Sarah Bloom Raskin

3/1/12

 

Last week we were privileged to receive the visit of Sarah Bloom Raskin, a Governor of the Federal Reserve System. She was accompanied by her parents and a number of welcome guests including members of the Y’s Women of Westport.

She began by describing how her parents had instilled in her and her brother the concept of working and saving from an early age, in his case as a teacher of the French horn for which he was paid $1.25 an hour and in her case, at the age of 10, as a page numberer for her father’s publishing business. Her pay rate was 1 cent for every 2 pages. This instilled in her the desire to find work that was not mind numbingly dull.

In looking at the economic downturn that began in 2007 – now referred to as the “great recession” –   Sarah noted that between January 2008 and February 2010, 8.75 million non-farm jobs had been lost and from the 4^th quarter of 2007 until the 2^nd quarter of 2009, the economy contracted by 5%.   And household wealth had contracted by $7 trillion as a result of the drop in home equity values and, by the end of 2011, real disposable income was still lower than it had been 4 years earlier when the recession hit. The recovery now in progress was gradual and access to credit was still limited thereby slowing the return to former levels of consumer expenditure. Even though the pace of economic recovery had increased to 2.5% by the end of the second half of 2011, the housing market was still down, credit conditions were still tight, exports were constrained, chronic long term unemployment was still high and the increase in gas prices were expected to lead to reduced consumer spending. The Federal Open Market Committee (or FOMC) projected a GDP growth of 2.2% to 2.7% for 2012, with unemployment slowly coming down and inflation at or below 2%. But the pace of expansion was likely to be modest and the European situation would continue to impact the demand for US exports.

The Fed had dropped the Fed Funds rate to virtually 0.0% and “Operation Twist” had been introduced to swap short term holdings of Treasuries and Mortgaged backed securities for longer term maturities, thereby reducing long term interest rates. The January FOMC meeting minutes indicated that the very low Fed Funds rate would be extended at least into 2014 and would thus have stayed virtually at 0% for an unprecedented 6 years. And the winding down of the Fed’s stock of treasury holdings would not begin at least until 2015. There was a concern about whether the low interest rates placed an additional strain on households that depended on interest earned on their savings. Studies had indicated that this was not really the case and was offset by the low interest charged, for example, on financing a new car or the ability to refinance mortgages at very low rates. In fact, only 7% of average investments were in CDs, savings bonds or the like.

In keeping interest rates low, the Fed’s priorities had been directed towards maximizing employment and economic expansion.

Among the many questions from the audience, the following were of note: Were members of the Fed permitted to invest? If so, in what was she investing? Sarah explained that the position as a Board member of the Fed arose either by appointment of the President, subject to confirmation by the Senate – this was her history – or by rote: the Presidents of the other 12 Federal Reserve banks took turns to serve. They were required to sign extensive ethics and disclosure statements and were subject to blackout periods during which they were not allowed to act on information that they had obtained during the course of their work. She said that the constraints were appropriate and effective 

Some politicians were calling for the abolishment of the Federal Reserve- how did she feel about that?  Not surprisingly, she felt that would be a mistake. What would replace it? All modern economies relied on some form of Central bank.

What about the issue of banks being “too big to fail”? Dodd-Frank will raise the questions on how to unwind large banks whose failure carried with it the threat of systemic risk. More work on regulation would be needed.

And what about the country’s chronic long term indebtedness? Again this was tied into fiscal policy that needed to find the right compromise between long term austerity and measures to provide short term, sustainable, economic recovery.

We citizens were now the owners of Fanny and Freddie – what were they worth? Yes, the agencies had been taken into receivership and were run out of the Treasury Department. Housing was a very important part of the national economy but the Fed did not have the power to restructure Fanny and Freddie – this was a congressional issue.

What did she believe would be the legacies of Alan Greenspan and Ben Bernanke? She did not comment on Mr. Greenspan (not surprisingly), but she described Bernanke as an “incredible leader”. He had brought them through an unprecedented period of economic stress during which he had adopted a very collaborative approach and had listened closely to the many and diverse political and economic views expressed within the FOMC.

Was the banking system over-regulated? She believed in regulation but it had to be “smart regulation”; those involved had to be “regulatorily nimble”.

This was one of the high points in the Y’s Men speaker line up and, on the Peter Knight scale of 1-10, Sarah Bloom Raskin scored a resounding 10.