I thought you were going to ask about the Redskins. I have no view on house prices in the region. Nationally, house prices have been relatively flat for a while. My expectation is they will not move very much for a while. There could be some downward pressure because of all the foreclosures coming on the market. So nationally the housing market is extremely weak. Construction and production are very, very low—much lower than the increase in the population, which you might think would dictate the long-run trend of production. The country overbuilt houses. There is an overhang, and it’s being worked off gradually.
What advice would you give investors as they try to preserve capital in this environment?
I’m not in the business of offering investment advice. My general advice would be to diversify—don’t put all your eggs in one basket. That’s certainly a truism.
The other piece of advice I would have is there’s never something for nothing. If it looks like something’s offering a bit of a higher yield, a bit more interest return, an expected extra profit on a particular investment, that probably implies there’s some extra risk involved and you need to look under the hood.
Leading up to the crisis in 2007, people didn’t look under the hood. They were looking for a little bit more return. They forgot that the extra return comes with extra risk. In the end, the extra yield and extra return they were getting wasn’t enough to compensate for the extra risk.
There was a widespread complacency about the amount of risk in the financial markets and the economy. That complacency grew out of 2½ decades of economic growth, interrupted only twice by relatively mild recessions, by the upward march of housing prices since the 1930s without a significant national decline. Everybody got a little relaxed about the kinds of risks they could take, chasing that extra half a percentage point or percentage point, the promise of extra profits and buying a house and rolling it over and refinancing it on a periodic basis. There’s just no free lunch there.
What careers should young people pursue in the wake of this recession?
I would tell those graduating from high school to go to college. If we’ve learned anything about the distribution of income and winners and losers over the last decade or two, it’s that the winners have been concentrated among people who have a college education, particularly those in the knowledge industries. The information-technology area has been rewarding.
High-school graduates have fallen behind. Even people with run-of-the-mill college degrees who haven’t thought carefully about the demand for their profession can fall behind. You need to consider carefully where the needs of a rapidly aging population are, where the knowledge can be applied. The more sophisticated the profession, the more likely you’re going to reap the rewards from education.
Let me add that the community colleges of this country are playing a really valuable role in training people to meet the needs of the 21st century. So when I say get a college education, it doesn’t have to be a four-year college.
Of the five Fed chairmen you served under, who stands out?
I was closest to the last three—Paul Volcker, Alan Greenspan, and Ben Bernanke. Each has served the Federal Reserve in an outstanding way. Their personalities are somewhat different, but there are some similarities people don’t always recognize: three really smart people who had a knowledge and an awareness of how they and the Federal Reserve fit into history and what their responsibilities were as Federal Reserve chairman to further the welfare of their fellow citizens.
That sense of history is important because it helps you avoid repeating mistakes of the past. The country was fortunate that in Bernanke they had somebody at the helm who had done deep studies of the Great Depression and the policy errors and successes of that era.
How close did we come to another depression?
If the Federal Reserve and the Treasury hadn’t acted very aggressively in the fall of 2008, the Great Recession would have been even greater. When the private sector was unwilling to extend loans to one another, the Federal Reserve stepped into that in a classic central-bank function. Going back to the late 19th century, [economics writer] Walter Bagehot said that in a panic you should lend widely and lend often to solvent borrowers against good collateral. And that’s what we did.
We had to do a lot of innovating. I also think that if Congress hadn’t passed TARP [the Troubled Asset Relief Program]—as much as they say they regret it now—and the Treasury hadn’t used that to stabilize the banking system, the situation would have been far worse. We might have had a bunch of nationalized institutions, as many people were calling for in the spring of ’09, and a real problem on our hands that would have been very, very difficult to unwind.