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Interview with Susan M. Phillips

Susan M. Phillips knows her way around the futures industry but faces new challenges as a Federal Reserve Board governor. Phillips shares her impressions of both in this interview.

March 1, 1992


David Levy Vice President
Interview with Susan M. Phillips

Formally confirmed by the Senate in mid-November as President Bush's nominee to the Board of Governors, Susan Phillips comes to her new position with wide-ranging experience.

Her work, teaching and study have led her from leadership positions within the futures industry to a scholarly examination of the theory of regulation.

She has traveled extensively and lived as an expatriate, but considers herself a Midwesterner, with a Midwestern point of view.

Region: In a newspaper report you're described as the "stealth" nominee. What do you think that the reporter meant by that?

Phillips: That reporter was probably referring to the fact that I hadn't been giving interviews about my candidacy and also that not much was known about my views on monetary policy. I think that was the Des Moines Register. They knew a lot about me in my context at the University of Iowa and were used to fairly ready access to me on university matters. But they didn't know too much about my thoughts on the Federal Reserve System and may have been surprised at my taking such a low profile.

Region: But it might also suggest that you've avoided most public radar with a discreet personal style. Do you think it means that to some extent?

Phillips: Possibly. I've never sought a lot of public exposure. But in Iowa I certainly did give interviews in connection with the university and university policy. I think it's more a function of not giving inter views in connection with my candidacy or monetary policy.

Region: You sailed through the Senate hearings. To what do you attribute that piece of good fortune?

Phillips: I think that's probably a combination of things. My hearings were scheduled shortly after the Clarence Thomas hearings, and there was incentive at that time to move some of the nominees through the system. With two vacancies on the Federal Reserve Board at that time, there was pressure by President Bush to fill economic vacancies, since the economic situation was starting to show signs of worsening. I think there was considerable interest on the part of all parties to get some of the economic nominees through.

The fact that I was from the Midwest, not from within the Beltway, perhaps might have helped my situation. I was not a known entity in terms of the Federal Reserve Board. I have spent time in Washington but not recently.

Region: And this was your fourth hearing. Did it help to prepare?

Phillips: I don't think it helped that much. Every time you go for a Senate confirmation hearing, it's different. It's certainly true this was my fourth confirmation hearing. The first time I was completely new, coming as a commissioner. The next two times I was coming as nominee for chairman. I was actually acting chairman the first time and then was being considered for reappointment the second time. When you're coming as the chairman of an agency with a track record, you tend to be heard on whatever the issues are of the agency.

For membership on the Federal Reserve Board, I was coming before a completely different committee, in a different economic situation. The Ag Committee is quite different from the Banking Committee. Having testified before, however, gives one a little more notion of how to respond to questions, but the issues were so different I don't think my prior experience helped that much.

Region: Typically your specializations are listed as options, commodities futures, financial management and economic theory of regulation. Is that how you would describe your specializations?

Phillips: Yes, I think that's fair. In addition, I taught securities and portfolio management and did research in the private pension area. Financial intermediation is another teaching and research area. More recently, I am probably associated with the derivative markets. But as a finance professor, I certainly got involved in market analysis, and Federal Reserve activities are certainly a major influence on markets, So I don't think I was professionally associated with Fed activity through my research, but rather came in contact with the Fed more in a secondary way through my teaching and research endeavors.

Region: At the Commodities Futures Trading Commission (CFTC) you gained a reputation as a strong advocate for minimizing governmental regulation of the marketplace. Is it safe to assume that at the Fed a primary interest of yours will be regulatory policy and that the "minimal" point of view will remain the same?

Phillips: I have somewhat mixed views about that reputation because the important thing is to have not necessarily the minimum regulation but the right regulation. One doesn't want to have unnecessary paperwork, so I think the emphasis should be in eliminating unnecessary regulation, but retaining or implementing appropriate regulation. In fact, I think that the right kind of regulation is helpful to the markets. And with respect to the banking system, appropriate regulation certainly can assist in providing confidence to the users of bank services. The goal should be a fair marketplace and a fair banking system where people are not going to lose money by caprice. It's a question of balancing.

Region: Do you expect regulation will be your focus at the Fed?

Phillips: I would think so. Although I haven't been on board long enough to get a full sense of the Board's agenda, it does seem to me that much of the day-to-day activity centers around bank issues—mergers, failures, regulations, new powers and reserve levels. As the new banking act is implemented, I expect we will all be addressing bank regulation.

Region: Tough but fair is the reputation that some say characterized your leadership at the CYTC. Do you accept that?

Phillips: I hope that's my reputation. When I was at the CFTC, I worked very hard at strengthening the enforcement programs at the agency and at the same time strengthening exchange regulatory oversight. Sometimes I think deregulation is confused with self-regulation. We were very involved in pressing for stronger self-regulatory programs, both at the Futures Commission Merchant level through the National Futures Association and at the exchanges. We also strengthened exchange oversight and audit programs as well as the enforcement programs.

