A Matter of Money


Cullum: We're going to go back to the great age of enlightenment to which this organization is committed.  One of my very favorite novels is Howard's End by E.M. Forster, and there's a wonderful line from Howard's End which paraphrased goes like this:  Better to be taken unprepared than prepared and not taken.

Our speaker tonight is prepared, he is always prepared.  Richard Fisher was born to be a central banker and now he is.  He is president and CEO of the Federal Reserve Bank of Dallas and he brings to this assignment considerable experience.  He was deputy trade representative under Bill Clinton, working with Charlene Barshefsky, mainly in East Asia and in Latin America.  I turned on the BBC one night, on National Public Radio very late, and there was Richard being interviewed about a speech he had given that day in which he said that housing had fallen about as far as it was going to go and he didn't expect it to get any worse, but he still had fears about inflation; the markets had shifted that very day. When Richard Fisher speaks, people listen.

I'm happy to introduce Richard Fisher to you tonight.  Richard, we are all ready to listen to you.

Fisher: Well, the nice thing about that introduction is it was short.  I appreciate it.  Lee is always so sweet.  She always spoils everybody that she introduces, and she always lionizes everybody, and as you know the only person that didn't enjoy being lionized was Daniel.



Sorry, couldn't resist that one.  Anyway, Lee, you've always been sweet to me and we love you for it.

Well, I did sit through most of the discussion today, starting with Dr. Brettell's fantastic presentation early this morning.  I didn't realize that she was a Canadian émigré.  You know the old saying about Canada, the vichyssoise of nations:  cold, half French and difficult to stir.  And Carol was anything but.  She was spicy, and I found her presentation riveting, and I thank her so much for that magnificent presentation.

Senator Hutchison reminded us this morning that this kind of discussion is what makes the Philosophical Society so interesting and vital.  My wife, Nancy, and I are delighted to be back with so many friends here at the home that Mirabeau B. Lamar built.  I'm not talking about the Fairmont, of course, I'm talking about the Philosophical Society, although I am happy to be at the Fairmont because, believe it or not, this is where we spent our wedding night 34 years ago.

Lee mentioned I was the deputy U.S. trade representative and then worked with Henry Kissinger for four years, so I've been gone for eight years in Washington, D.C.  We're very glad to be back home.  In so many ways - and Senator, I hope you'll forgive me  - as you know, Washington is best admired from afar.  Ronald Reagan used to wonder out loud what the Ten Commandments would have looked like if Moses had been required to run it through Congress, and I know the answer: we would have had ten thousand commandments.  And then Harry Truman, of course, nailed it when he said Washington is the place where a friend is someone who stabs you in the chest.

We loved being there, but it's as brutal a place as it can sometimes be inefficient, and I can't tell you how refreshing it is to be back home in the can-do, no-nonsense, straight-up, look-em-in-the-eye place like Texas.

And given the nature of Washington, Senator, I feel pain for you and for your colleague, Kay Hutchison.  I have a great luxury, being from the Federal Reserve.  All we have to do is worry about little things like monetary policy, and Kay and John have to worry about the tough stuff; how their Texas sensibilities work their way through Congress to make the laws to solve this Gordian knot of immigration that we've been talking about today.

Listening to the two senators, I was reminded of my favorite Federal Reserve story.  One of the legendary Federal Reserve chairmen was William McChesney Martin.  Bill Martin served under four presidents; he served even longer than Alan Greenspan and he was very popular in the nation's capital.  Every year, usually in January, there's a meeting of the group called the Alfalfa Club in Washington.  Now, the Alfalfa Club is named after the alfalfa plant because it will drink anything, anywhere.

The annual Alfalfa dinner is a tremendously fun affair.  One of the periodic rituals is to nominate a candidate for the presidency of the United States, and these nominees, by the way, are simultaneously inducted into what's called the Stassen Society, named for Harold Stassen, who, as you know, John, ran for the presidency nine times legitimately.  Then he ran for a tenth time as an Alfalfa candidate, and of course, he lost every single election.  Their motto in Latin is Veni Vidi Deficit; “I came, I saw, I lost.”  And some very notable Texans have been Alfalfa candidates:  John Connally, Bob Strauss and Lloyd Bentsen, and before they were elected to the real thing, both Bush 41 and the current president.

