Interview with Gary H. Stern (Part I)

President of the Federal Reserve Bank of Minneapolis,
1985-2009

Interview conducted by James E. Fogerty
Minnesota Historical Society
December 10, 1991

JEF: I am interviewing Gary H. Stern, president of the Federal Reserve Bank of Minneapolis. The interview is taking place in Mr. Stern's office at the Federal Reserve Bank building in Minneapolis [250 Marquette Avenue].

Mr. Stern, would you give us a little setting. You're a Midwesterner.

GHS: I grew up in Wisconsin and went to school in the Midwest, at least initially, in St. Louis, although as it turns out, I've lived in a lot of different places now. I used to spend a lot of summers up in Northern Wisconsin, not too far from here, so when I came back to the Twin Cities, in some sense it was an area I knew pretty well and really liked. When I was in the economic consulting business, I used to get here fairly often and enjoyed the area as well.

JEF: Do you feel like a Midwesterner?

GHS: Yes, I think I am a Midwesterner. I think I am a Midwesterner at heart. I always have been. I lived in New York for a long time, and while I really liked New York, I guess I never really thought of myself as a New Yorker. I always do think of myself as a Midwesterner, sort of a cautious, conservative Midwesterner. [Laughter]

JEF: So coming to Minneapolis was not a big thing.

GHS: No, it was not traumatic. In fact, Minneapolis was always one of the few cities, as we lived in New York, that my wife and I thought we'd be willing to move to. That was based more on casual impression than any real firsthand knowledge. It had a lot of nice features—obviously, the lakes. We weren't too discouraged by the climate. Easy access to outdoor recreation, a pretty sophisticated place. It's become a lot more sophisticated the ten years I've been here. Those kinds of things. So it did always have some appeal. My brother married a woman who had grown up on Lake Minnetonka. We were out here for the wedding several years ago before we moved, and I guess maybe that was it. It was in the middle of the summer, a nice way to spend some time.

JEF: Your degree is in economics.

GHS: Yes.

JEF: Any particular focus?

GHS: Yes. I guess I've always been interested in macroeconomics as opposed to micro, and in monetary policy, labor economics. Those are my areas of concentration, and my dissertation was on a standard macroeconomic policy topic, the tradeoff or lack thereof between inflation and unemployment. That is a topic kicked around very seriously since at least the mid-sixties and to some extent still is, although I think most of the serious work was done on it by the time we got into the early eighties.

JEF: And a matter of some moment right now in the newspaper headlines.

GHS: Oh, of course. Of course. Sometimes the papers do the subject justice and sometimes they don't.

JEF: From an economist's point of view, it's the latter rather than the former?

GHS: You'd be surprised. Some of the papers, at least, have gotten very sophisticated and understand that there is something like what economists call the full employment/unemployment rate, and that you really aren't likely to get the economy down below full employment/unemployment for any sustained period of time, at least not without paying a very high price at some point down the road in terms of inflation.

JEF: When you worked in New York, you were in an economic consulting firm.

GHS: I was at the New York Fed for seven years and then I was in the economic consulting firm for four or five.

JEF: What brought your reentry into the Federal Reserve System?

GHS: A couple of things. I really enjoy the consulting business, but I also learned in the consulting business that I miss being involved in public policy. As the years wore on, you spend a lot of time brooding about the Fed, and I kept saying to myself, "Yeah, I understand all that pretty well," and I used to be involved in it. So I said to myself that if an opportunity to get back into public policy on the economic side ever arose, I would at least give it serious consideration. That was the second thing that happened—the opportunity arose. Jerry Corrigan, who was my predecessor in this job, was looking for a director of research. I happened to run into him at a cocktail party in New York. We got to talking about this and one thing led to another. It was the ideal opportunity that I had in the back of my mind to get involved in public policy.

JEF: When you came back, it was as head of research?

GHS: Yes. I was head of research and I added a few responsibilities, what we call around here chief financial officer, but it's sort of a catch-all position. Then when Jerry left to become president of the New York Fed at the end of 1984, they naturally went through a search process and I was fortunate enough to get the job. And here I am. It's a terrific job.

JEF: Describe it a little bit, if you would.

GHS: It's diverse. That isn't the world's most exciting adjective, I guess, but it is. We're involved in all the macro monetary policy issues that the Federal Reserve is known for. The Open Market Committee meetings in Washington are kind of the centerpiece of that side of the business, but we also have major responsibility for regulating and supervising bank holding companies throughout the Ninth Federal Reserve District. In that vein it's not just the examination and supervision process. There are a lot of policy issues regarding what banks should be able to do, where they should be able to do it, what should the deposit insurance system be like, what do we do about "too big to fail," how should we operate the discount window in this environment, and a lot of very challenging public policy issues on the banking side as well. We made a point to be involved in those. I think they're important and I personally find them stimulating and challenging. They're obviously going to affect not just our banking system, but how our economy performs over time.

We have a whole operational side of the business as well—check processing, safekeeping and processing securities, coin and currency safekeeping and distribution, destruction, transfers, automated clearinghouse, and so on. Actually the bulk of our people are employed in those operations. Getting that business done as efficiently and as effectively as possible is a major challenge. It wasn't as big a challenge before 1980, but Congress passed some legislation in 1980 that really changed the nature of that business, and for the better, I would argue. So you have that and you have all the functions that you would think would go with a large corporation—that is, planning and control and budgeting and accounting and personnel, and the people who have to run the building. So it's very diverse, and you can get involved or not as your taste may be in different things and learn a lot about all sorts of things beyond the economics that I was trained for. In that respect it's a lot of fun, and hopefully from time to time I can make some contribution outside of the economic sphere. But even if I don't, at least I learned something.

JEF: I'd like to talk about some of those issues to understand the operations better. When you came here, you had been working here for several years before you became president.

GHS: Right.

JEF: Did you inherit issues that were particularly important or were there others that came along?

GHS: I think it's hard to make the distinction between what was inherited and what came along as new, because most of these things are evolutionary. When I became president, some of the banking issues that I enumerated earlier were on the table, but clearly have risen on the agenda both here at the bank and nationally since I've been president. There's no doubt about that. On the monetary policy side, we're always faced with issues having to do with inflation, unemployment, growth, and so forth. Those issues wax and wane depending a little bit on how the economy is performing, but they're always with us.

On the operational side, financial services and so forth, what really changed the environment clearly preceded me. The legislation that Congress passed was passed in 1980. By 1982 or '83, I think the Fed was fully geared up. Not that we had accomplished everything we wanted to, or have today, but we were fully geared up in terms of making the adjustment, the transition, to the new environment.

For a time that's what we were involved in—the adjustment and then trying to operate as effectively as possible in the new environment. What has happened since, I think pressures in that arena have probably intensified in the last year or two for a variety of reasons, to some extent for competitive reasons, to some extent for technological reasons, to some extent I think they're self-imposed. We feel we can do the business better and we want to do that. It's clearly in our interest, in the interest of the taxpayer, and in the interest of our customers.

