Interview conducted by James E. Fogerty
Minnesota Historical Society
December 13, 1991
JEF: The last time we talked a lot about your position at the bank, etc., in Minneapolis, but today I'd like to ask you to comment on a number of things that have to do with research as well, particularly if you'd comment on the role of research within the Federal Reserve System generally. You've got all these regional banks. How do they do research? Do they compete with each other?
GHS: There are at least two points to be made. One is, of course, that research ultimately has to have a policy purpose. That doesn't mean everything that every economist is working on, you have to see the light at the end of the tunnel, that you know it's going to have policy relevance, but ultimately it should. When I say policy relevance, I think everybody tends to think monetary, policy, macro economic policy, economic performance domestically, and so forth, and internationally. That's all true, but, of course, there are a lot of issues in banking that economists have and can and should contribute to as well. So I would point out that the research programs can be fairly broadly based.
It is probably true that there is some competition, but I think there are again two points to be made. From the point of view of Federal Reserve bank presidents, one of our important responsibilities is participation in Open Market Committee meetings. We do our preparation independently, by design, so our research people are very important in that effort in helping us prepare, not just in terms of looking at and understanding the data and maybe looking at forecasts of the economy, but also talking about policy actions and what may or may not make sense or why.
In addition, though, I think the economics profession today is much like many others in the following sense. News travels quickly and results are shared very quickly, so while there might be concerns that there's competition or there's duplication or there's this or there's that, there's probably a lot less of that than you might expect. If somebody gets important results, they're widely disseminated pretty quickly today. It's not a question of [whether] the article has to be published in some prominent economic journal for everybody to be aware of it, although that certainly will occur eventually, but there are lots of informal networks in economics in the Federal Reserve and in the profession more generally. So people know to a considerable extent what people are working on and what the results are, if something important is achieved, if something controversial arises. It might set forth all sorts of other people looking at it more thoroughly to try to determine whether it really stands up or it doesn't.
So I think if you think about it in that environment, and I know I do, the news travels quickly and that's positive, because that means that you can build quickly on other people's results if they're really on to something.
JEF: Is there, though, a central funnel through which these go? Because the Federal Reserve System is, after all, a single entity, though it may have branches, is there a single research function? Has there been any talk of centralizing that as there is talk about centralizing automation?
GHS: No, there really hasn't been much. That's not to say that maybe there aren't some people around the system who might think that that's a good idea. I don't happen to think it's a good idea. There hasn't been much. For one thing, as I said before, part of the research function is to support preparation of the Open Market Committee meetings. Since all the presidents are there representing their own districts and taking independent points of view, I think that in and of itself suggests a role for independent research departments. Also I think the banks, over time, tended to have different orientations in research, have made different contributions.
I guess the case for centralization would mainly be one of efficiency of resources. I think the easiest counter case is I don't think we have a lot of history in this country where centralized things work all that well. [Laughter]
JEF: Good point.
GHS: To me it's pretty simple.
JEF: We were talking last time about the occasional scrutiny the Fed comes under from the Congress. Why do we need all the regional banks? You can see them thinking of Salomon Brothers or Chase Manhattan or Morgan Guaranty, how many research departments have they had?
GHS: That's right, and research is one of those areas, frankly, where I think it's always hard to say how many resources should you have. I guess I would say the question probably becomes not should you have one; I think that's pretty straightforward.
Another reason I didn't mention is partially because part of the role [of each Federal Reserve bank) is to understand the regional economy and also to, on occasion, contribute to regional economic issues. That's not part of our central mission in a sense. On the other hand, I think people have come to look to the Federal Reserve Bank of Minneapolis and many of the other banks as kind of a repository of expertise in regional economic issues and so forth.
I think the question isn't so much should you have one; it's really how many. It's almost a budget question. How many resources should be devoted to it? I don't think there's any answer to that. I don't think there's any answer to that question, really. I think the answer really depends on leadership in the individual district. It's impossible, as far as I can see, to say, You ought to have twelve economists, but not twenty-four, or something like that. It really is a question of how you want to do your business.
JEF: You raise a couple of interesting points. The role that the research department plays in preparing for the regional presidents' Open Market Committee, in light of our discussion last time about the efforts to remove the presidents from the Open Market Committee, what would that do to the research departments?
GHS: That might do actually less to the research departments than it might seem on the surface. It would depend, of course, on the nature of what they decided to do, but if the presidents remained as advisers to the Open Market Committee, you might well say, The presidents, if they're going to provide meaningful advice, need some support to do that. So it may not filter down into the research areas quite as substantially as you might think. I guess that's where I would start. I think if you've got a major piece of legislation that changed the situation fairly substantially, as something like that would, I think it would be a question of evolution. I think it's very hard to say. You'd have to see how this thing unfolded and so forth. From the point of view of the presidents' preparation and so forth, my first reaction would be, as I said last time, I don't expect it's going to come to this, and I certainly hope not. If it did, I would take the responsibility seriously and want to be well prepared, and then I guess I would have to see how it went from there.
JEF: The impact on the research department might not be very great.
GHS: I think it need not be very great. I think it really depends on how this thing would play out. It would obviously depend on some attitudes in Washington and what they felt was appropriate and so forth, but I don't think there's any real linear straight line kind of connection, that if A happens, then B is clearly going to happen.
JEF: It's not the domino effect.
GHS: Not necessarily. As I said, you'd have to see how it played out.
JEF: What about within the region? To what extent are the research departments in the various banks, as far as you know, the others beyond your own, dealing with issues of purely regional economics and therefore playing a role in helping other people within banks, other business forecasting within the region?
GHS: I think it varies all over the lot, is the answer to that. Some banks, some districts traditionally have put a great deal of emphasis on the regional economy. Boston and New England always have. In recent years, Chicago has put a good deal of emphasis on regional kinds of things. I think Philadelphia traditionally has. It's probably fair to say that to an increasing extent, Atlanta has. Some of the other banks spend a lot less time and energy on regional issues, and I think while there's a great hunger out there, as far as I can tell, certainly in this district, for regionally based information, data on the regional economy, information about the outlook of the regional economy, and so on and so forth, resources are finite and our budgets are limited. You can't be all things to all people, so you have to figure out where your comparative advantage is, what your contributions can be, and go from there.
I think our attitude is to try to be helpful when asked, but we don't take the initiative too often on regional issues. On the other hand, what we found about four or five years ago, maybe a little more, is that we were actually doing an awful lot of regional work, forecasting the regional economy. We helped develop the proposal for the Rainy Day Fund, for example, the Minnesota budget, going back into the early eighties. A couple of our economists were looking at that. I don't mean to try to take credit for it. I don't know all about the origins of it. I know we had something to do with it.
We've been doing a lot of regional analysis and we really hadn't been compiling it in any one place, so we took some steps to try to address that, because we felt that we had something to contribute and really hadn't been getting it out there very effectively. But it really varies all over the lot.
JEF: You don't see one of your major focuses of research being the provision of economic data to banks in Montana?
