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Speech by Richard W. Fisher, President and CEO (2005–2015)

Comments on the Current Financial Crisis (an Abridged Version)

Remarks before the 2009 Global Supply Chain Conference

March 4, 2009 Fort Worth, Texas

Thank you, Dan [Petty]. Dan and I go way, way back. I have enjoyed his friendship for over 30 years, from when we were just young pups in the Dallas Assembly and numerous other fora. I am always honored to be in Dan's presence, let alone to be introduced by him.

These are tough, challenging times for business men and women like you, central bankers like me, and for the legislators in Washington whom we collectively entrust with the power to tax and spend our hard-earned money—money whose purchasing power my colleagues at the Fed and I are duty bound to preserve and grow.

In preparing my talk for you today, I thought of a phrase coined by Queen Elizabeth II in her speech in 1992 marking the 40th anniversary of her accession to the throne. You may remember that that was the year when a series of personal tragedies, including the burning of Windsor Castle, beset her family. With classic British understatement, she told her subjects: "1992 is not a year on which I shall look back with undiluted pleasure.… It has turned out to be an 'Annus Horribilis.'" [1]

For all of us on this side of "the Pond," this past year, 2008, was an annus horribilis—a truly horrible year that only a sadist could look back upon with pleasure.

I want to talk to you today about what has happened and what we at the Federal Reserve are doing about it.

You all know the events that have transpired; I will not belabor them. They are neatly encapsulated in the most recent data.

Our gross domestic product shrank at an annualized pace of 6.2 percent in the final quarter of 2008. Even here in Texas, we saw our economy shrink in the fourth quarter. Abroad, the European Union's economy declined at an annualized rate of 5.8 percent, England's by 5.9 percent, Japan's by 12.7 percent and Korea's by 20.6 percent. And China's growth tapered down significantly to a reported year-over-year rate of 6.8 percent. Our closest neighbors saw their economies shift into reverse gear: Mexico's economy contracted, as did that of Canada, a net oil exporter with a surplus in its federal budget, low corporate and consumer debt levels, and no apparent subprime mortgage problems.

All indicators thus far point to our economy being on track for a decline of roughly the same magnitude in the first quarter of 2009. Just last month, we learned that U.S. industrial production declined by 1.8 percent in January and that overall manufacturing output declined 12.9 percent over the past year. And while the pace of contraction seems to have slowed somewhat, the Institute for Supply Management reported on Monday that this broad-based manufacturing decline has officially continued through the first two months of 2009. Mind you, it is worse elsewhere. Japanese industrial production in the first three months of 2009 is expected to be 33 percent lower than it was one year ago. For historical perspective, you may recall that in the classic 1954 film, Godzilla destroyed Tokyo, which then represented roughly a third of Japan's industrial production. We might call this the Godzilla Economy: It presents a monstrous challenge.

This challenge is vexing to bankers and other creditors, to investors, and to business operators. The credit intermediation process has become dysfunctional, and as for stocks, the S&P 500 Index has become historically and hysterically volatile; it closed yesterday roughly 55 percent off its October 2007 peak. British stocks are off 40-some-odd percent over the same period, the German DAX and the Hang Seng Index are down over 50 percent, and the Nikkei Dow for Japan is down almost 60 percent.

I will not venture to predict the future of our manic-depressive friend, Mr. Market. But I do know the consequences of his intemperate disposition. Faced with unforgiving stock and credit markets, American businesses are doing what they can to stay profitable: As demand for their products shrinks, they are slashing every cost factor under their control to preserve their profit margins. They are addressing their cost of labor by aggressively cutting "head count." They are delaying capital expenditures, tightening inventory management and demanding that suppliers cut their prices. They are watching their receivables and stretching out their payables. And they are taking every step they can to clean up their balance sheets. (One of my colleagues recently quipped that when looking at the balance sheets of consumers or banks or many other companies these days, nothing on the left is left and nothing on the right is right.)

There are plenty of armchair quarterbacks who now claim to have seen all this coming. Indeed, we must acknowledge that many in the financial community, including those at the Federal Reserve, failed to either detect or act upon the telltale signs of financial system excess.

Paul Volcker told me recently that in his day, he knew that a bank was headed for trouble when it grew too fast, moved into a fancy new building, placed the chairman of the board as the head of the art committee and hired McKinsey & Co. to do an incentive compensation study for the senior officers.

