Wall Street Week with Louis Rukeyser; 0516; The New York FED

They're running for public broadcasting. Wall Street Week produced Friday November 14. Your host for Wall Street Week is Louis Rukeyser. Our panelists are Frank happy Hello Joel staring at Julius Westheimer. Tonight's special guest is Paul a Volcker president. The Federal Reserve Bank of New York.

I'm Louis geyser This is Wall Street Week. Welcome back. Whoever started that false and malicious rumor that Wall Street is composed of cold spirited financiers with hearts of flint Why is anybody could have seen in that we just passed. Those fellows are really a bunch of mushy romantics as easily turned to sentimental tears as the audience at an MGM musical of the 1940s. The tune of Wall Street was beyond question. Everybody loves a lover. And if the roles of Mickey Rooney and Judy Garland were played somewhat improbably by Gerald Ford and Hugh Carey the stock market was not in the mood to cavil just as it was disturbed when the two stars fell out so we cheered when their areas of radiance grew closer. The final Clinch was not yet at hand and there was still the plot complication of what to do about poor a beam. But Gerry and Hugh had at least been brought together for a grudge Jean on his lengthy handshake and so was the violins reached a

crescendo in the romantic canyons of lower Manhattan. Eyes grew moist or parts grew happier and prices grew higher on the heaviest volume of trading in four months. If someone could only get them actually to kiss it might bring down the entire house. Will stars of this magnitude of course it's hard to get either one to admit that he was changing his position. Hence when New York's governor Kerry called a special session of the state legislature to ask for the new taxes and the new debt restructuring that Mr. Ford had been demanding. Mr Kerry said he was acting because of a softening of the federal position. And when Mr. Ford then let it be known that he might after all provide some short term federal aid to ease New York City's cash flow problems the White House claim that presidential intransigence had triumphed and produced state reform. Why the listen to those fellows talk you might have thought they were a couple of politicians. Tonight we're going to be talking with one of the most important men in the middle. Paul a Volker who is president of the

Federal Reserve Bank of New York is second only to Arthur Burns as an architect of the nation's monetary policy and who previously presided for five years over the international fate of the dollar. But first let's see what happened to all the dollars that were invested in the stock market in the week just passed. And as the Dow Jones Industrial Average indicates the market moved upward whenever New York and Washington seem to be moving closer. The with the future reconciliation was heavy enough on balance the put the market ahead for the week by about 18 points to eight hundred fifty three point six seven. Similar enthusiasm pervaded the broader composite indexes of the New York and American stock exchanges and the over-the-counter market with the Amex and TC indexes rising to their highest points in more than two months. When other hearts are happy the elves grow sad. Their technical market index has turned a notch more negative indicating their belief that the financial joy may be premature. You can never accuse the Elves of being sentimental this

hard headed realism is of course the best emotion for anyone trying to figure out how to invest his or her money. But sometimes realism is more difficult to achieve than the hard head part. And so we are left with three big questions. What is the federal government likely to do about New York. What should it do and what effect is it likely to have on the stock market. Let's ask them of our panel starting with Frank Caprio. Well I think the federal government will intervene. I think what we're seeing is a well orchestrated scenario. The federal government obviously in the guise of the administration wants to see some discipline in terms of the budget some sacrifices on the part of everyone the bondholders the New York City the unions the workers and so on. I think the last moment the cavalier ride over the hill and will have some sort of guarantee perhaps the taking over of some portion of welfare something along that line. But it will be very unpalatable. It will be so

difficult so many constraints that not many cities will want to do it. But will be a short term solution. This is exactly what they should do. So the second part of the question is answered in the affirmative to third level to do for the market. I think the market will heave a sigh of relief and continue to go up because my position has been over the past three or four weeks that the market would be much higher if it had not been for New York. We have all of the economic figures are positive we're going to deep decontrol oil. So you told me everything but what the government should do. Well what what they're going to do is what they should do to rescue New York. I really think they have to. What would happen to the banks in New York City. The state of New York and the country at large is too terrible to contemplate. No one knows what would happen if a large city which contained 6 percent of the United States population went into default and I don't think we ought to try to find out either. As the only New Yorker our panelist and as a New York banker you may find these questions particularly

