The Fed's Lone Star Loner
by Jack Pendarvis and Charles McNair
Georgia Magazine
Sept. 2002

A cloud appears on the horizon—a fearsome dust devil surrounding the hot-hoofed pinto ponies of the Hawk Gang, the orneriest bunch of varmints you've ever seen. They're coming to raise your rates—to pry the gold out of your mama's teeth, to turn you upside down and shake the last nickel outta yo' pockets. Townsfolk dive for doorways and close the shutters on shop windows. The clock strikes high noon. In the distance, a hero appears. Spurs on the wooden sidewalk signal his arrival. His black cowboy boots glistening like the bottom of a scorched coffeepot. He hikes his dungarees. The Texas sun glints off mother-of-pearl buttons on his red-and-white cowboy shirt. It's Lonesome Bob McTeer. He's here to save your bacon.

There was such a showdown just three years ago, but Georgia-born and Georgia-educated Bob McTeer (BBA '63, PhD '71) laughs to hear it described in cowboy prose as purple as the sage. But them's the facts, ma'am. McTeer faced down the Fed at its most hawkish time. And he did it alone, making a stand for free market processes and earning a reputation as a maverick for his trouble.

Twice back in 1999, the Federal Open Market Committee wanted to increase interest rates. (The FOMC is the key group of advisors to Federal Reserve Chairman Alan Greenspan, and they ultimately decide monetary policy for the nation.) Back in '99, the FOMC just knew that record lows in unemployment meant inflation ahead. But one man on the committee had the gumption to say that times were different, times were a-changin', that the FOMC didn't have all the answers—in fact, no one did, about the New Paradigm, the new economics driving the nation. He even dared to say that letting the market alone was a good thing. That one holdout was McTeer, the president and CEO of the Federal Reserve Bank of Dallas.

"It's rare to dissent, but it's even rarer to dissent on that side," says McTeer. "The first thing that happened is that Newsweek did an article and called me the 'Lone Star Loner.' A little later USA Today called me a dove, which smarted at the time. But people put it together, and made me 'The Lonesome Dove' . . . well, I kind of liked the sound of that! For a couple of years, it was pretty apt. I was legitimately on one end of the spectrum. Now circumstances have changed, but what happens is, you get a label."

McTeer twists his ring. The silver frog is a reminder of the time when the label first stuck.

"When I was trying to explain the New Paradigm that I saw emerging, I'd use the recipe for boiling a frog. You don't boil a frog by dropping him into boiling water. He'll jump out. Instead, you drop him in cold water and raise the heat. The frog won't jump out because he doesn't know his paradigm is shifting. "That's how my frog became the unofficial mascot of the New Paradigm Economy, the years of economic boom we had in the second half of the '90s. The frog comes in handy, because 'paradigm' is a pretty big word for a country boy." McTeer exudes a savvy mix of country and city in his black boots, immaculate machine-washed denim, and pearl-buttoned cowboy shirt.

"I have the soul of a songwriter, sort of a Texas blues person—but there's one small hitch," he says. "I don't have any of the talent. You'd think I could have been born with a little of it.

"I did grow up in Ranger, Ga., which only had about a hundred people in it, and most of them were back in the country. You don't even have to slow down to go through Ranger. I spent my first seven grades in a three-room schoolhouse. But my dad was not a hunter or fisher, and I never learned. I never learned to milk a cow. I never learned any of the things you learn on a farm."

All the same, John Ford himself couldn't have come up with a better hometown for the Lone Ranger of Economics, and McTeer isn't above playing to the image a little bit, if it helps get his message across.

"I'm leaving here tomorrow to make a speech at the Forecasting Club of New York," he says. "Now I've made speeches in New York before to national audiences, but I've never made a speech to a bunch of New York—just New York—economists. So, naturally, I'm bringing my cowboy boots. I figure they want to see the guy who came in on the turnip truck. I will wear a suit with my cowboy boots. But they'll get the picture."

Even more true to his maverick image, McTeer does the unthinkable —he writes his own speeches. There's an honest, rough-hewn quality to the work, and much subtlety. A listener, transfixed by a bracing, jargon-free love of language, becomes like McTeer's famous frog, poached in sophistication before he knows it. McTeer throws in his own salt ("You can create lots of jobs by substituting shovels for bulldozers. If that's not enough, substitute spoons for shovels.") And he adds spice to his talks with quotations from some of his favorite outlaws—everyone from Merle Haggard and Townes van Zandt to Richard Pryor ("Who are you going to believe . . . me or your own lying eyes?").

Not everybody likes their economics spicy, of course. There may be a few skeptics in the audience at the Forecasting Club. And the Hawk Gang is out there somewhere right now, coming out of hiding, sniffing the air like prairie dogs. Given the recent economy, some are more confident than ever that they were right all along. They'd like to paint McTeer as the proprietor of an illusion. And McTeer admits that the environment has changed since those days of long, cool drinks at the New Economy watering hole, but he refuses to make it Lonesome Bob's Last Stand.

