An overview of the ideas, methods, and institutions that permit human society to manage risks and foster enterprise. Emphasis on financially-savvy leadership skills. Description of practices today and analysis of prospects for the future. Introduction to risk management and behavioral finance principles to understand the real-world functioning of securities, insurance, and banking industries. The ultimate goal of this course is using such industries effectively and towards a better society.
Interview with Roger Ferguson
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From the course by Yale University
Financial Markets
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From the lesson
MODULE 7
Professor Shiller's final module includes lectures about nonprofits and corporations, and your career in finance.
Meet the Instructors
Robert ShillerSterling Professor of Economics at Yale University
Economics
So maybe we can just start, what got you interested in finance?
Were you always interested in the field, or
is it something that attracted you later?
>> No, I was interested in it from a very young age, as a teenager,
and that was because my father was very interested in investing.
He didn't have a lot of money.
He was a mid-level government bureaucrat but he had grown up during the Depression.
And the way the Depression influenced him was he became fascinated with the banks,
and banking, and money, and interest etc.
And so, while lots of folks would talk around the table about sports or
other things, my father made sure at some elements of our conversation were always
around interest rates and CDs and investing.
And he did it without very much money at all.
So this was very practical and the other thing that got me interested was he
allowed to start balancing the family checkbook.
And [INAUDIBLE] of a young age, it was very sort of practical,
hands-on financial literacy at home.
>> Well, that's an amazing story, I don't know how many fathers will do that.
But maybe you got kind of a sense of beauty in the structure, right?
>> Absolutely, I got a sense of a couple of things.
One is that finance is really interesting.
Two, frankly, it really drives people's lives.
The ability to achieve your goals, to bring your kids along etc.
In a modern society depends on financial well-being.
And I also really had this point-of-view that it has something to do with
everyone's life.
It's not just for rich people.
But moderate-income people, low-income people,
everybody needs to be involved in and, hopefully, benefit from finance.
And that's one of the lessons that sort of seeped in at my household.
>> It seems like your career is involved with the, I would say,
the human side or the social side.
You're were Vice Chairman of the Federal Reserve.
And that puts you in a role of stabilizer and regulator.
And now you're working for a non-profit,
TIAA, that seems to have a strong social purpose.
>> Look, because I firmly believe that the alternate role of finance is to help
people to achieve their dreams.
And that's very social, as you point out.
And, the Federal Reserve was something I became interested in.
Again, at a young age, because Andrew Bermer was appointed to the feds,
the first black governor, when I was 14 or 15.
So that peaked my interest.
>> You were following those things when you were fourteen.
[LAUGH]. >> Again, back to my father and
to the things he would talk about.
But to your bigger point, absolutely there are all sorts of elements around finance
that folks don't often think about.
And so creating a stable, well-regulated financial system,
which is one of the things the FED does which is very important.
Actually, the Federal Reserve also is responsible for
the payment systems of the US.
Pretty arcane activity but pivotal to keeping the economy going.
And then as you said, you come to TI, and the role here at TIAA is
to help individuals and the not-for-profit sector to achieve financial well-being.
We say we are created to serve and built to perform.
And so it's very much in the social side of finance that I found my career.
>> Yeah, you're both working for a non-profit and serving non-profits.
>> Exactly right, as we say, we're serving those who serve others.
And we also say we basically do finance for
people who have other things to worry about.
All of these things sort of describe who we are.
But the main point for TIAA is to get people safely to and
through retirement in a way that many others do not.
>> See I think some of my students have the impression of finance
that it's all about quick in and out trading.
And I won't tell you what I know because I don't want you to trade on it before me.
And I don't know what you feel about?
>> I think finance is much more then what's in the newspaper.
Finance is much more then quick profits.
It's much more then speculation.
So, what we do here at TIAA is long-term investing.
And we do it for people who are giving us their life savings, so
we have to do it with a really strong and heavy overlay of good risk management.
And all of these things are an important part of finance that aren't the,
sort of the newspaper story around finance.
It's also true that part of finance is around
trading quick profit but that's a subset.
It's not the whole thing.
And what I love about finance is that you really can use it for
social purposes to help make people's lives better.
Because all of us in a capitalist society live in a world in which finances is
an important part of and we're achieving overall well-being.
>> So, what do you think of millisecond trading?
>> I'm not terribly enthused about millisecond trading.
The challenge there is that's really not about
developing insights into what's likely to be a good investment.
It's not really understanding the income statement and
the balance sheet of a company.
