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Mr. International: Dallas Federal Reserve President Richard Fisher brings a global perspective to central banking.

Article Excerpt
A TIE exclusive interview.

TIE: How do you feel about the U.S. economy?

Fisher: Of all the rich countries--notice I don't use the term "industrial" anymore because we are "postindustrial"; we're a service-driven, cyber-enhanced economy operating on the nighest rungs of the value-added ladder--the United States is the only one that has consistently grown in the face of all the new competition that has come on stream since the fall of the Wall and the demise of Mao. The continental Europeans have recently begun to restructure their economies and grow; Japan is now coming out of a prolonged recession. But our growth and that of England, Canada, and Australia has been consistent and unique. The United States is the grandest of all economies: Our GNP now exceeds $13 trillion; the output of the 12th Federal Reserve District, headquartered in San Francisco, exceeds that of all of China in dollar terms; the output of the 11th Fed District, headquartered in Dallas, exceeds that of India by 25 percent. Ours is a gargantuan economy and also a very dynamic one.

I believe this is because we have two great assets. First, we don't suffer the sociological plague of envy. If we see that Bill Gates or Warren Buffet or Oprah Winfrey is richer, we want to be like that person. We don't seek to bring them down; we seek to emulate them. We're a highly entrepreneurial, adaptable society that seems almost genetically programmed to succeed economically. Second, and deriving from this characteristic of being driven to succeed, we have been the cradle of technological progress and, most recently, cyber-innovation. As such, the United States is well positioned to be a major beneficiary of globalization, as long as politicians refrain from interfering with the genius of the private sector and central bankers keep inflation from distracting our entrepreneurs and workers from doing what they do best: innovate, grow profits, create new jobs, and give rise to ever-improving living standards.

So the short answer is that we may suffer occasional setbacks such as slower growth or market corrections, but the underlying structural dynamic of the United States is profoundly competitive and progrowth. I am optimistic about America's economic fate.

TIE: You mention "market corrections." Why?

Fisher: I managed a hedge fund for a long time. [Mr. Fisher was Managing Partner of Value Partners, Ltd., a Dallas-based hedge fund, from 1989-97; the fund earned a return of 23.6 percent compounded annually for its investors.] I have been a "market operator." I know from experience that markets are manic-depressive. They overshoot. This tendency may or may not have been mitigated by the incredible acceleration of investment technology--from the speed with which computers can perform valuation calculations, to the global distribution of knowledge. But I don't think we've conquered the primal instinct to overshoot. There will always be a risk of market corrections. That is the nature of capitalism; it is not meant to be predictable and certainly will never be boring.

One thing that fuels the potential to overshoot in the credit markets is that when yields are low, people reach for yield. It's natural--it's been going on practically since the ancient Lydians invented money! When the yield on highest-quality credits are low, all kinds of "new paradigms" spring forth in the search for greater returns. When they do, investors and financial agents too often forget the difference between price and value. All the modeling and stress testing in the world is, in the end, a mathematical and computer exercise, especially for synthetic securities. In the end, you don't know the "value" of a security or a bundle of securities until you try to sell it. The recent Bear Stearns case, where collateralized debt obligations were found to be worth a fraction of their modeled value, is a healthy reminder of these basics.

After a period of surging financial...

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