Now, Bill Martin, the chairman of the Fed, received the Alfalfa nomination for the president of the United States in 1966.  In his acceptance speech he said that as a good Federal Reserve man, he took his cues from the German philosopher, Goethe, who said, "People can endure anything except for continued prosperity."  Therefore, Martin pronounced that if he were to adopt a political platform as a presidential candidate, he planned to make life endurable again by stamping out prosperity entirely.  “I shall conduct the administration of this country,” he said, “exactly as I have so successfully conducted the affairs of the Federal Reserve, and to that end, I shall assemble the best brains that can be found, ask their advice on all matters, and completely confound them by following all of their conflicting counsel.”  And he said, “I say to you that America is at a crossroads and I shall do everything I can to keep it there.”

Well, today, as our many speakers made crystal clear, we are at a crossroads on immigration, but we can't, “keep it there”.  Action is required, and to this end, the two senators are getting all kinds of conflicting counsel. Unlike Bill Martin and his tongue-in-cheek platform as an Alfalfa candidate, these two wonderful senators could not follow all of the conflicting advice, but instead, they must navigate through to come up with legislation that will enhance and not harm the prosperity of this great country.

If I were to offer any advice to you, Senator, and particularly to the other lawmakers contemplating this matter, I would say two things:  first, fend off those with baser instincts by invoking history; second, as Margaret Thatcher loved to say - and she was always right, ask Dennis Thatcher - do the math or at least walk your way through the economics.

So first let's talk about fending off the lessons of history.  We've been through many bouts of anti-immigration fever; a lot of it was discussed today.  History indicates that even the best brains can get it wrong.  Jim Hollifield today mentioned Ben Franklin.  Let me take you back to 1751.  Here's what Ben Franklin had to say about the German immigrants in Pennsylvania: "Why should the Germans be suffered to swarm into our settlements, and by herding together, establish their language and manners to the exclusion of ours?  Why should Pennsylvania, founded by the English, become a colony of aliens who will so soon be so numerous as to Germanize us instead of our Anglifying them and will never adopt our language or customs any more than they can acquire our complexion?"  Sounds familiar.

Move forward 100 years to the 1850s when an entire political party, popularly known as the Know Nothing Party, emerged in the United States on an anti-immigration platform.  Their argument was published in 1854 and in an editorial it was summarized as follows: "The enormous influx of foreigners will, in the end, prove ruinous to the American working man by reducing the wages of labor to a standard that will drive them from the farms and workshops altogether or reduce them to a condition worse than that of Negro slavery." 

Harry Joe today on that panel mentioned the Chinese Exclusion Act and the Anti-Japanese laws in his discourse.  Here's what the partisans of the Chinese Exclusion Act of 1882 said: "It is the duty of the miners to take the matter into their own hands and erect such barriers that shall be sufficient to checks this Asiatic inundation.  The capitalists who are encouraging or engaged in the importation of these burlesques of humanity would crown their ships with the long-tailed, horned, and cloven-hoofed inhabitants of this infernal region of the world if they could make a profit from it."  I bet you Yo-Yo Ma, and I.M. Pei find that verbiage just a little bit offensive.

In 1903, George F. Bayer, the president of the Philadelphia and Reading Railroad, testified before Congress on the conditions of the Chinese and other immigrant laborers who were building his railroad.  In his testimony he said, "These men don't suffer.  Well, hell, half of them don't even speak English." 

And in 1913, when California Governor Hiram Johnson signed a law forbidding Japanese immigrants from owning land, he boasted, "We have prevented the Japanese from driving the roots of our civilization and their civilization deep into Californian soil."

These two particular laws, by the way, inspired others who, in hindsight, we might have preferred not to inspire.  In 1926, an observer in German took note of our anti-Asian laws and other legal restrictions on immigration and commented that, "At present there exists one state which manifests at least some modest attempts that show a better appreciation of how things ought to be done in this matter.  It is in the United States of America that efforts are made to conform, at least partly, to the counsels of common sense.  By excluding certain races from the right to become naturalized citizens, they have become to introduce principles similar to those on which we wish to base our people's state."  That was Adolf Hitler.

