Q: You must know your name has been bandied about as a possible successor to Volcker?

A: I find that very flattering. Those are very large shoes to fill.

Q: Are you prepared to step in if asked?

A: I have no reaction to that. I feel fortunate to have this job. Until he makes some signal about what his plans are, I plan to be the best doggone vice chairman this place ever saw.

Q: Are you approached on this question as you go overseas and meet with your fellow central bankers, as you did on your recent trip?

A: No, I am not.

Q: They're too polite?

A: I don't know, but my answer to your question is no I am not.

Q: They're usually pretty brash, aren't they?

A: Some of them are, as we would say in Italian, molto gentile -- gentillissimi.

Q: Do you have a special affinity for things Italian?

A: Yes. I lived in Italy a couple of years and I was fortunate in my one-week (recent trip to meet with financial leaders) in Europe to be in Milano for a while and -- molto bene.

Q: As you talk to other central bankers, what do you see ahead that you're going to have to grapple with?

A: Well, number one, I would put the structural adjustment that every one of the Western countries has to go through. That is the surrender of the old mentality that we in the United States, France, U.K., Germany, Japan or whatever it is, are the greatest manufacturing assemblers. Best engineers in the world. Produce all those automobiles and steel and airplanes and so forth. I think that each of the countries is going to find that those classic industries of the '50s are going to shrink. The South Koreas of the world are going to do that for us. Do that with great enthusiasm and with new plants and robotics and all the rest of it. It's a very difficult adjustment for us to make. To retrain those blue-collar folks -- which nobody seems to have done a very good job of.

I'm reminded -- getting back to Italia again -- I'm reminded of those people out of the hill countries in Sicily who, frankly -- the most technological thing they'd ever seen was a tractor. (They got them) off those rocky hillsides in Sicily that the Greeks ruined in the ancient days, come up there into Turino and get 'em in some pretty damn complicated forms of factory labor. I think we can learn a lot from the Europeans and from the Japanese as to how to retrain.

Q: So we have to become even more a services economy? Not only we but the other industrial countries?

A: Japanese, Germans, French, yes. And boy, we are going to wrestle with that. It is going to give us fits.

Q: What's that going to mean to employment? Jobs?

A: I think that it will mean that this phenomenon of so many married females in the labor force is going to continue. I think it's going to mean that on a margin there will be the cottage-industry phenomenon of people working at home off an intelligent terminal. It's just going to change the way we do everything. It's going to be positive toward the life in medium-sized and smaller towns vis-a-vis the megalopolis. You know, it's the most hackneyed thing in the world to say we're in a time of change. We're in a time in which change is vectoring in on us. We're just in the middle of the maelstrom as far as our lives are concerned.

Q: I can see that you could get to a point of really beneficial and productive worldwide prosperity. But certainly it also means that there's an interregnum here -- a transition period that's going to hurt somewhere. Is it going to hurt us?

A: It's going to hurt us, but it will hurt us less than the French, Germans. It's going to hurt us and the Japanese less, it's going to hurt the traditional societies more -- including, unfortunately, some of the developing countries. You've got Brazil, U.S., Japan, South Korea, Taiwan and some countries in which change seems to come to us well. You've got the French, the Germans, the British, India, Pakistan -- very traditional hierarchical societies to which change comes very hard. Take France and Germany in their labor force growth over the last 10 years. Practically no growth at all. And look at the U.S., look at the (upward) curve of employed persons here. There are going to be a set of countries it'll hurt. And there are going to be a set of countries that's it just going to hurt excruciatingly.

Q: Where do the Chinese and the Russians fit into this dynamic?

A: I don't know the Russians that well but, of course, it is a bureaucratic society. And Mr. Andropov seems to be having a terrible time getting people to even think about, you know, maybe working a full work day there. I would think the more bureaucratic you are, the tougher it's going to be. On the other hand, the hungrier you are -- you have a certain motivation. Which certainly the Chinese have. Part of the Chinese question is going to be -- is that oil really out there off the coast? You know, if Shell and those other companies go in there and really find it, if they've got a power source, by God -- . They've got a handicap not having that sort of resource.

Q: Do you think that our focus is inevitably going to shift toward Asia and away from Europe?

A: If you're talking about proportion of export, proportion of financial activity -- we'll certainly see some shift toward those countries around the Pacific Basin. But I wouldn't see that they would be primarily our markets, with our trading partners in Europe way down the line. They'd come up in importance -- no question about that.

Q: The (Asians) would not dominate?

A: Not for so many years. My goodness, when you get out to the (Hudson Institute futurologist) Herman Kahn era, you know, or ("Megatrends" author John) Naisbit or somebody -- I pass. I don't think anybody would look out that far.

Q: What does one learn on the job about the economy and the influence of the Fed?

A: It is the interdependence of the several policies and goals here that I find fascinating.

Q: Fascinating in the sense of the influence you have on the economy or power structure or just what?

A: We at the Fed have two irreconcilable objectives -- combating inflation and yet encouraging a recovery that would be sustainable. Some people see those as poles apart. To me they're very interdependent.

Q: You say they are reconcilable?