JEF: You had been at the Federal Reserve Bank in New York before. You had been here as head of research and chief financial officer. When you came in as president, did you bring with you some things that you really wanted to do?

GHS: No, in the sense that I think the place was already running reasonably well and was a high-quality operation in many respects. My management style is very different from that of my predecessors, and I wanted to maybe open up the management process a little bit. I viewed my role more as fine-tuning than as radical reform. Let me put it that way. Fine-tuning has some negative connotations in the economics profession, having nothing at all to do with management style. I saw my role as much more a fine-tuning process. The Federal Reserve System, and the Federal Reserve Bank of Minneapolis, has a kind of special culture. For many of us, we choose to be here and it's a very positive place to work. There is no need for somebody to come in and start busting things up, at least in my judgment. So I viewed my role much more as one of a fine-tuner.

JEF: You've raised an interesting point; how would you characterize your management style?

GHS: I know I'm not the best judge of that. I don't know what my management style is. I think I'm a good delegator and actually I prefer to delegate. I sort of view my role as making sure we have the right people in the right jobs at the officer and especially at the senior officer level, and then trying to see to it that they have adequate resources to do their jobs and then hold them accountable for results. That's the way I see my role. I think I'm largely a delegator. Obviously in some areas I'm going to be the senior spokesperson for the bank on a variety of issues, I'm going to set priorities in the sense that I'm going to say (and I do), "We need more resources in banking supervision. We have budget constraints, so those resources are going to have to come out of somewhere else, or at least we're going to have to limit the increases in other areas in order to fund what we want to fund in banking supervision or wherever the area of emphasis may be." It's those kinds of allocation questions. But I'm not likely, in most cases, to say, "Here's how I want you to do it." I usually leave that to the people who work here.

JEF: How much latitude? You talked earlier about a good deal of latitude. Everyone who comes into a job like the president of a major organization inherits the structure that's there. How much latitude is there to change that?

GHS: Lots. Lots. In terms of structure, first of all, I don't believe that the organization chart matters very much, let me say that. In fact, my eyes glaze over when somebody tries to explain organization charts to me, because I don't really think that's the way organizations function. People draw charts all the time, but if they're effective, I think they function in a much more informal way. I think they have to. Now, there are people who disagree with that, and they're going to feel more comfortable working somewhere else than here, because, as I said, I think the important thing is to get results. Don't get me wrong. I mean to get results in an ethical, honest way characterized by integrity, but to get results. To worry about the organizational chart, who's supposed to tell who before something happens, that doesn't make a lot of sense to me. Process tends to bore me.

So my view of structure, as a consequence, is that structure can be anything you want it to be. Sometimes you do things as a matter of convenience, sometimes you do things because you're shaping the job to fit the talents of the individuals you have, sometimes you want to change a reporting relationship. You can do whatever you want.

JEF: I get the sense of you as not so much a hands-on person.

GHS: I think I'm hands-on in some areas. I try to know my limits and I'm not an expert in everything. Where I'm not an expert, I think I'm better off leaving it to others. On the other hand, in areas like monetary policy, where I think I am an expert, I'm pretty hands-on. I think I'm becoming more hands-on in banking policy issues, not in the examination process, but in the policy side of it, because I've been back at the Federal Reserve for ten years now and I've absorbed a lot. I've thought about it a lot and have learned a lot. I would say that I try to pick and choose.

I used to read a lot of mysteries when I was a kid, and in one of the first Sherlock Holmes stories, he talks about how your brain can only retain so much. I don't know if this is true, but I know it made an impression on me. It probably isn't true. Your brain can only retain so much, so you sort of have to focus on what you think is important and try to let somebody else focus on the rest of it. I kind of believe that. I'd like to be able to remember everything and do everything, but as a practical matter I know that isn't going to happen.

JEF: You mentioned the Federal Reserve System culture. Corporate culture has become a buzzword for a lot of things, and everyone talks about it. If you had to describe the culture within the Federal Reserve System, how would you describe it?

GHS: I would describe it, I think, in relative terms. I've worked some other places, but not a lot of other places, but maybe more than many other senior people in the Fed. Some of them have made their entire career here. I think relative to what I've seen elsewhere, the Fed is clearly a meritocracy. Corporate politics are far lower than you might expect. Again, this is all relative. I think the Fed is a place where you may disagree with people about how they want to get something done, but we really don't have to worry about people's intentions. I think we have managed to attract and retain over time a group of people at almost all levels of high integrity, honesty, and so forth. I guess that's how I would characterize the culture.

JEF: Is it an organization systemwide that tends to retain people?

GHS: It depends. It's hard to generalize because I don't think normally our turnover rates are unusually low. They haven't in recent years been unusually high. In the current environment they're quite low, but that's what you would expect. In sort of a bad labor market, we're a pretty stable employer for the most part. We have had problems from time to time, and that's why I avoid the generalization. For example, retaining economists sometimes is a problem. For a while, Wall Street was very anxious to acquire people with Fed experience and they'd pay lots and lots of money. We didn't lose too many people from Minneapolis, although we would lose somebody on occasion, but in New York or Washington they would lose lots of people. In the area of computer professionals, you've got a lot of talented people in that area, and when that market is very strong we might have trouble holding onto them. It's probably in areas like that where people see themselves as economists or data processing people first and Federal Reserve people second, that you can lose people because of market forces. But I suspect that isn't too different from other corporations, and there are a lot of other people who have made the decision that this is their career.

JEF: Is there much movement in and out of commercial banking?

GHS: No. There is not much of that at all. They don't prohibit it, but they make it a little difficult to do all that readily. On occasion somebody will. The president of the Cleveland Fed just left to join a large bank holding company in Ohio, and his predecessor did the same thing. But there hasn't been too much of that. People come and go at the president's level, but it's hard to pin down exactly where they go. They don't all go to commercial banking or anything like that.

JEF: How many employees are there [in Minneapolis]?

GHS: Roughly 1,000 full-time people here in Minneapolis, another 100 out in Helena at our branch. More than 300 of those full-time employees are in our check processing operation. Another hundred-plus are in our data processing. You think of the Fed and you probably think of all these economists and bank examiners running around, but that's not the way it is. The bank examination department here is maybe 100 people. We have maybe a dozen full-time economists. We have four or six lawyers on the staff full time. While policy is very important here, the bulk of the people are actually doing other things.

JEF: What kind of interaction do you have with your staff?

GHS: I would say my role is somewhere in the middle. We have an open door policy and some people avail themselves of it at any level and other people, no matter how senior they are, just won't come in here. Lots of people call me by my first name. Of course, I've been around here long enough that they at least know who I am, and I'll go play in the softball tournament and I play basketball with some of the guys here and things like that. On the other hand, I don't typically go to the employee club parties. I typically don't go to those. I try to do what I feel comfortable with, actually. I think if you don't do what you feel comfortable with, employees see that you're uncomfortable and you don't accomplish what you thought you were going to accomplish anyway. We'll serve at the summer picnic and the Christmas luncheon, and I get a kick out of doing that, but what I don't like to do is stand around and look presidential. That's pretty stupid.