It's really, as you say, computer-driven algorithmic trading looking for
minor imperfections in markets.
Now, as an economist, you and I both know that we try to teach our students that
markets bring into consideration all the available information in setting prices.
So, millisecond trading, insofar as it maybe dries out small anomalies.
Perhaps that's an important role to play.
But it's not the only role to play and it certainly is not investing.
It is really computer-driven activity looking for
small incremental pennies to make, or less than a penny to make here and there.
>> Another subject, on your watch at the Federal Reserve,
you experienced several financial crisis.
I'm thinking first, the Asian financial crisis, then it was the 2000, 2001.
>> Right, the dot-com bust.
>> The dot-com bubble.
And then there was also 9/11 which I understand you had a very important role
in managing.
>> Well, so let me start backwards, if you will.
So, yes, I was the only governor in Washington on 9/11.
As you know, the Federal Reserve is overseen by a board of governors.
I was The Vice Chairman at that point, Chairman Greenspan,
was out of the country and out of touch for about two days.
And all the other Governors were out of the building, so it did fall to me to lead
the initial response on 9/11.
And there were two or three things that we immediately had to do.
One was we issued a statement, very brief.
That said the Federal Reserve is open and operating.
And then in sort of technical language, it said we
provide all the liquidity that's called for to keep the system running.
And then the second thing that we had to do is then keep up with our promise.
And so we provided huge amounts of backstop liquidity for
banks, for checks, etc.
That proved to be very helpful.
And then the third thing we had to do was work with the banks to
get them back to a state where they're operating smoothly.
>> So, it could've been a lot worse.
>> It could've been much worse.
The U.S. economy at that point was, you know, gradually coming out of
the dot-com bubble and bust that had created a slowdown in the U.S. economy.
We were already at the Fed keeping interest rates relatively low to allow
the economy to heal from that.
And so had the shock of 9/11 really reverberated and had we not been a good
shock absorber, I do fear the U.S. would have gone into a very very deep recession.
Fortunately, that did not occur, so
it ended up that the team around the Fed did the right things.
And the other crisis that you talked about, the Asian crisis,
the dotcom bubble and bust, they all really point
out the important role that central banks can play and it's become more visible
in cushioning these blows that occur periodically in capitalism.
And the reason you need central banks is they act as the lender of last resort.
They work hard to offset cycles by using their primary tool,
which is interest rates.
And all of that came to play around those crises that you're talking about.
>> But then, I think it was just after you left the board and
came to TIA that we had the even bigger crisis.
How did that affect you or what was your role in dealing with that?
>> Well, as you say, by that point, I had left the Fed and
when the 2008 crisis hit I had just started working here at TIAA.
And my most important goal there was to make sure that people's retirement
incomes, the millions of Americans,
four to five billions saved with us, had a safe and secure retirement.
And so we immediately, I joined here in April and
I won't say I foresaw the crisis, things were starting to feel unbalanced.
And so early on when I got here we started to reduce costs.
We reviewed our portfolio and
made sure we had no material amounts of subprime in the portfolio.
So we did that and
we went through 2008 basically trying to do two things simultaneously.
Reducing the risk in the portfolio, but
also frankly because we had plenty of cash, looking for new opportunities to
invest knowing that the markets would eventually right themselves.
And we were also trying to find sort of relatively,
favorably priced assets that we could purchase.
So it was an interesting balance of keeping cost down, managing down the risk
in the portfolio, while also looking for opportunities to invest wisely.
>> So some of your participants did suffer in this crisis?
>> Absolutely.
Because one of the products that we offer is basically a loan
only equity kind of investment called CREF, the college retirement equity fund.
We also offer mutual funds.
And so there`s no doubt that participants who were invested in
equities saw the market decline.
The good news, as you well know, is that market since that time,
equity markets in particular, have been rallying, have been going up in value.
So those that stayed invested and
didn't sell at the low point have ended up doing quite well.
They more than made up for the losses.
And so that's a real message about a long term perspective and avoiding panic.
>> Right. >> When everyone else is panicking.
>> So TIA offers help to investors and gets that message?
>> Absolutely, so we offer help in the form of our website.
TIA has phone centers as do many others.
And importantly, we have well over 1,000
individuals out on campuses giving advice to everyone.
And one of the big messages that we are trying to deliver during
the most recent crisis, consistent with all the messages we deliver,
is taking a long term perspective Not panicking and
certainly don't sell into declining markets unless you really need the money.
Now, easier said than done, but counseling and cautioning people to think
about their longer-term goals is a really important service we offer here at TIAA.