penetrating. How would you answer them. I believe that the government is going to intervene. I think that from the standpoint of what the government should do I think that when we look to government leadership it's very important that the president of the country stick by his principles instead of waving with the slightest breeze and the polls change. Now of course from the standpoint of its seriousness I think we have to take a look at the consequences of being able to forecast the outcome. I think we cannot accurately forecast the outcome but we've heard pending before. What do we did. What did we do in the Penn Central situation. What did we do in the case of equity funding. What about the percentage decline in stock prices that took place during the last two years. You told us these questions are going to actually come I think in total wealth decline that took place there was far greater for the country than it would be if the bonds and note holders were to lose out as a percentage of their holdings in these bonds. From the standpoint of its impact on the stock market however I think that of course the stock market looks to uncertainty with some degree of trepidation and that will be

illuminated by this. Joe you leave me a little confused on only one point which is seems to me that you are suggesting that Mr. Ford should not waver but also that he want to do something. Is there anything grounds there. I have a problem in the sense that obviously my own private remuneration is a function of the outcome and that if banks don't do well then their people don't get paid as much. But from the standpoint of the difficulty in forecasting the outcome I think that the catastrophe is being overstated. Fair enough. Joyce Westheimer What's your view. In my opinion President Ford will change his mind on this and the federal government will take some very strong steps to help New York out of its troubles. He's bucked this so far but the suit never reaches the table quite as hard as it leaves the kitchen. And I think there's going to be a great deal of pressure on him to do this. I think his feelings will moderate and I think he will help New York. I obviously believe this is the right course I think he should do it. I don't think we should let the largest city in our country go down the drain there's plenty of money to help it and other things too so I think it is the right course to pursue. As far as the market is

concerned I think the market has discounted a good deal of the problem should New York go under. And as you just pointed out earlier the market was strong this week it was up about 18 points on some of the fact that there is a changing in the position of the administration toward New York. So I think some of New York's problems may be behind them. OK. In any event is time now to turn from the money problems of New Yorkers who are as Mr. Westheimer just so graphically told us in the soup. To the money problems of all our viewers and answer some questions we've been getting in the mail. Frank Caprio utility stocks of special interest to investors who emphasize high current income. So for the benefit of Todd Bode Yeah. Richmond Virginia Mary Benson of Cincinnati Whitney Williams of Los Angeles and other viewers would you give us your current appraisal of the outlook for the utility group and how to choose within it. I think this is probably a positive group next year 1976. You have all of the ingredients for a good utility stock market

lower interest rates unwinding of inflation and a more favorable regulatory attitude. The stocks are still cheap and they still contain very high ingredients in terms of dividends. I would certainly buy them as matter of fact I would buy most of them and some utilities that one should look at I guess would be Commonwealth Edison located in Chicago. Stocks like Florida Power Tampa Electric all with secure dividends. All with rising profit margins all with promising prospects 1076 has got to be the year for the utilities. Long last you're guaranteed anyone I know in my solution will have to get a copy out and this is not a shop recommendation but the recommendations of Frank at the moment of Cabul does not personally underwriters recommended it. Speaking of utility is s m corner of Tampa Florida wonders what the effect of a default by New York City would be on the market for utility bonds and for corporate bonds in general what's your view on that.