In some quarters these initiatives are popular, in other quarters not as popular. One of the most unpopular things that I worked on was improving the audit trails at the exchanges. At the time anybody would have thought I was working on personally trying to dismantle capitalism in the United States.

In retrospect, following the crash of '87, those audit trails stood the futures exchanges in very good stead. And in fact, I think that some of the other regulatory agencies are looking very carefully at futures audit trail systems and the auction trading environments that the futures exchanges have in place. I think that while some of the work that we did was seen as being tough at the time, it has turned out to be good for the markets. Fair markets are good for business in the long run.

So tough but fair, I hope that that's my reputation.

Region: You worked with the Board and staff of the Federal Reserve System in several instances before you became governor and I assume you formed some opinions on what life was like here at the Fed.

Phillips: Yes, there were several studies that CFTC and the Fed did jointly, so in that sense we worked directly with the staff.

The staff at the Federal Reserve Board is enormously competent. The healthy cadre of economists at the Federal Reserve Board makes me feel very at home. There are very few regulatory agencies where economists play such a strong dominant role. I found that when it came to difficult policy problems, as in the studies involving the CFTC and Federal Reserve Board, the Fed staff had a very thoughtful, analytical approach. They did not seem to approach problems with predetermined views. Rather they tried to see what would be the best for the long run, taking very long-term analytical approaches to problem solving. I found that very helpful and very refreshing.

Region: So no surprises with staff then?

Phillips: I've been favorably surprised at the extent to which the staff and governors seek outside advice and develop very strong information networks. It's a constant effort to keep ears to the ground to know what's going on throughout the country. When I went to the first FOMC (Federal Open Market Committee) meeting, I became aware that people vitally pay attention to the Reserve bank presidents' statements at those meetings. There would be no way that I would have had any sense of that until I got here and participated in the process. I've been very pleased to see the desire to seek viewpoints.

Region: Occasionally questions arise about the independence of the Federal Reserve. I noticed you commented on that in the Senate hearings. Where do you stand on Fed independence with in the government?

Phillips: Squarely behind the independence of the Fed. I think that for a number of reasons: the need for confidence in credit and the monetary authority; the need for the Fed to take the long-term view of what's needed in the U.S. economy; the need to work internationally to deal with our foreign counterparts. I think for a variety of reasons it's of utmost importance. And the Fed, as the banker's bank, does stand in a unique quasi-governmental position in terms of directly interacting with the private financial and banking community.

Maybe you wouldn't organize the regulatory environment this way if you were writing on a clean blackboard, but it works and I think that Congress has confidence in the Fed as an independent agency.

Region: The time during your tenure, at the CFTC when the institution was evidently in need of change, you said, "It was more, appropriate for me to encourage, reform within the system as opposed to stepping out of the system and making public comments." Does that quotation help one understand how you might approach questions of change in the Federal Reserve System?

Phillips: Very possibly. As chairman of any agency, I think that you've got to be part of the solution. If there are problems in the industry, the agency or in the regulatory structure, it's necessary to provide the leadership to create reform, to develop reform. I think that would be true at the Federal Reserve Board. That to the extent there are problems, I hope to be part of the solution as opposed to leading the critics.

Region: And another of your quotations: "Where monetary policies no longer adhere strictly to national boundaries, the challenge of central banks becomes exponential." What does that mean?

Phillips: I was thinking of a number of things when I said that. But specifically, when you don't have a system of fixed exchange rates, it makes it very difficult for any government to anticipate fully the reactions to any particular initiative. You don't have any rules by which the rest of the world is going to react to monetary initiatives. Various economics are at different stages of development; they all have different incentives and agendas. As long as there aren't fixed exchange rates, there aren't rules by which they might respond to initiatives elsewhere.

Not only does the central bank have to be concerned about what's going on in the domestic economy and what initiatives might portend for our own economy, but at the same time we have to be concerned about the various kinds of reactions that might he engendered by a particular initiative internationally. Exponential implies that you really have a multiplicity of effects that might be engendered by a monetary initiative.

Region: Could this globalization of the marketplace make the Fed less effective?

Phillips: No, I think it makes the job more complicated.

Region: When questioned about the recent poor performance of the U.S. economy, you pointed principally to the "overhang debt" not just the federal deficit but massive consumer debt. Is debt the principal problem?

Phillips: I think that's a major concern. As I was going through my hearings, the discussion about the debt overhang arose. Everybody has focused on the federal deficit for so long, and now people are really beginning to focus on both consumer debt and corporate debt as problems. The deleveraging initiatives that are being undertaken both by consumers and by corporations have slowed the recovery.

I think lower debt levels will be very good for the U.S. economy. It is positioning the U.S. economy to be much more effective, efficient, productive in the long run, but it's a fairly painful process right now. Eventually we're going to work our way out.

I do hope the federal policy initiatives that may be upcoming over the next few months will not contribute to ballooning the federal deficit as we try to work out of debt on the private side. We are seeing more equity issues now with the stock market very strong, so that should help.