JEF: In the reception line.

GHS: Yes.

JEF: What about communication?

GHS: We've made a lot of changes in that, but I don't do most of that personally, except as part of the United Way campaign and the Savings Bond campaign and maybe one or two other occasions in the year. Certainly if we're making changes in the official staff, the communication comes from me in written form. But we've got a talented group of people in our public affairs area, and the guy who runs that, whom we brought in from the outside, is very talented. He has upgraded the internal publication, called The Grapevine, and there's another one aimed at managers, called MGMT. Those are good communication vehicles, in my judgment. I think they'll get better. We just made the changes less than a year ago.

JEF: Purposely, in order to give you more vehicles for communicating and management as well?

GHS: It was basically a quality question. I was dissatisfied with the predecessors [publications]. I didn't think they were very good, so we said, “We'll either do them well or we won't do them.” Our public affairs guy said he had some ideas for making them better. As I said, I think he has succeeded, but it's early in the process. I think they'll get even better. That's something that we've been trying to emphasize. We are trying to say throughout the organization that if we're going to do it, let's do it well. If we don't do it well, then we ought to think about either, “Can we do it well and are willing to devote the resources to doing it well?” If not, for whatever reasons, then we probably shouldn't be doing it. We can either do without it or we can find somebody else on the outside to do it for us, perhaps.

I think there's always a tendency in the Fed and probably outside, too, that after a while you get a little complacent. You sort of do what you do and you think you're doing it reasonably well. Once in a while, though, something comes along and makes you realize that really that isn't very good, that you ought to fix it or discard it.

JEF: How much do you rely on face-to-face in terms of meetings with your management staff?

GHS: We have a Monday morning breakfast meeting with senior management, which means me, the first vice president, and the senior vice presidents, of which there are five. Those probably only occur 50 percent of the Monday mornings just because on occasion too many of us are out of town to make it worth the trouble. Then we'll hold periodic senior management meetings when there is something important to discuss, and broader meetings with managing officers or whatever, again on an as-needed basis. I don't think routine meetings are a particularly good idea because they become routine. We can sit around in meetings all day long if we put our minds to it, but I don't think we'd accomplish much.

JEF: What about your relationship with the Minneapolis, particularly the Twin Cities, communities? The Fed is a major institution with a lot of prestige. Is there something expected within the System that the president of a regional bank will do?

GHS: No. I think it's left to your own devices. People have taken very different approaches to that. I can't be on any corporate boards where I would get paid a fee or anything that would even resemble a potential conflict of interest, but I'm on a number of not-for-profit boards and I do that intentionally. I think that's part of my role. I enjoy it. It's not hard duty, for the most part, but I think that's part of my role. I try to participate in community functions, groups of one type or another, as time permits.

I don't know how the other Reserve banks feel about it, but I think it's fair to say we're not quite a full member of the corporate community mainly because we can't make corporate contributions to anything. It's not up to us to say how to use the taxpayers' money, that that should go to the United Way and we shouldn't give anything to the charity Y or something. So it's a matter of policy that, as far as I know, is adhered to throughout the Federal Reserve, that we don't make corporate contributions no matter how worthy I may think the cause is or no matter what my personal preferences may be. We don't make corporate contributions. I think that limits the role.

We don't have any memberships. Nobody here gets a country club membership on the Fed or anything like that. That's going to limit the role you're going to play. I think it does. I think that's just as well, frankly, because we want our objectivity to be above reproach. I am personally much more comfortable not playing golf very often, or if ever, with other banks. The problem is that inevitably if you get to be friends with the people you're supervising, it gets tougher to supervise. So I kind of enjoy their company, but I like to keep an arm's-length relationship. If our examiners come in and say, "Hey, that bank's got real problems and you'd better go over there and talk to that board of directors," then I can do it with a clear conscience.

JEF: You're saying that it is an organization that is part of, and yet apart from, the community.

GHS: That's the way I see it, yes.

JEF: Have there been any surprises for you since you became president of the bank?

GHS: There were surprises, and a couple of them are very particular-event-related surprises. In October 1987, when the stock market collapsed, hopefully that was a once-in-a-lifetime experience. That was certainly a shocker.

There was a very difficult discount rate decision back in the spring of '86, probably the single most difficult moment ever, when it looked like the board of governors was perhaps in the process of overthrowing Paul Volcker. That was really difficult. Fortunately, I'm convinced we did the right thing, but it was very difficult because to both maintain your integrity and independence, and yet do the right thing, was very tricky.

I guess the other surprise—and I should have known this—is how much time you spend on personnel-related matters, no matter where you are. [Laughter]

JEF: You can't get away from it.

GHS: You can't get away from it. You just can't. I'm not even suggesting I really want to, but it just is amazing, and maybe it shouldn't be with 1,100 employees in the district. I spend a lot of time not so much on what should the merit pay program be next year, although you spend some time on that, but it's, “What do we do about that problem?”

JEF: That's interesting. Even with your management style.

GHS: The buck ultimately stops here, you know, and people know that. They also know that I don't like surprises, so I don't want to hear about it when it's too late to do anything about it.

JEF: On a day like Black Monday in '87, what did you do? What happened?

GHS: In a way, there was less to do on Black Monday because you're just watching the screen for just the rest of that week, and it was a two- or threefold thing. Part of it was information gathering and disseminating. I would get calls, of course, from people telling me how they saw things and whether they were or weren't going to get financing, whether they were prepared to give financing for their customers and so forth. Sometimes I would call them and discuss that kind of situation. I'm sure we had a policy conference call every day, at least one every day that week. I can go back and check the records. I think so. So it's really sort of information gathering.

There isn't much we're going to do in Minneapolis. Minneapolis, to some extent, is insulated from the real heart of that, which was in New York and Washington. Nevertheless, it was a major event. I think it was mostly a communication and information exercise, as far as we out here were concerned, to try to calm some people down who might have been a little excited, and get people excited who maybe were a little too calm about it. “Okay, what does this mean for the economy? What, if anything, do we do about it?” That's a really interesting question.

JEF: So in a situation like that, you got conference calls almost daily. Were the regional presidents on there?

GHS: That's right. We're all on there together and we would go around and say, “Is there anything that you want to report, either unusual or more of the same?” We were trying to make sure that there weren't problems that we hadn't recognized, or issues that we hadn't recognized. We wanted to be certain that everybody knew what was going on and what our stance was, so that if we got a call from a bank that said, “Am I expecting you to make these security loans or not?” (they probably wouldn't put it that boldly and we probably wouldn't answer too directly), we'd be prepared.

JEF: In a process like that, with a number of presidents in various parts of the country, what is your function or that of your staff in finding out what is going on, what is the impact on the banking system?

