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Haverford Trust and Hank Smith are nationally recognized investment leaders committed to informing and inspiring people to build better financial futures for their families. In his chats with authors, influencers and industry experts, Hank helps bring a sense of clarity and calm to the complexity and stress of personal finance. Topics range from quality investing, retirement resilience, market trends and behavioral psychology.
Transcript
00:05 Maxine Cuffe
You're listening to Speaking of Quality: Wealth Management Insights with Hank Smith, a podcast by the Haverford Trust Company. On Speaking of Quality, Hank chats with authors, influencers, and wealth management experts to bring a sense of clarity and calm to the complexity and stress of personal finance. And now here's your host, Hank Smith.
00:26 Hank Smith
Hello and welcome to another episode of Speaking of Quality: Wealth Management Insights. I'm your host, Hank Smith, director and head of investment strategy at the Haverford Trust Company. On this podcast, we explore topics ranging from quality investing, retirement resilience, stock market trends, estate planning, small business ownership, behavioral psychology, and more. In this episode, I'm joined by my friend and colleague, Ed Boehne. Ed is a renowned economist and former president of the Federal Reserve Bank of Philadelphia and has served as our senior economic advisor and director and board member at Haverford since 2000. Ed, welcome.
1:08 Ed Boehne
Thank you. Good to be here, Hank.
1:12 Hank Smith
Ed, what motivated you to study economics and earn a doctorate in economics at Indiana University, the state where you grew up, and what brought you to the Philadelphia Federal Reserve Bank in 1968?
1:27 Edward Boehne
Well, I went off to college, not really knowing what I wanted to do. I thought, maybe I would go to law school. But I took an economics course, and I got hooked and I liked it. Then I figured out that you can actually make a living at it. So, I stuck with it. Coming to Philadelphia, once I was well along and looking for a job, I had a college professor who asked if I'd thought about working for the Federal Reserve, and I hadn't really given it that much thought. He said, "Well, I think you ought to try, it might be a good experience, even if it's only for a few years. I think you might fit in nicely at the Philadelphia Fed, and by chance I have a contact there.” And next thing I knew, I was invited to Philadelphia for an interview and they hired me. When I started out, my job was to write articles for what they call the Business Review, which was aimed at the general public, which I liked very much. I really didn't want to talk to other economists. I wanted to talk to the general public. And I gave lots and lots of talks. That was my job, and I loved it. From there, I just moved up the ranks and one day I became president.
3:16 Hank Smith
Tell us about that and your interview with then Fed Chairman Paul Volcker?
3:23 Ed Boehne
Well, the way it works is that it's a two-step process. Really, each Federal Reserve Bank has its own board of directors. They select the president, but that selection is subject to the approval of the Board of Governors in Washington. I remember the events well. The Philadelphia board approved me on a Thursday, the chairman of the board called Paul Volcker and said, “We've elected our guy, and now it's up to you to do your job.” And he said, “Okay, how about a breakfast meeting the following Monday.” So, I met him. He was reading the paper, The New York Times, I think, or maybe the Wall Street Journal. He didn't really put it down, which really made me feel important as I was coming in, and finally, somebody came to take our orders. And he said, “Well, I’ll have a couple eggs.” So, I said, “I'll have a couple eggs.” And then just a little small talk. At that time, the Philadelphia Fed had the biggest loan to a commercial bank outstanding, maybe ever. I don't remember that but certainly it was at the time. He looked me in the eye, and he said, “Can you get that loan repaid?” And I said yes. He said, “Well, I don't think we have a lot to talk about, you might as well get the train and head back to Philadelphia.” So, I came in, and the outgoing president said, “Congratulations, I just got a call, the board approved you.”
5:21 Hank Smith
So, what a time to start as head of the Philadelphia Federal Reserve Bank in 1980, as the Federal Reserve was beginning a most aggressive interest rate hike, and driving the US economy into, initially, one recession and, ultimately, what turned out to be a double-digit recession, I can't think of a more challenging time to become head of the Federal Reserve Bank.