GHS: No, no, no.
JEF: Do they really need it?
GHS: I was going to say, I don't know that there's that much demand for that. Montana bankers are always interested in how the Montana economy is doing and so forth. We're not a principal source of information on the Montana economy, a source of original information. What they have is various state agencies and the national Commerce Department or something that will have that data. We can help analyze it and understand it to some extent. For banking data we'll have stuff.
JEF: Does the Fed get contacted, for instance, if you're in Minneapolis, by state agencies in the various states in the region for data to feed in to their own?
GHS: On occasion. We get a variety of requests from all sorts. It's not so much for data. They have the data. I think their questions tend to be, What do we do with this? Our expertise is in analysis and so forth. They already have the data. Where we're going to be helpful is with trying, where appropriate, to help them understand what it is they've got, what it's telling them.
JEF: Interpretation rather than data.
GHS: Yes. Data-gathering, outside of the banking arena, where clearly that's our responsibility, data-gathering is not.
JEF: What effect, then, does the president or anyone at the Federal Reserve bank like yourself have on the research agenda of that bank?
GHS: I think that potentially you can have a lot of effect. Again, it's a question of taste and expertise. As I said, a lot of effect, because you can affect a lot of the things we've already discussed. How many resources go into a regional as opposed to national or international kinds of questions? How many resources are devoted to banking-type issues? Do we want to be what I might call sort of relatively academic state-of-the-art research department, or do we view our principal role as taking the Commerce Department and Labor Department [statistics] and so forth and getting to the nitty-gritty of that, to try to understand as well as we can where the economy is at the moment in preparation for the next meeting?
In fact, I would say the president and occasionally boards of directors have a great deal of influence on individual research departments, even if they don't do anything. If you don't say or do anything, then you're essentially telling the research people, Okay, we're comfortable with what you're doing and you can continue to do it, whatever that may turn out to be.
JEF: You mentioned that your tenure, for instance, is longer than that of a number of your predecessors. The research department keeps rolling along like they do in other departments of other institutions. Surely you inherit projects that are ongoing. It would seem clear that the projects might be ones in which the president doesn't have a great deal of interest. They're not something that you find particularly interesting, that you want more data on and set a research agenda of your own. I'm interested in the power to stop those or diffuse them.
GHS: Oh, sure. If you want to. I don't think there's any doubt that you could just say, Hey, I'm not interested in that. I don't think that's a good use of our talents. Let's redirect that. I'm not sure I think that's a good strategy personally, because as I said at the outset, I think it's very hard sometimes to know where some of these things are going to lead. That's one reason I'm personally a little cautious about saying, Let's not do X. Let's do Y. You're not clairvoyant, so you're not sure where it's going to lead to.
I try to stay away from micromanaging the research department or any other department. I don't worry all that much about how the economists are spending their eight or ten or however many hours a day they use to do their professional thing. I am concerned about the quality of what I get, but I don't worry a lot about whether they've got some pet project and they want to do it, as long as they're also doing lots of other things..
JEF: What would your comments be on the things you see as research agendas for which the Minneapolis Fed is particularly known?
GHS: There's a long history of those that go back well before I became involved here. Rational Expectations is, I think, the first thing that comes to virtually everybody's mind. Not always favorably, but the first thing that comes to everybody's mind when they think about research at the Minneapolis Fed. Justifiably, because that has been a major, major contribution, and even that understates it. While Rational Expectations were very controversial when they first hit in the early seventies, I think now they are part of every macro economist's tool kit. Even people who have reservations about them will certainly acknowledge that it's an important contribution and you kind of have to think along those lines if you're going to make sensible economic policy.
Even prior to Rational Expectations, I think there was a very important paper done by people here and at the University of Minnesota that never quite got the attention it should have, although it made a big impression on me. That had to do with the use of information in economic policy. Basically the thrust of the paper is non-controversial, yet at the time it came out, it was. That was Don't throw away information; I think that was a very important paper.
Since Rational Expectations, there have been other contributions of significance. One has to do with statistical techniques called vector autoregression, or Bayesian vector autoregression, that again has been pursued aggressively both by people here and at the University of Minnesota. Real business cycle theory, which is a more recent development, but again something where this bank has been at the forefront. We've also been at the forefront for a good number of years now in banking research, both historic banking research, that is, the banking system of the U.S. and how it worked or didn't work back in the previous century. We have a couple of the real experts in the country in that area on the staff here, as it turns out, and on more recent banking policy issues and critical questions. There may not be a more important question or issue at the moment than reform of the deposit insurance system and what to do about the too big to fail policy. So I think the people here have distinguished themselves, and it's clearly to their credit.
JEF: Have these been research agendas that came out of the research department itself, or have they been ones that past presidents have been interested in, or a combination of the two?
GHS: I think it's a combination. I think it's fair to sayat least it's been my perception that the research program really has come from the research department itself. The presidents, including myself but certainly a number of my predecessors, have chosen to support this and to, where appropriate, not just support and encourage it, but publicize it. They have also shaped it to the extent that clearly in something like the banking issues that were taken up, I think we more or less unconsciously, rather than consciously, in the last several years have all gotten increasingly interested in it. I would include myself in that. Because of that, I think we've naturally evolved in the direction of working in that area and putting more resources into it and so forth. By more resources, I don't mean adding a body. I just mean taking the people we have and saying, Okay, we'd like you to take a look at some of these issues.
JEF: As research and topics like Rational Expectations continue to go on, you continue to invest in that.
GHS: Yes, except I think Rational Expectations is, as I said, part of everybody's tool kit now. While you can look at different applications of the concept, I don't know if there's a lot new to be said about the concept per se. Another area where the bank is notedand it's also as esoteric as Rational Expectationsis overlapping generations models. Actually that's a very important contribution, because until these models came along, people didn't think that the incentives for the current generation might be different than the incentives of the next generation at any point in time. So if you think about it, of course, the country is populated by all sorts of different people of different ages and so forth, who may have different interests in saving versus spending and borrowing versus lending and so forth.
JEF: How much research is done within the system on comparison between American economic systems and the role of central banks and those in, for instance, Europe and Japan?
GHS: I think over time there's been a lot, especially in the last ten years. In a way you can't avoid it. As we become increasingly a part of this integrated global economy, questions internally and externally arise about how the Federal Reserve fits with other central banks in the world, how are we different, how are we similar, what are our roles, what's the role for coordinating policies internationally. Is that a good idea, bad idea, etc., how much policy flexibility do you actually have if the Bundesbank is doing one thing and the Bank of Japan is doing something else? How much leeway does the Federal Reserve actually have? I can probably think of dozens more issues or questions like that, but all of this has become increasingly important because the real world has demanded it, I think it's fair to say.
Now you've got Europe '92. Clearly major things are happening and will happen in Eastern Europe that are going to further heighten all of this. This is clearly one of those areas where I think many of the staffsnot allperhaps, but many of the staffs in the Federal Reserve [system] will be spending more effort.