GHS: There are no rules and regulations. I think it's left to common sense. You would call the leaders of First Bank [First Bank System, Inc.] or Dain [Dain Bosworth, Inc.] or Piper [Piper Jaffray, Inc.] and so forth. You kind of know who the players are. Called some bankers out in Montana, too, to find out whether anything was going on, and most of the time not too much, but whether anything was going on out there. But it's left up to common sense, for the most part.

Then, of course, we do operate the discount window. We didn't have a lot of discount window borrowing here during that period. They did in New York. But conceivably part of our response was, “We'll make short-term credit available to banks so you can make it available to your customers,” assuming that they're fundamentally sound and have collateral and so forth. That was part of our response. Again, it's fair to say that was a bigger deal in Chicago with the commodity markets, for example, than it's going to be here. Nevertheless, insofar as possible, we want to try to have a common response.

JEF: What would you characterize as the most important component in your work as president as you see the job right now? What do you think are the most essential functions?

GHS: I think I've touched on it to a considerable extent already. One is, as I said, to set priorities, directions, objectives, at least help to get them set, and to provide resources for them one way or the other. Beyond that there are the areas where I'm more involved in a hands-on way, and that's clearly on the policy side and as spokesperson for the organization both on Federal Reserve-related policy matters and in some of these community roles and boards and so forth. That's, I think, the most important part of the job.

JEF: How much contact do you have with the other presidents of the regional banks?

GHS: A lot, because we're all together at least eight times a year in Washington for the policy meetings. While you don't sit around the table making chitchat too much, there's a lot of time before and after the meetings and at dinners to talk. There's something in the Federal Reserve called the Conference of Presidents, which meets formally at least twice a year, but the nature of business is such that we probably meet four or five times a year fairly formally and then again we'll have conference calls or lots of bilateral conversations. Then some of us are friends, so we're just talking all the time, not necessarily about Federal Reserve matters, but about what's going on.

JEF: Does your approach to it strike you as being pretty mainstream?

GHS: I don't know. I would have said yes, but there's an issue in the Federal Reserve at the moment of automation consolidation, where mainframes are going to get consolidated over the next several years in three sites. The group that's doing that is located in Richmond, and they're building up their staff. We'll lose one or two people, probably to that staff in Richmond right away. They're going to be part of the management.

JEF: They will actually transfer to Richmond?

GHS: Yes. In talking with one of our guys who is likely to go, he said he thinks the atmosphere here is actually quite a bit different than in many other Reserve banks. It's less formal. I know that's true to some extent, less formal, more open, less concerned with what I might call the trappings of the place. There's been a long tradition here that predates me. Our economists come to work in casual shirts and jeans most of the time. They think of themselves as academics and that's the way academics dress. We don't. That's fine. This predates me, but some of the stories are really entertaining. They were told in the past that they had to wear shirts in the summer, and I guess we ruled out sandals one day, that kind of stuff. I don't think that goes on at the other banks. In fact, you hear all sorts of stories about rules in other banks, no coffee machines in offices, or going outside your office, if you're a man, without your suitcoat on, this and that. We don't get too bogged down in that kind of stuff.

JEF: How much does that have to do with the banks and where they're located?

GHS: I worked in New York and they paid more attention to this stuff than we do. I never thought of New York as particularly onerous in that regard. I don't know that I would draw much of a correlation between location and this kind of stuff. I think it's just a question of atmosphere.

JEF: The atmosphere, of course, comes from corporate decision-makers who are promoting and maintaining it.

GHS: I wasn't suggesting it was accidental.

JEF: As happened at IBM.

GHS: That's right. So again, I think it's one of those things like structure. You can probably get just about anything you want to, depending on what you want.

JEF: That's one difference, certainly—the atmosphere between one bank and another. What are some of the others you can think of? Apparently they're not put together—

GHS: No, they're not, though, of course, we do have most of the same responsibilities, except for New York, which has a few special responsibilities that the rest of us don't have. Washington isn't a bank; it's the Board of Governors and that's a different thing altogether. The banks, for the most part, have the same bundle of responsibilities. One obvious difference, of course, is size and scale.

But aside from that, I think a variety of things maybe distinguish the organizations. Since 1980 or shortly thereafter, we put a great deal of emphasis on serving our financial customers, banks of all sizes in this district. I have the impression that a lot of other districts haven't worried so much about the small banks the way we have. I think we've tried to be more innovative in the provision of payment services, whether check services or electronic services, than many of the other districts. I think we are known for our research department, which is distinctive relative to some of the other districts. But for the most part you're not going to find that district A does some things and district B just doesn't do them at all. That isn't likely. There are some instances of that, but they're certainly the exception rather than the rule.

JEF: A question of emphasis.

GHS: Yes, emphasis and attitude.

JEF: Is it partly a function of region?

GHS: Sure. We have a lot of small banks here. I wasn't part of the process, but I was here. I was on the research side. I think we made the decision early on that we wanted to try to continue to serve rural banks and other rural financial institutions and not only did we want to serve, but we wanted to do it in more than a perfunctory way. We thought to do that effectively, you had to be creative and innovative and so forth, and I think people, to their credit, have done a remarkably good job of that. We do offer a better range of services to a wider range of institutions of different sizes than you'll find in many other districts. That is a decision that was made early on. As I say, I wasn't on that side of the shop then, but my instincts might have been that if the Fed was going to be in the payment services business, we were going to survive as the low-cost, no-frills provider. Well, at least around here that would have been a bad idea had we pursued it. We didn't pursue it.

JEF: What role do the bank holding companies play in this area? How important are they? You have, after all, two of the twenty biggest bank holding companies in the country right here.

GHS: Two of the thirty biggest, maybe. First Bank's relative rating has slipped. The two big holding companies, it all depends on how you measure it. If you just count institutions, they're not all that important because there are so many small banks in Minnesota and a good number in the Dakotas and Montana as well, even a decent number in Northern Wisconsin, the Upper Peninsula. If you count by assets, on the other hand, they're very important because they are very large. Clearly, in terms of supervision, they are very important. The holding companies are very important for the following reason. You ask yourself, as I do, “What happens if a small bank gets in trouble and needs to be closed?” There may be some difficulties to the customers, the employees, and the community involved, but it's not going to have any economywide or even regionwide implications. If you ask yourself what happens if First Bank or Norwest gets into difficulty, you've got to deal with them. It may not have economywide implications, but it's certainly going to have important implications for the region. So they represent, in some sense, a different scale of responsibility.

To be honest about it, banking supervision responsibilities are convoluted. While the Federal Reserve is responsible for the holding companies, the Comptroller of the Currency is responsible for First's and Norwest's banks, because they are nationally chartered. So I can't suggest that this is a burden or a responsibility that the Federal Reserve may resolve by itself, because we don't. But you can see that there is an important distinction between the two big holding companies and most of the other institutions in the district.

