President of the Federal Reserve Bank of Minneapolis,
1985-2009
Interview conducted by James E. Fogerty
Minnesota Historical Society
January 16, 2013
JEF: Today is January 16, 2013. I am James E. Fogerty, and today I am interviewing Gary H. Stern, former president of the Federal Reserve Bank of Minneapolis. The interview is taking place at the Bank headquarters in Minneapolis. This has been a fun interview for me to prepare for, because I don’t often have an opportunity to interview someone I first interviewed twenty years ago. Although I have to tell you that when I was asked about that earlier interview, I said—Oh, that was ten years ago. And I was reminded that in fact it was twenty years ago.
GHS: I wouldn’t have guessed that either.
JEF: But the interesting thing is that we can kind of reflect on what happened in the interim. I was amused that you pointed out, at that time, in December of 1991, that you’d already been president for about six years, and that made you already one of the longer serving Federal Reserve presidents. Did you have any premonition that 17 years later you would still be president?
GHS: No, I didn’t. I didn’t anticipate staying with the Federal Reserve over that lengthy period, although I’m glad it worked out. I loved my years here. Working at the Fed was a great opportunity for me. Hopefully I added some value along the way. You know, if you’re an economist interested in public policy, it’s a great place to work. I probably said that before. The people are very well-intentioned, which makes it easy. It’s not a place where there’s too much internal politics, so that’s a plus. And every day was different, which kept it intellectually stimulating and challenging for me. And then, you know, my wife was working fulltime, and when I first thought about retirement she beat me to it. I didn’t think it would be a good idea for us to both be hanging around the house trying to figure out what was going to happen next, and one thing led to another, so …
JEF: There you were.
GHS: There I was.
JEF: Seventeen years later.
GHS: Right.
JEF: But a lot of things happened, of course, during that 17 years, not surprisingly. I was interested that you talked, at that time in 1991, about how each incoming president wants to do something that’s important to them. You wanted to open up the management process a bit, make it a little more open. Is that something that you feel happened, is it something that really became a hallmark, would you say, of your tenure?
GHS: Yes, you know I think I would say that. As it turned out, as I may have mentioned, I never considered myself a professional manager. I never took a course in it. I don’t have an MBA or something like that, so it was a lot of on-the-job training and learning by doing, but I think it turned out that I’m a good delegator. And I think that’s important. First of all, you’ve got to have capable people around you or delegation, obviously, isn’t going to work. But you need to be a good delegator in the sense that you want to let people have the opportunity to do their jobs—or in some cases more than their jobs—to take responsibility and ownership. I think that’s very important. I couldn’t do it all myself anyway, even if I thought I was capable of that. I couldn’t do it all myself. I think it makes for a better working environment. You get contributions, both in terms of ideas and operations, from people that certainly wouldn’t have occurred to me. It’s easy to be a critic, and I tried to be a critic only when I thought it was absolutely essential. The easiest thing to do is to criticize somebody. The nice thing to do is to encourage them and/or put people in jobs where you think they will succeed, and if you get it right, that’s great.
JEF: You mentioned at that time, too, that you saw yourself as a fine-tuner. Your comment was that, you know, the organization runs pretty well, and it doesn’t need radical reform. I think I’m a fine-tuner. Is that kind of how you continued to look at yourself?
GHS: Yes. You know—if it’s not broken, don’t fix it, right? [chuckles] I would say—and this certainly wasn’t apparent in 1991—but as things turned out, the Federal Reserve wound up on the payment system side basically exiting the check processing business. Now that was something driven by the marketplace. It wasn’t that the Fed suddenly got an inspiration that check processing could occur without the Federal Reserve. But, that was more than fine-tuning, and I was one of the key players in that, because I happened to be head of the committee that oversaw the Fed’s payment system operations, which, of course, include more than just check processing. Check processing was where all the people were, fundamentally, across not just the twelve Reserve Banks, but all the branches and all the regional check processing centers. That was a major, and, I would say, fairly wrenching, adjustment for the Federal Reserve, but one that had to be made basically because there was no justification to continue in the check processing business. Had the Federal Reserve tried to do that, we were just squandering taxpayer money, and there’s no justification for that. So while I said it was wrenching, it was critical to do that, and it was more than fine-tuning. That was something that occurred across the System, not just in Minneapolis, something that, in my judgment, had to happen.
JEF: How quickly did that happen after 1991, because I recall—and we’ll talk about the famous Minneapolis Fed buildings a little later—but at that time I recall the check processing was a huge operation and had, in fact, outgrown the building you were in at that time.
GHS: Yes, that’s right. I think at one time, at its peak, Minneapolis probably had over 400 people in check processing, running three shifts a day. That was true in lots of locations, so there were thousands of people in the Federal Reserve involved in check processing. That effort got started early in the first decade of this century. I don’t remember if it was 2003 or probably somewhere in there. We got some data that were surprising to us, and that suggested check volumes were considerably lower than we thought they were nation-wide. Not the stuff we were processing—we knew what those numbers were—but the aggregate volumes, and also that volumes were dropping nation-wide. And the reason was, of course, that people were converting paper checks to electronic information as quickly as they could, because it was much more efficient and less costly to process. You got your credits more quickly, although with today’s interest rate levels that doesn’t matter so much. But it did matter more back then, and so once we were confronted with some of the cold, hard facts, we realized that we had better get moving and that the Fed has a responsibility in financial services to cover its costs. We hadn’t been covering our costs, and the prospects of covering our costs in the future in check processing didn’t look good either. Now I don’t want to take all that much credit for this. As I said, I was chair of the committee that oversaw this, but there were a number of important key players throughout the System, many at the operations and first vice president level. Pat Barron, who was first vice president at the Atlanta Fed at the time was the key guy, because he ran the check business, and he basically organized and devised the plan and the effort for our orderly shrinkage and, ultimately, withdrawal.