JEF: You look at the regional banks and clearly they have a regional focus and they feed into national issues. When you get to global banking and monetary policy issues, is there a bank or is there a staff that particularly focuses on those as opposed to national and regional?
GHS: The answer to that probably depends on who you ask it of. [Laughter] I think it's fair to say that the staff of the Board of Governors in Washington and the staff of the New York Fed probably have the most global orientation. For one thing, they have larger staffs, so to say that the world is their oyster, whatever that expression is, is more true in that case. The Board of Governors' staff probably has twenty or thirty times the number of economists we have. New York probably has five or six times the number of economists we have. So they have the resources. To some extent, San Francisco, particularly in the Pacific Rim area, views itself as a source of expertise in international matters.
Again, like most generalizations, you've got to be careful with them. I don't think you have to be on a coast or have a large staff to make a contribution to international economic or financial issues. I think we have. We wrote an annual report a couple of years ago on fixed exchange rates, part of which was excerpted in the Wall Street Journal. In fact, it turned out to be one of those cases where maybe because the handwriting was already on the wall, we basically said fixed exchange rate is the way to go. One of the implications of that was Europe ought to, if they were smart, go to a single currency, a single central bank. That's what they're doing. I'm sure it wasn't because we wrote the essay. It's not that.
JEF: But still...
GHS: But still, we were right. So I think again it's a question of how do you choose to use your resources and where is your comparative advantage. I think we saw that issue early and clearly, so we wrote about it.
JEF: How much give and take is there between the research section and, for that matter, the policy-making staffs, of the Federal Reserve System as a whole and foreign banking systems?
GHS: I think you'd get a more complete answer from the New York or Washington people than I can give you.
JEF: What's your perception of it?
GHS: My perception of it is that at fairly senior levels it's quite good. My impression is that the senior international guy at the Board of Governors, a guy by the name of Ted Truman, knows his way around Europe and so forth pretty well. He knows his counterparts and all that. I know the people at the New York Fed, not so much from research, but a little higher up on the policy side, spend a lot of time over there.
More recently, and this isn't true just in policy, with what's been happening in Eastern Europe, a lot of Federal Reserve people, principally from Washington and New York, have spent time in places like Poland and Czechoslovakia and Hungary, helping them with all sorts of what you might call financial infrastructure issues. How do you set up a banking system? So on and so forth. So there's a lot of that kind of give and take. Again, part of it is dictated by circumstances. Obviously three years ago that wouldn't be happening because the wall wasn't down. Well, it happened a little, but obviously with the change of environment, it happens to a far greater degree.
JEF: I thought of that just this morning when I was reading the Wall Street Journal, looking again at the plans for the Ukraine to print its own currency. Obviously there are so many more implications than simply starting up a printing press and rolling off some bills and deciding whose picture is on them. I'm wondering who is giving them advice on how to do this.
GHS: Right. Those are the right questions. Again, because of the circumstances, there really has been, I think it's fair to say, an explosion in some of those arenas.
JEF: To what extent does the business community, for instance, in the United States, look to the central bank of the United States for at least some component of the information that it's trying to gather? For example, the united Europe, what's it going to be like doing business in 1992? Clearly, the big commercial [enterprises] have staffs that are looking at this, too.
GHS: I don't think the business community would look to the Fed for that.
JEF: That's interesting.
GHS: Because I think what they're more inclined to do, and probably correctly, is to see, they're not interested in sort of the broad scope too much of how rapidly is the European market going to grow. I think that they're more interested in narrow questions. We make the following products. What is the outlook for those products in those markets? Those kinds of things. I was a consultant. I can tell you. I was in the consulting business for a while. 3M's interests were very specific. The lighting division was one of the clients, and they didn't care all that much about agriculture or at all. What they cared about is demand for commercial lighting, you know.
So I think businesspeople clearly have a different orientation and probably rely a lot either on their own people or on things like business partnerships for these kinds of things. I'm sure the big international firms, like 3M and Honeywell, have a lot of in-house expertise, a lot of hands-on experience in dealing in those countries. They're also part of the Business Roundtable and all of that. I would guess that for their purposes they'd get a lot of the information they'd want, probably in informal ways, just sitting down with other executives.
JEF: You said you didn't think there would be much push for consolidation for research services [in the Federal Reserve System], perhaps. What about the push for consolidation generally? I'm thinking of automation. Clearly that's an opening edge or might be viewed as such.
GHS: I think some of us in the system have had concern about that. If that's the opening shot, what happens next? As a practical matter, I would say that, first of all, that is not going to happen overnight, so it's like everything else.
Rather than heading to jump out the window immediately, it probably makes sense to wait and see how it goes. I think in that case it's clearly a good idea from at least a couple of points of view. It doesn't make a lot of sense to have twelve-plus mainframes around the country if you only need three.
But also from the point of view of the way banking is evolving, interstate banking and branching has kind of stalled for the moment because things got mixed up in Congress, perhaps predictably. But nevertheless, interstate banking and branching is the way things are going to go, in my judgment. We provide electronic services to these institutions, and even though electronic services are a fairly homogeneous product, they weren't entirely standardized. That meant if you had something like an organization like Citibank with operations in New York and in South Dakota, or First Wisconsin with operations in Milwaukee and Minneapolis, they would get different services to a degree because they were operating with two different [Federal Reserve] districts. Things weren't entirely standardized. Well, from the customers' point of view, that clearly doesn't make a lot of sense.
So what's maybe even more important in the consolidation effort isn't just that we'll have fewer mainframes and better backup and all of that, which we will have, but also I think we'll serve the customers better because we'll ultimately get to a truly standardized service.
In terms of what's delivered to customers and the way it's delivered, it will be far more standardized than it is today. I think given the way banking is evolving, that really makes sense.
The ultimate concern is, I think, that the structure of the Federal Reserve has served us and, more importantly, the country well. I may be biased in that assessment, but nevertheless that's my assessment.
JEF: That having regional banks has been good.
GHS: That's right. The question that arises, irrespective of what it means for the Feds, is it in the best interest of the country to consolidate more things? I think the burden of proof is on those who think it is, who think that we should consolidate more. It's something I certainly think about and worry about from time to time.
My guess is that these things, like a lot of other things, are somewhat cyclical. You see the same thing in the corporate world. Everybody says, Well, we had the centralized structure. It hasn't worked. It's time to decentralize. So they decentralize and it operates like that for five or ten [years] and then they say, Gee, we could really reduce a lot of duplication if we centralize, and they centralize. Well, I suspect that's what is going on here, and I suspect that given a little time, this thing will play itself out. If we were having this conversation five or ten years from now, everybody would say, Gee, I hear you're looking at ways to decentralize some things that you had been doing in a centralized way somewhere. So it's probably one of those issues that if you put it in the longer-run context, it's one of those things where there's not much new to be said about it, is my guess.
