Timing Gives NABE Front Row Seat As Crisis Unfolds

Speaking at the outset of one of the most tumultuous weeks in U.S. financial history, top policymakers and other keynote speakers at NABE’s 50th annual meeting laid the groundwork for what was to come in terms of unprecedented monetary policy initiatives and Treasury-led rescue plans that continued to unfold over the month of October.

Attendance that topped 350 made the 50th annual meeting one of the most popular in the organization’s recent history, as new registrants were added at a fast clip in the two weeks prior to the Oct. 4-7 meeting at the JW Marriott in Washington, D.C.  Media coverage was unprecedented over the three main days of keynote speakers and sessions that focused on long-term challenges as well as near-term concerns.

The buzz about emerging policies was unabated between sessions and at times it seemed that nearly everyone was checking their Blackberries for the latest breaking news.  Then President-elect Chris Varvares, Macroeconomic Advisers, remarked to the audience at one session that he had never seen such a high volume of discussion between sessions. “Some of us are losing our voices,” he said.

Eager for the details of newly enacted rescue plans, NABE members asked pointed questions of speakers as they pushed for answers they could take home to their clients or corporate colleagues. It was clear from some questioners that their confidence in the federal government was shaken.  Speakers and attendees alike shared details of what they knew about emerging new policies and tried to gauge how the changing rules would affect their firms and industries.

The stellar line-up of speakers included Federal Reserve Chairman Ben Bernanke, who received a standing ovation before he addressed the final luncheon gathering on Oct. 7.  Another major player in the policy arena, Federal Deposit Insurance Corporation Chair Sheila Bair spelled out the FDIC’s plans for shoring up financial institutions and helping consumers in her Oct. 6 speech.  Other policymakers and private sector experts shared their perspectives on both short and long-term issues.

Coverage of the annual meeting in this issue includes separate reports on: “Lessons of The Great Credit Crunch” by Richard DeKaser, “Hall Stays Clear of Recession Call in Business Cycle Session” by Mark Lieberman, “U.S. Manufacturing Renaissance?” by Kathryn Kobe, and “International News Media Flock to Annual Meeting” by Melissa Golding.

Working to keep up with rapidly changing conditions, NABE survey coordinators released the results of the latest economic outlook survey the morning of Oct. 6, and there was a turn toward recession projections. The survey included a series of supplemental questions, added Oct. 1-2, to reflect changing conditions.

New Officers Take Posts

As is tradition, NABE installed newly elected officers and board members at the end of the annual meeting.  Chris Varvares, president of Macroeconomic Advisers, became president, succeeding Ellen Hughes-Cromwick, chief economist, Ford Motor Company.  Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America, followed Varvares as president-elect. Varvares outlines top priorities and plans for the coming year in his letter in this issue.

In her presidential address on Oct. 6, Hughes-Cromwick offered her views on “Economic and Financial Climate Change: A Business Economist’s Perspective.”  She traced the last few decades of U.S. economic history that have seen the decline of manufacturing, in terms of employment but not in productivity, and the expansion of the financial sector.  One of the major challenges going forward will be “allowing market forces to thrive without over-regulation to redress bubbles,” she said.  Operating in the global marketplace, even as the financial crisis spreads, will be challenging for U.S. policymakers and for their counterparts in trading partner nations, she added.

Hughes-Cromwick and other NABE officers thanked the annual meeting’s organizers:  Chair Lynn Reaser, and committee members Rich Brown, chief economist of the Federal Deposit Insurance Corporation; Diane Swonk, chief economist at Mesirow Financial; and Kevin Kliesen, economist at the Federal Reserve Bank of St Louis.

Celebrating 50th Anniversary

The 50th anniversary celebration’s highlight was a presidents’ dinner at the National Press Club, attended by no fewer than 20 past presidents, including George James, the senior member of the past-presidents group. Also in attendance were 25 current and past board members.

Jeffrey Sachs, director of the Earth Institute at Columbia University, gave a provocative keynote address to guests at the presidents’ dinner.  In keeping with his widely recognized work with the United Nations and other international organizations, Sachs challenged economists to encourage government investment in science and new technologies that will make non-oil energy sources less costly and ease medical care costs.  “We have stopped being a government that participates with the private sector,” he said, citing what he sees as critical losses of public funding for non-military programs.
Even as a new administration and Congress grapple with the “looming fiscal challenges,” they will need to address “the public good… like all other high income countries do, where they don’t have an underclass without protections,” he said.