JEF: What about the other parts of the business, too? I mean electronic transfers and cash systems and all that sort of thing—how did those change along at the same time?
GHS: Well, I don’t know that wire transfer, funds transfer, changed very much. Obviously, I’ve been out of the Fed for awhile, but I think volumes there have continued to grow. That’s a business that is run out of New York, as it should be, being the financial center of the country. As far as the cash-related businesses, my guess is that right now the Fed has excess vault capacity System-wide, although perhaps not at every location. Some locations may be stretched. But, you know, vaults—once you’ve got ‘em, you’ve got ‘em. [chuckles] If they’re in the buildings, the only choices are to continue to operate them, or, if you can do it more efficiently, by moving everything to a different location. For instance, you may not need a vault service in both Saint Louis and Louisville, just because of the geography—they’re pretty close physically. Well, then, you need to make whatever adjustments you need to make.
You know, there was legislation passed around 1980 that required the Federal Reserve to cover its costs in these areas. Now, actually, vault service is not a priced service, so that’s a little bit removed, but I think what that legislation did was to sensitize everybody in the Fed to resource use and cost recovery and so forth. I think that was very healthy, although it led to some difficult decisions. But I think that was very healthy in terms of how resources were used in the Federal Reserve, and I think that attitude persists. As I said, I think it’s very healthy. You don’t want to be doing things that you don’t need to do over time. Something that may have made perfectly good sense when the Fed was founded in 1913-14, or even in 1954, or even in 1974 or 1984, may not make any sense today.
JEF: Talk a little, if you would, about the evolution, both of the Minneapolis Bank and, frankly, of the regional banks in general over that next fifteen-to-twenty-year period after we interviewed before. How did they evolve, how did they change?
GHS: Well, one way of thinking about it is they became increasingly what I would call white collar rather than blue collar organizations. What happened in check processing is illustrative of that and perhaps the most dramatic example. The other side of the coin was that I think more resources have been devoted over time, and in the last several years substantially more resources, to banking supervision, and - I would put it more broadly - financial system supervision in the Federal Reserve. I think that’s appropriate, obviously, given the severity of the financial crisis from 2007 through 2009 and even through today, depending on how you like to view it. Also, of course, Congress made it pretty clear with the Dodd-Frank legislation that was passed in the summer of 2010, that the bank regulators, including the Federal Reserve - maybe especially the Federal Reserve - needed to be at the top of their games going forward. So, I think you’ve had, as I say, this evolution, from blue collar to white collar, greater emphasis on banking supervision, and some real challenges, without question, in broad economic monetary policy. That almost goes without saying, given the financial crisis and its aftermath.
I think one of the things that has happened as a consequence of that shift is that it calls into question the role of the branches. Not so much the head offices, because the head offices, after all, have the preponderance of the banking supervision people—the economists, the lawyers, the white collar people. I think it does call into question the role of the branches. The New York Fed closed down its Buffalo branch. I think some of the other districts have turned their branches basically into public outreach undertakings. I question the value of that, but that’s for those districts to worry about. Those changes are occurring, and my guess would be that that trend is not going to change. That is a trend that’s going to persist for sometime further.
JEF: At the time I interviewed you before you had just built a beautiful new branch out in Helena, and I recall you saying at that point that, of course, one of its features was check processing.
GHS: Right.
JEF: But that went away. How did that affect the Helena branch?
GHS: Well, there’s excess space in Helena, and I believe they’ve rented some of it out to non-Federal Reserve entities. They still have a vault operation. They still have some bank supervisors out there that worry about the Montana institutions. They do some community outreach on the economic side. They’ve been very successful working with some of the Native American tribes, and trying to develop a commercial code and more standard lending practices and improved credit availability on the reservations and so forth. And obviously that’s a valuable undertaking, but it’s not something that the Federal Reserve all by itself is going to address entirely. So, I think they are continuing to play a significant role, but it’s probably not the role that was envisioned when the building was built—certainly not the role that was envisioned when the building was built. But Helena has the great advantage of isolation. It is unlike some places like Louisville or Little Rock, where the geography makes it easy to say, well, you know you can do everything out of Saint Louis or whatever. You know, Helena’s further from Minneapolis than Washington, I believe. So, there may be an important role for Helena over time. Personally, I think the jury’s out, but you can ask current management that question. It does have the benefit of isolation where, you know, with lots of locations that just isn’t the case.
JEF: How did your role as president of this bank in a huge region, one of the largest, most geographically diverse in the country—how did that evolve at all over the twenty-plus years that you were here?
GHS: I don’t know that it did. I always took it as a responsibility to try to not be too devoted to just Minneapolis or Minnesota. So, I made it a practice to get out to the District with some frequency, be it Montana or the Dakotas, or the Upper Peninsula of Michigan, or Wisconsin, and so forth. Actually, that’s a fun part of the job, because you get to meet a lot of people and get different views and help to explain the Federal Reserve and its policies to lots of different audiences, and I think that’s an important undertaking. In a way you can never do enough of that because the District is so big and so thinly populated outside of the Twin Cities. It’s very hard to do as much of that as effectively as you might like, but I gave it a shot. I think Narayana [Kocherlakota, current president of the Federal Reserve Bank of Minneapolis] has even upped that quite a bit, at least that is my impression. Having said that, you know, getting around the District is a little more challenging than some other locations, just because, even with air service, some of those places are pretty remote, and it can take a fair chunk of time just to arrive, much less to do something substantial.