JEF: What is the health of the independent banking system in this region?

GHS: Very good. A lot of the independent community banks went through some very difficult times in the mid-eighties as a consequence of conditions in the agricultural sector of the economy. But since about '86, if you look at conventional measures, return on assets, return on equity, problem loans and so on, virtually everything has been on a favorable trend in those institutions. The trend has kind of leveled off in the last year or two, but part of that is because agriculture has leveled off, and part of it is because nothing goes up at a steep climb forever. It's almost inevitable. We have avoided in this district, most fortunately, most of the excitement that has characterized banking in Texas and the Energy Belt and now more recently in New England and down the East Coast. We've avoided most of that excitement. I think most of that is a tribute to the bankers. It's their judgment and prudence and so forth.

JEF: Apparently more conservative?

GHS: I guess. I don't know if I would say it's conservative, but it's good management. There's no other way, around it, in my view.

JEF: Has that been as true for the bank holding companies?

GHS: They've both gone through their periods of difficulty. Norwest, as I recall, had a particularly difficult year in 1984 and brought in new senior management. First Bank's problems have been more recent and they've brought in new management as well. We don't like to discuss individual institutions, but I think both of them are doing reasonably well right now and I certainly hope they'll continue to.

JEF: You mentioned that in relative number of banks, neither of them or any other holding company is that important, but then in terms of the effect on economic realities, what has the effect of those banking systems and holding companies been on the independent banks?

GHS: There's some tension, as you no doubt know, between holding companies and the independents. That tension has always been there and will probably always be there. I personally just view it as a piece of the landscape. I don't know that it's unhealthy, but whether it's healthy or unhealthy, I suspect it isn't going to change. I think the independents have a view of the future that I don't particularly share. They somehow, I think, believe that unless the status quo is maintained, they're all going to disappear in the next X years. I don't think that's likely. I think even if you sort of did away with restrictions on interstate banking and branching, and even if you changed what we call powers and activities and let banks, if they chose to, do a wide range of things, I think a lot of independent banks would survive and thrive. Many that didn't would probably get bought out in nice multiples that I doubt their owners would be all that upset that they were, if they were leaving the business.

I think our economy is so big and diverse and our financial services industry is so big and diverse that there's room for lots of different players, with lots of different objectives in terms of what they think their market is and how they want to serve it. After all, if you just look at New York today, where you have many big banks, they're pursuing some very different strategies. You've got Citibank and some others that are sort of trying to be all things to all people. On the other hand, you've got Morgan.

We shouldn't lose sight of what the purpose is here. The purpose, in my judgment, isn't to maintain a certain number of banks or particular banking structure. The purpose is to make sure that the customers of banks, whoever they are, borrowers, savers, municipalities, the customers are well served. That's the issue. Who serves them? Do we really care?

JEF: What about contraction of service availability, though? You look at small towns in Minnesota, and you notice the hardware store and the grocery store are going out of business. Are the banks next?

GHS: I think John Borchert has a pretty good explanation for that. I think that's one of those trends that there isn't anything that's going to stand in the way of that at any reasonable cost to the taxpayer. I think that has to do with the changes in agriculture and the agricultural distribution system relative to the situation that existed when those towns were all founded. That's a trend that's been under way for sixty, seventy years. Once in a while it gets interrupted when things get very prosperous in agriculture, but otherwise it's one of those long-term secular trends that, as far as I can tell, is going to continue. My own guess is our best policy in most circumstances is just to let it continue, which isn't to say that individual towns shouldn't develop a strategy that will let them thrive. I would be all in favor of that, but I think you've got to be careful about trying to get some taxpayer money from outside the area to do that. Then you're making a decision that's in everyone's interest to subsidize that, and I'm not sure I would want to go too far in that direction.

As far as the financial services firm is concerned, if the bank leaves, in most cases it's likely to be for lack of customers. Usually if there's a niche that's going unfilled, some entrepreneur, somebody who sees an opportunity to make some money, will step in and try to fill it. So usually when things are contracting, it's because that niche is contracting or no longer exists. Technology today is such that for at least some banking functions, you don't need bricks and mortar across the street. For some, it's still nice to have it; not for all.

JEF: The growth of the ATM sort of thing, you mean?

GHS: The ATMs, the fact that you can do a lot with Merrill Lynch, you can do a lot with Fidelity. If you're a borrower, there are lots of people in the mortgage business, lots of people other than banks in the lending business. I will admit that it's not automatic, and sometimes it is difficult to go find a substitute, but, on the other hand, it's probably not accurate to say the service is simply unavailable.

JEF: It's just going to be provided differently.

GHS: Right.

JEF: You have a branch bank in Helena.

GHS: Yes.

JEF: What purpose does that really serve for you?

GHS: Mostly as an operations center. That is, it does the check processing and so forth for the Montana institutions. It's been very successful at that. They've done a very good job out there. We also have a staff of bank examiners out there who do most of the Montana institutions.

JEF: While Helena is a long way from Minneapolis, it is not inaccessible. Why do you need it?

GHS: Actually, I would say two things about it. First of all, we didn't set it up. I don't remember when the Helena branch was authorized, but it was years and years ago. You could, I suppose, imagine a situation where we don't need some of our branches, but my guess is that because we're still moving a lot of paper around in the check system and currency system, Helena actually makes more sense than many other branches of Reserve banks in the country. Otherwise, you would be moving that paper into Minneapolis or into Seattle or Denver or some other operational center that we've got, but all of those are going to be further [from the institutions they serve] than Helena. Moving paper around is not costless, geography is clearly part of the answer. I should say that the officers out there represent the Federal Reserve in the Montana banking community and in Montana generally, and there's actually a pretty good demand for that. People in Montana like to see people from the Fed and know something about what we're up to.

JEF: It is almost wholly focused on Montana, not the western Dakotas?

GHS: No, it's almost exclusively Montana.

JEF: What kind of reporting functions do you have with Helena from here? How closely are they tied?

GHS: As a structural matter, the vice president who was in charge of the Helena branch reports to our senior vice president for operations here. They have their own budget and own board of directors, although it's a little unclear exactly how much authority their board of directors has relative to ours here in Minneapolis. But they have their own budget. Typically, we would sign off on it. I guess it's the kind of relationship you would probably expect to see between a head office and a branch, whether it's the Federal Reserve or whether it's 3M with headquarters in an operating division over there. To some extent, it's not all that different between the Reserve banks and the Board of Governors in Washington. It has its smooth spots and its rough spots. For the most part, it's become routine.

JEF: What kind of regular personal communications do you have? Do you go out to Helena?

GHS: Oh, sure. I usually get out to Montana, not always to Helena, two or three times a year, at least. We will always have a senior officer from Minneapolis at the Helena branch board of directors meetings monthly. There's a lot of communication back and forth between staff, because many of our policies and practices are districtwide, so we want to make sure that Helena agrees with them, understands them, is following them, so on and so forth. If they're not, there may be good reason, and we want to know why, that kind of thing. There's a lot of communication between staff who travel back and forth. I've never tried to total up the resources that might be devoted to that, but I would guess it would be a fairly substantial total.

