Editor's note: The following commencement speech
was given in May before the 2002 graduating class at the University
of Minnesota's Carlson School of Management.
Almost immediately after accepting Dean Benveniste's
invitation to speak at this commencement, I began to have second
thoughts and to wonder whether my acceptance was such a hot idea.
After all, what could someone like me, who has spent most of his
career at the Federal Reserve in public policy, offer that would
be meaningful and valuable, that would "resonate" with
business school graduates looking forward to careers in the private,
for-profit sector? From one perspective, answers to the question
I just posed are not easy to come by, because the two worldsfor-profit
business and public policyare distinct, with different objectives,
responsibilities, accountabilities. And while I don't view myself
as a bureaucrat, I can understand if bankers or prospective bankers
out there see it differently. When our bank examiners show up
at your institution, it is probably not comforting to hear, "we're
from the Fed and we're here to help."
But the two worldsgovernment policy and the private sectorintersect,
and one of the legitimate and significant roles for government
is to establish the rules of the game and make sure they are followed.
Where they are not, the consequences can be severe, and fortunes,
but more importantly reputations, can be lost. The government
may be an effective, after-the-fact policeman, but we all would
do well to remember the importance of reputation in considering
our business practices and decisions.
Let me continue these remarks with some perspectives on the role
of government in our market economy. It may not be widely recognized,
except by those of us who study macroeconomic data, but the U.S.
economy has turned in a truly remarkable performance over the
past 20 years, both absolutely and relative to the other major
industrial economies around the world. Economic growth here has
far surpassed that of Western Europe, Japan, the United Kingdom
and Canada. Our standard of living is well above those of these
other nations. Our unemployment rate is generally well below theirs.
I don't point this out to sound at all self-congratulatory, but
rather out of a sense of deep appreciation of what is possible
in the United States. America still is, by almost every metric,
a land of great opportunity.
But why has the United States outperformed these other significant
economies for the past 20 years? It is tempting to answer this
question by pointing to the amazing advances in technology over
the period, but that, by itself, can't be the answer because the
technology is available worldwide. Another appealing answer is
the quality of American higher education, which is clearly the
envy of the world and also something I am particularly pleased
to acknowledge here. But higher education has been outstanding
in the United States for a long time. No, there must be something
unique about the American system which has emerged relatively
recently and produced these results. Along these lines, I would
suggest that a growing commitment in the United States to competitive,
market-determined outcomes is part of the explanation for this
Put another way, over the past 20 years or so, government has
come to play a somewhat diminished role in the U.S. economy than
it had formerly. There are numerous, relevant illustrations of
this. For example, there has been a growing commitment to free
international trade, and, on balance, trade restrictions have
been reduced meaningfully in the United States. Moreover, a wide
variety of domestic industries have been deregulated during the
past 20-plus years and permitted to compete far more freely for
customer business. And there has been a largely hands-off attitude
toward merger and acquisition activity; not that all deals have
worked well, but the government did not often prejudge their success
This experience might suggest that when it comes to government,
"less is more"; less regulation, fewer obstacles to
trade, diminished concerns about mergers strengthened productivity
and U.S. economic performance. But I don't think we should stretch
this point too far. The government has important responsibilities
in a capitalist, market economy.
We often think of the appropriate role of government in terms
of provision of so-called public goods like national defense,
the interstate highway system, some aspects of health care and
support for education and research, and so forth. These functions
are important to be sure, but equally important is provision or
regulation of what I call the "soft infrastructure"
in the economy: adherence to the rule of law, honoring of property
rights, assuring equal access to credit, transparency of accounting
standards. We generally can take the quality of this soft infrastructure
for granted in the United States, which is a tremendous luxury
and advantage. We assume that the rules of the game are in place
and will be adhered to. In much of the rest of the world, and
especially in many developing economies, this infrastructure is
only partially in place at best.
Recently, of course, we have had several glaring examples of accounting,
and more fundamentally, business ethics gone awry. The rules of
the game have been violated. And it has been amazing to observe
how quickly a firm can collapse once its reputation is called
into question, as in the case of Enron. As Enron's business and
accounting practices became suspect, it lost the ability to obtain
funding in the financial markets and from banks and other traditional
financial intermediaries and was forced to bankruptcy.
Make no mistake; if Enron-type problems are or become commonplace,
they pose a serious threat. Confidence in financial reporting
could be undermined, and this would adversely affect asset values,
especially in all likelihood equity values.
Fortunately, an Enron-type problem should be largely self-correcting.
Incentives are such that if I were a senior executive at a publicly
owned corporation today, I would act quickly and aggressively
to disclose as much information about my business as possible,
without giving away competitive secrets or violating any laws,
of course. The intent would be to get out in front on the disclosure
issue so as to maintain and to bolster confidence. The last thing
I would want is to have information, even if innocuous, dragged
out in some sort of adversarial proceeding. Meaningful, voluntary
increased disclosure strikes me as a very good idea at this point.
While Enron may recover and operate at a scaled-down level
post-bankruptcy, its senior officers are unlikely to ever recover
their reputations. This is a sobering observation, because at
the end of the day none of us has much without our good name.
And if you think about it, a solid reputation is absolutely essential
in business, where so many transactions are concluded with a handshake
at the end of a meeting or an OK over the telephone or the click
of a mouse.
In the Federal Reserve, we pay a lot of attention to what we call
"reputational risk." We mean by this term risk to the
Federal Reserve as an institution from the failure to fulfill
our responsibilities well and to manage our resources responsibly,
or the embarrassment we might cause the organization by the failure
to conduct ourselves ethically. Our obsession with reputation
risk is one factor which makes us a conservative organization;
but so much of what we do in the Fed depends on our credibility,
both as an institution and as individuals, and we cannot afford
to compromise it.
Recent leaders of the Federal Reserve, namely Paul Volcker and
Alan Greenspan, are I think widely and deservedly perceived as
men of unquestioned integrity and ethical standards. Having served
and worked with both, I sincerely commend them to you as models.
They are very different personalities to be sure, but both are
dedicated to public service. Both are uncompromising when it comes
to intellectual and ethical commitment and both have gone beyond
the call of duty in the interest of public policy. There is an
old saying to the effect that "the harder you work the luckier
you get" and I think there is something to it.
As you proceed in business, in whatever career, eventually you
will have some tough decisions to make. Most, if not all, are
likely to have an ethical component, and many will affect your
reputation. I have found that difficult decisions really are not
so daunting and complex once I can articulate the decision and
the reasons for it clearly and convincingly, and in a few words
or at most in a few sentences. If I can't pass this self-imposed
test, then I need to think further, and perhaps consult further,
And let me offer one other piece of advice as I conclude these
remarks. Most of you have a 30- or 40-year business career ahead.
This means that for at least five days a week, 200 plus days a
year, for say 30 years, you will get up in the morning and go
to your job. Given the required time and effort, make sure you
do something you genuinely enjoy and find of value. I realize
that "real world" responsibilities may interfere with
this admonition for a time, because income has to be earned and
bills have to be paid. But if you are going to do it virtually
every day, make sure you like it. Look forward to going to work,
not just because it makes life far more pleasant, although it
does, but also because you will find that with enthusiasm and
commitment, you will do a better job and will, almost automatically,
In closing, let me extend sincere congratulations to all the graduates
and their family and friends here today. In many ways, graduation
is just a beginning, but it is also a significant accomplishment.
So I hope you will celebrate the occasion, because you deserve