Ex-Professor Makes Waves As Head of St. Louis Fed

Armed with fierce independence and a homemade crystal ball, William H. Poole is making a name for himself as president of the Federal Reserve Bank of St. Louis.

Already a master of monetary policy, the former Brown University professor has had a crash course in banking issues during his 10 months at the helm, and even plans to participate in a bank exam this spring.

Mr. Poole, 61, says the economy works best when the government does little to interfere with the private market. This hands-off view helps explain Mr. Poole's support for removing the barriers separating the banking, insurance, and securities industries.

"The idea that we can tightly contain what banks do seems to me to not reflect how competitive the situation has become," Mr. Poole said. "Banks are losing market share to less regulated competitors."

Banks will not last long in the current regulatory environment, he said, which means consumers will have fewer options for obtaining financial services.

"If we don't update the regulations, we not only stick consumers with higher costs but in the end we will see the more regulated industry gradually fade away," he said.

He is not afraid to be different. He dissented in his second Federal Open Market Committee meeting, pushing for a raise in short-term rates. It is rare for any FOMC member to object to the consensus decision, let alone a newcomer.

He pulled up to the Fed's annual retreat in Jackson Hole, Wyo., last summer driving a Toyota Land Cruiser towing a pop-up tent trailer. (Mr. Poole and his wife Geraldine did not sleep in the trailer, but took a post- conference camping trip.)

He has climbed the tallest peak in Australia and is an avid racer of Thistle-class sailboats, which look more like dinghies than yachts. For a central banker, he's downright bohemian.

"He doesn't think he is a hotshot or anything," said Joshua Feinman, a global markets economist at Bankers Trust Corp. and a former student of Mr. Poole. "He will talk to you, and if you have interesting things to say, he will listen."

"Sometimes people feel so strongly about a position that they become dogmatic about their approach," said Robert T. Parry, president of the Federal Reserve Bank of San Francisco. "That is not how Bill is. He is quite practical."

Stacks of papers, most about a foot high, litter his modest fourth-floor office, which is decorated with eight nature photos he took while on sabbatical in Australia in the early 1980s. There is not a single shot of his treasured sailboat. "My boat is small and gets wet so I don't take a good camera out there," Mr. Poole explained.

Mr. Poole does not take himself too seriously; he showed up for a local television interview carrying a crystal ball. Unfortunately, the previous segment was an interview with a fortune teller. "I never appeared on that show again," he said.

The crystal ball, which his son made, sits on his desk next to a sign that says "The Buck Starts Here" - oddly appropriate decor for a Fed president.

Mr. Poole opposes calls to privatize deposit insurance, saying nothing could match the government's guarantee. He said private insurance works only if the insurer can diversify its risks. That works fine for property insurers because no natural disaster can affect the entire country at once, he said. But the same is not true for bank health.

"Deposits are not privately insurable," he said. "There are too many types of shocks to the system that could affect all the depositories at once."

He does advocate requiring banks to issue subordinated debt equal to about 3% to 5% of assets. A portion would periodically have to be refinanced at market prices, giving the market a bigger role in policing banks. Investors would have an incentive to investigate the institution's health before buying the debt, he said.

Mr. Poole said he sees no need for more government regulations to avoid debacles such as the crisis at Long-Term Capital Management.

Despite suffering serious losses, no banks collapsed from their exposure to the hedge fund, he said. "Trying to get regulators to impose their views on the thousands and thousands of loans is a losing proposition," Mr. Poole said.

In fact, he said, the Long-Term Capital Management crisis showed the effectiveness of the current regulatory structure for banks' use of derivatives. "Bank capital did exactly what it was supposed to do," he said. "It protected safety and soundness."

But all economists worry, and Mr. Poole is no exception. Topping his list of concerns is credit quality. Spreads are too thin, even given low default and delinquency rates, he said. "There is still risk out there, and loans have to be priced to account for that," he said.

Less than six months into the job, Mr. Poole was confronted by Russia's debt default, which sent the U.S. bond market reeling as investors fled from even AAA-rated corporate bonds to the protection of highly liquid 30- year U.S. Treasury securities.

Mr. Poole was one of the first to downplay the crisis, saying he expected bond investors to regain their senses soon, and aberrations such as the unusually wide 35-basis-point spread between the 29-year and 30-year Treasury securities to soon evaporate. The prediction turned out correct, though not until the Fed cut short-term interest rates by 75 basis points.

The crisis reaffirmed the importance that banks play in the economy, Mr. Poole said. When the Russian debt default crippled the U.S. commercial paper market, banks stepped up and extended loans to credit-starved corporations.

"Banks were able to backstop these markets effectively," he said. "Firms knew if they had problems rolling over their short-term credit, they could turn to the banks."

He praised the Fed's handling of the Russian debt default, noting that policymakers had to devise a strategy in the midst of a crisis that defied conventional wisdom. "It was a very unusual and odd thing," he said. "I don't remember any case like this in my career."

Mr. Poole's claim to fame is his rabid support of monetarism, an economic theory that contends inflation is caused by the growth of the money supply.

A member of President Reagan's Council of Economic Advisers, Mr. Poole was lured away from Brown by the St. Louis Fed because it has long been a bully pulpit for monetarists.

This is Mr. Poole's first stint as a chief executive, a fact that worried the St. Louis Fed's search committee. "That was the one area where he did not have much in the way of experience, and it is an area that we looked into considerably," said John F. McDonnell, former chairman of the St. Louis Fed and chairman of aircraft manufacturer McDonnell Douglas Corp. from 1988 to 1997.

The search committee eventually decided that the bank, which covers parts of six states, had enough internal management expertise to compensate for Mr. Poole's lack of experience, Mr. McDonnell said.

"If we had brought in a president who was very strong in management and not very strong in monetary policy, that would have been redundant," he said. "But Bill is without peer as a monetary economist. His views of the monetary system are very much in congruence with the tradition of the St. Louis bank."

Mr. Poole readily concedes that he has little management experience, but he said few people are both top-notch economists and experienced managers. "There is no other job in the economy that requires such a mix of skills," he said.

Like most economists, Mr. Poole is a Fed veteran. After failing to garner tenure at John Hopkins University in 1969, he joined the Fed's special research unit. He took a temporary transfer to the Federal Reserve Bank of Boston. Brown enticed him to Providence, R.I., in 1974. "It was close to good sailing," Mr. Poole explained.

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