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Comments on the Current Financial Crisis
Remarks before the 4th Annual Archway Investment Fund
Financial Services Forum, Bryant University

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

Smithfield, Rhode Island
February 24, 2009

The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve System.

Comments on the Current Financial Crisis
Richard W. Fisher
I want to thank Matthew [O‘Rourke] for that poised and articulate introduction. You exemplify
the very best of Bryant [University], Matt. I also want to thank Ron Machtley for inviting me to
speak today. As Ron knows, for over 45 years, I have watched this university evolve through the
eyes of my brother, the chairman of your board of trustees, Mike Fisher. I know no other
university president in the nation who is as dynamic as Ron, and I thank him for his leadership.
I also want to take advantage of being at this podium to single out my brother. It would be an
understatement to say that Mike and I grew up in a difficult and tumultuous household. Mike
was always the voice of reason, always the leader by example, always the ―look-to‖ guy for me
and our other brother, Bob. All the nice biographical things that Matthew said about me just now
would not have happened had I not wanted to grow up to be like my big brother. Thank you,
Mike, for being a bright, shining star and for showing me the way.
Now to the economy and our current financial predicament. The most cogent description of
recent economic developments I have heard came from a woman who, having just commiserated
with her accountants, put it this way: ―This has been like the divorce from hell: My net worth has
been cut in half and I‘m still stuck with my husband.‖ The mood and pace of the economy have
shifted from near bliss to acrimony and an almost palpable sense of betrayal. Our self-confidence
has gone wobbly. Many of our fellow citizens feel trapped in an unsustainable situation. The
challenge facing President Obama is daunting.
Certainly, few of us imagined in our wildest dreams that our global economy could have turned
so rotten so quickly. Only yesterday, it appeared that the economy was cruising along in the most
tranquil of seas. In the third quarter of 2007, we recorded our 25th consecutive quarter of
economic growth. Unemployment hit a low of 4.4 percent in March of that year. And the stock
market closed at an all-time high on Oct. 9, 2007, with the S&P 500 Index finishing the day at
1,565. To be sure, there were some signs of friction developing—most noticeably a heating up of
headline inflation, which reached its peak at a 9.6 percent annualized rate in June of 2008. And
there were fissures developing in the superstructure of the credit markets—most noticeably in the
housing market, but also on the balance sheets and income statements of major creditors and
various consumers. But to the unsuspecting world, all was well.
In 2008, conditions shifted radically. You all know the events that have transpired, and I will not
belabor them. They are neatly encapsulated in the most recent data. Our gross domestic product
is no longer growing, but shrank at an annualized pace of 3.8 percent in the final quarter of 2008,
a figure likely to be revised downward after greater scrutiny. Even Texas, the only large state in
the United States to have employment growth last year, saw its 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.

Last Wednesday, we learned that U.S. industrial production declined by 1.8 percent in January
and that overall manufacturing output has declined 12.9 percent over the past year. It is worse
elsewhere. For example, Japanese industrial production is en route to declining by 30 percent this
year. 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. 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 52 percent off its October 2007 peak. British
stocks were off 42 percent over the same period, the German DAX was down 51 percent, the
Hang Seng Index was down 53 percent and the Nikkei Dow for Japan is down 57 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 cutting ―head count‖ so aggressively that
unemployment appears to me to be headed in the direction of, and possibly past, 9 percent.
Businesses are delaying capital expenditures. They are demanding that suppliers cut their prices
and are tightening inventory management. 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
―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
―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.‖1
That was not written by Martin Wolf of the Financial Times or Paul Gigot of the Wall Street
Journal or David Brooks of the New York Times or Ellen Goodman of the Boston Globe. 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 fear—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?
Of course, we could have let nature run its course for fear of making things worse. P. G.
Wodehouse, my favorite comedic author, used to say that ―there is only one cure for gray hair. It
was invented by a Frenchman. It is called the guillotine.‖ But my colleagues at the Federal
Reserve and I refuse to be fatalistic. (Besides, those of us who still have hair have seen it turn
gray this past year.) Though 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.


―A Time of Unexampled Prosperity,‖ by Washington Irving, in The Crayon Papers, 1890.

