Forget Larry Summers. What if Roger Ferguson took over the Fed?

August 1, 2013
Roger Ferguson (right) with Alan Greenspan. Ferguson may have Greenspan's old job before too long. (REUTERS/Larry Downing)
Roger Ferguson (right) with Alan Greenspan. Ferguson may have Greenspan's old job before too long. (REUTERS/Larry Downing)

On Sept. 11, 2001, Roger Ferguson, the mild-mannered vice chairman of the Federal Reserve, found himself unexpectedly asked to play the role of first responder in what could've been a global financial meltdown.

The World Trade Center housed some of the world's most important banks and investment firms, and the terrorist attacks left southern Manhattan, the nation's financial capital, in physical ruin. If the nation’s banking system were to freeze up, then the economic damage from the attacks also could have been monstrous.

But then-Federal Reserve Chairman Alan Greenspan was on a flight back from Zurich and found himself grounded in Switzerland after the terrible event. The responsibility fell to Ferguson.

Ferguson, by all accounts, nailed it. He issued a statement short enough to get through to people but clear enough that no one could mistake its meaning: "The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs." Banks took out $46 billion in emergency loans, 200 times the daily average before the attacks. He led briefings to organize the Fed banks across the country to work in concert to ensure that the human disaster of 9/11 did not also become a financial disaster.

"He took charge without being in any way overbearing," said William Poole, president of the St. Louis Fed at the time. "He was very competent under fire, and boy, if there was ever time when you're under fire."

Now, as President Obama weighs who to name chairman of the Federal Reserve, Ferguson has unsurprisingly emerged as a top contender, particularly if frontrunners Larry Summers and Janet Yellen do not get the nod. Based on a review of his record and his recent public comments, and interviews with about a dozen people who have worked with him, Ferguson is a deliberative, thoughtful leader whose style tends to be more conciliatory than divisive, a particular contrast with Summers, who frequently finds himself in public and private scrapes.

It is less clear whether Ferguson would be aggressive in regulating Wall Street or push the boundaries of monetary policy. It’s not even clear that he wants the job. (Ferguson declined to be interviewed through a spokesman for the financial services firm TIAA-CREF, where Ferguson is CEO.)

Former colleagues are largely unanimous in describing him as an intelligent, decent man. "I have tremendous respect for him,"  Poole says. "I always thought he was worth listening to."

He particularly has a track record of teaching and encouraging colleagues.

"Those of us who joined the board under his vice chairmanship found him to be an enormously hands-on mentor," Mark Olson, who served on the Fed board from 2001-2006 says. "I think of Roger as one of the best mentors I've ever had."

And the president, it appears, also listens to him. Ferguson has visited the White House 14 times, often in relation to his role on the President's Economic Recovery Advisory Board (PERAB) and its successor, the President's Council on Jobs and Competitiveness. He was asked to submit his name for consideration for a high-level position when President Obama took office. A former administration official says that Ferguson became "someone that people at the White House and Treasury would view as a resource, someone you could go to who would give you the unvarnished truth."

But even as those who have worked with Ferguson think he's more than able to take on the job, what he'd do in it is a bit of a mystery.

No fan of targets

Ferguson, like his successor Donald Kohn (left) and unlike Ben Bernanke (center), opposed an explicit inflation target. (Brendan Smialowski/Bloomberg News)

His time at the Fed does provide some clues to his leanings, but colleagues say that it was hard to define his stand relative to other policymakers, particularly because the economy when he was at the Fed was so good. "There was actually not a lot of controversy about monetary policy, because things were going very well," said Alice Rivlin another former Fed vice-chair. "Remember those Goldilocks years, when growth was high, unemployment was low, and inflation was coming down?"

Monetary policy in good times is radically different from monetary policy in crisis. Interest rates were not hitting near zero; if the economy worsened, rates could go lower, and if inflation was a risk, they could go higher. Quantitative easing through bond-buying wasn't necessary. Debates about whether to target inflation or nominal GDP were largely flights of fancy for academics rather than real discussions about how to save the world economy.

That said, you can still find some clues in Ferguson's statements during that period. For one thing, he was skeptical of hard and fast targets for inflation, which has been a hallmark of the Bernanke Fed. In the mid-2000s, while Bernanke and Yellen backed an explicit inflation target, Ferguson, along with Alan Greenspan and Donald Kohn (who succeeded Ferguson as vice chair), were skeptical, according to transcripts of Fed policy meetings from the era, arguing that setting an explicit target for inflation could hamper the bank's flexibility.

If Ferguson carries those views today, it suggests he may be less likely to give clear "forward guidance" about what the Fed will do than Ben Bernanke has been. It's hard to imagine him declaring that the Fed would target 5 percent year-over-year growth in nominal GDP, for instance

Yet his comments on quantitative easing, the vast purchases of bonds that the Fed has used as a major policy tool since cutting short-term interest rates to zero in 2008, suggest he would support the efforts the Bernanke Fed has undertaken. The Atlantic's Matthew O'Brien notes that Ferguson signaled support for quantitative easing and for promises to keep interest rates low in 2003, exactly the same policy approaches adopted by Bernanke since the crisis hit. When the second round of quantitative easing launched in late 2010, Ferguson said on CNBC that he wasn't sure it would work but that he thought it was worth a try. "On balance, I think the Fed is doing the right thing, and in that I'm in the same company as Chairman Bernanke and others," he said.

