"I get a great deal of enjoyment out of debating issues," says Cleveland Fed President W. Lee Hoskins in the following interview, in which he addresses such pertinent topics as zero inflation, deposit insurance and the emergence of Fed bank presidents as a stronger force in the Federal Reserve System.
Since his appointment as president of the Federal Reserve Bank of Cleveland in 1987, Hoskins has gained national attention, in part, from his outspoken views on inflation and deposit insurance reform. On the former, he says: "There is widespread agreement that the central bank ought to pursue price stability.. If the Federal Reserve commits to an explicit plan for achieving price stability, the transition costs would be reduced, and any costs that arise will be outweighed by the benefits."
Prior to joining the Cleveland Fed, Hoskins was chief economist and senior vice president for economics and corporate affairs at PNC Financial Corp. in Pittsburgh, Penn. His experience with the Fed dates to 1969 when he became an economist at the Federal Reserve Bank of Philadelphia, where he later became a research officer in 1972, vice president in 1973 and director of research in 1975. Hoskins has a bachelor's, master's and doctorate degree in economics from the University of California at Los Angeles.
Regarding his penchant for public discussion of current financial issues, the Cleveland Fed president says there is merit in open dialogue. "It's important to take public positions, to discuss ideas, and try to persuade people that, in fact, there's some merit in your thought."
Region: In your few short years as president of the Federal Reserve Bank of Cleveland, you have become known as "outspoken" on the banking and economic issues of the day. This has given you a high profile and at times placed you in controversial positions. Do you agree with that assessment?
Hoskins: I agree that the issues are controversial and important, and I think that is what has led to any visibility that I might have received. When I came here I wanted to focus on two issues: eliminating inflation and financial reform. Both of those are of great interest to me and subjects on which reasonable people do disagree, resulting in some controversy.
Region: Earlier in your career, you served as research director to then president Mark Willes in Philadelphia. Willes, who now is the president of General Mills, was also known as outspoken and took positions that at times didn't square with System thinking. Do you see parallels between you and Willes?
Hoskins: I wouldn't go so far as to say that I see parallels. Mark is an exceptional individual. He has the intellectual capabilities, drive and determination to achieve whatever he sets out to do. Mark hired me into the Federal Reserve Bank in Philadelphia and he has had some influences on me. I don't want to hold him responsible, however, for any of my transgressions.
Region: What influences do you think he had on you?
Hoskins: Mark was very positive in terms of presenting his views and believing that they should be aired and discussed. He also set pretty high departmental standards when he was there for writing and articulating positions.
Region: And as a follow-up question, after Willes' presidency, he took a prime position in the private sector. Would you welcome such a move in your future after you have accomplished what you set out to do here in Cleveland?
Hoskins: What I'm doing here in Cleveland now is challenging and very, very enjoyable. I haven't given much thought to the future. I'm one of those people who believes that as long as you enjoy your work immensely, you ought to continue to do it. The only other consideration would be if you don't think the issues you're dealing with are important or you're not effective at accomplishing or contributing anything with respect to those issues, then it's time to think about what you want to do next.
Region: Jokingly, some of your colleagues have dubbed you "The Hawk." Is this because of your zero-inflation position?
Hoskins: I hope it's not because I look like a large bird. I suspect it has to do with my focus on price stability and to some extent, as some people might say, dogmatic pursuit of that very important goal.
Region: That leads to this question, what are your ideas on zero-inflation and how did they evolve?
Hoskins: When you're trained as an economist, you automatically move toward the idea that price stability is the goal for a central bank; a goal that leads to the efficient workings of a market system. Inflation, in fact, clogs up the workings of that system by distorting relative price changes. When I worked at the Federal Reserve Bank of Philadelphia in the 1970s, I saw first-hand the serious problems a central bank creates when it loses its focus on price stability, and therefore its credibility. The Cleveland Fed Research Department reinforced and sharpened my views on price stability.
I must say that the Minneapolis Research operation also has made an impact in that some of the major developments in macroeconomic theory in the last 20 years came from both the University of Minnesota and the Minneapolis Research Department. Their work has stressed the importance of credible and predictable policies.
I can't stress enough the importance of a credible and predictable monetary policy. If policy is credible, then markets won't react to noisy data as much as they current do. If the policy is predictable, then there will be fewer wrong decisions by private sector decision makers. Yes, I continue to focus on inflation, I continue to learn about the value of eliminating inflation.
Region: As for the people who haven't agreed with your positions on zero inflation, do you think they don't understand your argument or are they just reasoning incorrectly to some other conclusion?
