Thursday, May 29, 2008

Federal Reserve President Richard Fisher at the Commonwealth Club

Richard Fisher, the CEO and President of the Federal Reserve Bank of Dallas, spoke at San Francisco's Commonwealth Club (595 Market St.) on May 29, 2008. Some highlights:

1. Mr. Fisher is a big fan of Bill [McChesney] Martin, known for his statement that the job of a central banker is to "take away the punch bowl just as the party gets going."

2. Mr. Fisher said that the Dallas Federal Reserve's inflation numbers incorporate food and energy/gas prices. See for more information. I believe that what Mr. Fisher was referring to is the the "trimmed mean PCE" numbers, but I could be incorrect. What seems clear, however, is that the PCE numbers are probably more accurate than the CPI numbers, which are usually "excluding food and energy." As you can see in the next link, the PCE numbers are usually at least one percentage point higher than the CPI numbers. See

Mr. Fisher indicated that only his bank and the Cleveland Federal Reserve Bank published these more comprehensive numbers.

3. Mr. Fisher's speech sounded like a more number-heavy speech that the former Comptroller David Walker would give. He warned us to do something about government spending, saying that we are "falling victim to complacency and recklessness." He mentioned the "frightful storm of untethered government debt." [He probably meant to say, "unfettered," not "untethered."]

8 years ago, we had a surplus of 236 billion dollars, with a Republican Congress and Democratic president (Mr. Fisher emphasized that these issues were non-partisan.)

Today, the expected deficit in 2008 is at least 410 billion dollars.

Our underfunded liabilities, using an infinite horizon discounted value, is 13.6 trillion dollars for social services.

[Now, I don't pretend to know what an infinite horizon discounted value is. For more information on infinite horizon projections, see

That article says that an infinite horizon model is misleading, but Mr. Fisher mentioned an infinite horizon "discounted value," which may be different.]

Mr. Fisher said that Medicare was the biggest problem. Medicare has three parts, A (hospitals), B (doctor visits), and D (drug benefits/prescriptions). He estimated a projected deficit of 85.6 trillion dollars for Medicare. Including the projected deficit of Social Security benefits, Mr. Fisher expects a 99.2 trillion dollar deficit in unfunded portions of entitlement programs. He said that this debt works out to be more than 300,000 dollars per person, assuming a population of 304 million, which includes nonworking adults and children. Income taxes have to increase 68%(?) to cover deficits, which is basically reaches confiscatory levels.

What to do about all this? Well, he didn't have much to say, other than it was our responsibility, because we elect the people who run the government.

4. Mr. Fisher dissented in the last three interest rate cuts. He is an inflation hawk and said that "inflation is the most insidious enemy of capitalism and prosperity." He also said that "running the printing press" [of money] is the worst option, because that causes inflation, and stable prices are necessary for growth.

5. Mr. Fisher mentioned a humorous story where someone asked a researcher, "Is there a difference between the Republicans or Democrats [Congresses] in terms of who spends more money?" The answer was, "There's only one difference--Democrats enjoy it more."

6. Mr. Fisher was more relaxed during the Q&A session.

When asked what his bank does, he said that among other things, the Federal Reserve lends money at the discount window; clears checks (which is a declining function--he said his children had never used a paper check--people are moving to online banking); assists the U.S. Treasury; and processes cash (his bank recently processed 12 billion dollars--cash is used more in TX).

Mr. Fisher ran for a U.S. Senate seat and lost. In his funniest remark, he said he calls the legislative branch "the lower intestine." This was after he said the best part of his job was that he was allowed to speak the truth, and most government officials could not do that because they had to get elected, or balance competing interests. The difference between his position and the other branches was that he "could tell the truth."

He said that the FOMC meetings were a civil deliberation and a process that emphasized civility.

Comparing Greenspan and Bernanke, he said both of them had a great sense of humor. Bernanke was "perditiously smart," understanding the Depression more than any other living human being. He said Bernanke's best experience was serving on the local school board in Pennsylvania. On Greenspan: he "listened very well," perhaps because he played the saxophone.

Mr. Fisher said we are in for a period of "anemic economic activity," but said he would not call it a recession. He said the "debauching of our credit system" hurts small businesses, which create jobs in America.

He also said that we are experiencing inflation and our current economic climate because "we won." In his most passionate remarks, Mr. Fisher commented that "Chairman Mao is dead--I won't say God bless his soul. Hồ Chí Minh is dead. In November 1989, the Soviet Union filed for bankruptcy. We won." Everyone wants to imitate our lifestyle, which raises prices and leads to a period of more competition as other countries adopt our successful capitalist model.

A question was asked about implementation of the Basel II Accord, but Mr. Fisher said the writer of that question should come up to him afterwards and speak to him about it directly, because it was a technical question.

Mr. Fisher said he was instrumental in getting NAFTA passed and was "proud of NAFTA." He referred to Joseph Schumpeter and "creative destruction," saying that it drove each of us to our "competitive advantage." but said that the media was skewed in its reporting. If a company shut down, the media was there, but it wasn't there to record an instance when a completely new job opened for that person who was laid off or in general. He said that only 1% of our economy was based on agriculture; 5% on mining; 11% on manufacturing; and the rest (84%) was services. To give us an idea of how the economy has changed, Mr. Fisher said that lawyers "produced" more GDP than auto manufacturers [a sure sign of over-legislation].

A question was asked about whether he believed that the numbers from the BLS were accurate. He said that he was more concerned about sufficiency of the data than its accuracy. There are apparently large swathes of the economy that aren't reflected in the numbers he receives.

Overall, it was a fun experience. I asked him a question privately, about which currency he believed would be the most stable over the next five years. Mr. Fisher said that he couldn't predict that far out, and a basket of currencies would be the most stable way of managing risk. He did say that the European Central Bank had only one mandate, which was to control inflation, while the Fed had a dual mandate [maximum sustainable employment and price stability]. His comments seemed to imply that the Euro might be the most stable currency, but for the long term, he said he favored the U.S. dollar. His refusal to give me a clear answer was astute. To give you an idea of just how quickly things can change, remember than as recently as November 2003, Mr. Bernanke is on record as saying that "the current risk of increased inflation is, for the time being at least, quite small." See

The job of American central bankers--especially given their recent inability to predict bubbles and busts--is to respect savers while minimizing unemployment. Hopefully, Mr. Bernanke will get back to the "respecting savers" part of the mandate by raising interest rates at the next FOMC meeting.

FYI: The San Francisco Federal Reserve is right up the street from the Commonwealth. Call ahead of time, but for now, they have tours open to the public on Fridays at noon. Otherwise, they are closed to the public.

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