Financial Update (Third Quarter 2002)
Tough Credit Lesson
Treasury Official Sees Challenges for the Economy
oving beyond the uncertainties and pessimism that abound in today’s economy as the United States pulls out of recession, Undersecretary of the U.S. Treasury Peter Fisher said that businesses must come to grips with longer-term economic changes and challenges.
Speaking to the Atlanta Fed’s directors and local business and community leaders, Fisher made the point that participants in credit markets must become much more skilled at discerning credit risk.
He noted that in the 1970s, 1980s and even the early 1990s inflation expectations were high because of volatility in price levels. In this environment’s credit markets, an investor or a firm could make money by catching the turn — the big swing — not by picking winners among individual firms. Fisher characterized the accounting excesses of the late 1990s as a symbol of the fact that credit matters. He said he finds hope in the fact that far fewer firms have the highest credit ratings when compared with the number a few years ago, citing this development as evidence of greater discernment by the credit-rating agencies.
Fisher acknowledged that this credit lesson will be a tough one for many businesses, but he stressed that the U.S. economy will greatly benefit by firms’ getting their bottom lines in order.
When asked whether the return to federal budget deficits might reverse the virtuous circle of reduced uncertainty, greater price stability and more output stability, Fisher — a former manager of the New York Fed’s open market trading desk — expressed optimism about returning to surpluses in the next five to six years as the economy recovers and returns to expansion. Nonetheless, he emphasized that the number-one priority for the United States is to increase savings now lest the country have to lower living standards in the future. Achieving this orientation may require not just growth but also a change in the tax code, he said.