics. It was interesting to hear happiness talked about based on what research has shown, not just on what people theorize about what ought to bring happiness.

Figuring out just what makes people happy is a bit more complicated that I originally thought.

Just because people are better off financially doesn’t mean that they will become happier people. One study showed that while, overall, income levels have been going up, people aren’t reporting that they are getting happier at the same rate.

Dr. Kimball also said, however, that there are correlations between happiness and income levels.

“Basically money does by happiness consistently,” he said the research shows. “To be clear, it doesn’t buy a lot of happiness.”

If I understood him right, he said that there are trends that show that those who are making more money report they do feel happier, while people with less money, over time, are reporting that they are less happy.

And not everyone is motivated by a desire to be happier. Sometimes they are willing to sacrifice things like sleep and family time to achieve greater social rank or more money.

Dr. Kimball, who is the Jon M. Huntsman Presidential Visiting Professor, has come here from the University of Michigan where he is a professor of economics. Today he spoke to a nearly packed room on the ninth floor of the George S. Eccles Business Building.

Some of his findings probably won’t surprise you. For an example, he cited research that shows that getting enough sleep, exercise and eating well can make you happier. So can spending time with friends and getting involved with an engrossing hobby. Having a positive attitude, being grateful and forgiving can also make you happier.

He covered a lot of ground and shared some fascinating research. If you are interested in an audio recording of what he said, send me an e-mail at steve.eaton@usu.edu.

Steve Eaton