Paul Volcker is the wisest of men. Yet, I believe the following, written by another wise man, provides a more fulsome and insightful description of what we recently experienced. This is a long quote, so bear with me, as it perfectly captures the circumstances that led up to our current predicament:

"Every now and then the world is visited by one of these delusive seasons, when 'the credit system' ... expands to full luxuriance: everyone trusts everybody; a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; and men ... dash forth boldly from the facility of borrowing.

"Promissory notes, interchanged between scheming individuals, are liberally discounted at the banks.... Everyone talks in [huge amounts]; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums [are] made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises calculates the aggregate as solid capital....

"Speculative and dreaming ... men ... relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them maddening after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble....

"Speculation ... casts contempt upon all its sober realities. It renders the [financier] a magician, and the [stock] exchange a region of enchantment.... No 'operation' is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune....

"Could this delusion always last, life ... would indeed be a golden dream; but [the delusion] is as short as it is brilliant."[2]

That was not written this past year by Martin Wolf of the Financial Times or Paul Gigot of the Wall Street Journal or David Brooks of the New York Times. It was written by Washington Irving in his famous "Crayon Papers" about the Mississippi Bubble fiasco of 1719.

Irving, mind you, had never heard of a subprime mortgage or a credit default swap or any of the other modern financial innovations that are proving so vexing to credit markets today. He had never heard of Bernie Madoff or Allen Stanford. But he understood booms propelled by greed and tomfoolery and what happens when what one old colleague called "irrational exuberance" is replaced by irrational un-exuberance—when what was a sure thing yields to uncertainty. Uncertainty is the ultimate enemy of decisionmaking, forcing an otherwise robust credit system into a defensive crouch. (A fellow being interviewed on television not long ago was asked what positions he would advise his clients to take to ride out the current storm. He replied, "Cash and fetal.")

With uncertainty in full fever, cash is hoarded, counterparties are viewed with suspicion and no business appears worthy of financing. The economy, starved of the lifeblood of capital, staggers and begins to weaken.

So what have we at the Federal Reserve done about it?

In normal times, central bankers appear to be the most laconic genus of the human species. In times of distress, we believe in the monetary equivalent of the Powell Doctrine: We believe that good ideas, properly vetted and appropriately directed with an exit strategy in mind, can and should be brought to bear with overwhelming force to defeat threats to economic stability.

In rapid order, over the course of a year, we took at least eight major initiatives: (1) We established a lending facility for primary securities dealers, taking in new forms of collateral to secure those loans; (2) we initiated so-called swap lines with the central banks of 14 of our major trading partners, ranging from the European Central Bank to the Bank of Canada and the Banco de México to the Monetary Authority of Singapore, to alleviate dollar funding problems in those markets; (3) we created facilities to backstop money market mutual funds; (4) working with the U.S. Treasury and the FDIC, we initiated new measures to strengthen the security of certain banks; (5) we undertook a major program to purchase commercial paper, a critical component of the financial system; (6) we began to pay interest on reserves of banks; (7) at the end of November, we announced we stood ready to purchase up to $100 billion of the direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, as well as $500 billion in mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae; and (8) we announced, and just this Monday fleshed out, a new facility to support the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration—a facility which we have since stated we were prepared to expand significantly to other types of securities and beyond our originally planned $200 billion to $1 trillion, if needed.

And, as you all know, in a series of steps, the Federal Open Market Committee reduced the fed funds rate to between zero and one-quarter of one percent, a process which I supported once it became clear that the immediate inflationary tide was ebbing (though I remain concerned about the effects low rates have on aging baby boomers and the elderly who played by the rules, saved and squirreled away money and are now earning meager returns on their fixed income portfolios and bank deposits). Simultaneously, at the request of the 12 Federal Reserve Banks, and again in a series of steps, the Board of Governors lowered the rate it charges banks to borrow from our "discount window" so as to lower the cost of credit to the economy.

All of this has meant expanding the Federal Reserve's balance sheet. As of today, the total footings of the Federal Reserve have expanded to roughly $2 trillion—more than a twofold increase from when we started in 2008. It is clear that we stand ready to grow our balance sheet even more should conditions warrant. Our options include purchasing longer-term Treasuries, expanding our holdings of mortgage-backed paper and purchasing larger amounts and different forms of asset-backed paper.