Hoskins: I think that there is widespread agreement that the central bank ought to pursue price stability, but economists have conflicting views on the transition costs of achieving zero inflation and whether the benefits of price stability outweigh the costs. If the Federal Reserve commits to an explicit plan for achieving price stability, the transition costs would be reduced, and any costs that arise will be outweighed by the benefits. These benefits will be large and permanent, and will far outweigh the costs of getting there.
Region: Is it correct to say that another issue about which you have strong feelings is the need to reform deposit insurance?
Hoskins: Yes, as I mentioned earlier, there are two crucial issues of much importance in front of the Federal Reserve. One is eliminating inflation and the second is financial stability and financial reform. And deposit insurance is certainly a key element of that necessary reform.
Region: You see this as a precondition to more generalized reform of the financial system, is that correct?
Hoskins: Yes, I believe that deposit insurance has interfered with the smooth functioning of financial markets and that we need to take a close look at what we're attempting to achieve with deposit insurance as well as other aspects of the safety net.
The thrift crisis has highlighted what happens when we socialize risk in a capitalist or free market economy. When we socialize the risk, it creates an obvious liability for the taxpayer and it affects the real resource allocation within the economy. Not only does financial resource allocation get distorted, but real resource allocation does also. We end up with too many commercial real estate projects, as well as, perhaps, even too many residential buildings.
Region: You've been fairly active communicating your point of view on deposit insurance and other aspects of financial deregulation. As a policymaker, do you sense you're making some progress?
Hoskins: I can't take credit for making progress, but I do think that progress has been made and it's been made principally because of the magnitude of problems associated with the thrift industry. The thrift crisis has highlighted the difficulties of trying to reduce systemic risk without creating problems for the economy. There will always be some systemic risk; the question is which system contains it better—the private sector system or a system of government insurance? I'm obviously in favor of the former. The progress that has been made is that people are now questioning the soundness of the current system of deposit insurance. Five years ago, excepting a few academics, it wasn't really a question on the minds of the policymakers or the public.
In terms of my own district, when I started here I did a tour of the district and met with all the bankers. When I raised the issues of limiting deposit insurance there was not great acceptance for the idea, so then I would fall back on an alternative which was to suggest that we price the insurance differently to reflect the risk. That was also rejected as infeasible.
Now when I go through the district and speak with the bankers I still don't get universal support for limiting deposit insurance, although I do get some support for deposit insurance reform.
There's almost a unanimity among bankers, including community bankers, that we ought to price insurance more appropriately. Essentially bankers can now see on their own balance sheets the cost of deposit insurance with the recent increase in the premiums and potential rise in the future. So they're recognizing that the system is flawed.
Region: Do you anticipate testifying before Congress on the Treasury proposal or other related bills?
Hoskins: No one is currently requesting that I testify. However, I do think it is appropriate on some issues that officials of the Reserve banks testify. It is not an uncommon practice. A former president here, Karen Horn, testified twice in her five-year tenure. Last month an economist testified before a Senate committee. I have testified and so have other presidents of Reserve banks.
Region: Your thoughts on deposit insurance seem to have evolved. Earlier, you proposed abolishing government deposit insurance, and now you favor a reduced form of deposit insurance somewhat similar to the coinsurance proposal put forward by the Minneapolis Fed. From that I infer that your process to crystallize these ideas is an open one; that you are willing to listen to other points of view and adjust yours if convinced a change could lead to better public policy. Is that correctly put?
Hoskins: Yes. I would agree with that statement, but I would perhaps say it somewhat differently. In principle, I'm in favor of eliminating deposit insurance for the reasons I have suggested above because I think it leads to many distortions. Particularly in capitalist economies with very efficient financial markets, it leads to major distortions. There are better ways to contain systemic risk. In principle, I would still look to private sectors to manage potential systemic risk as opposed to using a government safety net. I find no government guarantee program that is currently doing very well and I can start with the farm credit system or student loans or the government guarantee of pension plans. All of those seem to have the same flaw as deposit insurance. In practice, I think one has to deal with what's doable. And as the legislation on deposit insurance has come forth, it is important to be able to adjust our position and pick the best of the lot: try to shape the legislation. And in that sense, clearly my thinking has evolved. I'm very open to alternative ways to manage this problem of deposit insurance, and the Minneapolis Fed probably had an impact on my thinking and raised the issue of coinsurance very clearly and made a very strong case for it. When I talk about limiting insurance, I now include coinsurance as one mechanism for doing just that.
Region: On a political economy continuum ranging from libertarian to statist, you, with your free market orientation, would fall well toward the libertarian pole. You speak to many groups including some who are similarly oriented toward libertarian thinking. Do you get the best reception from the free marketeers?