But he was clear that he thought there were risks, most notably that "inflation expectations suddenly pick up because the Fed is pumping so much money into the system; next thing you know you get interest rates that suddenly spike, and you get a contrary reaction, a reaction just the opposite of what the Fed is trying to do." Ferguson still thought a positive U.S. economic response — like the one that actually occurred — was more likely.

But even in the best-case scenario, he didn't think QE would be a lifesaver: "Is it going to suddenly jumpstart growth so that next year is much better than this year? I don't think so." What's more, in the past, he's been very clear that he thinks "low and stable" inflation is a prerequisite to long-term growth. That's at odds with the view, most prominently voiced by Harvard economist Kenneth Rogoff, that we might need 4 percent or even 6 percent inflation for a few years.

On monetary policy, then, Ferguson appear broadly similar in approach to Bernanke. But he would probably be less willing to entertain exotic, unconventional targeting mechanisms like NGDP targeting, or even the unemployment rate threshold that Bernanke implemented last year.

On the banks

Paul Volcker (center) led PERAB, the main vehicle through which Ferguson has advised the administration. But Ferguson is probably a bit less enthusiastic about financial regulation than Volcker was. (Chip Somodevilla-Getty Images)

Then again, that may not be the most important issue in picking a Fed chair. "The mandate for watching out for systemic risk and the financial system is a much bigger mandate now than it was [when Ferguson was at the Fed]," says Alice Rivlin, who preceded Ferguson as Federal Reserve vice chair. "And I think Roger gets that. He's focused on financial stability and on international aspects of it as well."

His role at TIAA-CREF gives him a unique perspective as someone from a major financial institution, but the firm doesn't engage in the kind of trading that led to the financial crisis. PERAB, of which Ferguson was an influential member, was chaired by former Fed chairman Paul Volcker, who continues to advocate for the Volcker Rule. An administration official who was present during the Dodd-Frank discussions adds, "Because of his background in government and finance, Roger has a worldview that recognizes the relationship between policy and financial markets. This would certainly extend to regulation of the large financial institutions."

That said, Ferguson's writings on financial regulation before the crisis — not to mention his time on the deregulation-minded Greenspan Fed — suggest he might not be the anti-bank crusader some progressives hope for. In April 2007, he argued that hedge funds did not add to overall systemic financial risk. "On balance…hedge funds enhance market stability and are unlikely to be the source of a systemic failure," he concluded. While hedge funds did not lead to the financial crisis, that's no guarantee they won't be a danger going forward.

In 2006, while still at the Fed, he spoke in glowing terms about financial consolidation and new derivatives markets, saying he was more optimistic about the latter than some critics. But he did have some sense of the dangers to come, and the need for bank supervision. "The central bank can assist in getting market participants to consider and focus on the management of risk in general and of the risk of low probability, but high cost, outcomes in particular," he concludes.

In 2003, he endorsed more stringent capital standards as a way of controlling the risk deriving from larger banks. "Capital standards provide an anchor for virtually all other supervisory and regulatory actions and can support and improve both supervisory and market discipline," he concluded.

In 2007, he suggested support for tightened regulation of rating agencies, which proved prescient. But his read on the derivatives markets was fairly rosy. "The financial community — broker/dealers, end users and regulators — has ably managed the development of the derivatives market in recent years," he and his coauthors concluded. They took a "wait and see" approach to subprime mortgages. The crisis "has not yet brought any generalized fall in asset prices, a central feature of a true 'financial crisis,'" they concluded. Of course, eventually, it would.

More recent comments suggest Ferguson may still be fairly lax in his views on bank regulation. In an interview with CNBC earlier this year, Ferguson suggested he thinks self-regulation is called for. "Regulation is necessary, but not sufficient, and one should be looking to see how they improve their own behavior, their own risk management, and their own internal corporate governance," he argued. An emphasis on "self-regulation" doesn't augur well for any tough rules coming out of a Ferguson Fed.

Would he even take it?

Of course, there's a question of whether Ferguson would even take a position. A senior administration official tells me that Ferguson was contacted about applying for a top position in the Obama administration in late 2008. But Ferguson declined to even fill out basic paperwork, citing his job at TIAA-CREF, which he had only recently taken. Another administration official says he was considered for a number of jobs — including head of the National Economic Council after Summers left — but the TIAA-CREF job kept getting in the way.

"I just don't think there is really a story here," McPherson says. "Roger loves what he is doing, and he has said repeatedly to us and publicly that he wants to stay at TIAA-CREF for many years." When Maria Bartiromo at CNBC asked if he'd take the Fed job, Ferguson laughed out loud, and added "I really love what I'm doing, I'm very committed to TIAA-CREF and our important mission of creating financial well-being for millions of Americans."

That's not a firm denial, and Ferguson hasn't really said "no." But he does seem to genuinely like being in the private sector. That might explain why Obama mentioned Yellen, Summers, and Kohn in meetings with Congressional Democrats on Thursday, rather than Ferguson. The fight for Fed chief shows no signs of dying down soon, though, and there may be many twists and turns to come. Don't be surprised if they end up leading to Ferguson.

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