JEF: I'm waiting for the synergy to come back. [Laughter]
GHS: I don't know about synergy. Actually, it's one of those words I never quite understood.
JEF: It sure got a lot of play.
GHS: Yes. Sometimes they're in fashion and sometimes they're out of fashion. Our responsibility is clearand this sounds like apple pie and motherhoodbut, nevertheless, when you're in public policy, this is what you think about. You try to do what's in the interest of the country and the taxpayer and so forth, but it's not always black and white. Most things in economics and most things in management and so forth are double-edged swords in the sense that they have their pluses and minuses, there are going to be some winners and losers and you have to try to weigh those things. It's gray most of the time.
JEF: A related side point that has a little bit to do with that, in terms of constituency building within this region. Do each of the banks have a constituency, which, for instance, if push came to shove, would argue for the fact that it is important to have a Federal Reserve bank in Minneapolis or one in Chicago or one in San Francisco?
GHS: I don't know, because I don't think it's been quite put to the test. I think you can get a sense of it. I think in this district, for example, a lot of the smaller community-oriented banks are pleased with the fact that we are in the financial services business and want us to stay in payment services. I'm sure they'd like us to stay in payment services. I think they truly value what we do there and so forth. In a political environment, you could say we employ 1,000 people in Minneapolis. That's not trivial, and I suspect that means that there are some natural constituents and that kind of thing.
I think the answer is yes, there probably is, but we've never really gone out and quite tested it.
JEF: That's an interesting thought, Congress being pulled, as it always is, by groups that have constituents.
GHS: I think the prevailing view in the system, certainly my view, is that while in theory you can conceive of, We can merge district one with district two, or whatever, I suspect that Congress, were they really confronted with that, would find it very difficult because we couldn't unilaterally do that. Congress set this up. Congress, when confronted with that, would find that very difficult probably for the employment issue, to start with, and maybe for other reasons as well.
JEF: Have there been other moves for centralization within the Federal Reserve within the last ten years?
GHS: I can't remember anything as high profile as automation consolidation is, although we tend to forget that when Congress passed the Monetary Control Act of 1980 and we had to go about pricing our services and so forth, that required, back in 1982 and '83, maybe even a little beyond, a much greater degree of coordination of payment services than we had been used to at all. Before that, each district sort of did its own thing. There were a lot of people who were very opposed to that in the system, saying, again, we're losing our autonomy because we're setting up these groups that are going to help to coordinate. As it turned out, I think that was actually a very healthy thing for the Federal Reserve and for the economy. So there were fears there, but as they played out, they turned out to be unfounded. That could be the way this goes.
JEF: Automation has a very high profile as other things are considered, or rumors of them. People construct rumors out of thin air at times if they want to. What is the effect of such a high profile rumor as centralization of automation on employee morale at the Federal Reserve? Have the presidents talked about that?
GHS: Oh, sure.
JEF: Are people worried about that?
GHS: Oh, sure. We've talked about that from very early on in the consideration of consolidation. Yes, we've talked about it a lot and think about it a lot. We are devising, although we don't fully have in place, plans to retain the people we need to retain or want to retain through the transition. Some people will move to consolidation sites and some people will probably get other positions in the bank or district where they're located as opportunities arise. Some people won't. I think, in general, the Federal Reserve is very good in the way we treat our employees, number one, although I think we tend to beat ourselves up on that issue from time to time. In the hard light of day, we are actually good at that. But I think we're being straightforward with people. Consolidation is coming. There are going to be fewer people in this. Let's not kid ourselves. We're going to do our best to make this work, but you have to understand we're going to be downsizing. I think people do. Obviously the people who are directly affected, and maybe some others, clearly have high levels of anxiety and so forth. I don't think there's much that can be done. That's the way it is.
JEF: Some people have higher levels of anxiety than others.
JEF: It's an interesting point, because whenever it happens in businessand I can't imagine the Fed is much differentpeople are wondering, What's next?
GHS: We've been through some of this before. Back in the early eighties, we had over 400 people in our check department, and now we don't have much over 300 people in check. Check is a fairly high turnover area, so most of it was done through attrition. But we've done things like selective early retirement programs. We've tried to become more efficient and create some openings, so we've done some of this. We always agonize over it a lot ourselves, frankly, and it presents some real management challenges. But I think for the most part it's gone reasonably well, and I think people understand. We're adults. People understand that you don't have to look around very far to see that a lot of corporations are going through the same thing and to a far greater extent than we are.
JEF: Yes. Looking at the Fed as a business, the system and the individual banks as a business, what are the major services that they provide that actually generate income and that stand as bank services?
GHS: Priced services, or payment services, is that part of the operation, so check processing is by far the largest, both in terms of the number of people it employs and the revenue it generates. Then there's electronic funds transfer, wire transfer, and related to that is the automated clearinghouse. Then there's various issues in cash. Then there's some securities-related businesses. Electronic transfer of securities is one thing. Definitive securities, that is, paper, clearly is a dying business, but we're still in that to a degree. Then cash services, currency and so forth.
Some of these things we do on behalf of the Treasury, so we don't collect any revenues, but some are clearly payment services that we do for banks and other insured depository institutions, and we do charge fees for that.
JEF: What are the most important cash-generating services that you provide?
GHS: Check, without question. Check is the bulk of the business.
JEF: Are we headed to a checkless society?
GHS: Not anytime soon.
JEF: The paperless office.
GHS: Right. The saying is that we'll get to the checkless society about three years after the paperless office.
JEF: I wondered about that.
GHS: That is another issue we've been talking about for at least twenty-five years now. We could get there. Don't get me wrong. I can imagine scenarios that could get us there and get us there fairly quickly, but I don't attach a high probability to it. When you stop and think about it, the check is a pretty convenient instrument, so consumers and businesses are going to use them unless banks price them in such a way that it really just becomes prohibitive and expensive to use. Some of our banks have been exceedingly reluctant to price them that way, so check volume, while it hasn't grown very rapidly in recent years, continues to grow. I don't see any signs that it's going to turn around and start to diminish or diminish very rapidly anytime soon. If you tell me the banks are going to start charging their customers what it costs, or maybe even more than it costs, to actually process these things, that might change the nature of the way the instrument is used.
JEF: Given the dramatic failure of things like debit cards, which did not succeed
GHS: Why should they? [Laughter] Who wants their account debited immediately?
JEF: Right. You wonder. And yet the banks tried to push those.
GHS: I think if grocery stores took them, because people are so used toyou either write a check, which, of course, isn't an immediate debit, or paid with cash at a grocery store. I think if grocery stores took them, I think there might be some modest future for debit cards. Outside of that, I don't know why you would ever use a debit card rather than a credit card.
JEF: No one else did either, apparently.
GHS: Banks keep trying, which says something, I suppose, about their marketing expertiseor judgment. Not expertise. Judgment.
JEF: Probably summed up best by someone I interviewed a while ago, who said, Why should consumers not have a chance to play a float like the big boys? [Laughter] Of course, it's the truth.