JEF: Was there an evolution over that period of time in the role that you saw the presidents of the Federal Reserve banks serving within the System itself?
GHS: Well, I think it depends more on what you, as a president, think your comparative advantage is, rather than your role. The role isn’t that precisely defined. It isn’t—thou shalt do this, thou shalt not do that. There is lots of room to do things you want to do and to avoid doing things you don’t want to do, if that’s your choice. I think that you should try to think about where you can add value and make a difference and what you’re interested in, what really gets you enthused, and try to focus on those things, because there are only so many hours in the day and only so many resources available. I happen to have a Ph.D. in economics, so economic policy, at the end of the day, was going to be my first priority. I thought that’s where I could add most value. Intellectually that’s what I liked. Not the only thing I liked doing, but I liked doing that. Some of the presidents have different backgrounds. They may be lawyers, they may have MBAs, who knows? They may be more interested in operations or in HR issues, or whatever.
The Federal Reserve runs so much by committees and task forces and special groups that are ad hoc groups that are created. Well, you can find lots of opportunities to contribute if you want to. One important thing that I think started to change with my predecessor Jerry Corrigan, and maybe a little earlier, but it certainly started to change with him, and I tried to continue it, is that there was a little tendency in Minneapolis to be insular, even by Federal Reserve standards. Let’s focus on the District, let’s not worry too much about System matters, and let’s not get too involved with the Board of Governors and Board staff in Washington. I think that’s a mistake. If you choose not to get involved, then they are going to do whatever they choose to do, and you won’t have any impact, and that’s not a good idea, in my opinion. I thought that we should, over time—again, where we could add some value—get involved in what Washington was interested in and working on.
JEF: Well, talk a little then about the—I mean, that brings to my mind the Federal Open Market Committee, which you were involved with a lot. How did that evolve over time, and particular the role of the regionals in that arena?
GHS: Well, it did change quite a bit in some ways, and in other ways not at all, and I’ll give you the not at all. At the end of the day the Open Market Committee—it comes down to a vote, the majority rules, and you’re going to make a decision before you leave the room, there’s no question about that. So, that didn’t change. Now, what did change, to start with, is, of course, leadership. When I started to attend the meetings, first as a staff member, director of research, and then as president, Paul Volcker was chairman. Then Alan Greenspan became chairman, and then in 2006 Ben Bernanke became chairman. They all had their own styles, and I won’t dwell on that. I mean, we could talk about that for hours, so I won’t go into great depth. But with Volcker the meetings were less structured and more free-wheeling. Paul had limited tolerance—and this is not a criticism, this is actually a tribute—Paul had little tolerance for nonsense, so he would cut discussion off if somebody was going down a path that he didn’t view as being particularly productive. Now that, obviously, rubbed some people the wrong way, but so be it.
Alan had a whole different approach. The meetings became much more structured and formalized, in part because it was during Alan’s years that committee members—maybe some realized, but I know I didn’t—that the meetings were actually being taped for posterity and recorded for posterity, so there would be word-by-word transcripts. And when that took hold, most people came in with prepared statements, which they either read or referred to quite carefully as they proceeded. And that changed the tenor of the meetings, and not for the better, in my judgment, because there was less interaction, there was less response to what somebody else might have said. Many people came in with their positions well-established, and it was hard to persuade them to change. It may have been hard to persuade them anyway.
And then under Bernanke, I would say the general format of the meetings was similar to that when Alan Greenspan was chairman, but he was, I think, more—I wouldn’t say open, because Alan was quite open, but probably more encouraging of alternative views along the way. Of course, Bernanke—I mean, let’s not kid ourselves—the Fed has been dealt a very difficult hand since he’s been chairman. I haven’t been there for the last three-plus years, so it’s hard to know exactly how it has played out. Watching the decisions of the committee, I think they must have had some very spirited discussions. I suspect things, perhaps, have become a little more free-wheeling than they were. As a president, obviously you’re not indifferent to the way the chairman operates, but what you’re trying to do at the meetings doesn’t change. I mean, you’re trying to provide some perspective on the District or regional economy, where you believe it’s relevant and matters to the decision, which is obviously going to depend on national and maybe to some extent international matters. You certainly want to talk about your view of the broad economic circumstances; that is, nationally and internationally, and your view of the outlook. And then you’re going to certainly want to weigh in on the policy alternatives, which you prefer and why, and, if you have your own alternative, why you prefer that. And then, of course, sometimes you get into details of language in the statement, and are you happy with what it says, with the order in which it is presented, with the adverbs and adjectives, and so on and so forth. You’re driving your own bus, so you can weigh in on a lot of different matters. You’ve got to be a little careful, I think, about choosing your battles in the sense that you don’t want to nit-pick, if you really have bigger fish to fry.
JEF: Talk a little bit, if you would, about … I mean, we have to talk about it because you actually used the words in 1991—too big to fail.
GHS: [chuckles]
JEF: And that was in 1991, and then, of course, the famous book came out, and then it all actually happened.
GHS: Yes.
JEF: Talk about that, because here you are calling the shots, in fact using the words almost twenty years before.
GHS: Well, yes, I appreciate your bringing that up. We were early. We were talking about that issue around here for many years. It initially started, I think, with a couple of the economists who had appointments over at the University of Minnesota and also worked as consultants here at the Bank, and then some of the rest of us picked it up and ultimately Ron Feldman and I wrote the book. One footnote on that which I like to relate is how Ron and I got the idea for the book. I’ll tell you how that came about. Actually we wanted to do a monograph, maybe forty pages. We thought we could say what we needed to say in something like that. So, we went to Brookings Institution, who published it, and we said we want to do Too Big to Fail, and they said—yeah, great. But, monographs don’t sell. And we took that to mean that books do sell, which, of course, was an error, [chuckles] because we haven’t sold many copies.