>> So do you think the structure of our retirement funding industry is set and
final or what about people who are thinking of careers?
What would it look like in ten or 20 years, will it be different?
>> I think the structure of at least the U.S.
retirement system, but more broadly will have to evolve.
And the reason is that the private sector pensions that many
of our parents knew growing up are really a thing of the past for most people.
We're also are discovering as we sit here in 2016 that public sector
pensions in the U.S., but in other countries are in distress as well.
>> Yeah.
>> And so I think what we're going to see is for a variety of reasons,
retirement decisions are going to be pushed more and more to individuals.
And that challenge is that many individuals, not just in the U.S.,
but around the world are not very financially literate.
And so those of us who are in the retirement space are going to have to
continue to invest in financial literacy and advice for
individuals, while also knowing that we have a broad obligation to
manage their retirement money prudently over long periods of time.
And, I hope that the private sector really steps up to the challenge and
does it the way that we here at TIAA do it.
>> Of course not everyone is capable of understanding these
subtle financial and we care about everybody.
>> Right.
>> There used to be a defined benefit
pensions that used to be more prominent >> Exactly right.
>> Do you see any advantages in that or in some kind of?
>> Well I think there's some advantages in the defined benefit world,
but I think it's a world that's behind us.
The advantages were very much that the individuals didn't really
have much to do with the decision making around their retirement.
So what we need now is what TIAA does,
which is a combination of define benefit and define contribution retirement.
In which, every individual contributes,
hopefully the employer matches the contribution.
>> Yeah.
>> We invest wisely in a well diversified portfolio and
then we create lifetime income for individuals through our inuity products.
And so I think you need all three.
You need everyone participating and contributing with a match.
You need good solid long term investment performance with diversified portfolio.
And then you need the benefit component to be a salary for life or lifetime income.
And we offer all three of those things.
>> There seems to be some public resistance,
some psychological barrier toward even understanding annuities.
>> Right.
And the reason that there is, here in the U.S.,
a psychological barrier to understanding annuities, as you pointed out,
is that some annuity products, not ours but others, are maybe too expensive.
But I think there's a broader question, which is you need to weed,
the industry needs to create products that respond to people's concerns.
So one of the things that people are concerned about here in the U.S.
around these annuities is that what happens if I invest my money with you,
give it to you and you promise to give it back to me over life, but
I had an unexpectedly early death.
Or what happens if I'm really interested
in leaving a bequest for other people leaving something?
And so we have developed a number of annuity products that speak to
these concerns.
Because we want more and more people annuitized.
We want them to understand what the annuity offering is.
And to have an annuity that speaks to the psychological needs that people have.
And so I'm cautiously optimistic that we will continue to see
great developments in the annuity space that responds to the psychological needs.
>> So in some recent interviews of you,
you have expressed skepticism about the secular stagnation theory.
That seems to be a fundamentally important issue for the kind of business you do.
>> Right. >> So secular stagnation is the idea that
we're going to have 0 interest rates, maybe high unemployment,
maybe low growth for decades.
>> Right.
>> What do you think?
>> Well, I am skeptical in part because the history of the idea of secular
stagnation started not at Yale, but at Harvard with Alvin Hanson, as you know.
>> Right.
>> And he proposed that idea shortly after the end of the second World War.
Well, it turned out to not be accurate.
And so, one of the reasons I'm always skeptical about this theory is I think
it under weights the ability of societies to grow, to evolve, etc.
So as we sit here today, the US economy and
global economies are dealing with slow growth, low interest rates,
but at least here in the US, we're finding sort of rising employment.
So I think what we're actually dealing with is not secular stagnation, but
what will be perhaps a long adjustment from the industrial
world to a world that's more driven by technology and other things.
And if you think about economic history in the US, we've gone through this before
when we went from an agriculture economy to an industrial economy.
It took a generation to sort of sort that out, and
I think we're basically in the process of going back to high productivity,
high growth, but require some adjustments.
So I think that's really what's going on here.
Now it may take some time with low interest rates to make all that work,
to be fair.
>> As a CEO of a fiduciary, you can't let
your independent opinions dominate, right?
>> Correct.
>> And there are people who express different views about secular stagnation.
>> Absolutely true, people express different views.
So my job is to think about how do I set the company up,
in case that is true, versus other things.
And so the way we've been thinking about this is to
broaden the alternative investments that we have.
So fixed income investments in a world of so-called cycle of stagnation
are likely to have very low interests rates for a long time.