Then there were the comments of rising immigration in Britain by the conservative politician, Enoch Powell.  In his famous “Rivers of Blood” speech on April 22, 1968, arguing against immigration to England, Powell pointed to the United States and he said, "That tragic and intractable phenomenon which we watch with horror on the other side of the Atlantic is coming upon us here in Britain.  Indeed, it has all but come.  In numerical terms, it will be of American proportions long before the end of this century.  Only resolute and urgent action will avert it even now.  Whether there will be public will to demand and obtain that action, I do not know.  All I know is that to see and not to speak would be a great betrayal."

Which goes to show that A, Enoch Powell never saw Max von Sidow or Liv Ulman in the movie "The Immigrants"; and B, even cultivated minds - and Powell had a superb Etonian education -  can reach harsh conclusions about immigration.

One of today's great cultivated minds belongs to Samuel Huntington, who was also mentioned earlier today by Jim Hollifield.  Huntington is an iconic professor at my alma mater.  In his book Who Are We? he elaborated on Mexican immigrants in the following way: "Unlike past immigrant groups, Mexicans and other Latinos have not assimilated into the mainstream U.S. culture, forming, instead, their own political and linguistic enclaves and rejecting the Anglo-Protestant values that built the American dream.  The United States ignores them at its peril."

And then Professor Huntington rips into Lionel Sosa - who, by the way, is a member of the Texas Business Hall of Fame, and according to Time Magazine, one of the 25 most influential Hispanics in America.  "Sosa," Huntington writes, "ends his book The Americano Dream with encouragement for aspiring Hispanic entrepreneurs.  The American dream, he asks, it exists, it's realistic, and it's there for all of us to share."  And then Huntington said, "Sosa is wrong.  There is no Americano dream; there is only the American dream created by an Anglo-Protestant, English-speaking society."

With this introduction, I thought I would just remind you that the subject is not new to America.  We profess, as the Senator said today, always to be a nation of immigrants.  This is certainly true, as economists would say, ex post, but ex ante, the case for immigration has never been a pleasant one.

Well, my second suggestion to political leaders would be to insist, as I mentioned earlier, in the words of Margaret Thatcher, do the math.  We heard a lot of statistics today:  there are 36 million immigrants in the United States, roughly a third are illegal, et cetera.  What we didn't hear was this:  immigration increases the labor force, heightens efficiency, and spurs innovation to higher productivity.  We didn't hear that immigration also tends to be what economists at the Federal Reserve call pro-cyclical.  Not only do immigrants come in greater numbers when labor demand increases, they also tend to move to areas where jobs and labor demand is the highest.

And in fact, in the last five years during which we have undergone a significant economic expansion, immigrants, legal and illegal added together, contributed 46 percent of the labor force growth of America.  Forty-six percent of the growth of the labor force in this country was legal and illegal immigrants added together, and we have prospered, and as Kay Hutchison said today, unemployment has been driven down to 4.4 percent.

The bottom line, from a macroeconomic standpoint, is that immigrants grease the engine of economic growth by allowing for both a closer correlation and the factors of production with output and alleviating shortages when they exist.  In this way, immigration makes it easier for monetary policy makers like me.  They increase the speed limit of the economy and its expansions, they hold down inflation, and they reduce slack when we go into an economic downturn.

I want to touch briefly on the economic effects of immigration on native workers, on non-foreign-born workers.  A lot of concern about immigration centers on labor market impacts.  Despite the massive immigration of the last 30 years, the U.S. labor market has done well, posting, as Kay Hutchison mentioned earlier, declining unemployment rates and robust job and output growth.

Now, to be sure, this does not mean that some U.S. workers have not suffered.  Research suggests the wages for low-skilled native workers, non-foreign-born workers, are between 1 and 5 percent lower as a result of the immigrant presence in the labor force.  Wage effects on high-skilled native workers, on the other hand are either estimated to be zero or slightly higher.