JEF: You mentioned board of directors. How many directors?

GHS: We have nine. Helena has five. All Reserve banks have nine directors.

JEF: How are they appointed?

GHS: Everything in the Fed is cumbersome, and this is a good example of how cumbersome it is. It's sort of a checks and balances system, and that's the way the Fed works. We have nine directors. Three are so-called Class A directors. They are banker directors representing large, medium, and small banks, and they are elected by the member banks in the district. The term is three years, by the way. They can serve one term.

JEF: Can they be reappointed in the future?

GHS: No. But the terms expire in successive years, so that we don't find three new banker directors every third year or something like that.

Then we have three Class B directors who represent business and more general interests. They cannot be bankers, but they're elected by the bankers. Their terms are also three years. By practice they can serve two terms if it works out. They represent general business interests.

Then we have three Class C directors, who also represent general community and business and almost anything, and they are appointed by the Board of Governors. They're not elected by bankers or anybody else; they're appointed by the Board of Governors in Washington. Their terms are also three years, and typically they can serve two three-year terms.

We've always tried for a lot of diversity on our board, mainly because of the nature of the district. That is, we've always tried to see to it that all the states are represented, if possible, that we have different ranges of business—agriculture, forest products—represented, if possible. There has been more interest recently in diversity, so now there is a desire to make sure we have gender diversity, maybe somebody from the labor movement, the consumer movement. Well, with nine people, you can only do so much, but, anyway, all those things come into play in the director selection process.

JEF: Presumably, if they're appointed by the Board of Governors in Washington, they have to get the names from someplace.

GHS: They get them from us, that's right. Some they develop on their own. Some they get from us. Yes, we kind of work together on it. I'm going to suggest people that I'd like to see on the board, but I'm not going to try to ram [it] down anybody's throat. I wouldn't be able to, anyway, in Washington if it's somebody they're really opposed to. This stuff gets ironed out.

There is a view, which I think is wrong, and that's why I'll mention it, that somehow our boards of directors are controlled by the banks. I think if you argue that while six out of the nine are elected by banks, you might, on the surface, make that case. But the reason it's wrong is that it's really the Class C directors appointed by Washington who are, in some sense, the heavy weights. But it's also true that I don't think the Class B directors view themselves in any way, shape, or form as representatives of the bankers at all. So I think our boards are much more diverse and more independent than they're frequently given credit for being.

JEF: Is their role fairly routinized? How much latitude do they have? Are they like a corporate board of directors that has the latitude to look into anything they want to?

GHS: Pretty much. I haven't served on any corporate boards, so it's hard for me to draw comparisons. I can tell you what we expect of them. Part of their role is like a corporate board. It's oversight of the management of the bank. I don't mean the management just as individuals, but is the bank, in their judgment, doing the things it ought to be doing, is it doing it well, so on and so forth. Our general auditor reports to the Audit Committee of our board of directors; he doesn't report to me or to our first vice president. So they can ask him to look into anything they want. But I can tell you we're very responsive to our boards. If they raise any questions, we'll try to get them an answer. There's no doubt about that. They have to act on things like appointment of officers, officer salaries, promotion of officers, all those kinds of things. I think that is kind of typical. They have to approve our budget; they have to approve major capital expenditures. I think that's very typical.

JEF: Do you have an Executive Committee, a Compensation Committee, those sorts of things?

GHS: We have an Executive Committee, we have what we call a Budget and Evaluation Committee, we have a Nominating Committee, a Building Committee, Audit Committee, and then one of our directors is chairman of our Advisory Council on Small Business, Agriculture, and Labor. I think that pretty well encompasses it.

JEF: If there's this routinized sort of function, in which people are elected by the banks or appointed by the Federal Reserve Bank, how do people come to the Nominating Committee's attention?

GHS: Where it's really important is with getting candidates for the Class C directors. I may have some suggestions or other management people here, but we've been coming more and more to rely on the Nominating Committee for candidates for the Class C directors. So then we typically will work with some of their candidates and present those to the Board of Governors in Washington and so forth. That's where they're particularly important. Some of the rest of what the Nominating Committee does is more routine.

JEF: Within the Federal Reserve System, what is the relationship, as far as you know, between presidents and boards of directors? In the corporate world, it's various.

GHS: Yes, it is various.

JEF: There are some that ride roughshod over them, others who listen to them to the exclusion of almost everybody else.

GHS: I don't know that much about it. It's not one of the things I've discussed with my colleagues at great length. I'm not sure that there are great differences. I think some presidents rely more on their boards than perhaps we do, and I'm thinking of circumstances where a president, in particular from outside the system, has been brought in, and the objective wasn't as sharp as cleaning house, but it was, “You probably don't have enough senior management talent here. You've got to go find some.” In the meantime, you can use your board as more of a sounding board for management ideas. But I don't think it varies a lot.

JEF: The Federal Reserve regions, as I looked at the maps of them, certainly vary greatly. Some of the Eastern ones are much smaller, more densely packed, more banks to supervise. This is a huge region. How does it compare to the others in terms of the relationship of the bank to the region? Are there regions in which the bank has a more powerful presence or a less powerful presence? Is the Federal Reserve Bank in New York, simply by virtue of being in one of the financial capitals, more visible than this bank is within its region?

GHS: Again, it's hard for me to judge that, because I haven't worked in enough regions.

JEF: You've been in two very different ones.

GHS: Yes. In the financial community in New York, obviously the New York Fed is a major player. My impression, at least when I was there, is that outside the fairly tightly knit financial community, the New York Fed wasn't much of a regional presence. To be fair, that was back in the seventies. I think we are more of a regional presence here. Some of our publications reflect that.

I make an effort, as I know some of our other people do, too, to get out and about in the region and meet with businesspeople and give speeches on policy issues and so forth. We probably have a better ongoing—“working relationship” isn't quite right, but sort of a better ongoing relationship with much of the region than at least some of the other districts, but that's because we've worked at it.

JEF: I look at the states you deal with, like North and South Dakota, Montana, where population centers are few. The economic activity may be fairly significant in terms of agriculture and stock-raising and mining and things like this. How do you maintain contact within a region this diverse and, in some cases, where the population centers are so scattered?

GHS: With difficulty, is the answer. Aside from the publications, we have one particular program in place—actually, a couple. One is a program we call district dialogue, that we put in place four or five years ago, where six or eight times a year, I and one or two of the other staff people would go out for dinners and breakfast with community leaders in towns around the district. We tie them into the Open Market Committee meetings in Washington. We do it a week or so before the meetings. Over time, that takes us to just about any meaningful population center, whether it's Kalispell, Montana; Marquette, Michigan; or Superior, Wisconsin. We don't get to all those places every year, but we do that on a regular basis.