I think we have to separate the issue into two parts the short term interest rates and the long term interest rates. I believe that is the degree of uncertainty increases for investors they switch out of what they were in safer instruments as a result we have seen short term interest rates go down but the long rates have stayed up because of high anticipated rates of inflation to continue. I believe that high grade corporate bonds and public utility bonds are likely to be good investments and better investments in the near future because people will be doing the switching and therefore I recommend they hold their positions. That was I regard the interest return on tax free securities as uncertain and will therefore see the more certain return on corporate bonds right more uncertain than before. Fair enough just as much time and this is call evilly of Orange Park Florida sent us this question. At what age 18 or 21 can a person own buy sell and trade stocks and bonds. And does the answer depend on the state in which you live. The answer is yes it does depend on the state in which you live and for the benefit of this is that really I phoned the Securities Commission in Tallahassee and the rule down there is 18 so if she has any stocks in

custody a name she was taken out of custody name and put her into that put them into the name of the miners. Many states recently have changed from 21 to 18 including Maryland and it's a state by state rule. Check your broker and if he doesn't know call the state capitol with Mr. West time or did you know if you've been wondering whether you're old enough to lose money in the stock market or if you have any other questions about investing just send them along to us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland. 2 1 1 1 7. Now before we meet tonight's special guest let's take some time out to go traveling the camel route to Iraq but the financial route to a book. Not only does the dollar buy less at the supermarket than it used to. It also buys less in terms of other currencies than it did 10 years ago. A period that is included to official devaluation of the dollar. While it's clear that the paper with George Washington's picture on it can no longer be called the almighty dollar. It's changing relationship with other major world currencies has been far from

uniform against the British pound for example we've actually improved. Ten years ago this week it cost two dollars and eighty cents to buy one pound after the dollar's second devaluation in February 1973. The exchange rate for the pound was down to two dollars and forty eight cents. And as of yesterday the still faltering pound was down to $2 and 9 cents which means the pound has lost about a quarter of its value as compared with the dollar in the last decade. And that's just about the end of the good news. Across the Channel. The French franc has continued to gain against the dollar worth only 21 cents in 1965. It moved up to 22 cents in 1973 and 24 cents now a total increase in the price of perfumes and truffles of about 14 percent even before you allow for France's own inflation for the full 10 years the dollar has done even worse against the Japanese yen worth twenty seven hundred of a cent in 1965. The end gained nearly 50 percent by

1973 to 40 hundredths of a cent. But lately Japan's economic problems have been even bigger than ours and the yen has given up some of its gains. It's the only one of these currencies that has reversed its trend since 1973. The German market in contrast as Jess kept rolling along with a quarter ten years ago and 35 cents in 1973 the mark now commands 40 cents again for the decade against the dollar of 60 percent. But even that on American performance has been exceeded by the world's premiere money men. The Swiss Switzerland franc could be purchased for 23 cents 10 years ago after the $2 devaluation zip commanded thirty one cents. Now it takes 38 cents to buy one Swiss franc again for the crafty gnomes of zürich of fully 65 percent which means an awful lot of watches on the run in recent months. The dollar has been looking a little healthier for some thoughts on its present and possible future. Let's go over now and meet

tonight's special guest Paul a vocal. All of what I did you guys. Paul Volcker was named in May to Head New York Federal Reserve Bank the largest of the 12 Federal Reserve banks and the one that has sole responsibility for executing domestic and international monetary policy on behalf of the Federal Reserve Board and the Treasury. He came to the job after a year in the academic pastures of Princeton following five years as undersecretary of the Treasury for monetary affairs. Mr. Bowker is also about the only economist tall enough to stand head to head with John Kenneth Galbraith and still not see eye to eye with him. Paul when you were appointed to your present post. You said you thought the dollar was undervalued as compared with other currencies. Do you think it's undervalued today. Well it's come up in the past five or six months and I think that's a healthy thing. Get a little suspicious that it may still be a little undervalued relative to some currencies certainly but it's in the.

Zone with that's more debatable than it would have been some months ago. In a speech you just made at Princeton New York city's controller house and gold and said the impact of his city's defaulting on its debts next month will be felt in both nation and worldwide money markets. How much damage would you expect. Well the. Fact is nobody knows very well it's and it's it's fraught with uncertainty. Much would depend upon how it was handled and become increasingly fearful that of the fault. Would be increasingly serious partly because it's very difficult to handle Well I think. It's going to be good business for the lawyers. If it happens a great many competing claims but as you get some fleeting claims winding through the courts. There's a danger of a good deal of confusion in the lay and subtly. And I think the uncertainty of that sort is bad.