So what we've been doing is also investing
in different kinds of asset classes that might do well in different environments.
We call that alternatives, so agriculture and timber and real estate and
so-called infrastructure, different kinds of loans, for example.
And all of these diversifying investments are meant to create
incremental returns for our retirement participants over the returns
that they would get if they only had fixed income investments.
So while I may be skeptical around the theories of secular stagnation, knowing
that low interest rates may be with us for a variety of reasons for some time.
It's important for us to have a well diversified portfolio that has some
opportunities for higher return, as well as a fixed income
investments that are normally associated with retirement activity.
>> Now what you're saying ties into some themes of my course in financial markets,
about diversification, in particular.
And there is a mathematics of diversification.
Now, you have a PhD in economics.
>> That is true, but I'm not an esteemed economist like you.
I am a person with a PhD in economics.
That's true.
>> So what you are doing at TIAA, which I think I applaud,
is generating opportunity for real and important diversification.
>> That is absolutely right.
And what I like about it is this is true not just for
the senior faculty at a great place like Yale, etc, but
also for the buildings and groundspeople.
And we make the same alternative investment diversified
portfolio available to everybody.
So one of the things I really like about what we do here
is we are serving millions of people.
Some at the very upper end of the university hierarchy,
and frankly, some who are doing more menial, manual kinds of labor.
But we give them both access to, directly or indirectly,
to this well diversified portfolio, which we think is part of the secret of
getting people safely to and through retirement.
>> Well, I have one final question, which is, recently, it's in the news that you've
joined the Board of Directors of Alphabet, which is the parent of Google.
>> Yes.
>> And I wonder if you can just tell us a little bit about what you think.
Google is an amazing company.
>> Yes, it is.
>> And you're not a computer person.
>> Right.
>> But I can imagine that you have important contributions.
Maybe you could talk about that.
>> I certainly hope I have important contributions.
I think it's going to be a two way street.
So, here in my company, we're very interested in digitization and
using technology to help people to customize their retirements, etc.
So I am very excited about being exposed to Silicon Valley and
that kind of thinking and bringing some of that back to TIAA.
>> I see your motivation is, [LAUGH] you have a social motivation,
you're thinking of- >> I have a social motivation, absolutely.
>> Synergies.
>> I'm looking for synergies.
Now, but it's gotta be mutual, so
what I think I bring to them is a world view that's quite different from theirs.
So, people in Silicon Valley are deep experts of technology, they're deep
experts in thinking about how to change what we do, they call it disrupters.
That's all fine, but their experience is limited to the world of technology.
So I come from a world of regulation, of finance,
which are things that they need to understand a bit more about.
So high tech companies are finding themselves more and
more in the world of regulation.
Questions around the so called net neutrality, for
example, or privacy or the so called right to be forgotten.
These are all places where technology and
government regulation are intersecting, maybe even colliding.
So I know a lot from my experience about how to think about regulations,
how to adjust your company to deal with them.
So I think I can bring some of that.
The other thing is that Google
makes billions of dollars a year that it has to invest in new ideas.
And so capital allocation,
holding businesses accountable, all of those things are business
concepts that I hope I bring to them with my background in finance.
And so I think it's going to be a nice mutual learning,
where I'll learn a lot about Silicon Valley and technology,
and they'll learn from someone who's got a different world view.
It's a version of diversification.
So that's what I'm trying to do.
>> Yeah, so it seems like in your examples, there're some lessons for
young people or for people anticipating a career change.
That you do something like serve on a board at Alphabet for
broader reasons connected with your feelings, for people in various places
and officiating the kinds of different understandings that we all can do.
>> Absolutely.
I mean, I think, frankly, all the business I think of,
the better parts of business, are the people sides, both sides.
So there's building your own human capital, as economists would say,
learning more and more and continuing to learn and
be a continuous learner as you go through your career.
The other side is really understanding what others are going through and
figuring out how you can be helpful to them.
I describe that as empathy, and I think a good career has a nice mix of both,
where you're building you're own human capital.
>> Good for society and for yourself.
>> And good for others.
And that's back to where we started, one of the great things about finance is,
it can be good for society and good for yourself.
And that's an important lesson in our careers in general.
So I'm very excited about both the opportunity at the Alphabet Board, but
more importantly, the opportunity to lead TIAA.
It's been spectacular because it's had the society benefit,
while also being things that I'm really fascinated with.
>> Okay, I want to thank you very much.
Again, this is wonderful discussion.
>> Thank you very much.
I had a great time doing it, thank you.
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