Another concern is about the fiscal impact of immigration.  The fiscal costs related to immigration stem mainly from the provision of education and healthcare to low-skilled immigrants, as was discussed today.  Based on National Research Council estimates, each native household - that is, each non-foreign-born household in the United States pays about $245 per year more in federal, state and local taxes combined as a result of immigration.  Now, that may strike you as a very low number, but it's because the high-skilled immigrants compensate for the fiscal burden of the low-skilled immigrants.  Moreover, with time the fiscal cost of immigration changes dramatically.  As immigrants assimilate, their incomes grow and their reliance on public services falls.

The bottom line is that the economics of immigration are, like the music of Wagner, not as bad as they sound.  It's very important to bear this in mind as we sort through the cacophony of the political debate in Washington.

From almost every speaker, we heard a little bit of repetitive Latin today:  E Pluribus Unum, E Pluribus Pluribus, and as the hour is late, let me just conclude with one of my favorite Latin phrases: Vibamus Moriendum Est; “Death is Unavoidable.”  Especially if I keep speaking - so let's have a drink.  Thank you very much.

Now, I know you didn't come to hear me speak about immigration policy, and so I would be happy to avoid any questions you have about monetary policy.  Lee wants me to take questions.  I'm happy to do it if anybody has any.

Male Speaker:  How serious is the decline in the value of the dollar?

Fisher: How serious is the decline in the value of the dollar?  No central banker and no secretary of the Treasury wants to talk about specific exchange values, but let me ask you to consider the following.  If you learn anything from participating in markets - and I ran a hedge fund for quite some time - or you read about great investors like Warren Buffet, markets are manic-depressive mechanisms; they have huge emotional swings.

And the job of the Federal Reserve is not to please markets; the job of the Federal Reserve is to get the economy right.  We set the base interest rate on the basis of a mandate we're given by the Congress of the United States, going all the way back to 1913 and updated in later history.  We're responsible for maintaining the monetary conditions, creating the monetary conditions for sustainable, non-inflationary growth.  If we just get that right, then the markets will adjust accordingly.

We have huge fiscal imbalances in this country, not so much the short term imbalances. By the way, despite what I call the “Eeyores” are saying about this president, if you look at the current fiscal situation in terms of what's on the books of the United States - not what's off the books which is substantial - substantial progress has been made in terms of what was promised, with tax cuts and revenues increasing. The real problems are the long term deficits that we have in terms of our Social Security, our healthcare and our long term balance of payments.  And the markets have a choice:  they can invest here or they can invest elsewhere.  If you're a big investor - let's say the Bank of China with a trillion dollars in reserves - you have to think about this.  Your choices are limited:  you can buy dollars, a liquid market, or you can buy euros; you can buy Japanese yen; you can even buy some British pounds.

If you look at the way rates are trading around the world to the longer term of the yield curve, that is, further out than overnight money which is what we work on at the Fed, say the Fed Funds Rate, the yields are not tremendously attractive.  Spain and Greece borrow money cheaper than the United States.  Where would you prefer to put your money?  There are limited options.  And it is natural that at different points in time you're going to have different preferences, depending on the moods of the marketplace.

But I don't for one nanosecond feel that suddenly everybody is going to dump dollars in the marketplace.  First, if you were the central bank governor of China and you dumped all your dollars, you'd take a loss and you'd be fired, or worse.  But I want to remind you also that we do have some great assets in this country.  We're the one place that is reproducing itself.  We like to breed and our immigrants love to breed, and we reproduce our population.  We have better demographics, not only better than France and Germany and Italy, we have better demographics than Japan, and we have much better demographics than China because of their one-child policy.  We rejuvenate ourselves; we're flexible; we have a system of laws that for the most part upholds itself.  And we have constitutional unity.

Europe is an attractive place.  The European central bank does its job just like we do, but we have a senator sitting in the corner here that represents a United States.  There is no constitutional unity in Europe.

And I must tell you that long term the question, and I'm not the only person that would raise this question - great German bankers formerly from the Bundesbank and others – of how viable the euro is.  Well, we run fiat currencies.  The United States dollar is a fiat currency; nothing backs it up.  The euro is a fiat currency.  Nothing backs it up except for the confidence in our fiscal authorities, and forgive me, Senator, especially in our central bank.  Aas long as we do our jobs, I don't worry about the day-to-day fluctuations of the United States dollar.