But I think on the substance of the issue, we obviously got a lot of things right, in terms of our concern. We didn’t try to predict the timing. I think that’s impossible. Even if I had tried, I don’t know what I might have said. The reason we wrote the book is that, prior to 2004 when it was published, Ron and I had been giving speeches in various locations about our concerns about perverse incentives and what that meant for risk-taking, and how that made these institutions and the financial system ultimately vulnerable. And we got two reactions, principally, neither of which were encouraging. One was—well, you guys are right, but nothing can be done about it; that is, you cannot address too big to fail, and you certainly can’t eliminate it. I agree with that. But I don’t agree with the argument that you can’t rein it in, and you can’t reduce the dimensions of the problem. We thought that was wrong and we had a lot of suggestions about that. And others said, well, you know, you’re really barking up the wrong tree because there’s this legislation passed, actually in the early 1990s, that addressed too big to fail.
Obviously in making that statement, people believed it and thought the legislation addressed it effectively. We thought that legislation was close to worthless, and those people were kidding themselves or had misdiagnosed the situation. That’s maybe a nicer way to put it. And so, since we seemed to be having so much trouble getting through to our audience, we decided to try to write a book, put it all down in one place—here’s the problem, here are some prospective solutions, prospective ways of addressing the problem. It ought to be taken seriously.
The book came out in 2004. The crisis commenced in 2007. Obviously, we didn’t spend a lot of time either congratulating ourselves because, frankly, we’d all be better off if the crisis didn’t occur. So we didn’t spend time either congratulating ourselves or wringing our hands about why didn’t anybody listen to us. But I will say that had people taken our work more seriously, I think we would have been better prepared for the crisis. The crisis would have happened, I believe, but we’d have been better prepared and it would have been less severe. We’d be better off sitting here in 2013 than we are. But that’s all water over the dam.
JEF: But as I was thinking about it, and the fact that you actually used the words—talk about prescience. I’ve wondered, as it began to unfold, and the dimensions of it became apparent, for you it must have been sort of like having predicted the Titanic and then sitting there thinking—oh, my God, it really is happening.
GHS: Well, you know, it’s funny. Some people will acknowledge what you just said—you know, you guys really called that one, and so forth. Many people do not, and I don’t know why. It may simply mean they’re not even aware of it—that’s OK. I don’t agonize about it.
JEF: They don’t want to think they weren’t clever enough to see it coming.
GHS: Well, I think that there may be some of that. It’s interesting that the economics profession has taken a beating, undeservedly, in my opinion, for not calling the crisis. I don’t think there is a serious economist who would say—I have the ability to predict a crisis. Like I said to you earlier, we didn’t say anything about timing, and, yes, now if we had said—the crisis is going to commence in 2007, that would have really been a home run. But we didn’t say that. Some economists have pointed to our book and said—look, Stern and Feldman called it—the profession didn’t blow it entirely. I mean, there are people who recognized the problem and they saw what was happening and saw where this was going, etc. I think that’s fair. I wouldn’t claim that, as I said, we knew 2007 was going to be the year or that we knew anything about the severity of what was going to happen. Although I think we knew it wasn’t going to be a walk in the park. But, I don’t think the profession should be damned because it didn’t call the crisis. I don’t think anybody seriously tries to do that.
JEF: Talk a little, if you would, too, because it’s allied to it, about the changes in the US banking system. When we talked in 1991, you know, the conversation is littered with references to First Bank and Norwest, both of which have gone away.
GHS: Now there is US Bank and Wells Fargo. They’ve gone away in one sense, and are alive and well and thriving in another sense, because those two institutions are two of the five largest banking institutions in the country today. Obviously they have different logos, but they are fundamentally those institutions. 8
JEF: And yet there are fewer big money center banks today. I look at a place like Boston, which has no big money center bank …
GHS: Headquartered there … no, that’s true.
JEF: Headquartered, yes.
GHS: There certainly has been consolidation, and there certainly has been a decline in the overall number of community banks. It is certainly true that firms like Goldman Sachs and Morgan Stanley now have banking charters. That’s a consequence of the crisis. The issues to think about, in my opinion, are at least two, and I would have said this in 1991. Maybe this is just that I’m too old to change. My wife would agree with that probably. But what I would say is—you want to ask yourself, does the financial services sector, industry, broadly—not just banks, but banks and brokerage houses and insurance companies, the whole plethora of institutions—do they meet the needs of their customers, whether you’re talking about households or businesses or municipalities or whatever. Do they meet the needs of their customers well? You know, that waxes and wanes a little bit, but I would say the answer to that is clearly yes. Most customers have lots of choices in terms of the institutions they choose to do business with. Lots of people—not all—but lots of businesses and households do business with multiple financial institutions. That is true even today, despite this so-called financial supermarket concept and so forth.