A: They are reconcilable indeed.

Q: Do you feel last year that the Fed (deepened the recession by keeping money tight), as some people now think? And perhaps (now is encouraging inflation by keeping money) too loose, as some of the administration people now say?

A: If long-term interest rates were (2 or 21/2 percent ) lower now, I would, in a smarty, newest-kid-on-the-block way say we (kept money too tight too long.) But I don't feel we overstayed. No is the answer to that. Are we providing reserves at too rapid a rate now? The pragmatic test is the strength of the recovery. There are so many signs now that the recovery is picking up steam. That is gratifying to see, given the suffering that is attached to unemployment and underemployment. But there are enough question marks on the recovery. I asked a staff member, "All right, auto sales have dropped again. What's going on?" "Big snowstorm up and down the East Coast." Maybe that's the answer. I hope it is. I'm an optimist about the recovery. But damn! There are question marks on this recovery.

Q: Do you see question marks in areas other than automobiles?

A: Yes. The whole heavy-machinery, metal-bending, metal-using, mining, heavy- construction, commercial, industrial infrastructure still shows some signs of weakness. Here and there there are some positive signs. Housing looks very good, of course.

Q: Isn't there some rule of thumb that historically has worked?

A: It seems to me that a very fundamental caveat today is -- don't take the historical relationships for granted. We're in a different era. We're in an era in which the (less-developed countries') debt is much larger than any of us can remember for a very long time. We're in an era in which the world is in a recession, not just the U.S. or not just the locomotives of Germany and Japan. I believe in looking at the environment as we find it. Historically, my God! He who doesn't read history is doomed to repeat the mistakes. But you have to say, okay, that's the history. That's what we would expect, other things being equal. They aren't.

I was talking to a lender yesterday. I said, "What in the world are you doing with these high-cost (money-market) funds? He said, "I'm laying them out at 12 percent on mortgages." Well, hell, if somebody had said 12 percent on mortgages 30 days ago I would have been surprised. (Now) I would be surprised indeed if mortgage rates didn't come down to a range between 11 and 11 1/2.

Q:Would that process be inhibited by the prospect of continuing high federal budget deficits?

A: I think it can go on during this calendar year and perhaps a little longer despite those horrendous megadeficits. I think that if the expectation toward the end of this year is that indeed the figures that were cited in the various messages to the administration hold, and the Congress appears not to accept its responsibility, then I don't see how this could continue.

Q: I think practically everybody agrees that (world financial stability is threatened because) some banks loaned too much money. Some borrowing countries borrowed too much. How do you prevent that from happening again?

A: Oh, I think you do what good bank supervision has been ever since the Bank of England started conferring with commercial banks in jolly old U.K. I think you sit down with the management and go over the apparent exposure not only of that bank but what appears to be the exposure of American banks. Make sure that the credit decision is the bank's, and the responsibility is the board of directors'. It certainly is not the Federal Reserve's. But that these decisions are made with eyes open.

Q: It seems to me that back when Banco Ambrosiano got in trouble, a lot of bankers I talked to in New York at the time were saying "Well, hell. The Italian Central Bank should have been in there at some point."

A: The problem of Ambrosiano -- and I used to drive by one of their beautiful -- they certainly know something about architecture, my friend -- those are some of the best looking bank offices in Italy -- was insolvency, not illiquidity. They had bad assets, they depleted their net worth. Now that's not the central bank's function then.

Q: I guess I should preface this with God forbid. But suppose, God forbid, that Chase Manhattan was verging on the borders of insolvency, not illiquidity. You don't want me to think that the Fed would not consider bailing Chase Manhattan out?

A: I would say that we had the lender-of- last-resort responsibilities there. This is a national bank with FDIC insurance. If for some reason the banking system's liquidity is threatened, then of course we have a responsibility. The size of the thing -- does it have systemic, deep systemic implications? I think its too facile to say big one, yes, little one, no. You know, it ain't that easy.

Q: It's an interesting question, though.

A: Yes, it's fascinating. It's a sleep-robbing question. You wake up and you realize you're still thinking about it. It certainly is.

Q: What were the results of your analysis of (lower) oil prices?

A: Every view I've seen has been positive. It is positive in terms of inflation, where I've heard estimates that it may help by (half a percent.) But I must say to you that I think it's a large unknown. I haven't seen anybody say that's the one (correct prediction); they've really got it. I think we're all saying, "Well let's see now. It probably will have this effect and that effect, positive." But to numbers on it -- . In the first place, if it got to $20 you have one set of effects. If it drops $4 or $5 or $6 from a $31.50 refiner price, you get a different result. The speed by which you get down is very important. So you know, goodness, I can't give you anything very definitive. Very positive. Positive in the world recovery sense. You know it's gonna help us get out of this worldwide recession. Gonna help most of the (less-developed countries).

Q: It's just too bad it took a lot of people so long to see it.

A: I couldn't understand that from the very beginning. The first comments were all scared. I couldn't understand it. What better thing could you have happen?

Q: People were brainwashed by fears of OPEC.

A: Arriverderci, I'd say to OPEC. Ciao!