Roger W. Ferguson Jr. has answered the call at a time when our nation needs him most. Earlier this year, he agreed to serve on President Barack Obama’s Economic Recovery Advisory Board, the influential body charged with providing recommendations for revitalizing America’s battered economy. Ferguson was enlisted to be part of the 15-member task force charged with simplifying the federal tax code and finding ways to recoup the $300 billion in taxes that go uncollected each year.
Ferguson was a sterling choice. A former vice chairman of the Board of Governors of the U.S. Federal Reserve System, he is one of the nation’s leading economists. He is also the president and CEO of TIAA-CREF, one of the world’s largest financial services firms with more than $360 billion in assets. In February, his credentials earned him a coveted spot on the black enterprise list of the 100 Most Powerful Executives in Corporate America.
Editorial Director Alan Hughes recently sat down with Ferguson in TIAA-CREF’s New York City headquarters to discuss the turbulence in the financial markets, the uncertain state of the economy, and projections of when things may turn around.
Black Enterprise: Right now there’s not a lot of investor confidence in the financial markets. When do you think we’ll start seeing sustainable upward movement?
Roger Ferguson: Well, it may take some time before we see real sustainability in the absence of volatility because the markets are being influenced by a number of forces. Recently there have been, I think, as [Federal Reserve Board Chairman] Ben Bernanke said, some hints of turn in the economy. The market is also certainly influenced by the amount of liquidity that is ready to go into investments. There’s a lot of cash on the sidelines.
And obviously, the markets are meant to be very forward looking, so they are thinking about what’s likely to happen over the next several quarters, not just this quarter. There’s uncertainty there, partially around corporate earnings and partially around the state of the economy. So I think even when we get an economy that is clearly on the upswing, we’ll start to see the market move, but I think there will continue to be volatility around that as opposed to sort of a one-way move because there will still be some residual uncertainties.
Some of the president’s critics have talked about too much state involvement in financial services and the automotive manufacturers. For things to turn around is it necessary for the government to be as involved in free enterprise? How much do you think is too much involvement, and at what point should the government let free enterprise be free enterprise?
Well, I think we have to get back to letting free enterprise be free enterprise as soon as we reasonably can. On the other hand, we have to recognize that government got involved in this in order to help some significant financial services firms create a base of stability around their capital and that, I think, was absolutely the right thing to do.
Financial services depend on confidence and that confidence emerges if there is a sense that there is a solid capital base. There’s no question that we do not want the government involved in financial services for a long time, but it was right for the government to step in for a number of cases, to smooth the transition from one state to the next.
Some critics have said that the economy would probably be better off if the Obama administration just stayed out of it entirely. and that the administration’s policies could hurt the economy in the long term.
As you well know, there are a variety of views and a number of critics. My judgment is the government had to get in, stabilize the situation, and get out as quickly as possible. The situation is not yet stable with respect to the markets or financial services firms, but I would like to see the government with a clear exit plan. I think everybody would.
Because otherwise it could be sort of like an occupation that just does not end.
Exactly. That is clearly inconsistent with the way the Obama government does things. I’m not a spokesman for the administration, but I assume it sees things exactly that way. My opinion is that the administration is not a group of people interested in having undue government influence in private markets whatsoever.
Historically, recessions have lasted 18 months on average. How long do you see this downturn lasting?
Well, what has been interesting is recessions have actually been getting shorter and shallower for the last 20 years or so. This one has already proven to be one of the longest, maybe at this stage the longest, since the 1930s. It’s hard to know when exactly it’s going to turn. As I said earlier, we are starting to see some tentative signs of stability. Existing home sales and new home sales have both been slightly better than many had thought.
Certainly unemployment, which many people focus on, tends to be a lagging indicator, so that’s unlikely to turn before other things do; therefore, we should just be mindful of what to expect there. We are clearly seeing some stability in equity markets. I think many of the government programs to create more liquid credit markets have started to take hold. So there are some early and tentative signs that maybe the economy is starting to look for a bottom right now, but it will take some time for that to be confirmed.
Part of the stimulus plan is being criticized because so many jobs have been focused on construction. Are you in agreement with the Obama administration that there is going to be sort of a ripple effect and that this is actually going to have the desired effect within the span of time the administration is hoping?
I think it will have an effect within a reasonable time frame. I think it would be historical and highly unlikely for the government to be putting $787 billion of stimulus, plus trillions of dollars of liquidity in the markets, and not have that turnaround.
The U.S. economy, at bottom, is quite resilient. I think the big thing that makes this recession different from most others in recent memory is the combination of macroeconomic events–a recession that was triggered by a rapid decline in housing prices and clear challenges to the financial
services industry in terms of companies that may not have enough capital. This created a third leg: uncertainty and illiquidity in financial markets. This is circular, to a degree. Some of the loss of capital has been due to the illiquidity in markets, which means that market-to-market positions are being written down based on very stressed market conditions.The government is attempting to attack each one of those three components and my expectation is——and I can’t predict exactly when——with the amount of money that is going into each one of those components, from the Treasury and from the Fed, that there will be the desired impact.
There’s a lot of uncertainty and fear out there with regard to government spending. One of the concerns is how the country will be able to pay for the Obama administration’s initiatives.
Well, there’s no question that some of it is going to have to come from taxes. There are also going to have to be places where the government spends less. And a fair amount of this money is for a short-term stimulus. The government’s 10-year plan clearly calls for pulling back and moving closer to balance when it comes to the budget.
From an economic standpoint, do you expect more of the same for the remainder of 2009? Are you looking at 2010 as a turnaround year?
I think there are some clear signs of a moderate turnaround toward the end of this year, but I think the risk around that might be too optimistic.
This story originally appeared in the July 2009 issue of Black Enterprise magazine.