Male Speaker:  What is it like to be under the scrutiny of the whole country?  What kind of experiences have you had with dealing with public services [Inaudible]? 

Fisher: Well, Alan Greenspan gave me some good advice.  He told me two things when I was hired.  And by the way, the bank presidents are hired by their boards of directors; Ray Hunt is my chairman.  Only the central authority, the governors, of which there are seven - presently there are six - appoint three of the nine members of my board.  We put up their names and they approve them.  The other six are my shareholders - that is, the banks that our bank regulates here.

But when I sat down with Greenspan after I had been offered the job by Ray Hunt, he said, “There are only two things you have to do, Richard:  one is remember you're paid to pursue the truth.  This is the only job in Washington where you'll never be penalized for saying what's right.  The second is just remember this, if you're standing at a building outside on the sidewalk and someone drops off the top of that building and lands right next to you, you're going to get the blame for it because you're going to be watched very, very carefully.”

And the way it works - since this is all off the record, right?  And Senator, you know how reliable that assurance is.  Whenever I speak in public - which is not this evening - there are usually four or more reporters there.  We call it the suicide watch, Bloomberg, Reuters, Dow Jones and other.  They stream everything you say.  They are usually young; some people disparagingly call them 20-somethings.  Not all of them are educated in economics, but they're journalism students.

I've found often before I speak the article is already written.  We had an experience in New York a couple of weeks ago: a minute before I stood up to speak, I was handed a BlackBerry that had an article written with quotes from my speech that had been injected a minute before I said them. These are the wire services.  You have to think about how these TV shows work, in particular, which is why TV is not necessarily the best medium to pick up financial information.  Let's take someone like Larry Kudlow, an old friend of mine, a difficult individual, but a friend.  He has a 20-something that prepares his teleprompter.  You know, these fellows.  They're actors.  Larry is an actor and he's going to put emotion behind it.  So one 20-something picked up something, wrote an article, puts it up on a screen.  Another 20-something puts it on a teleprompter, and Larry reads it and acts it out.  And then supposedly I move the markets. Lee mentioned that: 20-somethings move the markets.

The big boys read; the big girls read everything that we say.  I like to say that we're the only species left where like in ancient times, they slit us open and study the entrails to try to figure out what the heck we're saying.  And with Alan Greenspan, you had to slit him every which way because you weren't quite sure what he was saying.

The sophisticated investors in the other central banks and the firms like Goldman Sachs and so on, they parse every single word, analyze everything you say, read things very, very thoroughly.  The day-traders don't; they get their information out of the public media.  And now I know what it's like to be a senator or a president because now that I'm inside what's called a temple, the Federal Reserve, and I see what they write about us, I wonder what they write about other good people that are just trying to do their jobs.

So it's an enormous burden, you have to be extremely careful what you say, and in all cases, avoid television.

Male Speaker: Paul Woodruff and I are members of Powell & Powell in Austin, Texas, and we heard J.D. Galbraith give an analysis of international monetaries.  When you mentioned that the head of the Chinese national bank would be fired if he tried to turn in his dollars, J.D. said more or less the same thing, and he gave the impression that we are essentially holding the rest of the world hostage to our quite confident ways.  So what's the long term prognosis in terms of consumer indebtedness, national indebtedness, the weakness of the dollar?  What's the long term look at this?  Really, are we holding these other nations hostage to our ways of operating?

Fisher: Well, we're part of a system.  We're the largest, most powerful economic machine in the world. And I'll answer your question in just a second, but let me put things in perspective for you.  We produce $13 trillion a year in output.  We produce so much that the state of Texas with 24 million people produces 25 percent more than India with 1.1 billion people.  California, the 12th Federal Reserve Bank, headed by my friend, Janet Yellen, produces $189 billion more than China per annum.  That's how big we are.

We consume a lot in the United States.  Seventy percent of our GDP, our gross domestic product, is consumption.  Americans will buy anything that smells good, looks good, feels good, tastes good, and the world is grateful for it.  And actually, I have some friends in this room who probably are helping hold up the rest of the world economy.