Another program we have is every summer, usually in July, we have what we call the directors' tour, which is rather than hold a directors' meeting here in the bank, we will take about a day and a half and go visit some part of the region. We just rotate around by states. Last year we went to Montana; we did it in Helena. This year we'll be going somewhere probably in Northern Minnesota. So we got not only some of the officers, but the directors out and around. It's not just seeing businesses and so forth, but there will probably be a couple of luncheons and a dinner, and our chairman will make some remarks and I'll make some remarks. So we do that.

As I said, we view ourselves as representing the Federal Reserve in the district, so we get lots and lots of speech requests. Depending on the time and location and so forth, I'll do some of them and our public affairs people will do some of them, our economists do some of them. So we devote some resources to it. So we do that.

JEF: So holding up the Fed banner and making yourself visible is part of the game plan.

GHS: Yes, but I think it's a little more important than that, in the sense that I view these things as kind of communication tools in the following sense. We in the Fed, in the policy arena, can't do things that the public ultimately doesn't support. So I think part of our job is to essentially build that support by explaining to the public what we're doing and why, what issues we're concerned about, and so forth. But also on these kinds of things, as you undoubtedly know, either in the meeting itself or before or after, you get a chance to pick up a lot of information about the local economy and what the people are concerned about. So there is sort of two-way communication.

JEF: How much information-gathering goes on as part of this process in terms of finding out what people are thinking, what they're worried about?

GHS: Lots. In fact, when I came down here this morning, I had just gotten out of one of these district dialogue meetings here in the Twin Cities. We tend to do those in December, so this sure turned out to be a good idea, given the weather. For district dialogue, that is the purpose. For the directors' tour, that's part of the purpose. For most of these other occasions, even if I'm out giving a speech somewhere, there's lots of opportunities to talk to people at the table you're sitting at or when the meeting breaks up, before you go catch the plane, or whatever. Lots of opportunities to talk to people and find out what's on their minds. And usually they're not very bashful.

JEF: Who is invited to these? How is the guest list, if you will, arrived at?

GHS: Some of them are almost routine by now because we've been to the place. Basically what we'll do is contact a current or former director or Advisory Council member or somebody we happen to know pretty well, and we'll say, "Will you help us put together the list?" In the local community. So that's what we do. By now, of course, we've got a lot of these people on our mailing lists for various publications. That's not a problem.

JEF: What are your relations with some of the other regional presidents? How much coordination is there in terms of policy issues as they might arise within the various regions, things that someone sees on the West Coast [for instance]?

GHS: There's less of that than you might expect, I think it's fair to say. We all, I think, are pretty jealous of our independence on the policy side, but let me describe this a little bit and try to flesh it out. Monetary policy, which involves the Open Market Committee meetings in Washington, there's never any discussion in advance of that meeting about what I think I might want to do, in part because there's plenty of opportunity for that at the meeting, and in part because, as I say, I think we all want to maintain our independence and independent judgment. Once you get to the meeting, you're all sitting around this big table and there's kind of a go-round where everybody discusses the economy and its prospects. Then there's a second go-round where everybody talks about policy options. So all the views come out on the table. That's what the Open Market Committee is all about.

On the banking side, I think the need for coordination is going to grow over time, but, you know, we've had a country where interstate banking has been quite limited, so there haven't been too many cases where you had to coordinate. Now they're growing. Some of that will happen between presidents, but a lot of it is going to happen between supervision or officers at the discount window and so forth. Clearly, there's going to be more and more of that both on the banking side and on the payment services side as these sort of artificial barriers, state boundaries, as those disappear, and become less important. Because our district doesn't happen to perfectly follow state boundaries, and because our two big holding companies are grandfathered and have operated out of state for a long time, we've faced more of that than probably most other districts, but to date it has not been what I would consider to be a major issue. It may be over time.

If you're talking in a more fundamental way in sort of, "Who speaks for the Federal Reserve on some issues?" that's a different question altogether, and that really depends on the issue and it depends on who the chairman of the Board of Governors is. When Paul Volcker was chairman, I think it was pretty clear that Paul Volcker spoke for the Federal Reserve on virtually all issues. [Alan] Greenspan has a far different style and it has its pluses and minuses. On monetary policy, I think everybody still recognizes that Greenspan does [speak for the Federal Reserve]. But on banking issues and other things, I think it's been sort of whoever feels like it. [Laughter]

JEF: Less centrally—

GHS: Less centrally controlled. Right.

JEF: In determining agendas when the regional presidents get together, how is there a blending of agendas? Surely everyone comes to them with certain issues they want to discuss.

GHS: There's a process for that. Whatever staff is working for whichever president happens to be chairman of the conference at the moment will, maybe six weeks or so before the meeting, send out a request for agenda items. You can either fill out that request or call up somebody and say you want to talk about this. If it seems to be a reasonable topic and time permits, it goes on the agenda. There are some things that maybe we want to talk about and we don't put on the agenda, and that we just leave to time for general discussion at the conference. So that's all that happens. It's informal.

JEF: What is the tenure, would you say right now, the various presidents of the regions? You've been here—you're starting your sixth year?

GHS: I'm into my sixth year.

JEF: As president. In general, ball park overview, people have been there for four, five, six, seven, ten years? What is the average tenure?

GHS: I think I'm somewhere in the middle in terms of people right now, so I would guess I might not be at the average, but I'm pretty close to the median, probably. The president of the Richmond Fed, who I think is the longest serving president, he's probably been president about twenty years now. The president of the Boston Fed, who retired a few years ago, I think served for over twenty years. On the other hand, I mentioned the guy from Cleveland who is leaving, and I think he was president for about four [years]. The guy who is currently serving in St. Louis has been in office just a couple of months shorter than I have, but his predecessor was around for only two years. He clearly didn't like it and didn't stick around.

This bank has had a history. Actually, I'm the longest serving president in this bank in quite some time, I guess. You'd have to go back to the sixties, probably. They've had a history of people turning over about every four years. I was going to say I'm glad I haven't, but in some sense it's up to me to do what I want.

JEF: When the presidents get together and there are issues to be discussed that clearly need some sort of coordinated approach, what is the method employed to gain some sort of consensus? Clearly if people have their own agendas-

GHS: Ultimately it will come down to a vote if it comes to that.

JEF: This is the Conference of Presidents, you're talking about.

GHS: Yes. It will come down to a vote, and majority rules. The Fed works, though, by consensus building. We don't like many 7-5 votes if we can avoid them. We might live with 10-2. We prefer 12-0. So there would be a lot of negotiation probably prior to the meeting. Some of the things we're concerned about don't even require a vote. They sort of say, "We want to do the following. Let's ask the following subcommittee to do that for us," or, "Let's form a task force to do that for us and then we'll take a look at their work," and massage it a little bit till we get comfortable with it. So it doesn't always come down to a vote.

JEF: So there are methods for consensus building.

GHS: Oh, yes.