I think I would have said that in 1991, and I would certainly say that today, that most customers find the financial services marketplace pretty competitive. Do they always get what they want? No—but it’s pretty competitive. The other issue that you want to think about is whether the taxpayer is adequately protected, and that’s what we were getting at in Too Big to Fail. And I think that’s much more of an open question, at least for me. I think the Dodd-Frank legislation tries to address that. I have not read all the … however many pages there are of Dodd-Frank. Fortunately, I was retired by the time it came out and I didn’t have to. But I think there are things in Dodd-Frank that are very constructive as far as protecting the taxpayer and addressing too big to fail. I think there are, no doubt, things in Dodd-Frank that would not pass the cost benefit test. If somebody said—we’ve got to implement this, and somebody said well, let’s sit back and see if the benefits outweigh the costs—sure there are things in there that don’t, and won’t. And then I’m sure there are things in there that are gray, and it’s not clear what the cost benefit results would be. But that’s probably true of most major pieces of legislation. It’s probably not unique to Dodd-Frank. So, you know, I guess that’s a long-winded answer to say that while the financial system has changed significantly in many ways since 1991, if you think about the real fundamental issues, I’m not sure they have changed all that much.
JEF: I think that’s an important perspective. It’s interesting to hear you say that, because, I think, in the popular press—we were talking before the interview started a little bit about the popular press—that’s not always what’s presented to people.
GHS: Oh, no—that’s quite true. But for people like us who live in a big metropolitan area—I mean, if you take thirty seconds to think about it, you know that there are lots of different banks where you could have an account if you wanted to. You know that if you get on line, the choices go up a lot. You know that with options like Schwab and Fidelity and Vanguard—if you don’t want a bank, you can pretty much do everything with them. And I’m just talking about households, now. In a rural community, except for online, the choices are going to be more limited, but that’s always been the case.
And, in fact, I guess maybe I’m skipping over the online part a little too quickly, because that does mean that even if you’re sitting in a fairly isolated rural area you’re not confined to the one or two financial institutions in town. You can get online, you can open an account, you can proceed. Now, there’s obviously a generational gap in terms of people’s willingness to do it. I would guess somebody who’s thirty years old is much more willing to do it than somebody who’s seventy, but that’s a problem that will solve itself. [chuckles]
JEF: As, hopefully, will be the lack of high-speed internet in some rural communities, too, which is a minor, but important, problem.
GHS: Right.
JEF: Talk a little bit, if you would, about the increasing globalization of financial services, because every time I open the Wall Street Journal in the morning, it seems to me, as a complete outsider to the financial system, that we’re a whole lot more interconnected, like it or not, than we were in 1991. Is that really true—did that affect the Federal Reserve System and its decision making? It seems that suddenly people are talking - even ordinary people of the United States - about the Greeks and the Euro, and seem to be far more conversant with the realities there than they ever would have been twenty years ago.
GHS: Well, certainly. I think you’re right, in the sense that that has had more of an impact here than might have been the case a couple of decades ago. But having said that, again, I think you’ve got to be careful to think about how this works. For example, Tokyo is a major financial center and Singapore’s a major financial center, and London and Frankfurt, and you go on and on. But, I think it’s been true, at least in recent years, that asset prices in those various markets are more highly correlated. So, if you think you’re going to protect yourself from a problem in Europe by buying Asian assets, whether you do it in the US or whether you have an account that actually trades in Hong Kong or Singapore, well that may not be the case anymore. If those correlations have increased, then it means that somebody who’s trying to diversify away from what they think is a problem, may have more difficulty doing so. That’s going to affect a relatively small part of the population. Except for, I suppose, big pension funds and endowments and things, which are basically managing other people’s money, and all of that.
On the other hand—it’s certainly true that some of the large financial institutions have some kind of presence in lots and lots of places. I think some work has been done recently through the Financial Stability Board in the UK, but I may be wrong about the organization, because there’s been a lot of concern in the wake of the financial crisis in making sure that the international bank supervisors are prepared for the next problem and can deal with a major institution that’s got widespread operations. But as it turns out, at least for the US and the UK, I think most of the real action, most of the balance sheets of these big institutions are either in the US or the UK or Switzerland. Oh, yes, they may have a presence in Indonesia—and I’m just picking Indonesia at random—but it’s not really big enough to matter. It may matter to Indonesia in some sense, but it’s not big enough to be a major issue if one of these institutions gets into difficulty. What you have to worry about is where they really have a lot of their balance sheet, which is going to be, like I said, in the US, the UK and so forth. In a way it hasn’t changed quite so much as some of the headlines might suggest. You could ask yourself, well, do the big banks or whatever they call themselves, do they compete globally? Well, yes, sure, some do. But you know, if you’re a big multi-national corporation, you probably have a choice of dealing with lots of US banks, lots of German banks, French banks, etc. Again, we’re talking about large multi-national corporations. For the vast majority of businesses and people, they don’t give it a thought.
JEF: As you saw things evolve in the Federal Reserve System, do you feel that there was an evolution in—how can I put this? The Federal Reserve, of course, is concerned with the economy in the United States. But it’s an increasingly global economy. Now there’s a European Central Bank, which there wasn’t years ago. Is there more international, global cognizance, if not interaction, than there was twenty years ago?
GHS: I think there’s always been a fair amount, partially through the Bank for International Settlements, and partially just because central bankers are a bit like a fraternity or a family, and so there’s always a certain level of understanding and sympathy among central bankers that you might not find in other professions. I don’t know. Obviously, the crisis has heightened some things – certainly communications. And I think to some extent there may be more cooperation and coordination among policy makers, not just central bankers, but policy makers around the globe. It would be exceedingly naïve if central bank policy makers or others tried to take the attitude that what happens in China doesn’t matter here, or what happens, as it turns out, in Greece—that I might have found harder to believe years ago [chuckles] but what happens in Greece doesn’t matter here.