Hoskins: When I speak to free market groups, I get a favorable reception, but it's more a base of like-minded people simply agreeing with me. I don't find that as interesting or as useful in some sense as presenting these ideas to people who do not agree with them or who have not considered them. The job is to educate and to influence them. I get a great deal of enjoyment out of debating these issues with various representative trade groups, bankers and the public at large. I think it's important to take public positions, to discuss ideas, and try to persuade people that, in fact, there's some merit in your thought. I'll give you an example. Next month I'll be going out to talk with the IBAA (Independent Bankers Association of America) at their annual meeting in Las Vegas. The IBAA has come out clearly and strongly against any form of deposit insurance reform, and I look at this as an opportunity to make my case with them and at least give them the opportunity to hear another view. I commend them for their willingness to include me in their program.
Region: I can see you've warmed to the challenge. If you seem to have an affinity with the free market group and not so much with the others, do you think that puts you at risk of being considered an ideologue?
Hoskins: I think there's always a risk of being perceived as an ideologue, if one takes one end of the blanket on an issue and tries to tug it more towards the center. And that's a risk that concerns me because to be effective as a policymaker I think it's important to be able to respect other peoples' positions and try to make an accommodation with those while retaining your principles and views in the process. If you're labeled as an ideologue, then you're not able to do that. People will not listen to you and you will not be able to get your message across. So it's a risk.
Region: There is a chorus from a popular country western song that says, "You've got to believe in something, or you'll fall for anything." Does that country wisdom apply to the president of a Federal Reserve bank and a national policymaker?
Hoskins: I think certainly it does. Our social value system is based on beliefs, our national policymakers operate in the context of those beliefs, and it's important to have at least in your own mind what you do believe. Hopefully, those beliefs can be supported with fact and theory. To narrow it down further, I believe there is value in eliminating inflation and pursuing price stability. We don't have all the evidence in yet. So, to some extent it is a belief, but it is one that I'm willing to hold until shown to be in error.
Region: The Fed is seldom completely of one mind on any issue. Some see that as a healthy condition and others consider it lamentable. As the leader of a district bank, how do you view the role of the Board of Governors vis a vis the 12 banks? Is there a collective responsibility to reason and speak as one, or should independent voices abound?
Hoskins: I believe we get better policy from open and frank discussions. We have very formal mechanisms for dissenting with respect to monetary policy. The framers of the Federal Reserve Act and those who amended it clearly believed that different views ought to be made public. In fact, that's what we do in the monetary policy process. On internal matters relating to the Fed, we ought to have an open forum to present our ideas, but then we should reach a point when we all get in the boat and row in the same direction.
Region: As a follow-up: this spring, media reports have alluded to a perceived schism between the Board of Governors and the presidents of the Federal Reserve banks in matters relating to monetary policy. Would you care to comment on those reports?
Hoskins: Those reports were greatly exaggerated. As I noted earlier, the process allows for the airing of different views and indeed there are differences of opinions on monetary policy. I would say that those differences are not neatly divided among governors and presidents, and that in the three-and-a-half years that I have served as president, little has changed in the nature of the dialogue at the FOMC meetings. What has changed is the attention the Federal Reserve is receiving from the media. The media are more knowledgeable about the intricacies of Fed policymaking and Fed personalities.
Region: Deserved or not, the Federal Reserve has a reputation as a predominantly closed system in terms of communication. Considering that perception, do you think the System should release information about the Federal Open Market Committee sooner than the "after-the-next-meeting" embargo that now exists?
Hoskins: Well, the System has discussed this issue on many occasions and there are many people in the System who believe we ought to at least release the decision earlier; I'm one of those people. I think markets work better if they have more information, and some of the intense scrutiny that we were just talking about might dissipate. Currently market participants understand very quickly any change in Fed policy, the rest of society may not and I think it's important that they do.
The reason I think it's important is to get back to the issue of credibility. It seems to me we can lessen the cost to the economy of any change in policy if we are credible and predictable—if people believe us. The only way we're going to earn or increase that credibility is to state clearly what our objectives are with respect to monetary policy. And then take actions that are consistent with that objective. Taking actions and releasing information about those actions offers us the opportunity to increase our credibility.
Region: Do you think that would politicize the committee process?
Hoskins: I don't believe so. I think we are mature enough to sit around that table and discuss the issues fully. I'm not an advocate of having C-Span in the room while we do that. By early release of the decision, I mean just that—the decision. I think much of the discussion ought to remain confidential or it could inhibit or politicize the process.
Region: Turning to internal matters, what are your thoughts on the System's efforts to streamline itself by consolidating mainframe computers?