Region: Related to that, you've also expressed concern about the low national savings rate and changes in international capital flow. Is that correct?

Phillips: That's right. I think that U.S. consumers have been consumers, they haven't been savers. We're seeing an emphasis and an interest nationally in deleveraging even at the individual level. I think we're going to see some change, and that's going to be very good for the U.S. economy in the long run.

Region: Do you believe that the economy left to its own devices will eventually get stronger and come out of its malaise?

Phillips: Possibly. But at what cost and at what price? It was for those reasons that I certainly supported the major easing that occurred in late December. I think eventually the economy would right itself. But if there can be policies that will assist that process, the difficult times may be shortened.

Region: There are dozens of federal and state stimulus packages that are surfacing, Without singling out one over the other, does the underlying concept of any of the proposals strike you as the proper next step?

Phillips: I don't want to focus on any one proposal, because as soon as I did there would be another 10 coming out of the woodwork and I would have missed the best one. However, if I could group them—stimulus packages that focus on enhancing the savings rate, long-term job creation and productivity would be the most helpful.

Reducing the capital gains tax and effecting an investment tax credit are obvious ones that I think in the long run would be helpful. The former may not provide a short-term stimulus, but for the long term would be helpful. In general, we need a stimulus package that doesn't increase the deficit too much: That's a key. I wouldn't like to see short-term stimulus packages that just get us into more trouble in the long run. I'm becoming a little more optimistic that there is enough ease in place that a major stimulus package will not be required.

Region: With most policymakers if you dig deep enough, you can find a great mentor at whose feet they studied, or intellectual hero who still seems to influence their thinking. Is there someone like that for you that comes to mind?

Phillips: I was coming through school at the time portfolio theory was being developed. I have to cite Markowitz, Sharpe and Modigliani as having influenced me, and then also Stigler and Peltzman on the economics of regulation, and others from the Chicago school. A lot of my thinking does go back to market efficiency.

Region: Not much has been written about your life outside of work and study. What would you be willing to share?

Phillips: It seemed so very different in Iowa. When I was in Iowa I was very involved in the life of the University and a number of activities within the state. I'm not sure what's going to happen when I move to Washington. Right now I'm focusing on just trying to get moved. I have a lot of outside interests, including antiques, music and the arts. I hope to get more involved here in Washington.

Region: We understand that you were a quite serious fan of the University of Iowa football team. Right?

Phillips: That's right. Both men's and women's intercollegiate athletics reported to me. In fact, the rocking chair I am sitting in was given to me when I left Iowa by the women's athletics department. Athletics is a very large and complicated enterprise and I enjoyed it. I suppose I'm as much of a fan of athletics as anyone, and I wouldn't single out men's football. I went to all the NCAA Final Four women's field hockey events in which Iowa participated. But yes, I was definitely an Iowa fan.

Region: You said intercollegiate sports was a direct report. Any instances along the way where your diplomatic skills were tested as the director of inter-collegiate sports?

Phillips: Athletics is a very definite challenge. Athletics is one area where the outside world meets the inside academic world. The goals of fans wanting to win seemed at times to clash with the academic goals of the institution. Such conflicts required a fair amount of, well, delicate negotiations at times. Let me leave it at that.

I don't know whether you are aware of the intense rivalry between the University of Minnesota and Iowa in football. The Iowa-Minnesota football game was the last game that I attended before I came to Washington. It's always the last game of Iowa's season other than any post-season bowls. The Floyd of Rosedale leather pig goes to the winner of the Iowa-Minnesota game. I might say that Minnesota managed to he a spoiler last year, but not this year. I have some fond memories of visiting Minnesota for games.

Region: We understand you grew up in a career military family. Did that take you to the four corners of the globe?

Phillips: Yes. We lived in a number of places within the United States and also lived in Germany and just outside of London. I lived in Germany two different times at two different locations, and then in Ruislip, just outside London.

Region: So I imagine that you developed an interest in cross cultural things?

Phillips: Absolutely. People ask me about my home. I claim Iowa since I've actually lived in Iowa longer than I've lived any other place. I was born in Richmond, went to school in Atlanta and Louisiana and worked in Boston. So even though I've lived in Iowa longer, there are a number of other places I could claim as home.

Region: Its not officially so, but some think that by filling Martha Seger's unexpired term that your seat on the Board of Governors is a woman's seat. Do you see it that way?

Phillips: I've heard it termed a woman's seat and I think it's important to have a woman on the Board. Women are becoming more and more active and influential in the banking and financial sectors. It's hard for me to know if this seat is any different than any other seat. I don't see that it's any different, and certainly don't act as it is. But if it's a woman's seat, I'm glad to be filling it.

Region: Thank you, Ms. Phillips.

Update (July 1998)

Susan Phillips resigned from the Board of Governors June 30, 1998. Phillips' term officially expired Jan. 31, 1998, but a governor may continue to serve until a successor is chosen. Phillips has been appointed dean of George Washington University School of Business and Public Management, in Washington, D.C.