There is one thing I will say, at least for the Federal Reserve. The Federal Reserve can be criticized for some things, legitimately, and accused of some things—but it’s not a naïve institution, and I think people in the Fed have recognized for a long time that there’s more to the game than just worrying about what’s happening in the fifty states. I think that’s been well-recognized for a long time. I think resources have been devoted to that, effectively. It doesn’t mean the Fed gets it right, either domestically or in terms of what’s going on abroad, but it’s not for lack of effort and lack of expertise. It is just that some of these things are very difficult to sort out and to understand, and nobody can foresee the future with any real ability. So, I guess it complicates policy making a bit, but I would say not all that much. I mean, if you get a crisis abroad that you don’t anticipate, like in 1997 and 1998, where you had the Asian financial crisis and then it spread to Russia and so forth—well that may be a bigger problem now than it might have been in the 1960s, because the global economies and the global markets are more intertwined. But it wasn’t even true in the 1960s. I don’t think people would have pretended that we should pay no attention to that.
JEF: Although they probably wouldn’t, sadly, have mentioned China, because we at that time, politically, we really didn’t think it mattered.
GHS: No, no, not China. And even Japan—you know, it was only twenty-plus years after World War II when Japan was probably just starting to become an important presence in the international economic arena.
JEF: You know, you come out of research …
GHS: Yes.
JEF:… and, given some of the things we’ve just been talking about, how did you see the research agenda, as you saw it here at the bank, change over that twenty-year period?
GHS: Well, first of all, let me say that Minneapolis has always been unique in its research orientation. When I say always, starting in the 1970s before I got here—I suspect we talked about this in the previous interview—it’s always tried to be more cutting edge, more academic-oriented, trying to understand not just the immediate policy questions and issues, but what’s going on in the economics profession that may affect the way central bankers and other policy makers view policy and what ought to be done going forward in the years ahead. I think the Minneapolis Fed was for a long time very successful at that, and you know there are three Nobel Prize winners now that have had association with the Bank. With the University of Minnesota, there are more—but with the Bank there are three Nobel winners, and I think that’s really remarkable. I don’t think you’ll find any other Reserve Bank with that record.
I would say two things about the research agenda. I don’t think that changed. That is, I think Minneapolis has always prided itself on its sort of cutting edge, academic orientation, recognizing that some of it may wind up having no policy implications, but some of it may ultimately have very important policy implications. You can cite things like rational expectations and some statistical techniques—auto-regressions that turned out to be very important. Time consistency—I’m just rattling these things off—but time consistency issues and credibility, which are very important in policy making.
The reason, or one of the reasons, that that was a good strategy for Minneapolis was that both in my case and in my predecessor’s case we came out of the New York Fed, which is a very different place. The New York Fed does things very differently. If you spend any time in their research department, at least when I was there, you learn a lot about analyzing the latest data and how it fits into the broader picture of the economy, and how to do forecasting—because you have to produce a forecast. How to do forecasting, and what all the pitfalls in forecasting are, why you ought to be very cautious about making claims for your forecast, and all of that kind of stuff. Well, it would be silly for me to come here, since that’s what I was good at, and tell the economists—you do it. Not only that, Washington is also very good at that, so you don’t want to just accept their forecast. You want to look at it with a somewhat critical eye, but you’re not trying to reproduce everything they do in Washington. I mean, that would just be a waste of resources. So, I think that worked out, and, in fact, I think what we’ve seen over the years is that many of the research departments in the Fed have tried to figure out what they were really good at, and then not devote all their resources to that, because you have a range of responsibilities, but figure out what you’re good at and allocate resources in a sensible way. That’s the way I would put it.
JEF: And, that’s what happened here—you felt that it’s continued going forward.
GHS: Yes.
JEF: Well, let’s talk a little bit about something that we mentioned in the pre-interview, and that was very much a topic of interest twenty years ago, and that is the physical location of the Bank, the building that it happens to occupy. The building that you were in at that time was an iconic, still is an iconic building, designed by Gunnar Birkerts, and it wasn’t working out very well, and now you’re in a beautiful new building, which was created under your watch as president. How did this all unfold?
GHS: Well, what really provoked the new building was that the old building, which I think many people would argue was an architectural masterpiece, was functionally not very good. But that wasn’t the principal problem. The principal problem was that it was a steel frame building and the curtain wall—that is the exterior—didn’t work. So that made it very energy inefficient. But the real problem was the steel was rusting, and it was hard to know how severe that was. To address it in theory you should take off the exterior, check the steel, fix what needs to be fixed, put it back on. Meanwhile, of course, everybody would have had to move out of the building and relocate somewhere for however long all that took, several years at least. And so, when we evaluated the various alternatives and expenses associated with them, it was clear that that was not a good solution for the Federal Reserve. The new building was a better solution, in part because if we sold the old building, the new owners got an empty building and they didn’t have to move people out and move them back in. They would get an empty building; they could fix what needed to be fixed and go from there. So, the economics were basically the deciding factor. Then, once that conclusion was reached and it was approved—the decision was approved first by the Board here in Minneapolis and then by the Board of Governors in Washington, and that was a fairly extensive process. And then we had to find a site, we had to find an architect, had to find a construction firm, etc., etc. All that took quite some time, as you might imagine.
We were very fortunate to find a site along the Mississippi River, obviously. There wasn’t really anything here on this site worth preserving. Basically, it was some low-rise warehouse-type buildings and a bar or two. But the preservationists and others were concerned, and so you had to work your way through all of that. We did tell the architects that this time around we wanted function, not form. If you could design a nice building, that’s great, but we want an efficient building. Efficient for operations, efficient for energy usage, low maintenance, etc. And I think they did a wonderful job. I think they managed to both take advantage of the site and gave us an attractive building, but one that, at least as far as I know, has had virtually no issues in terms of energy efficiency and maintenance and so on. When the checks were being processed here it was much more efficient than the other building. So I think in a way that turned out to be a big success. Would it have been better if this building didn’t have to be built and the other building had worked out; that is, the steel wasn’t rusting—well sure! But you have to play the hand you’re dealt.