GHS: Sure. Of course.
JEF: They never seem to. It's a good point, because the marketing never seems to have gotten over that hump.
GHS: Yes. I don't understand it, because it's not very complex.
JEF: When you look at the Fed as a business and the services that it provides, how important is the cash-generating portion of its services within the system itself?
GHS: From an aggregate revenue point of view, if that's what you're asking, it's not great in the sense that our revenues are in excess of $20 billion a year now, most of which is interest on our portfolio of government securities. I think our total revenues in financial priced payment services is less than $1 billion a year systemwide. So it's not a large chunk of that. I think where it's far more important than that is in a couple of related ways. The fact that we no longer give these services away for free to member banks, but now have to cover our costs, broadly defined, and sell the services to any insured depositories, leads to a better allocation of resources. I mean, that's number one. That's clearly very important. I would argue that's very important for anybody, and it's certainly important for us.
So it leads to better allocation of resources. I think it makes us more innovative and creative as payment system participants, providers, so I think that's another benefit of the current arrangement. And related to that, as you might expect, it has changed the culture in the Federal Reserve, particularly in those areas, where it has really given us a raison d'être. You can imagine an environment where you're sort of giving services away to member banks, who will probably take them because they're free, as compared to an environment where you have to charge for the services, compete with other correspondent banks, and cover your costs. That's a very different environment. I think that's turned out to be very healthy. That has really changed the orientation in that area.
JEF: Does the Fed make a profit at the end of the year?
GHS: We don't quite use that term, as you might imagine. [Laughter] We do have sort of a bottom line in priced services. Some of the districts make a profit and some of them don't.
JEF: How much emphasis in the system is put on cost control and turning a profit?
GHS: What the Monetary Control Act saysand we take it very seriously, because, again, this came from Congressis that we should break even, essentially. That is, our revenues should cover our costs. Our costs are defined not just as operating and overhead and so forth, but also something we call the private sector adjustment factor. That's sort of a proxy for return on equity, taxes, and so on and so forth. The objective is to break even or to get 100 percent recovery. We take that very seriously. That's the objective. That doesn't mean every bank has to get to 100 percent. In fact, the way it works is we would like every bank in what we call district services to essentially break even. Every district. That is, 100 percent recovery.
National services, wire transfer for example, that's different. We'd like the service as a whole to cover its costs. That's a high overhead, low variable cost business. We're never going to break even in that business in this district because we're a low volume district with relatively high overhead, although consolidation may help that, with most of the costs that other districts have. But we want the nationally priced services to break even as well.
So we're always shooting for recovery essentially of 100 percent, and I think we have always come quite close. Sometimes we're a little over. I don't know if we've ever come under in the aggregate for all services. If we have, not by much. We take that very seriously. That's there and that's what we shoot for.
JEF: How much publicity is given if the Federal Reserve System returns money to the Treasury?
GHS: My recollection is that in February, when our books are closed, there's always a press release, and it's always in the papers. It doesn't get big headlines, of course, but it's always there. Here's the Federal Reserve results for the year, and X was returned to the Treasury. It's always there. Nobody jumps up and down about it, and I wouldn't expect them to.
JEF: Although in this day and age, as people are more and more concerned about the expenses of government, it seems that a system that actually makes a profit and returns it, however
GHS: The problem is, though, because most of what we do is interest earned. We couldn't help but make a profit. It's not because we're clever or good or anything. The profit has nothing to do with what we actually are accomplishing. It just arises in the normal course of our business. In this case, everybody has it right. There's no reason to get thrilled about it.
JEF: The system doesn't go overboard trying to make it.
JEF: You mentioned the 1980 congressional legislation, regulation and deregulation. Can you comment a little bit on the effect that that has had on the system and the work that it does?
GHS: I think I've already hit, from my point of view, the high points of that. It has had a major change on the culture of the organization, particularly in the payment services area, but not exclusively. It's given us kind of a bottom line orientation, and I think that's very healthy. As I said, it really gives you something to shoot for, a reason for being. It's added a whole new level, I think, of both discipline and excitement and creativity that heretofore didn't exist. So as I said, I think it was very healthy. At least that part of the legislation was a very good idea.
I think the Federal Reserve has responded to that very well, from my perspective. Some of the correspondent banks feltI think a lot of this has diminished, but not entirelyearly on that we were inherently very inefficient in that we would just lose volumes to them across the board. That turned out to be wrong, and I think some of them then felt we were doing the cost accounting wrong and cooking the books and our prices weren't as high as they should have been. But, you know, we had an outside accounting firm in and there was lots of congressional testimony by us and others. I think we got a pretty clean bill of health there. In fact, I think that issue, while it's not entirely put to bed, is kind of behind us. As it turns out, we're pretty good at what we do.
JEF: Which is good to find out.
JEF: What about the larger issue of banking deregulation? There are spectacular examples of the effect this has had.
GHS: That particular piece of legislation I don't think was so critical to banking deregulation, but there have been various attempts at banking deregulation, which followed that a few years later and so forth. If you're getting at whether we can link our current banking and savings and loans problems to that legislation, I guess my answer is sort of yes and no. The convenient whipping boy is, Well, we deregulated these guys and that was a big mistake and we should re-regulate them, and so forth. I think the world is, again, more complex than that.
Mistakes were clearly made. The most important mistake, in my judgmentand this isn't original with me, but it is original with some of our peoplewe put the cart before the horse. We deregulated before we fixed deposit insurance, so the incentives were wrong. The incentives were wrong from the point of view of public policy and the taxpayer, but from the point of view of a banker or an S&L operator, they'll deal with the incentives that confront them, just like everybody deals not with the ideal tax system, but the tax system that confronts us.
They were confronted with a set of incentives and they proceeded accordingly. Again, that's not the whole explanation for problems in financial services, but it's part of the explanation. So if it had been done rightbut it's history now and it's too latewhat you would have done is fix deposit insurance first and either address too big to fail or never let it become policy, depending on where you were in the cycle. Then, as far as I'm concerned, if deposit insurance were right and too big to fail were not a policy in this country, or if we had a way of controlling (I think there are ways, but that's another matter) too big to fail, then I would say I'd just deregulate them all. I mean, the problem is we didn't do what we should have done first. We haven't done it yet. So we shouldn't be surprised, given the incentives we have in place, that we get these persistent problems in savings and loans and banking and so forth.
My prediction would be we're going to continue to see problems of some type and magnitude until we get serious about fixing the incentives.
JEF: Do you want to comment briefly on a couple of things you think could have been done, particularly the deposit insurance and what might have been done to make sure, that because you were very large
GHS: I don't want to do this as a forum for promoting my own thoughts on it, but I will.
JEF: Please do.
