EclectEcon

The Women’s Economic Round Table sponsored a panel discussion Tuesday in New York that featured New York Federal Reserve Bank President Timothy Geithner, former NY Fed President and FOMC Chairman Paul Volcker, former NY Fed chief and FOMC vice-chairman Gerald Corrigan, and former NY Fed President William McDonough. The discussion of monetary policymaking amongst some of our most seasoned central bankers ran the gamut from inflation, to asset bubbles, to communications, to LTCM and supervision. ...

Question (Terri Thompson): ... [W]hat are the two or three things that worry you most today?”

William McDonough: “The thing that worries me most, in fact, the only thing that worries me a great deal - are what are popularly called the global imbalances. The United States of America last year needed to import $800 billion of other people’s savings; six and a half percent of gross domestic product. Unlike the days of yore when it was rich countries that were exporting savings to poor countries, it is now emerging market countries - China, Brazil - which are not investing enough in their own societies and sending money to the United States. It seems to be a good deal. We are the importer of last resort. They want to export things. We have very well developed financial markets - very creative financial services companies. And, so we are the place to invest of last resort.

In my view, this is not in the interest of the United States. We are a country that has a very serious problem with our aging population, of which I’m part. The Social Security system and the Medicare system on an actuarial basis are both in deep bankruptcy. Therefore, it is not appropriate for us as a society to be living higher than we should on other people’s savings from poor countries. China has 400 million people living below the poverty line; 800 million people living in poor rural areas. It makes no sense that they have a trillion dollars in reserves and that we, the people of the United States, are living better as a result of it. We have to do a better job. They have to do a better job in managing their economies. This is a situation which, left to its own devices, is one that will hit a brick wall. The only question is when.”

Gerald Corrigan: “The first point I would make is related somewhat to the one Bill just made – its kind of the other side of it. That is that the United States savings rate is virtually zero. The household saving rate is negative. And for the reasons that Bill mentioned and a whole bunch of other reasons as well, this is a potentially very dangerous situation, not only in terms of economic and financial terms, but it brings with it, I think, some potentially very serious problems down the road in terms of the well being of our own citizens. You know, as I said, that’s very closely related to Bill’s point about imbalances.

The second thing that I would mention is I think there is what I will describe as a small risk that the old inflation genie could sneak out of a bottle on us again. I emphasize that I think that is a very small risk, but if there’s one thing I think I’ve learned in the 40 years it is now in the financial fights that is once the genie is out of the bottle, it’s very, very difficult and expensive to put it back in the bottle.

I would just add to both of those points, whether it’s inflation or imbalances or savings, the other thing you have to be very cognizant of is that these kinds of problems clearly have potential to generate potential elements of financial instability. And the fact of the matter is that no matter how smart we think we are, we are virtually incapable - individually and collectively - of being able to anticipate the specific timing and triggers associated with financial shocks. So if you put that variable into the equation, it seems to me that it just reinforces in spades how important it is to get the fundamentals right.”

Paul Volcker: “Well, what I immediately thought, Terri, when you asked the question, I should resist the temptation to say what worries me the most is that I’m not in Washington. That’s not quite true because I take great confidence in the people in the Federal Reserve and elsewhere, particularly Tim Geithner. But both of my associates here have already touched upon the issues that I would put front and center economically.

I do worry about a lot of things in the economy these days, because I do think an awful lot is going wrong in the world generally that are even more important than monetary policy. But I don’t think I’ll get into those too deeply and just underscore what my two friends just said. I am a little bit more worried about inflation than Mr. Corrigan – although he expressed a worry. Not that it’s high, not that it’s going to go running away, but it’s kind of creeping up.

And I am impressed by the degree of pressure - if that’s the right word - psychological pressure, political pressure there is not to do anything about it. A lot of people out there on Wall Street and on Main Street are operating on the assumption that nothing very startling will happen in terms of restraint. And that’s reflected in attitudes pretty broadly. But once people are convinced that that’s the case, it can creep up on you. And the more it creeps up on you, the more difficult it becomes to do something about it.”