5:48 Ed Boehne
No, it really was. And I tell you, Paul Volcker was the man of his times. It took a turnaround person because the U.S. economy was on the wrong path, inflation was up, unemployment was up, and we had lost a fair amount of credibility in the US and international circles. Paul had this wonderful reputation. He was bipartisan, he had worked for Republican administrations and Democratic administrations, and he had credibility. President Carter appointed him and what he knew is that the economy needed some shock treatment. I came on board just in the beginning of the shock treatments. And if you can believe it, interest rates went up, the federal funds rate went up to 20%. Today, we're around five and it hurts at five. But up went interest rates, it's never a popular thing but the Fed was created really to make tough decisions in tough times. And that's really what happened. Meeting after meeting was just, “what do we have to do to bring inflation down?” So, that's what happened, and it went on for several years. And you're right, there was an initial risk of recession. Then there were some cracks in the financial system. So, the Fed backed off a little. Once those financial cracks began to heal, we went back in for a second round. And that lasted for several years. The back of inflation was broken, and we got on a path of prosperity. The early 80s were tough for a few years, but then the economy took off and we set the stage for decades of prosperity. Paul Volcker was a tough guy – he wasn't tough as an individual. Privately, he was like us all, he had a family and children. But he had a job to do and he did it. I think the country really owes him a lasting thanks for what he did, because had someone not stepped up and dealt with it, I think the U.S. economy could have gone the way of a Latin American economy, just ripped up with inflation.
9:14 Hank Smith
You were the longest serving Fed President of really any of the districts, I believe you served for 21 years. Tell us about that decision, compared to most Fed presidents that just seemed to serve, I don't know if it's a term or what have you, but there seems to be a lot more turnover compared to your tenure.
9:42 Ed Boehne
Well, I served for about 20 years. I think I certainly was the longest serving president of the Philadelphia Fed. There may well have been other longer serving presidents of other reserve banks. Well, first of all, Hank, I got the job at a relatively young age, I was 40 years old - and that's unusual. And so, 20 years and I was still 60, and a lot of Reserve Bank presidents don't get the job until their mid 50s or approaching 60. So, I had age on my side. I really did like the job. I clearly was involved in national policymaking, and I went to Washington, I don't know how many times. Somebody calculated once, 500 times, which is a lot of travel to Washington. But it's a very good balance, because I had one foot in that Washington policymaking. But the Reserve Banks were created so there could be contact throughout the country with the business community, with labor, with nonprofits, and so on. The Fed was really the third attempt at a central bank. And the first two attempts were actually headquartered in Philadelphia, but they didn't last. I think the main reason they didn't last is that they were viewed as an East Coast Philadelphia institution and not really plugged into the local economy. So, the Federal Reserve are these 12 banks. A main part of the job is to stay in touch with what's going on. You talk to people, and you listen to people, that's the most important thing, I think, is to listen to people. I found that to be extremely valuable. But in addition, the Federal Reserve Bank is a bank. I mean, the Philadelphia Fed cleared more checks than any other check clearing facility in the country. We had a huge wire transfer of funds, we had a huge cash distribution system, so there was an institution to run. And as President, you're on the hook. I mean, if it goes well, good, it goes well. If it doesn't, it's your problem. And so, you have to keep a bank running. But also, spending a lot of time listening, reaching out to people. I think that particular characteristic of the Fed has kept it around for over 100 years, whereas the first attempts at central banking lasted no more than 20 years each.
13:14 Hank Smith
Would you say that skill of listening is part of your success as a leader and being the President of the Philadelphia Federal Reserve Bank for 20 years?
13:27 Ed Boehne
I think it's important to keep in touch with the people you work with and the community that you serve. I'd always prefer to listen. Although people expect that if you're the head of the Fed, they want to hear what you have to say, too. But one of the things that I found particularly helpful was to go around and set up lunches, informal lunches all around in Johnstown, Williamsport, Dover, all around the district, and just listen, just go around the table and listen. And you would always come back from those meetings thinking, “Oh, I thought I understood something, but now I understand it a lot better.” I think if you're going to be a good leader, you just don't stand up and shout and tell people what to do. You listen, and you always, always, always have to remember that you don't have a monopoly on being right. You can be wrong. I remember one time the Fed made one of those tough decisions, it was a close decision about interest rates. And I was out traveling around the district, and I checked into a hotel. The guy looks, he says, “Oh, the Fed, you made a big mistake. You made a big mistake.” And I thought about it overnight, and I called Alan Greenspan the next morning and I said, “You know, I've got second thoughts about what we did.” And he said, “You know, I've been hearing the same thing. I've got second thoughts too; we're going to have to reverse what we did.”
