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
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 performance.
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 or failure.
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
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
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, be rewarded.
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 to.