As I said earlier, in times of crisis many feel that the best position to take is somewhere between cash and fetal. But it does the economy no good when creditors curl up in a ball and clutch their money. This only reinforces the widening of spreads between risk-free holdings and all-important private sector yields, further braking commercial activity whose lifeblood is access to affordable credit. We believe that the new facilities we have created will improve the functioning of credit markets and restore the flow of finance to the private sector.

I realize that by straying from our usual business of holding plain vanilla, mostly short-term Treasuries as assets and by shifting policy away from simple titrations of the fed funds rate, we have raised a few eyebrows. One observer has posited that we have migrated from the patron saint of Milton Friedman to enshrining Rube Goldberg.

I assure you the Federal Reserve has not abandoned the wisdom of Professor Friedman or any of the other established patron saints of central banking. But these are complex, trying times. Our economy faces a tough road. We are the nation's central bank and we are duty bound to apply every tool we can to clean up the mess that our financial system has become and get back on the track of sustainable economic growth with price stability. The men and women of the Federal Reserve spend every waking hour doing their level best to perform their duty. Even if we have to deploy a little Rube Goldberg engineering to get the task done.

I would suggest to you that some of our innovative, Rube Goldbergian contraptions have begun to work. For example, the London interbank offered rate, known by its acronym Libor, has come down handsomely. This is important as most variable-rate subprime and Alt-A mortgages that will be reset in the immediate future are based on Libor. Our purchase of government-sponsored enterprise (GSE) mortgage-backed securities helped reduce the interest rate on 30-year, fixed-rate mortgages to a record low of 4.96 in mid-January, according to Freddie Mac data that start in 1971—though the rate has floated back upward as the yield on longer-term Treasuries has risen with the new issuance calendar. And our commercial paper and money market fund facilities have improved the tone of the all-important commercial paper market—not just the A1/P1 paper market, in which we have directly intervened, but also in the A2/P2 market. It has also not escaped my attention that, while still quite high, the premium over Treasuries that some investment-grade corporations pay to borrow in the open market has declined substantially from its December peak, as has that for noninvestment-grade borrowers. In addition, corporate bond issuance has stepped up.

Despite these accomplishments, we have miles to go before we sleep.

Please bear in mind that the Federal Reserve is only one arrow in the quiver that can be deployed to restore the nation's economic vitality. The power to stimulate activity through taxing and spending the American people's money lies with the Congress of the United States. All eyes have been on the stimulus package recently passed by the House and Senate and signed by President Obama. This was no easy task, and it was accomplished with unusual alacrity. Only time will tell if the stimulus, and the $3.5 trillion budget that has been proposed by the President for the coming fiscal year, will give our economic engine an activating short-term jolt without spooking the financial markets and/or encumbering or disincentivizing the entrepreneurial dynamic that has made for the long-term economic miracle that is America, and be executed, as Thomas Friedman reminded us recently in the New York Times, in a manner that encourages winners rather than "bailing out losers."[3]

I trust the Congress will get it right. And, in doing so, I trust that they—and you—will keep in mind both the limited powers of the Federal Reserve and the vital importance of allowing us to apply our own judgment on how best to exercise those powers in furtherance of our mandate—a mandate to promote financial stability, maximize sustainable job creation, and maintain price stability.

As a central banker, I am genetically programmed to be a worrier. In times of economic duress, there is always a temptation for political authorities to compromise the central bank. I saw this firsthand when I served in the Carter administration with the ill-advised imposition of credit controls. This was but one instance in a long history that stretches from the debauching of monetary probity in ancient Rome to the inflation disaster that is now modern Zimbabwe.

Liaquat Ahamed, a former World Bank official and CEO of the bond management firm of Fischer, Francis, Trees and Watts, has written an entertaining book, titled Lords of Finance. In it, he notes that the founder of the German Reichsbank was Otto von Bismarck. When the Reichsbank was formed in 1871, Ahamed reports, Bismarck's closest confidant, Gershon Bleichröder, is reported to have "warned [Bismarck] that there would be occasions when political considerations would have to override purely economic judgments and at such times too independent a central bank would be a nuisance."[4]

It is no small wonder that the political considerations of the First World War and the impulse to override what might have been the purely economic judgments of Germany's central bank led to the hyper-inflation of the Weimar Republic and the utter destruction of the German economy. I beg to differ with Herr Bleichröder. It is more important than ever that we maintain the independence of our central bank, keeping it free from being overridden by political considerations. As the executive branch and the legislature seek to navigate our economy to safe harbor, we must minimize the impulse to let political exigencies hamper the work of the Federal Reserve. If, in the process of doing what is right and proper by confining its activity to its singular purpose, the Federal Reserve becomes a "nuisance," so be it. The Fed under Paul Volcker's leadership was certainly a "nuisance," but you would be hard-pressed to find anyone alive today who would argue the fact that the Volcker Fed pulled the nation from the precipice of economic calamity. It is important that the Federal Reserve be left to do its job and no more.