Let me go back in history once more. The basic playbook for how a central bank, as the
economy‘s lender of last resort, deals with a financial crisis was written in the 19th century by
two men: Henry Thornton and Walter Bagehot.
Bagehot‘s prescription to counter a panic bears repeating: ―The holders of the cash reserve must
be ready not only to keep it for their own liabilities, but to advance it most freely for the
liabilities of others. They must lend to merchants, to minor bankers, to ‗this man and that man‘
whenever the security is good.‖
Bagehot describes the response of the Bank of England to the Panic of 1825 by quoting its
governor as follows: ―We lent it … by every possible means and in modes we had never adopted
before; we took in stock on security, we purchased Exchequer bills, we made advances on
[those] bills, we not only discounted outright, but we made advances on the deposit of bills of
exchange to an immense amount, in short, by every possible means consistent with the safety of
the Bank....‖2
All the while bearing in mind the advice rendered by Thornton, writing in 1802: ―It is by no
means intended to imply, that it would become the [Central] Bank to relieve every distress which
the rashness of [bankers and financiers] may bring upon them.... The relief should neither be so
... liberal as to exempt those who misconduct their business ... nor so scanty and slow as deeply
to involve the general interests. These interests, nevertheless, are sure to be pleaded by every
distressed person whose affairs are large, however indifferent or even ruinous may be their
If you are looking for a cognitive road map of what the Fed has been up to as we navigate
between the need to ―advance most freely for the liabilities of others, lend to bankers and
merchants, and ‗to this man and that man‘ whenever the security is good‖ and the equally
compelling need to fend off the moral hazard of relieving ―those who misconduct their
business,‖ you might dust off your Bagehot and Thornton.
Of course, the panics of the 18th and 19th centuries were different in size and shape than those of
recent times. The nature of financial crises changes with time, reacting to the dynamic contours
of the economy and financial evolution. Thus we must learn from experience, augmenting the
theories and models that come from the study of past remedies.
I recently read Ken Follett‘s magnificent book World Without End.4 It is a massive tome that
runs for 1,014 pages. (I was tempted to rename it Book Without End.) It deals with the Black
Plague that crippled England and Europe in the 14th century. In those days, the monks were the
intelligentsia, and those who practiced medicine were sent to Oxford to learn from the theorists
of ancient Greece. The nuns were the nurses. In the middle ages, women were not allowed to
attend Oxford, so they learned from doing.5 While the monks adhered to the Oxford-taught, old
orthodoxy of studying the ―humors,‖ of bleeding, and of invoking the dictum of fiat voluntas tua

Lombard Street, by Walter Bagehot, 1873.
An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, by Henry Thornton, 1802.
World Without End, by Ken Follett, New York: Penguin, 2007.
When I arrived at Oxford 650 years later, there were women studying there, but they were kept in separate colleges
and were small in number. The joke among women then was ―Come to Oxford where the odds are good but the
goods are odd.‖


(―Thy will be done‖), the nuns adapted their techniques according to what actually worked. The
punch line of World Without End is that the community where the story takes place is spared the
worst effects of the Plague by a savvy nun named Mother Caris, who applies experience and
adapts established methods and theories to address the needs of the time.
We at the Federal Reserve do not believe in the economic equivalent of ―fiat voluntas tua.‖ We
believe in using our powers proactively. We have dusted off our Thornton and Bagehot and then
some. We have been neither ―scanty nor slow‖ in addressing the pathology of our economy and
financial system. We have ―lent by every possible means and in modes … consistent with the
safety of the bank.‖ And we have made abundantly clear that despite having reduced the target
range for the federal funds rate to the ―zero bound‖—the old orthodoxy—we will not shy from
pursuing all practicable means available to a central bank in supporting the functioning of
financial markets and stimulating the economy back to a steady state.
Like Mother Caris, we have learned from the experience of crises more recent than the ancient
debacles of the Mississippi Bubble or the Panic of 1825. We have studied the mistakes made by
other lenders of last resort who failed to properly deploy their forces in times of distress, such as
the Federal Reserve in the 1930s and the Bank of Japan in the 1990s. And we have reviewed the
actions taken by others more successful, such as those of the Swedish Riksbank in response to
their banking crisis of the early 1990s. Thus, starting on Dec. 12, 2007, when the base interest
rate—the fed funds rate—was 4.25 percent, we began expanding our balance sheet by providing
access to credit for longer terms to eligible depository institutions to alleviate funding pressures
in the system.
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) we announced 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 last week we stated we were prepared to expand significantly beyond our originally
planned $200 billion; and (8) 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, as you all know, in a series of steps, the FOMC reduced the fed funds rate to between zero
and a quarter of 1 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 Feb. 18, the total
footings of the Federal Reserve have expanded to roughly $2 trillion—an almost 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.
You will note that the emphasis of our activities has been on expanding the asset side of our
balance sheet—the left side, which registers the securities we hold, the loans we make, the value
of our swap lines and the credit facilities we have created. Simple accounting dictates that the
expansion of the left side of our balance sheet has been accompanied by an equally impressive
expansion of the right side—the liability side. In this regard, the combination of banks‘ balances,
Federal Reserve Bank notes and U.S. Treasury balances has grown tremendously.
When the Japanese economy went into the doldrums, the Bank of Japan emphasized the liability
side of its balance sheet by building up excess reserves and cash. The bulk of this accumulation
was associated with an increase in government securities on the left side of the Bank‘s balance
sheet, which seemed to do little to rejuvenate the system.
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 allimportant private sector yields, further braking commercial activity whose lifeblood is access to
affordable credit. We believe that emphasizing the asset side of the balance sheet will do more to
improve the functioning of credit markets and restore the flow of finance to the private sector. In
the parlance of central banking finance, I consider this a more qualitative approach to
―quantitative easing.‖ It is bred of having learned from the experience of our Japanese
counterparts, much as Mother Caris learned from watching others‘ unsuccessful attempts at
curing the Black Plague in her community of Kingsbridge.
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 rather like Rube Goldberg. I recall fondly the complex devices his protagonist, the felicitously
named Professor Lucifer Gorgonzola Butts, would deploy to perform different tasks. If you turn
to Wikipedia, you will find one of my favorites: the self-operating napkin. As described therein,
it was activated when a soup spoon (Exhibit A) is raised to the mouth, pulling on a string (B),
thereby jerking ladle (C) which throws cracker (D) past parrot (E), who jumps after it, tilting
perch (F), upsetting seeds (G) into pail (H), whose new extra weight pulls cord (I), which opens
and lights automatic cigar lighter (J), setting off skyrocket (K), which causes sickle (L) to cut
string (M) and allows pendulum (N) with attached napkin (O) to swing back and forth, thereby
wiping face.