GHS: What we have evolved to in this country is a system where every account is insured up to $100,000 de jure, and de facto essentially insured without limit. Because of concerns about stability in the financial system and spillover effects, the intentions are good, it's just that it turns out the cost is very high. You can't divorce, in my judgment, deposit insurance reform from too-big-to-fail because they're tied together. The reason we've chosen to insure deposits over and above the $100,000, for all practical matters, is because of too-big-to-fail. We were concerned that large institutions with problems that might experience runs from uninsured depositors could have spillover effects here and abroad. So we've kind of backed ourselves into this policy.
Of course, the small banks, justifiably, said, You can't just insure deposits at large banks over and above $100,000, because that gives them a huge competitive advantage and we'll all be out of business. That's a bit of an exaggeration, but the equity argument is right. So what we have is essentially everybody is too-big-to-fail.
You might say, What's wrong with that policy? What's wrong with the policy is that it's going to cost the taxpayer $150 billion or $250 billion to resolve the savings and loan problem and it's probably going to cost the taxpayers at least several billion dollars to resolve the problems in banking. So this has not been a cheap policy.
What's the problem? Well, the problem is as follows. Depositors are not stupid. Depositors know that they have essentially unlimited insurance, so they don't care about the quality and caliber of the institution. They don't care much about the quality and caliber of the institution with which they do business. So that means the highest quality bank in the landMorgan is usually cited, but whatever it ishas to pay just about the same for deposits as some high-flying, risky operation down in Texas, because there's no incentive for depositors to care.
Well, what does that lead to? What that leads to is too much risk-taking in banking, and the reason is not because bankers are perverse, but just the incentives they confront. The guy in Texas running that institution, he knows he can always go out and attract more deposits and put on more assets and he doesn't have to pay that much to attract those deposits. So he grows more and takes on more risky assets than he would have and should have if the market really priced risk differentials. But there's no incentive. Depositors have no incentive to discriminate, or very little incentive to discriminate. So what that has led to, for the reasons I just described, is excessive risk-taking in insured institutions, whether they're savings and loans or banks and so forth. Well, excessive risk-taking has its price. The price is failures that have to be ultimately. resolved when the deposit insurance funds run out of money, have to be resolved by the taxpayer.
That, in my judgment, is the heart, not the whole explanation, but it is the heart of the problem. So if you're addressing the problem, what you have to do is reform the deposit insurance system to put more market discipline back into it. How would you do that? Well, what we have proposedand the more I think about it, the better I like itis co-insurance. The way coinsurance would work would be, let's suppose you said everybody could have one insured account up to $100,000. Over and above that, you're at risk, but only at risk for, say, 10 percent. What does that do? Well, I don't know if 10 percent is the right number, but the thought behind that is it gives the depositor some reason, at 10 percent, to care about the quality and caliber of the institution with which they do business. If they really believe that the institution is riskier than the bank across the street, then they're either going to go across the street or they're going to say to this first bank, Okay, I'll leave my money with you, but I expect compensating return. So again, you can see how that would start to get market discipline back into the system. But beyond that, it also deals with too-big-to-fail. Because what's the concern about too-big-to-fail? Too-big-to-fail is you get these runs, especially at large banks, with spillover effects.
What we've done here is cap the loss. Even if the bank fails, all you're going to lose is 10 percent. So you've capped the loss. I would argue that limits the spillovers very substantially, so it's a mechanism for doing what I think needs to be done. There are some other benefits I could describe to you, but that's the nub of the stuff.
Politically, of course, some of that is quite difficult to accomplish,
and I would add that it's not the kind of thing, even if you could get
over political hurdles, you don't want to say here at the end of 1991,
Guess what? In the middle of 1992, here are the new rules of the
game. It would be chaotic. What I think you can do, and should do,
is say (if you could get this passed), There's going to be a
three-year (or five-year) adjustment period. We're going to give the institutions and the customers time to adjust. You may take whatever steps you want to get ready for this, because in three years this is the way, it's going to be. I think if you have that kind of adjustment process, you would avoid much, if not all, of the chaos. As far as I can see, that would work out fine.
While we have some people who have supported this idea outside of this bank, we get a lot of objections, too, as you might imagine. What troubles me, I guess, about the objections is they all seem to assume that the current system is sort of working okay. I would argue, Not if it's going to cost the taxpayer $250 billion to resolve the savings and loan problem, it's not working okay. That's just not right. But some people tend to lose sight of the taxpayer in all of this.
JEF: As you describe it, it sounds like a system that would appeal to a great many taxpayers who indeed feel forgotten.
GHS: I think if you got it before the taxpayers, it might. What some people say is the argument you'd expect. What about the widows and orphans, the small savers? But if you've got that $100,000 limit there, that covers the small savers.
JEF: Right. Widows and orphans don't normally have seven-figure savings.
GHS: Right. Well, I mean, some of them do, but those probably aren't the unsophisticated ones.
JEF: Right. Those are the ones who have their money well protected.
JEF: Getting back to the question of the Fed as a business, is there a continuing
GHS: I should say that we don't quite think of ourselves as a business in the traditional senseI think it's a reasonable approximation. Again, our objective is to break even. Our objective isn't to make huge profits in payment services. I think we all feelI know we feel very strongly at this bankthat our role in payment services goes beyond breaking even. We really feel our role is to develop products and help to innovate and help to gain acceptance for things that we think are in the long-run interest of payments and the economy, but that might come along more slowly if only the private sector were involved. So I think we clearly-and this goes throughout the system, I think we clearly see our role more broadly than sort of a, Let's make sure we cover our costs and then we can sleep at night. It's broader than that.
JEF: That's an interesting question of perception. In one way, to an outsider it looks very much like an institution which, because it does business with businesslargely, the commercial banking systemdoesn't look at all like a government agency in the classic sense of the Department of Agriculture, Transportation, or some other federal bureaucracy. What's the perception of the people who work within the Fed, do you think? You can obviously only speak for yourself, but you have worked here a very long time. Do people think of themselves as members of the federal government or as people who are involved in an enterprise that goes beyond that?
GHS: I think it's hard to articulate that very neatly. I don't think people think of themselves as simply just another part of the government. On the other hand, we clearly don't think of ourselves as private sector or even particularly close to private sector operations either. I think we think of ourselves as special, but I would guess different people would define special differently. I do believe that we think of ourselves as special in the sense that our purposes are clearly different and, we would say, somewhat higher than the private sector. We don't think of ourselves as the federal government. We're not part of the government pay scale and that kind of thing. I think we think of ourselves differently because, again, of the nature of the system. We're structured the way we are to be responsive.
JEF: You wonder if there's an esprit maybe that says, We may be part of it, but we're not related.
GHS: I think there is an esprit. I really do. I think maybe after a while we come to take it for granted, although you see it in places. Like we have a tradition here of not closing. So when we had the big holiday snowstorm, I was in herethat Friday that it was snowing like a son of a bitch, as my predecessor used to sayand maybe 50 percent or somewhat more of our staff made it in, and operations kept going. I remember hearing on the radio they were announcing First Bank was closed, Norwest was closed, and then they announced places that were open and they didn't announce us and I was a little annoyed, because our people understand that we do our best to be open, and they made the effort to come in. We kind of pride ourselves on that.