JEF: Has the consensus become an important part of recommendations that go to the Board of Governors in Washington?

GHS: Sure.

JEF: Talk a little bit, if you would, about the legislation that's been proposed, that would remove regional presidents from the Open Market Committee.

GHS: There's probably a lot to be said about that. I'm not sure I'm the most objective observer. In fact, I'm sure I'm not the most objective observer. On the one hand, I would say, "What's broken that we're trying to fix?" In other words, I think the Federal Reserve has served the country well since inception, certainly since the thirties. The system hasn't always been in place, but it's been in place since then. It has withstood some challenges in Congress and so forth. My reaction is, in some sense, I think this works well. I think the Fed was designed with the idea—in fact, I know it was designed with the idea of not concentrating power and authority in Washington and/or New York, but in making sure that the country as a whole had a say. I think the Reserve banks are very important in that regard. I expose my bias, but if everything is done inside the Beltway, I'm not sure the outcome is all that great. So I think this has served the country well.

On the other hand, I think there is a legitimate constitutional issue there. I'm not a constitutional lawyer to really argue the ins and outs of that all that effectively, but I will acknowledge there is a constitutional issue there. If Congress is concerned about that, and we're a creature of Congress, if they want to change it, they certainly can change it. I would prefer, both personally and objectively, looking at what's in the best interest of the nation, I would prefer other solutions.

JEF: Such as?

GHS: If there has to be a change, and I am not endorsing that at all, then I think it would be better for the Federal Reserve and for the country to make us presidential appointees confirmed by the Senate, rather than just say, "You're not going to vote anymore." I'll tell you, I think if we become simply advisers on the policy side it may still be an interesting job here, but on the monetary policy side, if you're just an adviser and you're always an adviser, advisers are a dime a dozen.

JEF: And they don't have to be listened to.

GHS: They don't have to be listened to. You have that vote, even if you're not voting this year. Everybody around that table knows that sooner or later you are going to be voting. Well, then you have some clout. You also have to have some good ideas and be sensible and so forth. You don't have clout just because you have a vote, but it's probably necessary to have the vote to have some clout.

JEF: You mentioned, “If it's not broken, don't fix it,” or words to that effect. Do you think the political perception is that it is broken? What is the uneasiness of those who would like to change things?

GHS: I think it probably exists on several levels. Some may be, as I said, on the merits of the constitutional question itself. Some, on the other extreme, may be mostly political. That is, if the people making policy were all presidential appointees—in this case, the Board of Governors—then we can hold the administration accountable, make it a political issue. But while that's maybe arguable at the moment, it's not always arguable, because those terms in Washington are fourteen-year terms. While people don't necessarily serve out the full fourteen years, it's historically been more the case than it is today that the Board of Governors, the seven members, might be appointed by three or four different presidents from different political parties over time. So you'd have trouble making a political case. But I think some of it is that.

Some of it is probably some discomfort with the notion I cited earlier, which is why I cited it, that what you have out there in the [Federal Reserve] banks are people who are controlled by the bankers and private-sector interests. That, I think, is just dead wrong.

JEF: That sounds like a rather populist view.

GHS: Right. And the banks are somehow villains in the piece here. But I think that's dead wrong from a number of perspectives, although I think it would probably be hard to convince somebody who believes it is true.

JEF: How serious is the threat right now to do this?

GHS: I don't know. Some kind of legislation like this almost always seems to be around. In my judgment, it's somewhat more serious than usual, because the people who are pushing it seem to me to be pretty serious, respectable people. On the other hand, I don't know that there's any real momentum to it at the moment. I think it's going to depend probably on practical considerations—how does the economy perform over the next year or two, what happens in the banking system over the next year or two, and so forth. That's my guess. If the economy performs reasonably well and the banking system improves, the issue will probably diminish.

JEF: Hard times begin tinkering?

GHS: That's my guess.

JEF: What would the effect be on the presidents if this were successful? What would your role be?

GHS: From a personal point of view, there's no denying that I would not be pleased, because part of the job that I really care about and really enjoy would disappear. What it would leave would be the banking supervision-related matters and payment service-related matters, and, as I said, I think it could still be a pretty good job, but it wouldn't be as good as it is from a personal point of view. So I would be more than a little sorry to see that happen. I'd like to think that it's not just personal considerations that are dominating my thinking, but over time you can predict what will happen. It will affect the quality of people who will want to have these jobs, because if you diminish the job, even if you pay people the same, you diminish the job, and you'll get a different quality of person.

JEF: Will it affect the regulatory performance?

GHS: If it affects the quality of the leadership, it well could. Sure.

JEF: And the perception that the bank, as a regulator, is a powerful institution, is that affected as well? Is perception part of the game as well? Or is that not quite as important?

GHS: I think there's some importance there, but on the supervision side, as I said, everything is cumbersome in the Fed. All the Reserve banks operate under delegated authority from the Board of Governors. That's very clear. So we're not independent in the supervision area in any way, shape, or form, and certainly on anything important. So I mention that because, again, most people probably don't even understand that. Yet, on the other hand, I think it's important that what's going to happen in supervision in the Federal Reserve, at least, it's going to depend, and always will depend, in my view, a good deal on who's leading things in Washington and what they want to accomplish.

JEF: Congressman [Bruce F.] Vento has made some comments about the bank. Do you want to comment on those?

GHS: You mean his most recent comments? Well, we're going to try to have lunch or breakfast with the congressman. I'll comment, but not substantively. [Laughter] We're going to have lunch or breakfast with Congressman Vento sometime soon and discuss this. I was really, frankly, surprised, because I've had some conversations with him, and he hasn't expressed those doubts. I guess what really caught my attention was some of this, “Who is the Fed accountable to?” kinds of stuff. We're accountable to Congress. I don't think there's any doubt about that. Federal Reserve officials are up testifying before Congress probably at least as often, maybe more often, than just about any other officials I can think of. If Congress says, “Jump!”my reaction is we typically say, “How high?” So I was surprised. But in any event, we're going to try to come to a meeting of the minds if we can.

JEF: I have a lot of questions that move into the research department, in particular, and international and national monetary policy, which might be better to save till Friday.

GHS: Okay. Sure, that's fine.

JEF: Because it gets into a whole other thing, and I'm afraid of breaking it in the middle. We have only fifteen minutes left, and it might break your train of thought and probably would break mine as well.

GHS: Okay. That's fine. Hopefully, Friday I'll be up to the task.

JEF: I'm sure you will. Actually, that may be, for you, a more interesting thing than some of the context-setting that we're working on.

GHS: I don't know. I actually kind of enjoyed this. These are things that I talk about from time to time, but I don't talk about that often.

JEF: I think it's interesting, too. I do a lot of corporate oral history, and I find it interesting simply because, after all, the people who run organizations make a lot of decisions and affect a lot of people. That certainly is true here in the Fed.

I'll see you on Friday.

Stern Interview Part II