JEF: But was the other building workable even at its best? Wasn’t the other building really designed more to be a masterpiece, an architectural masterpiece …
GHS: Yes, that was done in a whole different era, and I wasn’t around. In fact, I think when that project got started I wasn’t working for the Federal Reserve, even in the New York Fed. But that was a whole other era. There was a view in the Fed, that changed shortly thereafter—actually, I think that building changed it—there was a view in the Fed that part of the Fed’s role was to help revitalize downtowns. You could do that by making an architectural statement. The city of Minneapolis, among other things, wanted a plaza. They didn’t want a building that just sat on the site, so that’s why you basically got a suspension bridge. That was the solution - to provide a plaza – and that led to the suspension bridge design. I think from some perspectives that was quite well-intentioned, but things change, and what seemed a good idea in the late 1960s probably by the late 1970s, shortly after the building was occupied, didn’t look like such a hot idea, and by the 1990s it clearly wasn’t such a hot idea.
JEF: And of course, I was just thinking as you talked about it, that building was in a part of town that the Minneapolis Downtown Council was indeed trying to redevelop with the Northwestern National Life building.
GHS: Yes, exactly.
As I said, I wasn’t here at the time, but I would guess that if you talked to the leadership, both the leadership in the Bank and the directors, they would say, well, we were trying to do our part for the city of Minneapolis. We needed a new building. Working with them, this is what they wanted—I don’t mean in terms of the precise design, and we tried to be constructive.
JEF: What was the, just in brief, what was the process like, because you were deeply involved in creating this new building. You said you wanted a building with function, but by that time, by the time this building was built, surely you knew, the System knew, that the check processing operation was in steep decline.
GHS: No, no we didn’t know that.
JEF: You didn’t know that.
GHS: We didn’t know that till early 2003, maybe, something like that. So, no, we didn’t know that. I think, among other things, we thought we’d be in the check processing business in some substantial way for a long time. Not forever, but you’ve got to plan. In fact, that brings up an interesting point. We probably knew we weren’t going to be in check processing forever, but we thought for a good long time. People in the Federal Reserve had been talking about that since the 1970s, at least, maybe even earlier. They had been talking about how the payment system is going to become increasingly electronic and that was the problem—it’s like crying wolf. So people kept talking about it and check volumes kept going up. And they went up into the late 1990s or early 2000s, nationwide. They just kept going up. Basically, when you think about it, they’re going to go up with economic growth. As long as the economy is increasing, they’re going to go up until people really make the switch from paper to electronics. I think people had said, yes, you know, the all-electronic day is coming, but we have no idea when. It’s already taken a lot longer than we thought it would.
You could look at it a slightly different way. You could say, well, how big a check processing operation do we need, given that there are check processing sites, not head offices, but there are check processing sites in Des Moines and Milwaukee, part of the Chicago District, and also in Chicago. Well, you know, Chicago is four hundred miles away, Milwaukee is three hundred miles away, and Des Moines is two hundred fifty, whatever it is, miles away. You know, they’re not huge distances, but they’re not right next door. So, it probably made sense, in that environment, to say that we’re going to have a substantial check processing operation. That was especially true because we were doing work here—the Federal Reserve Bank in Minneapolis had checks coming in from the eastern end of the Upper Peninsula of Michigan and, on the western side, even if all the Montana checks went to Helena, checks came in from well out into the Dakotas. That isn’t very convenient for Milwaukee or Des Moines.
JEF: Well, that’s interesting, it’s fascinating, because, in fact, it’s a comment in a way on the other building. You mentioned in 1991 that one of the problems with the other building was that when they designed it they had predicted that check processing would be going away long before, in fact, it did.
GHS: Exactly. I mean, we got it wrong twice. [chuckles] First we thought it was going …
JEF: …but you were safer the second time.
GHS: First we thought it was going away too soon, and then we thought it was going away far too late. It goes back to my other point that forecasting is … or predicting the future, or however you want to say it…is a hazardous business.
JEF: An inexact science.
GHS: At best. Science may not be the right word.
JEF: So to kind of wrap up—have I not asked you something you wish I had that you would like to comment on?
GHS: I guess I would just make two comments. I would elaborate on a couple of the things I said earlier. I commented a little bit about Chairman Bernanke’s tenure, and I think the Federal Reserve has been dealt a very difficult hand by the financial crisis. And it’s not just the Federal Reserve. I think policy makers and elected officials, obviously, have had a major challenge.
I was here at the Fed for part of it but not for all of it, and I think the Fed has been courageous. It has also been in many ways effective, but, obviously, the economy has not had the kind of recovery that many had hoped for and predicted, and so those are still challenges. The other thing we talked about a little bit was how the Fed has evolved, and so I would just note something that ranks up there with the too big to fail issue that you talked about earlier. I gave a speech in 2000, I think it was, at the Boston Fed. They were holding a conference honoring Frank Morris, who was one of their former presidents. This was before the decision to shrink the check processing operations. I talked about how I thought the Fed was going to become increasingly white collar, and that payment system operations were going to become less important. The Fed seemed to have a great advantage in economic research, not just related to monetary policy, but to a broad range of topics and had a lot of credibility in this area, and ought to find more ways to capitalize on that. And I mention that not because I am proud of the timing and the thoughts behind it, but I think that’s still true. I think the Fed has to change with the times. It has to continue to play to its strengths, and I think its strengths are on the intellectual capital side. And that’s what it should try to do, in my view.