I assure you the Federal Reserve has not abandoned the wisdom of Milton Friedman or Walter
Bagehot 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 has soiled the face of our financial
system 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.
To be sure, we have to be very careful in deploying our arsenal. For example, we are well aware
that the issuance of new Treasuries is expanding at an eye-popping pace: Net new issuance of
Treasuries was $145 billion in fiscal year 2007, expanded to $788 billion in fiscal year 2008 and,
by most everyone‘s accounting, will broach $2 trillion in fiscal year 2009.6 This ―guesstimation‖
is based on the pace of issuance in the first five months of this fiscal year and the expected price
tag for the recently approved fiscal stimulus package (but before a net cost is assigned to the
bank proposals that will be forthcoming from the Treasury and before accounting for the budget
about to be sent to the Congress by President Obama). The Federal Reserve must, of course, be
very careful to avoid any perception that it stands ready to monetize exploding fiscal deficits, as
this would undermine confidence in our independence and raise serious doubts about our
commitment to long-term price stability. These concerns certainly do not preclude some
Treasuries purchases, however, as we seek to strengthen the economy in this time of crisis. With
short-term Treasury rates near zero, an argument can be made that buying longer-term Treasuries
would be especially effective in this regard.
Parenthetically, I would note that such purchases are not at all unusual. We routinely buy
Treasury issues with a wide range of maturities in order to maintain a well-balanced portfolio.
So, we are talking only about a possible change in emphasis here, not a sharp departure from past
practice. That said, in my opinion, we certainly shouldn‘t try to peg long-term rates. Past efforts
to do so soon have led to costly credit-market distortions and inevitably ended in tears. In my
view, we must be very careful not to provide for an unsustainable and potentially disruptive
distortion in the benchmark market for Treasuries through any extraordinary efforts above and
beyond our normal balancing operations.
Similarly, we must be very cautious about the dimensions of our program to intervene directly in
the market for asset-backed securities, making sure that our actions are the absolute minimum
needed, and no more. Most important of all, we must continue to make clear that we will unwind
our interventions in the market and shrink our balance sheet back to normal proportions once our
task is accomplished, for this is, indeed, our unanimous and unflinching intention.
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, fixedrate 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

―Fed Home Loan Purchases Fail to Keep Mortgage Rates from Rising,‖ Financial Times, Feb. 9, 2009.