15:37 Hank Smith
So, speaking of leadership, and thank you, that is great advice that more of us should be doing more of - listening. But you served under two economic giants, if I may describe them as that, Paul Volcker and Alan Greenspan. Did they have different styles? And you're not always on the FOMC committee as head of the Philadelphia Reserve Bank, but you rotate. Tell us a little bit about that as well?
16:10 Ed Boehne
Well, every President attends all the Open Market Committee meetings. Every president at every meeting gets to say, this is what's going on in my district and this is what I think we ought to do. At the end of the meeting, only five of the 12 presidents get to vote, and all seven of the seven governors get to vote. Philadelphia would have the vote every three years, and I'm sure in a close call it makes a difference who's voting or not voting, but most of the time, the Open Market Committee operates on a consensus basis. There's vote taking at the end, but I think most of the time, you kind of know the way the thing is going to go just by another situation of listening. You listen to your colleagues, you have a position. So, there's all of that. Yes, if you look at Volcker and Greenspan, they're two completely different personalities. Volker was a turnaround guy and turnaround guys have a particular kind of decisiveness about leadership. Think, you're in a crisis situation and you've got to hang tough. But a leader who carries on in more normal times, you're not operating most of the time in a crisis situation. So, there is more time, I think, for collegiality, there's more time for talking. For example, I remember once, at an Open Market Committee meeting, one of my colleagues was overly chatty. Paul Volcker, those were in the days when people smoked in public, and he was a cigar smoker. So, he got up from his chair and his office door was just a few feet behind where he sat. He came back with a handful of cigars, and they looked up and he said, “Ah, you're still talking?” Well, that sends the message that “we want to hear from you, but we don't want you to stand up there and talk forever.” I cannot imagine Greenspan doing that. On the other hand, he would have more subtle ways. He might, for example, ask a question which would make you think. They were different kinds of personalities because of different kinds of times. Volcker had to be very decisive, in order to get the credibility in financial markets, whereas Greenspan was more subtle. And I remember one time he was up on the Hill, testifying before a Senate committee, and this Senator looked at him and said, “Chairman Greenspan, I've heard you testify many, many times, and today, for the first time, I think I understand what you're saying.” And Greenspan looked up and said, “Senator, if that's so, then I have failed today.” You can get that kind of style is appropriate in more normal times. But if you're in a crisis, you want the leader to be very clear every day in order to make the turnaround.
20:32 Hank Smith
I remember after every FOMC meeting, when Greenspan was chairman of the Fed, the financial press spent pages trying to dissect what he actually meant, because he was quite often so obtuse in his language. But you have said, and we have been blessed here at Haverford, by having your advice for the past 24 years. Throughout the teens and into the early 20s, you've always said it is paid to take the Fed at its word. And I think you've been spot on, whether it was Ben Bernanke, Janet Yellen – today, Jerome Powell. Now look, Jerome Powell did say he wants inflation to run a little bit harder. I don't think he meant 9% from two years ago. And now he has said that he does not want to repeat the same mistakes of the 70s, kind of a series of stop, go - stop, go - stop, go, that allowed inflationary expectations to build to a crescendo. I think the markets are coming around to that view. Do you have any thoughts on that?