JEF: Call WCCO and tell them we're open! [Laughter]
GHS: I don't think our public affairs guy made it in, so we didn't call. [Laughter] It's that kind of thing. On the other hand, to be fair about it, we had that flood that I'm sure you heard about. I think we responded very well to that, but I have to say I think Norwest responded very well to their fire when they had it, too. But on the other hand, you might say we responded far better than you might have expected from a pure government agency who might have said, Well, that's tough. We'll call you back when we're running.
JEF: That's important. That's a little of what I'm getting atthe feeling that the people who are here are not bureaucrats.
GHS: No, no. We're not. In fact, one of the most damning things you can say about somebody in the Federal Reserve is that they're a bureaucrat. We have some, but we tend not to like it.
JEF: Do you see new services that the Fed can offer on the horizon, both to replace services that may be obsolete or at least less important, or new things that you can see down the road that have been discussed perhaps and are emerging?
GHS: There are a couple of trends under way. I don't see our role as trying to dream up brand-new services. If we would happen to, I think we'd have to ask ourselves, Is this something we should get involved in or should we leave it to the private sector? On the other hand, I think you can see some evolutionary things going on. We were talking before about a checkless society and so forth. Well, we are in the process of turning some parts of the check service into electronics. Paper isn't going to go away entirely, but I suspect it isn't going to travel as far as it has. So the distinction between what's electronic and what's paper, while it may sound unlikely, is starting to diminish. We've been at the forefront of that, and I think that will continue. So that kind of thing is happening.
As I said before, something like definitive securities are changing not so much because of our effort, but those are going away. That business is becoming entirely electronic.
I'm trying to think if there's anything else. Clearly those trends are under way. I think beyond that we would be looking for what we would call sort of value added kinds of things. Given what we're doing and likely to do, can we add more value for our customers? Same kind of thing you hear in lots of other contexts. Are there ways we can figure out to provide the information more quickly or more information and so on and so forth? Can we make the system safer? Risk containment is another thing in payment services.
So, yes, there are lots of those kinds of things, but something brand new, that would be much more difficult, I think.
JEF: That's interesting, because you're talking about adaptations, refinements.
GHS: That's right.
JEF: Looking beyond the United States, at global banking and monetary issues, as Europe moves toward a single currency, I still don't understand how it's ever possible. I can't conceive how the French franc worth six to the dollar and the Belgian franc worth thirty-six to the dollar can be combined. That's because I'm not a monetary economist. What is the Fed's role in global banking policy, reacting to, contributing to, being part of it, that sort of thing?
GHS: I think I would try to start to answer that. I don't think I have a fully satisfactory answer. That's not one of my areas of greater expertise. But I would start to answer that by starting with some institutions. The first one I might mention is the Bank for International Settlements, based in Basel, Switzerland. That's sort of a central bank for central banks, which is to say that about monthly, the central bankers of the ten or eleven major industrial countries of the world meet in Basel. It's not always the same individuals, but they frequently will meet in Basel. I wouldn't say that coordinated economic policies come out of that, but certainly consultation comes out of that. We are represented there usually by Chairman Greenspan or one of the other members of the Board of Governors and usually by Jerry Corrigan from the New York Fed. So we've got two very senior people there essentially monthly. So consultation and occasionally more than that will come out of those discussions. If nothing else, you certainly get a lot of information shared.
Then you have what has turned out to be, I think, the other important vehicle for this at the meetings of the G-7 countries. Those tend to be meetings of the finance ministers, but the central banks are represented, again usually in our case by Chairman Greenspan. Those meetings are not quite as routine in the sense that they probably only meet two, three, four times a year, more or less when the spirit moves them, but that's the second important vehicle.
I think the IMF and the World Bank, which, when they were created after World War II, were envisioned (especially the IMF) as being the principal vehicle for coordination of policy, hasn't quite turned out to play that role. It's played some interesting roles, but it hasn't been that one.
So that's what we have, I think. Then, of course, you can always pick up the phone and talk to your counterparts and so forth, and that goes on, too. But I think that BIS and the G-7 meetings, while the G-7 meetings tend to get a fair amount of publicity when they occur and the BIS meetings don't, probably are both more significant than people give them credit for being, to say nothing about the more informal contacts that take place.
JEF: What is the effect, in your opinion, of the ownership of United States banks by foreign banks? Is this a problem? What I always connect it with is the periodic hand-wringing there is over the ownership of farmland by foreigners.
GHS: No, no, it doesn't bother me. Let me put it that way. You can look at it in a narrow sense and say, Well, you can always use more capital in US banks, so if we happen to get some of it from abroad, that's fine. But I have trouble understanding, aside from a xenophobic view or something, why we would get so concerned about it. From the symmetry point of view, we don't object, and we don't expect others to object, to our foreign investments. If Honeywell owns something abroad, I guess we would probably take offense if the French said, Hey, what's that Minneapolis company doing over here? I think symmetry should prevail, number one.
Number two, though, I think interests coincide. If somebody owns one of our banks, presumably they want to see that bank do well and they want to see the US economy do well. They didn't buy it to lose money. Why would we object to ownership that wants to see the institution and the economy do well?
JEF: Good point. It also seems to me, and maybe I'm not correct, that the same thing is true with farmland.
GHS: Oh, sure. That's the other thing, too. The amount they own is so trivial. From the point of view of the farmer selling it to them, I suspect he's rather pleased. To be more direct, I think a lot of it is aimed at the Japanese. I don't think there's a lot of concern about what the Brits and the Dutch and others own. It's really what the Japanese own. I don't know about that. That's a very strange issue to me. Clearly it gets to be emotional and gets to be high profile in some quarters of this country, and yet I have trouble believing that people really see the Japanese as threats and villains and so on. I would guess far more people in this country know who the prime minister of Britain is and who the head of the German government is and the head of France than have any idea who the head of Japan is. I'm not sure I can even name him. Usually if you're really upset, you can personify the villain. Sometimes I think this stuff is all just very superficial and it's no big deal. On the other hand, I think that probably is a little too complacent.
JEF: I've done interviews like this in Hawaii, for instance, where the Japanese presence and land ownership is a major interest.
GHS: But why, though? What do they think the Japanese are going to do?
JEF: That's the alternate point of view. So they develop a golf course. Can they pick it up and take it back to Osaka?
JEF: But it does have policy issues.
GHS: I guess it's one of those things of which I'm willing to be persuaded, but so far I haven't figured out.
JEF: I think you're probably right. I have to ask you about BCCI. [Bank of Credit and Commerce International, Ltd.]
GHS: You can ask me. I'm sufficiently removed from it. Fortunately we have not had much director anyexperience with it here in this district at all. I don't know what there is to be said about BCCI at this point. This is all second- and third-hand information from the papers. Obviously it's a scandal of major proportions, but beyond that, I don't know what can be said about it. I don't know to what extent there's any real evidence that the CIA or something was involved. It's not up to me to decide whether Clark Clifford and Altman, how much they did or didn't know. I have a view.