Having drawn that line in the sand, let me conclude by venturing an opinion on another area where our lawmakers must exercise critical leadership: It is imperative that they withstand demands for protectionism, including disguised protectionism in the form of nontariff barriers, "buy American" provisions and restrictions on capital flows. What made the Great Depression regrettably "great" was the Smoot–Hawley Act, with which everyone in this audience is familiar. You may be less familiar with the Long Depression that began when a flowering of new lending institutions that issued mortgages for municipal and residential construction in the capitals of Vienna, Berlin and Paris turned a cropper and began the financial panic of 1873.

If you study that debacle, you will quickly determine that what transformed a severe global downturn into a depression that lasted 23 years was action taken by our buddy, the aforementioned Iron Chancellor, Otto von Bismarck. In 1879, he decided to abandon Germany's free trade policy and acquiesce to the growing demands of manufacturers and rural farmers for increased tariff protection. His actions were followed in quick succession by France and then by Benjamin Harrison, who won the U.S. presidential election of 1888 by running on a protectionist platform and eventually signed into law the tariff of 1890.

I have been quoted as saying that protectionism is the crack cocaine of economics.[5] It provides a temporary high but is instantly addictive and leads to certain economic death. Were I not a taciturn, cautious central banker, I might have chosen my words with less constraint. As global growth slows and economic conditions in the United States toughen, our elected representatives, newly elected chief executive and his agents must resist with every fiber of their beings the temptation to compound our travails by embracing protectionism. For if they fail to do so, the economic situation we are now all working so hard to overcome will seem like a cakewalk.

Enough of this dismal stuff. I would hate to leave this podium with your having concluded that I am just another sourpuss like seemingly all the economists and the pundits that you read in the papers or watch on television. I am, as I said, paid to worry. But I am a red-blooded American, as are all my colleagues at the Fed. I believe deep in my soul that when put to the test, Americans rise to the occasion, no matter how great the challenge.

I opened with reference to Queen Elizabeth's "annus horribilis." 2008 might not have been the only "annus horribilis" we will have. It might well be extended to a biennium as we work to untie the Gordian knot of the economic mess in which we find ourselves. However glum or "lower-lipped" you may feel, I remind you that the queen's reference was a play on words from a poem written in the year 1667 by John Dryden, titled "Annus Mirabilis"—the "Year of Miracles"—about the period of 1665 to 1666.

Get this: The "Year of Miracles" that Dryden wrote about began with the Great Plague of London—a pandemic of something akin to bubonic plague—and ended with the Great Fire that burned London for five days.

So why did Dryden call it the "Year of Miracles?" Because from the wreckage, London rebuilt itself and arose from the ashes with wide streets, modern sewers and buildings commissioned by Charles II and designed by the great architect Christopher Wren that were so solidly constructed they last to this day. Our task is to turn the current "annus horribilis" into an opportunity, just as the Brits did 350 years ago—to emerge from the current economic wreckage stronger and better and more resilient than ever. If England could do it in the 17th century, we Americans, who face a far lesser challenge and have never, ever flinched from staring down and overcoming adversity, can certainly do it now. Turning something "horribilis" into a thing that is "mirabilis" is the American thing to do. We had best get on with it.

Thank you.

  1. Speech by Queen Elizabeth IIoff-site marking the 40th anniversary of her accession, London, Nov. 24, 1992.
  2. "A Time of Unexampled Prosperity," by Washington Irving, in The Crayon Papers, 1890.
  3. "Start Up the Risk-Takers," New York Times, Feb. 22, 2009.
  4. Lords of Finance, by Liaquat Ahamed, New York: Penguin, 2009, p. 88.
  5. "NewsHour with Jim Lehrer," Feb. 2, 2009.
About the Author

Richard W. Fisher served as president and CEO of the Federal Reserve Bank of Dallas from April 2005 until his retirement in March 2015.