21:53 Ed Boehne
Well, I think the Fed doesn't see the future 20/20. Nobody sees the future 20/20. So, you have to have an opinion, you have to have some thoughts about the way you think the economy is going to play out. That can turn out to be right, that can turn out to be wrong. The Fed was clearly wrong when they were underestimating the threat of inflation, so they had to play catch up ball. And that's what Paul and his team did. I think they thought that the progress that was made with inflation last year was going to continue into this year, and it didn't. It slowed down, it got sticky. That's not unusual, it happens. And so, instead of having interest rates drop in the early part of this year, I think we're off now at least to the second half of the year. The Fed has to deal with reality - forecasts are not reality. Every business needs to forecast, everyone who makes decisions makes forecasts. If they’re right, they’re right. If they’re wrong, they’re wrong. You have to adjust; you have to adapt. And I think that's where the Fed is. They do not want to ease too quickly, because if we do, you could let inflation reaccelerate, and then you got to start again and start tightening. That was the mistake of the 70s and I think Paul understands that. So, what he is doing, I think, is saying, “All right, we have to keep the current level of restraint in place until we see inflation again start to decline.” And that's where we are now. The markets have adjusted their thinking. It wasn't all that long ago that I think some people in the market thought we were going to have four, five cuts in interest rates this year. I think the consensus now is maybe two, maybe starting in September. We have to let this play out. I don't know, Paul doesn't know, whether that's going to be the case. I think what he doesn't want to do at this point and would only do if there were a significant reacceleration of inflation is to tighten - to raise interest rates some more. I think he would rather stay at the current level longer and make progress that way, rather than try to tighten up some more. And so, I think we're in a wait and see. Right now, the U.S. economy is performing really rather well on the whole. The economy has been stronger than I think almost everybody thought. Inflation has come down a lot, it was up around 8 or 9%, we're now down in round numbers around 3. The Fed would like to see it go lower. But that's a lot of progress from eight or nine down to three. So, I think he can afford to wait, if that's what's required. But what's most important is that the Fed is steadfast here, that it doesn't get into jerking things around. So, I think that's really their goal at this point.
26:32 Hank Smith
Ed, many pundits are suggesting that artificial intelligence could provide a huge boom to productivity, maybe even greater than what the internet did in the 90s and in the aughts. Do you have a view of that? And also, how technology has impacted the study of economics, the application of economic theory?
27:05 Ed Boehne
Well, technology really is the way that standards of living increase. People have to become more efficient, and they become more efficient when they have machines, when they have tools. I mean, a person is obviously much more efficient with a bulldozer than a shovel. That's been the history of economic progress. We started out with the steam engine, and then we had electricity, then we had cars replacing horses, then we had the internet come along. I think now, artificial intelligence clearly has a huge potential to increase productivity. How it all plays out? I don't know, I don't think a lot of people know. But I think it is one of those leaps in technology that will have a major impact. Now, we all know that there are downsides to this stuff. But I think the upsides are very positive. Now, it can take longer than you think for this to occur. You think about when the car came along. Well, it's good to have a car, but you also have to have roads. You have to have gasoline stations, and you have to have repair shops. So just because the technology is there, now we need the supporting environment to fully get the benefits of it. But yeah, I think they're there. I think it's big time. If we could go ahead 10 years, 20 years and look back, I think we would categorize it as one of those major breakthroughs in technology.
29:33 Hank Smith
Yeah, to your point, at the end of December, I asked ChatGPT to write me a two-page economic outlook for 2024. And it came back, and it said a lot of the right things and was actually quite interesting. But then I asked it to write a two-page economic outlook with supporting data, and that's where completely fumbled because all the data was completely wrong. So, we do have a little bit of a ways to go, but I do agree with you, the potential is enormous for our economy.
30:13 Ed Boehne
I always think about technological improvement. If you can believe this, this is a true story – in the late 1930s, the head of the patent office indicated that he thought that just about all of the major inventions had been made. So, you have to always think about the ability of human beings, the ability of technology, and most of the time it ends up being bigger than we anticipated.
30:57 Hank Smith
Yeah, and in the early 1960s, Life Magazine had a cover story that claimed almost all drug discoveries had been made. How wrong were both of those opinions?
31:14 Ed Boehne
Well, you think about our grandparents, things like heart problems and high blood pressure did them in. Today, it's almost a minor thing you can take with a couple of pills.
31:31 Hank Smith
It's hard to believe you've been retired for 24 years. You've been helping us out immensely. What else have you been doing during your retirement and keeping active?
