Richard Hartnack was indoctrinated into the world of banking at a young age. He remembers his father, Carl, who was chairman of the old Security, Pacific Bank, holding meetings with bankers at their home in San Diego. Hartnack later served as a Marine Corps pilot in Vietnam. After spending 20 years at banks in Oregon and Chicago, he returned to California in 1991 as vice chairman of Union Bank of California. Since then, the San Francisco-based bank has become one of the state's largest financial institutions, with $42.6 billion in assets. Hartnack, who works from the downtown L.A. office on Figueroa Street, has witnessed the pressures of the global economy --particularly the effect of a l0-year downturn in Japan. (Union Bank is majority owed by Japan's Bank of Tokyo-Mitsubishi Ltd.) Answer: It is in a period of moderate growth. In some places it's in modest growth or even decline, and in some places it's hotter than that. We don't have an across-the-board booming economy. And because we had that for a few years back in the 1990s, everybody's probably going to be disappointed until we get back to that. We may never get back to exactly that circumstance. When you think about it, that circumstance was driven, in some measure, by a bit of a speculative bubble. We went from recession to moderate growth to accelerating growth, to an all-out boom period. If the standard by which we judge things is that all-out boom period, we're probably destined to some disappointment.
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Q: What's holding things back?

A: What's different about the economy now is the jobless. In fact, if you just judge the economy by the GDP numbers, it's a pretty good economy. Moderate would probably even understate it a little bit, it's almost robust. But the jobless put a damper on the enthusiasm. That makes it somewhat riskier as an economic circumstance. Because there is a certain amount of appropriate hand-wringing about it, it makes people more cautious about investments.

Q: How has this affected loan growth?

A: Clearly, loan growth in the housing market is robust, and the small business area in the aggregate is pretty strong. But loan growth in the large middle-market and large corporate sector has been more problematic. If you look at Federal Reserve statistics on commercial and industrial loans across all institutions in the U.S., it's not robust growth. There's a lot of speculation as to why. But there is a correlation between minimum job creation and low loan demand. When you employ people, people tend to require capital investing around them. No one employs people and has them stay in an empty room. So when jobs aren't growing it's an indication companies are not investing in capital equipment.

Q: How would you say Southern California has fared compared with other markets?

A: It's among the strongest economies in the country. The Southeast U.S. and California are the two strongest economies in the U.S. Interestingly both have the most robust housing markets.

Q: When you look at the housing market, do you think People are waiting for the bubble to burst?

A: Southern California is interesting because we're just flat running out of space. But there are limits to people's ability to afford ever-rising prices, though there are not limits to the desire to own a home. The bubble issue is: If prices keep going up, what happens? People can only afford so much and low interest rates have extended that affordability. But at some point, at some interest rate, there is a price level that freezes out too many people and the market slows down. The more important question is: How do we manufacture housing that meets basic needs and is available at a price people can afford? Once we convert all the dairies to houses out in the inland Empire, the ballgame's over.

Q: Tell me your concerns about the state budget crisis.

A: The recall election was a high water mark for frustration, and we may yet see a couple more high water marks. There is a sense that we have a broken state and we need to fix it. The problem is, of course, that we have very passionate people that have different views about how to fix it. The governmental solution is often not the best solution. California needs to let its vibrant entrepreneurs get to work. California businesses have a long track record of creating jobs as long as they are unshackled.

Q: What are the biggest shackles?

A: A broken workers' compensation system, which is old news, a broken unemployment insurance program, and excessive government regulations. Why this state feels it necessary to always go further than every other state in regulation is a problem. It was OK when we were going further than every other state in the quality of education. But now we've gone further than every other state in prisons, and that's not doing anything for the economy. It's chasing people away.