Hoskins: The Cleveland Fed had some reservations about the business case that was being made for consolidation. We had the opportunity to present those views at the Conference of the First Vice Presidents, the Conference of Presidents and at a System management meeting with all the governors and Chairman Greenspan present. We were unsuccessful at convincing others that the business case had not been sufficiently made. The decision was made to go forward with automation consolidation and we fully supported that decision. Let me say that an important part of that decision was based on how the management of the consolidation process was to go forward. The way we are going to manage this consolidation is consistent with the Federal Reserve Act—the governors have retained their oversight role and the Reserve banks have retained their control of the resources. That's as it should be.
Region: You handed your senior officers the challenge to become the Federal Reserve System's number one producer of financial services. In other words, the lowest cost producer of quality services, a title currently claimed by the Federal Reserve Bank of Atlanta. Someone has to be second; why not Cleveland?
Hoskins: Well that's a good question. I think the important question is how can the Federal Reserve System, as a whole, manage the System's resources efficiently for the benefit of not only bankers who we sell to but also to the taxpayer. More efficient management of our resources means a gain for the taxpayer. Also, we are players in a competitive marketplace. If we don't supply high quality services at competitive prices, financial institutions will purchase those services in the private sector. The Federal Reserve will lose business and consequently jobs.
So it seems to me it's incumbent upon us to manage efficiently. To manage efficiently you've got to start with quality. If you don't have quality priced services, people won't buy them. So quality has to come first. And I don't find that inconsistent with an efficient operation. The Atlanta Federal Reserve Bank is to be admired. Not only have they been a leader in efficiency, they've been a leader for a long time. We have recently sent teams to several branches of the Atlanta Fed to try to learn something about how they manage. And I think that's what comes out of setting objectives, clear objectives, for a Reserve bank: The ability to improve the operations for the benefit of the taxpayer and financial institutions that we serve.
Region: How are you doing in this Hertz-Avis competition?
Hoskins: Well, what we really do is measure ourselves against our historical experience by looking at our quality and our unit cost measures. We set our objectives five years out and have worked to reduce our unit cost time series. In that sense we're on target and our quality measures have held up. In terms of the relative ranking, one has to continue to admire Atlanta. Enough said.
Region: On a different subject, you changed the performance evaluation system at Cleveland so that salary was strictly based on merit. A great number of evaluation systems pay lip service to merit, but in the final analysis provide perfunctory, inflation-based increments. Have you succeeded in truly rewarding the performers?
Hoskins: We are attempting to truly reward for performance. I think people have a view that compensation should be based on the quantity and quality of the work a person does rather than on seniority or other measures. People perceive fairness when they recognize that a strong performer has been rewarded. It's important for employee morale to have a performance system in place. We have not had a great problem, in fact we've had quite the reverse in terms of response to surveys that we've done with respect to the implementation of a performance-based system. We have worked very hard to try to identify strong performers and reward them; we do have more variability now in the range at which we pay people. Top-rated performers receive performance-based salary increases.
Region: And it's conceivable that someone could end up with very little or zero increase for the year?
Hoskins: Yes. We have increased the range significantly.
Region: Your activism on the issues and desire to have hands-on management involvement at the Cleveland Bank have led people to believe you're personally deadly serious and all business. Would that describe you?
Hoskins: I think I'm serious when it comes to managing the resources at our disposal. I believe that goes for the employees at the bank as well. Do we have fun meeting these challenges? Yes we do. It's an environment where the senior managers actually set the targets and I think people enjoy coming to work when they have a challenge in front of them.
Region: We heard you're a great dancer: lots of dips and even rock and roll.
Hoskins: I can hold my own with the "oldies"; however, I've yet to master the "electric slide."
Region: Fly fishing and skiing are also interests of yours. Is that correct?
Hoskins: Yes, I'm a novice at fly fishing. I'm lucky to get away a week out of the year to do that. I do that principally in northern California where I have a place on a lake. Skiing is something that I've been doing for about 30 years and I enjoy it immensely. It does take your mind off of what's going on in the business world.
Region: The Cleveland and Minneapolis Feds seem to have an affinity in some respects. Do you sense that?
Hoskins: Certainly on broad policy issues I would agree again without locking Gary Stern into agreement, but that's my sense of it. In fact, that comes from the mutual respect that the Research Departments have for each other's abilities. We do have a lot of interaction with Minneapolis. We don't agree on everything. And when we don't agree, we either correspond or we get together and discuss the issues. We've had Art Rolnick (senior vice president, Minneapolis Fed) out here to explain the benefits of a fixed exchange rate policy, or the theory of fixed exchange rates, and why it might be important to try that system again. Since Art doesn't have the chance to comment, I'll just say he did a fine job. However, I remain unconvinced that markets cannot price the relative value of currency as well as they can price any other asset. I have an interaction with the Minneapolis bank that I enjoy.
Region: Thank you, Mr. Hoskins.