JEF: You are, as you know better than anybody, one of the two longest serving Federal Reserve Bank presidents there may ever be.
GHS: Right.
JEF: If you had to sum up what you hope your legacy would be perceived as, what would it be?
GHS: You know, that’s a difficult question for me, because I really try not to think in terms of legacy. My guess is that you try to make a contribution when you can, but I try not to worry about whether anybody’s going to be thinking about me in thirty years or three hundred years. I think those kinds of people are few and far between. But I guess I would hope that people would say that I made a contribution to a number of areas of the Federal Reserve and its responsibilities over time, and that I did it in a way that people thought was positive.
JEF: Well, like it or not, you did call too big to fail.
GHS: [Laughs]
JEF: You did it. Nobody can ever take that away.
GHS: No, I know. But as I said before, I would feel better about that if we had been more effective in inducing some preparation, and you know, it just doesn’t seem like we did.
JEF: Well, but you wonder, even today—said I, speaking just as a plain old citizen—I wonder, is there preparation going on today? There are times when I think it seems like there is, and there are other times I look at people in the banking industry and you wonder if they’ve learned anything at all. And I mean the commercial banks, not the Federal Reserve.
GHS: No, I know what you’re saying.
JEF: And I’m sure they must have learned something, but I wonder if they are really applying what they learned.
GHS: I take your point. I think that’s hard to assess. I would speculate that, yes, that’s hard to assess. Memories are not infinitely long, and so even if most important players today, whether they’re in the private sector or in central banks, have learned a lesson, it may not last. I can tell you, actually, now that I think about my experience on some of the financial institutions—everybody’s highly sensitive to this today. It doesn’t mean they’ll make the right decision all the time, the question is what happens in X years. And I think that’s where really effectively addressing too big to fail is absolutely critical. Unfortunately, or fortunately—probably unfortunately—that’s not the only pressing issue. That’s a financial issue; I think everybody recognizes that we have a big fiscal policy issue between the demographics of the entitlement programs and all of that, so if you want to take a glass half empty view, it’s not very hard. [Laughs] I tend to be a glass half full person.
JEF: I do, too. It must be interesting, though, to you. I was thinking the other day, as I opened my Wall Street Journal, I don’t think in my lifetime I have ever seen a time when the average citizen is as aware of the Federal Reserve as it is today.
GHS: You know, let me respond to that, because you may well be right, although I wonder if some of us don’t get a little too caught up in that. I spoke at one of the Federal Reserve System leadership conferences, it must have been a year-and-a-half ago now. They had a panel of ex-senior officials, so there was another former Reserve Bank president and a very distinguished former member of the Board of Governors on the panel with me. This got videotaped, so it’s floating around somewhere. At that time the Fed was getting a lot of criticism on policy. Either the Fed hadn’t done enough or it had done too much, and it’s still going on.
The participants in the leadership conference were, I think, all or almost all officers in the Federal Reserve with a fair amount of tenure, which probably means, you know, ten years or more, plus or minus. And they were quite concerned about this, as you would imagine, and about what could be done. Can our public affairs people, can our presidents—people who speak, you know, can they do something? And I must say, I listened to the anxiety expressed in one or two questions, and then finally I said, you know, I understand, and I understand there’s a lot of criticism and so on, but let’s not get carried away. For the average guy in the street, he or she is more concerned about what is going on at their job, and who’s cooking dinner tonight, and how their kid’s soccer team is doing. Whether the Federal Reserve has done too much or too little is not their number one concern. It is for some people, maybe. But I think there’s a tendency to exaggerate some of this. Would people like to see a better economy—yes. Would they like to see if the Federal Reserve could somehow produce that—yes. But is that the number one issue for a lot of households? I rather doubt it.
JEF: Well, that’s a good perspective. Maybe because I read the Wall Street Journal every day I see it more often. But when you said that, I was thinking to myself, yes you are right. Having just got back from three days at a dog show in Oshkosh, Wisconsin, where the only thing that was being discussed were dogs and the Packers, [chuckles] you’re probably right.
GHS: Well, that’s a good point.
JEF: There was far more talk about the Green Bay Packers. [chuckles]
GHS: Well, and now the Minnesota Wild are going to be starting up.
JEF: Yes.
GHS: My guess is, you know, that will be a big deal around here. Bigger than anything having to do with the Federal Reserve.
JEF: But I bet more people today, and I may be wrong on this, would recognize the name Bernanke, than have recognized the names of previous chairmen of the Federal Reserve …
GHS: I think starting with Volcker there was greater public awareness.
JEF: Volcker, probably, everybody knew him.
GHS: I think starting with Volcker and Greenspan.
JEF: Greenspan, too, yes.
GHS: You’re right about that. When I started working for the Federal Reserve in New York it was 1970. This is New York, the financial center of the country, if not the world, and I would tell people I worked at the Fed. I got mostly blank stares. I mean, they had no clue. Now, as things kind of deteriorated, especially by the late 1970s when you had very high inflation and very high interest rates, then people started to pay attention. With Paul Volcker and the policies he implemented, that did change the nature of the game. Since then, I would say, and without question in the last thirty-plus years, people’s view of the Fed and understanding of it has gone up a lot. My only point is that it is still not the number one thing on people’s minds.
JEF: I couldn’t agree more. You’re right, you’re right. We need to come back to reality.
GHS: [Chuckles] Yes, right.
JEF: Well, thank you. This has been great fun for me.
GHS: Good to talk with you.
JEF: Good to talk with you! Fun to do it twenty years later.
GHS: Yes—I’m glad I can still do it. [Laughs]
JEF: Me, too! [Laughs]