NABE members also were guests at receptions at the new Chinese Embassy in the District and at the headquarters of the Federal Deposit Insurance Corporation (FDIC), which is celebrating its 75th anniversary this year.

The focus turned to the presidential election on Oct. 5 as NABE sponsored its third debate of this election season.  Kevin Hassett, an economic adviser to Republican candidate John McCain and Gary Gensler, an economic adviser to Democratic candidate Barack Obama, squared off for 90 minutes on key policy issues that will confront the next administration.  NABE member Ken Simonson, Associated General Contractors of American, introduced the participants.  Judy Woodruff of the Newshour and Steve Liesman of CNBC moderated the debate.

Bernanke Spells Out New Policies

Before a crowd that filled the Marriott ballroom and included more than three dozen media representatives, Fed Chairman Bernanke gave what was widely interpreted as a signal that the central bank was about to cut its interest rate targets to further support the weakening economy.  In fact, it was the next day, Oct. 8, that the Federal announced that, in coordination with other central banks, it had lowered its federal funds target by 50 basis points to 1.5 percent, the lowest since August 2004.

Bernanke told the NABE meeting “the expansion of the Federal Reserve lending is helping financial firms cope with reduced access to their usual sources of funding. Recently, however, our liquidity provision had begun to run ahead of our ability to absorb excess reserves held by the banking system, leading the effective fund rate, on many days, to fall below the target set by the Federal Open Market Committee.”  See the text of Bernanke’s address to NABE at the Fed's site.

FDIC Chair Sheila Bair discussed her agency’s role in the rescue package, in particular the temporary increase in the deposit insurance cap from $100,000 to $250,000.  “This increase does not solve all of the problems in the industry. But it will give a greater degree of assurance to depositors at a time when public confidence in the safety of their money is critically important,” she said.

Bair outlined five basic principles in reforming mortgage finance:  protect the consumer, keep it simple, reduce leverage, create the right incentives, and don’t take liquidity for granted.  Emphasizing the need to keep it simple, she observed that many consumers, including members of NABE who took a survey in 2007, don’t understand important instruments such as credit-default swaps and hedge funds.  “Going forward, we need to develop critical threshold tests for any financial innovation: Efficient markets work on the ability of all market participants to accurately understand and price risk,” she said. Text of Bair’s remarks is available at the FDIC.

Adam Smith Lecture Illustrates Lesson of Long Ago

Peterson Institute economist Michael Mussa, the recipient of NABE’s highest honor, delivered the Adam Smith Lecture at the annual meeting.  He drew parallels to today’s financial crisis to 18th century Scotland and shared the keen observations of Adam Smith, including many that pertain to 2008. Mussa’s Adam Smith address will be published in an upcoming issue of Business Economics.

Mussa also offered his own analysis of the credit crisis, putting part of the blame on what he considers mistaken Federal Reserve policies that he said ignored the need to more tightly regulate mortgage lending.  But, he conceded, the problem arose in the private sector from packaging mortgages and creating new instruments that were risky.  “When you have a magical capacity to create value out of nothing, there is a tendency to excess. The government needs to police them, but the private sector needs to policy itself,” he said.

Summers On Priorities For Next President, Congress

Earlier in the meeting, former Treasury Secretary Lawrence Summers looked ahead at what he considers the most critical economic issues that will face the new president and Congress next year.  “I know it’s a cliché to say that this election is uniquely important.  But sometimes clichés are right and I believe it is such a time,” he said. The economy is clearly in a recession, he said, predicting that the national unemployment rate could rise to 7.5 percent or higher by the end of 2009. 

Summers underscored the serious impact on family income that such a high jobless rate would cause.  According to his calculations, if the unemployment rate does hit 7.5 percent, that would be 2.5 percentage points higher than the normal rate, suggesting a 5 percent loss in U.S. output.  That would amount to a $750 billion shortfall in gross domestic product, or a loss of $8,000 for a family of four, he estimated.  He also talked about the growing income inequality across nations.  “If we don’t do more globally that does not just work for the top 1 percent, but also for American workers, we will not have support for policies” needed to strengthen the U.S. economy, he said.

Text of many speeches and presentations made at concurrent sessions are available on the annual meeting’s sessions pages.