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 the premium over Treasuries that investment-grade
corporations pay to borrow in the open market has declined by 20 percent and by 25 percent for
non-investment-grade borrowers and that 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 will give our economic engine an activating short-term jolt without
encumbering or disincentivizing the entrepreneurial dynamic that has made for the long-term
economic miracle that is America. Next, our political leaders must agree to funding, if any, of the
Treasury‘s proposals for the resolution of the banking crisis so as to make the system more stable
and viable—a resolution, as Thomas Friedman reminds us in Sunday‘s New York Times, that
needs to be done in a manner that encourages winners rather than ―bailing out losers.‖7 And, on
top of all that, they must begin, now, to dig us out of the very deep hole they themselves have
dug in incurring unfunded liabilities of retirement and health care obligations—programs that are
already on the books but have not yet been paid for—that Pete Peterson‘s foundation calculates
at $53 trillion and we at the Dallas Fed believe total over $99 trillion.8 If you do the numbers,
you will find that some 85 percent of those unfunded liabilities is due to Medicare; a budgetary
Heimlich maneuver is urgently needed to keep Medicare from choking off our economic
We are navigating uncharted, financially treacherous waters. Our fiscal authorities must carefully
plot a course between the immediate needs for stimulus and the future needs of our children and
When George Shultz was director of the Office of Management and Budget, he became
frustrated with the spending impulses of the Nixon administration. He reports that he called the
venerable Sam Cohen, a virtual encyclopedia of budgetary history, into his office and asked,
―Between you and me, Sam, is there really any difference between Republicans and Democrats
when it comes to spending money?‖ Cohen‘s reply was classic: ―Sir, there is only one difference:
Democrats enjoy it more.‖
Mr. Cohen might have been a more ―equal opportunity‖ wisecracker were he still around. No
matter. We are beyond the point of either party‘s placing its immediate political needs ahead of
the welfare of our children and successor generations. I am hopeful that the good people that
President Obama has assembled to guide his economic policy, and the leadership of the House
and Senate, will begin to prevail on Congress to finally begin filling in the gaping holes of

―Start Up the Risk-Takers,‖ by Thomas Friedman, New York Times, Feb. 22, 2009.
Figures from the Dallas Fed cited in ―Storms on the Horizon,‖ by Richard W. Fisher, remarks before the
Commonwealth Club of California, San Francisco, May 28, 2008. Figures from the Peterson Foundation cited in
―Washington Must Heed Fiscal Alarm Bell,‖ by David Walker, Peter G. Peterson Foundation, Sept. 22, 2008.


unfunded liabilities. In my eyes, these unfunded programs represent the greatest threat to our
long-term economic welfare and—given the historical temptation for politicians to ask central
banks to monetize their profligacy—the independence of the Federal Reserve. Left unattended,
these liabilities will surely tear asunder future American prosperity.
I trust 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
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 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.‖9
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 offering a recommendation to our
lawmakers: 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 ―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.

Lords of Finance, by Liaquat Ahamed, New York: Penguin, 2009, p. 88.

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. 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.
I have been quoted as saying that protectionism is the crack cocaine of economics.10 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.
I am tempted to end this cheery talk by saying ―Have a nice day!‖ and walking off the stage.
However, I would hate to leave this podium with your having concluded that I am just another
sourpuss. I am, as I said, paid to worry. But I am a red-blooded American, as are all my
colleagues at the Fed. I draw on the wisdom of Marcus Nadler, one of the great minds of the
Federal Reserve from a period when our economy endured an even greater ―stress test.‖ To
counter the intellectual paralysis and down-in-the-mouth pessimism that gripped the financial
industry after the Crash of ‘29, Nadler put forth four simple propositions:
First, he said: ―You‘re right if you bet that the United States economy will continue to expand.‖
Second: ―You‘re wrong if you bet that it is going to stand still or collapse.‖
Third: ―You‘re wrong if you bet that any one element in our society is going to ruin or wreck the
And fourth: ―You‘re right if you bet that (leaders) in business, labor, and government are sane,
reasonably well informed and decent people who can be counted on to find common ground
among all their conflicting interests and work out a compromise solution to the big issues that
confront them.‖
This became known as ―Old Doc Nadler‘s Remedy,‖ and for my part, it is spot on. Every one of
us preoccupied with what ails us should keep it in mind.
I conclude where I started, with the example of my brother. It sounds trite, but to me, your
chairman, Mike Fisher, is the embodiment of the principle that when the going gets tough, the
tough get going. Against sometimes overwhelming odds, he lifted himself—and me alongside
him—up to great heights through sheer hard work and faith in the American Dream. It may seem
like the stuff of the wildest dreams to imagine our getting this economy out from its current
nightmarish predicament. But I believe we can and we will. We are Americans. I believe deep in
my soul that when put to the test, Americans rise to the occasion, no matter how great the
challenge. We have done it time and again. We have no choice but to do it once more, now.
I think I have said enough, if not too much. In the time-honored tradition of central bankers, I
would now be happy to avoid answering any questions you might have.


The NewsHour with Jim Lehrer, Feb. 2, 2009.