In your judgment what is now the most reasonable solution for this problem. Well I've been out of touch for four hours so I don't know quite why. It has gone on in that interval and it's kind of almost minute to minute situation but I think the. Solution that is. Being. Pursued now. Very drastic action which is necessary in the city and in the state to get its budgetary situation. Back in balance that can be done fairly promptly for the state for the city it's going to take a while. And it takes some very tough action and a variety of directions taxes. But your thoughts. And the rest against that background. I think there is a possibility of enjoying an exchange of securities. Perhaps I understand the current thinking in the city involving. Some moratorium of

securities are not exchanged I don't pay you anything just are you not in default. Well. I'm not going to quibble over particular words I'm not sure it implies of interest will not be paid. One of the things I remember about this situation is. The securities are going to be paid eventually and I think they will be paid with interest with little interest as promised. Well what's full interest is probably only as security has mature then it's it's a question of what an appropriate rate of interest is. But they won't negotiate a lower rate of interest you think on the securities. Well part of this exchange particularly with some of the institutional investors in the banks I think will involve a lower rate of interest certainly but on some of the securities they have. That's the part that would be done voluntarily and part of this in a sense is. A contribution of one call so that through accepting a lower rate of interest. I want to ask you to define voluntarily. But from the standpoint of the rest of the country.

Do you think New York has now done enough to warrant federal have been observing the situation closely as you can imagine for some months. And I think city and state are now taking serious measures. And in order to prevent the situation from. The. Current to the point where it would have serious repercussions. For the rest of the country in this self interest I think the reason you're all interim support is needed to permit these plans to be carried out. Paul let's turn to the rest of the economy. You said earlier this year that you would be mightily concerned if the deficit in the federal budget went over 80 billion dollars according to Congress's reckoning this week. It's likely to top seventy two billion. How concerned are you. Is this likely to destroy our recovery from recession. Well I think it's big. I don't think it's going to destroy the recovery from the recession. The trouble with these deficits. Not so much the size of the deficit today. And there's a lot of unutilized capacity in the economy.

But are we on a course that carries us continuing along with these kinds of deficits as the economy does recover and the economy is. Just begun to recover it's been recovering rather vigorously for some months. And it's certainly time looking ahead to begin seeing reducing that deficit and I would remain very disturbed of those deficits will get reduced as we move ahead and as the economy moves. Given the present situation what are some of the details of your own economic forecast for the next year or two. Well. That's a rather large question now that we have interest rates. We've got some inflation built into the system and. Price rises are going to go away overnight but I think we begin seeing some hopeful signs that we're at a point here where we can begin getting a grip on the situation. Part of this frankly I think is in New York City New York State. We've had overblown expectation was. All around the country. Including in the areas that I come from it being deflated because we have to be

deflated. And. I think this will begin changing expectations I hope it will I think we may be kind of turning point here a year from now would you expect inflation and interest rates to be lower than they are now. I would hope inflation is lower now what interest rates do or. They're very close to the low point of the recession right now. If we have a vigorous. Continuing economic recovery. That typically is not accompanied over that long a period of time with lower interest rates. But I say that against a perspective of interest rates generally. I'm not talking about we could municipalities have a very high interest rates and particular types of credit. Interest rates generally for credit not low historically but they're lower than they've been for some little time and the inflation rate. If you think you have trouble in New York it's nothing to better the trouble I could be in and Owings Mills about in what our panelists