JEF: I'm interested in your experience as someone involved in the Federal Reserve System. Is it really as threatening to the international banking system as it is painted to be? Maybe it is. Maybe it isn't.
GHS: The question is, what's the size of the problem? I don't know the answer to that. How big a threat it is to anything, it seems to me, ultimately gets down to how big a hole is it. How big is the fraud? Because somebody somewhere is losing money, there's no doubt, now that the fraud is uncovered. So then you have to say, Who is going to bear these losses, and what happens when they do? I think that's the question, or questions, but I have to admit I don't know the answers to those things. The answers may depend on whether some governments choose to, or don't choose to, stand up to the plate, whether it's Abu Dhabi or it's the U.K. or whomever. I can't say that it's necessarily a good idea that they do stand up to the plate. I just don't know. The best thing to happen may be that somebody actually does lose money, other than the taxpayer, and people learn again what they should have known. You should be careful with whom you do business. But I really don't know the answers to those kinds of things.
JEF: It does appear to be tarnishing an amazing number of people for having known more than they let on and not informing the Committee on Banking authorities.
GHS: I don't know. The Salomon Brothers thing may be even a more troubling event. You don't directly have, of course, the big potential dollar losses. There may be some problems for Salomon Brothers with lawsuits and so forth, but in terms of tarnishing a system that seemed to work very well, the whole government, that's difficult.
JEF: More far reaching.
GHS: I wouldn't know who would win the horse race, but potentially quite far reaching.
JEF: There's a lot of speculation on the health of major commercial banks. The S&Ls haven't even been paid for yet. I haven't picked up a paper in the last three months that doesn't mention Citicorp or some giant New York bank as being less financially secure than one might perceive. And, of course, there are persistent rejoinders that it all depends on how you read the books.
GHS: No doubt.
JEF: Do you have any comment?
GHS: I will comment, but I'll try to avoid commenting on any particular institution. I think there's no doubt that some major banks, not all, but some major banks in this country have very serious problems. So to that extent, the newspapers or whoever is following it has it right. I don't even sugarcoat that or gloss over it. There are some very serious problems out there. What happens? I don't know what happens. Some of them will improve and strengthen and recover. We saw that in Bank of America's case. We saw that with both big holding companies around here, although the problems, admittedly, were less severe.
On the other hand, it's been clear that in Texas, almost without exception, and to some extent in New England, the banks did not recover. It required the deposit insurance fund and maybe ultimately the taxpayer, but so far only the deposit fund, to resolve those problems. It could happen that some of the major banks' problems today don't recover without some kind of assistance. But I think that's the other side of the coin. There probably will be assistance. It's very unlikely in any particular institution that policy-makers are going to simply ignore the problem.
For reasons we discussed earlier, I think one of these days we're going to have to change that policy, but you can't change in the middle of a crisis. So in some sense the definition of what we do here is pretty well set. As I said before, I think you might announce a change in policy if you get consensus on it, get the legislation that you need passed, and might change the policy for three or five years down the road, but you certainly can't do it right now.
JEF: In other words, if there is a crisis, then hopefully it won't be like that. They'll be a little bit better informed by what they learned from the S&L crisis.
GHS: Yes, but banking problems really are very different from the S&L problems in some respects. In this case what comes to mind is with some of the S&Ls, that was clearly abuse. What you had was real estate developers running S&Ls and just futzing with the books and so forth. At the banks, I don't think what's going on there is of that nature. I think the problems are more conservative in nature along the lines I mentioned earlier. The incentives are wrong. The bankers are operating against the incentives they confront, which is what they have to do. So the incentives are wrong. But I don't think you've got the excesses that you had in at least some of the savings and loans, where there wasn't even any attempt at reason.
JEF: Clearly the Federal Reserve Bank of Minneapolis is a major presence in downtown Minneapolis and the Twin Cities. The skyline of Minneapolis is changing. There's a lot of talk about a new Federal Reserve Bank building that might join that skyline. There are many options. What are some of the options that you have?
GHS: Our intention is, as we have said, to build a new building. It's going to be in the vicinity, at least, of downtown Minneapolis. We're not talking now about locations at the airport or suburbs or anything like that, so we will be part of the skyline of downtown Minneapolis for the foreseeable future, as far as I'm concerned. That's about as far as we are, though, in the project. We have not made decisions about where we're going to be, what the building might look like, so on and so forth. We're working hard on that, but these things tend to go slowly in the Federal Reserve and are subject to a lot of review.
JEF: You just built a beautiful and highly successful new building in Helena.
GHS: I have a picture of it there.
JEF: Just a beautiful building that appears to be the best of everything. Everyone in Helena likes it, the bank employees seem to like it, it's architecturally significant. Can that help you?
GHS: Yes. The answer is truly yes. I think we learned a bit from that Helena project, maybe more than a bit. So the answer is clearly yes. I think we've also learned a lot from all the problems we've had in this building. So I think we will do it right the next time. Helena, on the other hand, is a much smaller and, to some extent simpler operation, and that means the building can be simpler as well. I'm not talking about from the architectural point of view, but from the kinds of mechanics and so forth that you're going to have to put in it. Yes, we've learned something from all of our experiences.
I must admit I didn't get into this job because I wanted, or even imagined, I'd be involved in a building project. It's something that I personally had some difficulty warming up to. I'm starting now, I guess, to develop some enthusiasm for this, but I'm still a little cautious, because having been involved in the Helena thing, I know it takes a long time to get from the first stages of planning to the finished product. There's a lot of hoops and loops and hurdles along the way. At the risk of sounding like Tom Kelly, we sort of take this one day at a time.
JEF: As someone who is in an institution that's just finishing a building that's been planned for seven years, I know exactly what you're talking about.
GHS: We've been looking at this thing for at least five years. I mean what to do with this building, at least five, anyway.
JEF: That seems startling to me, because having grown up here, I remember this building was built and its architectural significance ballyhooed.
GHS: It is architecturally significant. That's its blessing and its curse, I think. Personally, from the exterior especially, I like the building a lot, but I wish it were somebody else's. [Laughter] And hopefully it will be.
JEF: That finishes up my list of topics. What do you think I should have asked you that I haven't?
GHS: I don't know, because I have not tried to put this in any kind of overall context. I think you've hit on a pretty wide range of things. You've hit on everything from system things to regional things and operational questions. I can't think of any big ones. I guess I have a question for you. I assume you've talked to some of my predecessors, or you intend to, anyway.
JEF: As I understood it, working with people here at the bank, they plan other interviews in the long term.
GHS: But you haven't done that yet. I would have been kind of curious if you'd have talked to Fred Deming or somebody.
JEF: Their determination here at the bank was to begin with you.
GHS: I think I'm the low cost.
JEF: [Laughter] I think it's more than that.
GHS: I will be curious about what you get from them.
JEF: Thank you for an excellent interview.