Credit Crunch, Recession Outlook Dominate Policy Conference

As the credit and housing crises continued to worsen, top policymakers from the Federal Reserve and the Bush administration briefed the more than 300 attendees at NABE 24th Annual Washington Policy Conference March 3-4 in Arlington, Va.  Headliner speakers set the stage for what was to become a month characterized by financial market turmoil stemming from the credit crunch and a deteriorating economic climate.

Speeches at the conference by two top Federal Reserve officials focused on issues that remain major concerns for the central bank as it attempts to balance the need to shore up credit markets with minimizing the risks for higher inflation even as economic growth declines.  Treasury Secretary Henry Paulson observed in his March 3 speech that the Bush administration would continue to monitor the economy and to evaluate options for dealing with credit restraints and mounting foreclosures.

By March 18, when the Federal Open Market Committee lowered the federal funds target rate to 2.25 percent, the lowest since December 2004, the Fed had already taken a bolder approach than predicted by policymakers or private analysts addressing the policy conference.  Conditions in credit and housing markets changed at a rapid pace over the month of March, as the central bank moved to prevent the collapse of major investment banks.  And in late March, the Bush administration changed its posture toward regulation of financial markets, calling for new oversight of investment banks following the demise of Bear Stearns.

Coverage of the policy conference in this issue includes the following separate reports on:  “Home Prices and Consumer Spending Fallout” by William Strauss, “Health Care Reform Proposals Draw Interest in Campaigns” by Devon Herrick,  “Green Initiatives: Short and Long-Term Profitability Issues” by Kathryn Kobe; and “Candidates’ Advisers Debate Key Issues.”

Politics and Economics

Two sessions underscored the interplay of politics and economics as presidential and congressional campaigns heat up.  In a “Meet the Press” style setting, NABE President Ellen Hughes-Cromwick, Ford Motor Company, interviewed Thomas F. “Mack” McLarty, who served in several key positions in the White House under President Clinton.  He is currently president of McLarty Associates, an international consulting firm. 

Calling himself a “centrist Democrat,” McLarty said he believes the next president will need a bi-partisan coalition to move forward in addressing the nation’s major economic and foreign policies concerns. Priorities for the next administration should include “establishing the U.S. standing in the world and addressing the economy.”  The first 100 days will be especially important, he said, adding that in his experience the transition period between the November election and late January inauguration is a “very challenging time.” 

NABE hosted its second debate of this national election cycle as the closing event of the conference.  Four presidential candidates were represented in the one-hour exchange.

Hughes-Cromwick thanked policy conference organizers:  co-chairs Robert Fry, DuPont, and Ken Simonson, Associated General Contractors of America.  She urged members to mark their calendars for NABE’s 50th annual meeting set for Oct. 5-7 at the JW Marriott in Washington, D.C. 

NABE officers also officially launched the Get Connected program at the conference. In conjunction with the program for early and mid-career professionals, NABE revamped its Career Center on the website.   New pages include profiles of several NABE members working in a variety of jobs in which they use economics, plus highlights of the latest salary survey and a members-only employment registry. 

Early the first day of the conference, NABE officers released the organization’s latest economic policy survey, focusing on policy options as members looked ahead and assessed the current situation.  “The combined threat of subprime loan defaults and excessive indebtedness remained the number one concern among survey respondents, with 52 percent of all respondents echoing this opinion,” the survey showed.  Health care costs were singled out as the most serious long-term challenge by 52 percent of respondents.

Miskin Stresses Expectations vs. Uncertainty

Fed Governor Frederic S. Mishkin told NABE conference participants on March 4 that, even as it addresses liquidity issues, the Fed must continue its long-term goal of anchoring inflation expectations as it tries to restrain core inflation.   “In the environment of well-anchored inflation expectations, the FOMC had the scope to respond aggressively to the strains in financial markets that emerged late last summer and to the worsening economic outlook,” he said. [link to text of speech]

As it gauges how inflation expectations may have changed, the Fed must make the distinction between uncertainty about the inflation outlook and inflation expectations, Mishkin said.  “Indeed, an increase in inflation uncertainty would likely complicate decision making by consumers and businesses concerning plans for spending, savings, and investment,” he said.

FOMC Member Charles Plosser, president of the Federal Reserve Bank of Philadelphia, devoted much of his March 3 speech at the policy conference to the value of the Fed following monetary policy rules, especially the Taylor rule on setting interest rates to control inflation.  As part of its systemic approach to monetary policy, the Fed can best keep its intentions aligned with the public’s expectations if it follows simple rules and makes its actions clear in public statements, he said.  

When it must deviate from its policy rules, such as in times of financial crisis, the Fed should strive to return to its basic rules as soon as possible, Plosser said.  “We are now, perhaps, in a period of extraordinary circumstances and have deviated from the benchmarks suggested by simple rules.  But such deviations should be temporary and limited and promptly reversed when conditions return to normal,” he said.   Plosser dissented from the March 18 decision to lower the federal funds rate by 75 basis points, preferring “less aggressive action” as did Richard Fisher, president of the Dallas Fed, and the only other member voting against the action.

Paulson Focuses on Weathering “Housing Correction”

In his address to the conference, Treasury Secretary Paulson said the administration was continuing to closely monitor the housing and credit situations and underscored the “shared responsibility of industry, government and homeowners.”  The new protocol announced last December called for a joint federal government/private partnership through Hope Now, designed to put homeowners in need of help on a fast track to renegotiate mortgage loans under certain conditions. The text of his speech is available on the Treasury website at:[link]

When asked during a brief question-and-answer period how lending practices could be tightened, Paulson said the White House was looking at various options and awaiting the report of the President’s Working Group on Financial Markets to evaluate the housing and credit markets.  On March 31, Paulson released a sweeping proposal that would give additional powers to the Federal Reserve, create a federal Mortgage Origination Commission, merge the regulatory agencies that oversee commodities and securities markets, among other initiatives.

Paulson also said, in response to a question from the audience at the policy conference, that he did not believe the economic stimulus package of $152 billion in tax refunds to individuals and incentives to businesses will stir inflationary pressures.  “In my view, the biggest issue is weakness in the economy and growth in jobs,” he said.

Media coverage of the policy conference was extensive, according to NABE Press Officer Melissa Golding.  More than three dozen national and international media outlets covered sessions on March 3 and 4, including American Banker, the Associated Press, BNA’s Daily Labor Report, Bloomberg News, Bloomberg Radio, Bloomberg TV, CNBC, CNN, C-SPAN, the Canadian Economic News Service, Carta Economica Regional (Mexico), Cox News, Dagens Industri (Sweden), Dow Jones, Fox Business Network, Housing Market Report, Inside US Trade, the Kiplinger Letter, McClatchy Newspapers, Marketwatch, Market News International, NHK (Japan), the New York Times, Nightly Business Report, Nikkei (Japan), Reuters, Tax Notes, TV Tokyo, USA Today, Voice of America, the Wall Street Journal, and Xinhua (China).

The March 2008 NABE Policy Survey received excellent news coverage following its release on March 3. NABE President Ellen Hughes-Cromwick was interviewed about the survey by Bloomberg Radio, XM Satellite Radio, and Bloomberg Television, and Survey Committee Member Catherine Mann discussed the Policy Survey on the Wall Street Journal Radio Network.

See the Policy Conference Session Pages for speaker presentations, papers, biographies, and links to websites of interest for topics covered in each of the sessions.