have a go at it. So let's start with Frank Caprio. Well you seem to have alluded to the fact that these deficits can't continue. Billion dollars this year equal amounts next fiscal year perhaps for I think let's say seven. And yet I gather that you think that New York City may have done some good in terms of a revulsion against I guess fiscal indiscipline and that we may be at a watershed that under a lot of pressure very quickly and I hope we're in a war and I think this is New York. But if we're not. ROBERTS Now you know we're just going to inflate continuously it's going to go. Faster and faster we're all going to be in trouble be awkward just be a symbol of trouble we're all being. One of the issues that is seems to be very popular and would no doubt be of interest to our viewers

as a discussion that's been very popular this year in the capital shortage. People claim that the amount of money that has to be spent over the next 10 years is enormous compared to the amount of saving that will be available to it. Is that is it really true that there is a capital shortage or as there is a true simply that people are adding up so many uses for funds that it's far in excess of what the markets will allocate through a fair interest rate. Well I think you could. Be a little deluded when you go around adding up all the money that somebody says they want or would like to have. You get an enormous figure. There's no question in my mind of the need for capital are going to be enormous. I think this economy has really had enormous potential for generating savings when it's operating well. That sounds too complacent. I think there are very serious problems in this area and I think particularly with a shortage of equity capital. And B the tax system for many years is borne down pretty hard on equity capital.

And this is something that's crept up on us over a long period of time it's been aggravated by inflation. But I think that we have to think about very seriously how do we get more real risk capital. And that's where the borrowing may be as much as on the total. Well Paul with the economy recovering and inflation coming down a little bit and interest rates short term rates particularly coming down sharply recently. Why don't you think the stock market is the haven better. And do you think it will start behaving better soon. Never. I know. The traditions of this program. But I get a bag out of that wood I think the stock market has obviously felt inflation. Profit margins have been squeezed. We've been in a period of some uncertainty that's not good for stocks but I'm not going to go. And see economy performs better stocks will do better. Paul even if you're a reluctant panelist let me ask you a much easier question for you. What rate of money growth would be appropriate for the next.

Oh that's easy to answer here you will be an easy one because the Federal Reserve for better or for worse is now in the business of announcing. What they think is good for the year ahead so every quarter often Burns watches up to Congress. And gives rather precise. Numbers and then do only one voice on these matters. Oh well the committee the Open Market Committee. Sits there and makes a judgment so in the sense in the end you come out with a figure of five to seven and a half percent for one particular version of the money anyway this year. And I think that same. In the sense in the middle it's not a figure which is designed to permit inflation to increase. Neither it is a figure that is designed to squeeze the last drop of inflation out of the economy next month is too much momentum built into this. Let me ask you another question about the Fed and. The banks in New York came under some early criticism for being flinty hearted and so forth but in fact it may be more valid to say that they were too

complacent for too long this New York public developed. Isn't there some way the Federal Reserve system could have taken a more active role in alerting the country to this growing peril. Who well. I doubt it. It may sound self-serving but the Federal Reserve likes to stand back from the actual decision of who gets how much credit the bank lending. It's not up to the Federal Reserve it's not up to a government bureaucracy to make that kind of decision and say. Saying that I'm not necessarily implying we would have been so wise who. Are forcing it at the right time either but it's not our job. We try to control the total amount of credit total amount of money. It's up to the banks it's up to private enterprise will you. Thanks very much Paul Volcker for coming down and speaking with us tonight about this problem that if we're. To believe everything we've just heard is possibly moving in the right direction for a change. And thanks panelist for joining us I hope you'll be back with us next week. If you're making a list of the most powerful men on

Wall Street the man with whom you might well start your list is Donald Regan the chairman of Maryland. You just come up with some radical and highly controversial proposals that could affect every investor in America. We'll be on the inside story from Reagan right here. Meanwhile this has been last week. I'm Louis Rukeyser. Good night. If you would like to obtain a written transcript of tonight's program. Send $1 to transcripts of Street Week Owings Mills Maryland 2 1 1 2 1 7. That's one top two transcripts. Wall Street Week Owings Mills Maryland 2 1 1 0 1 7. Residents of Maryland. Please include four cents sales tax.

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