But I make that as a serious point because if we were to suddenly, let's say - I'll go back to my semi-Norwegian answer - all become Lutherans overnight and stop consuming, we'd have the greatest depression you've ever seen.  Germans don't consume; Japanese don't consume.  Chinese are building a society; they need our consumption, and we perform a valuable function.  Now, I'm not saying that jokingly.  I'm very serious about this.

We should, of course, always try to be conservative and correct our ways, but we can't do it alone.  There is surplus liquidity worldwide.  The Arab countries have been accumulating enormous resources because of oil prices.  They can't spend it at home no matter what they do in Abu Dhabi or Dubai or wherever it may be; no matter how many ski slopes they build inside that building, they cannot consume everything they make.  They have to put it somewhere, and where are they going to put it - getting back to this gentleman's question - dollars, euros, yen, pounds.

The Germans produce and export; they don't consume domestically.  The French don't grow; the Italians don't grow.  The Chinese, who are very important to us in terms of having a peaceful mass of people - I was part of the team that negotiated W2 accession for China; I was part of the team that negotiated with Deng Xiaoping in 1978 and '79 that normalized relations.  We don't want them as our enemy; we want them as part of the process.  They have to grow in order to prosper, to feed their people, and they sell us things to do that.  In selling things to us, we put clothing on the backs of our children and shoes on the feet of our poor people.  It's a symbiotic relationship.

I happen not to be as pessimistic as your average New York Times reader, for example, which is very pessimistic.  I happen to be optimistic that somehow we will find a way to correct some of these excess imbalances.  But I would urge you, again, not to be an “Eeyore” and to remember that all this is linked together and that we cannot unilaterally correct for whatever excesses you think there are without others taking a counteraction not to create excesses, but at least to provide some kind of balance.  We don't have the freedom to act that independently anyway.  We live in a globalized world and everything is interconnected.

Let me tell you how globalized this world is.  This is my favorite little anecdote.  Forgive me because I get very excited about this.  By the way, the Dallas Fed is the center of research on globalization for the Federal Reserve System; we're very proud of that.  And it's natural for Texans to do this:  we're used to living with the poorest border; we are the largest trading state in the country - we just surpassed California in terms of exports.  We are part of the international community.

But here is the story that I love.  I was asked to go speak to the Ka Dong Ren which is the business roundtable in Tokyo.  I was in London at the time, in fact, staying with a Dallas couple, the Muses, and I got a call from the chairman of the Ka Dong Ren - I wasn't expecting it.  And he said, “Would you fly over to Japan tomorrow, give a speech for dinner and then go back to London?”  I was in the private sector there and I was working with Henry Kissinger and I was getting a Kissingerian price - which was outrageous - to give the speech, and I said, “Of course, I will do that.”

He said, “Well, here's the way it's going to work.  You're going to fly on Virgin Air, what they call upper class.  A car will pick you up.  Here's the number you call if anything goes wrong.  Click.”  Well, I'm waiting; I'm very excited about this.  I'm going to make a lot of money giving this speech.  It's a wonderful opportunity:  I get to go to Tokyo for an evening, come right back, fly first class on Virgin Air, which is quite an experience.  But the car doesn't show up, so I call this number.

I get a frightfully British woman answering the phone, and I said, “Could you please tell me where my car is?”  Well, her frightfully British accent became a deep southwestern accent immediately, and she said, “Y'all don't worry; the car is on its way.  Let me tell you where it is.” And she said, “It's two blocks away.  The driver's name is such-and-such, and it's on its way.”  She asked if I needed anything else and I said, “Yes, I do.  Where did you get that accent from?  You answered as a Brit; you answered like me.”  And she said, “Well, I know where you're from.  You're from Texas, Arkansas, Louisiana, New Mexico.”  I said, “Well, how do you know that.  Where are you?”  She said she was in Bangalore, India.  And I said, “Well, how do you learn to speak like people like me?”  She said, “Oh, that's easy. We watch a show called Walker, Texas Ranger.”  This is a true story.

I asked, “Well, what if I was from Boston?”  She said, “Oh, that's Cheers.” Think about it - this is a great image of globalization.  Here's a woman in Bangalore, a telephone operator, with a GPS tracking a car in London that's going to take a Texan to speak in Tokyo, flying on a British plane.  That's the way the world works; we're interconnected.