31:45 Ed Boehne
Well, I really had two careers. I had this Fed career, President of that for almost 20 years. And I started a second career, because when I retired, I was 60 and I decided that I wanted to be on corporate boards. When I retired, I was fortunate enough to be asked to be on a number of boards. I was on a home building company, I was on an insurance board, I was on a commercial bank, and Haverford Trust of course, which I'm still on. It was a tremendous experience. I hope I brought something to each of those boards. But, to learn about a different industry, to learn how a company functions and competes in those industries. What I learned is, go in with an open mind because you're going to learn a lot. And the worst thing you can do is say, “Well, this is the way somebody else does it.” You have to respect a successful company, because they have a culture, they have a way of doing things - that doesn't mean that there can't be improvement. But there are a variety of ways to achieve excellence. I was fortunate enough to be involved with some good companies. And that too, was a very rewarding and stimulating career to have. I'm very happy that I was fortunate enough to be able to do it.
33:49 Hank Smith
So, you took that skill of listening right to the second career, being on the boards. I think we can all learn something from that.
33:58 Ed Boehne
I think that's true, Hank, I think that's true. And quickly, what you learn is the guy who thinks or the gal who thinks he or she has all the answers, after a while people don't listen to them very much.
34:15 Hank Smith
Ed, I love to ask my guests about some of the impactful books they've read - impactful either in their career or in their personal life and what you might be reading right now. Do you have any favorites that come to mind?
34:33 Ed Boehne
I'll tell you, since I have been retiring from boards over the last few years, I have had more time to read, and I've kept an open mind about what I want to read. In the last few months, I've read some really fascinating books. For example, one that I just finished was entitled, “The Splendid and the Vile.” It is a very close-up, personal view of Winston Churchill in the first year of his being Prime Minister, and those were terrible days, you had the Battle of Britain, devastation, you had death. Churchill, again, was a man of the hour. I mean, he took over and he had a way of communicating with people. He could get on the radio in those days, or he could go to Parliament, and he could take a very bad situation and indicate ways out of it. And it was a real, real struggle, but I think very few people would have been able to do it. And it's not like he woke up every day with a brilliant idea. He just felt that the whole history of England was at stake, and he wasn't going to let it fall to the evils of Nazism. And he was everywhere and people relied on him. I found that to be a stimulating book. A second book that I read recently; it was entitled “The Women.” And it's about a young woman with a privileged background, who ended up in Vietnam as a surgical nurse, and how she held up and then coming back to a country divided. It wasn't like people from World War Two coming back, and welcomed as heroes. The Vietnam War was very divisive, and it caused her a lot of personal problems. But she found the strength to end up doing what she wanted to do in life, which was essentially trying to help other women go through these difficult times in trauma. It was an excellent novel about how adversity can make you strong. I read a number of other good books, but I also like science, and I finished one a month or so ago called “Before the Big Bang.” We think about the Big Bang, but the implications of this book, a physicist named Laura Houghton wrote it, is if she is any right at all, there are many Big Bangs and multiple universes. And it just is mind expanding. And it's a long way from economics, which I appreciate. The list goes on and on.
38:23 Hank Smith
Ed, I can't thank you enough for joining us on Speaking of Quality. It's always a pleasure talking with you, and it's just been my absolute pleasure to work with you for the past 24 years. To our listeners, thank you for listening to this episode of Speaking of Quality: Wealth Management Insights. Our next episode will be released shortly. In the meantime, please send suggestions or questions for me or the Haverford Trust team to marketing@haverfordquality.com. And don't forget to subscribe, rate, review and share this podcast. Until next time, I'm Hank Smith. Stay Bullish.
39:07 Maxine Cuffe
Thanks for listening to this episode of Speaking of Quality, Wealth Management Insights with Hank Smith. To hear future episodes of Speaking of Quality, please subscribe on Apple podcasts, Spotify, Google podcasts, or wherever you listen to podcasts. To learn more about The Haverford Trust Company, please visit www.haverfordquality.com. This podcast is provided as general commentary and market overview and should not be relied upon as research a forecast or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt an investment strategy. Any opinions expressed are as of the date this podcast was recorded and may change at any time, and are the opinions of that commentator, not Haverford’s. Any opinion or information provided are believed by Haverford to be reliable at the time of this podcast recording, but are not necessarily all inclusive or guaranteed for accuracy. Before making any financial decisions, please consult with an investment professional.