"I don't think the economy was a mirage; I think the stock market was. But that doesn't matter," says McTeer. "All the recipe books are still out there. The technology hasn't gone away. We just had trouble finding a way to make it profitable. But Old Economy companies are using the technology now, and they're transforming themselves.

"We've moved from 'early bird gets the worm,' to 'second mouse gets the cheese.' I'm a little disappointed that it seems so hard to make the Internet profitable. Technology got ahead of business. The stock market has wiped out a lot of wealth. I guess it's wealth that shouldn't have been there."

These things happen. It's a basic fact, to an economist. In fact, McTeer's early life exemplifies some of the rougher lessons of the free market culture he has championed. His grandfather, a blacksmith, was driven out of business by the arrival of the automobile. In the evolutionary process that McTeer later helped define as "the churn," McTeer's father Doyal started a filling station, catering to those same automobiles on Highway 411, a busy route to Knoxville. Business was so good that Doyal's Truck Stop became a fixture.

"The best way to describe it is, I lived on the side of the highway, right down the street from the service station and the truck stop," says McTeer. "I helped out, pumping gas, washing windshields." And he handled money, of course. "At the end of the day, my dad would make the cash register reconcile, and it always did."

Still, all the log trucks and college-bound Big Orange students in the world can't stop the churn from churning. "The churn keeps renewing us as a nation, it keeps us growing and dynamic, but it's painful if you're one of those bumped out."

McTeer's father learned as much when 411 was bypassed by I-75. It's clear that the renewal, not the pain, is Bob McTeer's focus. It's the stoicism of John Wayne in "The Searchers," something akin to the pure, diamond-hard Calvinism that got the first American colonists through their own tough times. McTeer's worldview, and his resolve, were strengthened in the 1960s at UGA, when the economic world was at war—on one side, the Keynesians of Harvard; fending them off, Milton Friedman and the Chicago school.

"We would call Milton Friedman 'conservative' now, but 'classical liberal' is more accurate," says McTeer. "The old dichotomy has diminished then, but it was in full force when I was at the University of Georgia."

The UGA years—which included an undergraduate degree in 1963, followed by a Ph.D. in Economics, completed by 1971—gave McTeer his spurs. He recalls professors who charted his path, an endless horizon of hard work and late hours, an occasional beer at a local establishment.

Another young man who, after grad school, would also go west, remembers McTeer in those years.

"It was a special time at Georgia," says U.S. Sen. Phil Gramm (BBA '64, PHD '67), who, like McTeer, is part of the history of Texas. "We spent a lot of time talking about economics . . . and as students since the beginning of time are wont to do, we solved all the world's problems."

Gramm, who says he's known McTeer "half my life," remembers him as "the great athlete of the class," a "good tennis player, a very good basketball and football player," who was "smart, incredibly hard-working, very good at working with people. That's a combination of abilities that tends to make a success in America."

Gramm remembers economics students enjoying a McTeer diversion called Leisure of the Theory Class. (The name is a spin on the famous economic conjecture known as Theory of the Leisure Class.) LTC members played sports, then huddled in Athens bars to drink beer and talk economics.

Those years helped shape a very capable man, to the senator's point of view.

"Bob is a very popular Fed president, very highly regarded in the business and banking community," says Gramm. "He's practical, has excellent communication skills. He's a very fine writer. He tends to talk about economic matters in terms people understand and relate to. And in my high opinion of him . . . he'd make an excellent chairman of the Federal Reserve."

It is apparent that McTeer gravitates toward the real and pragmatic over the theoretical and technical: "I don't think I realized my education was special until later when I got into policy-making and positions where I was debating people—and I realized I had a set of beliefs that I didn't appreciate earlier but that held together. My Econ 606 professor, David McCord Wright, said about a thousand times that 'growth comes through change and causes change.' I probably rolled my eyes the last few hundred times he said it, but obviously, the message stuck."

McTeer's career path since leaving the University of Georgia has taken him from a supporting role at the Richmond Fed in the 1970s to the Baltimore branch in the 1980s to the top job at the Dallas Fed, which he has held since 1991. There have been more than a few murmurs that his path might one day take him all the way to Alan Greenspan's spot, though McTeer doesn't think so.

"As far as my position, it was put most flatteringly by Larry Kudlow." Kudlow, a primetime commentator for CNBC and recent Wall Street economist, has called the Dallas Fed "a glittering jewel inside the Federal Reserve System," and has even personally recommended McTeer to George W. Bush as Fed chair.

"Kudlow can be a bit irrationally exuberant," says McTeer, "so you've got to take all of that with a grain of salt."

In any case, McTeer is so firm in his foundations that he isn't afraid to look 20 years into the economy's future.

"Just as agricultural employment went down from 90 percent to just about 3 percent, manufacturing will continue to grow, but as a percentage of the economy it will continue to decline," he says. "Various kinds of services and entertainment will continue to grow in relative importance, and biotech will be increasingly important. The medical field will be mining that genome and doing all sorts of miracles with health and well-being. And we'll all have more leisure and enjoy life more."

McTeer may be remembering Doyal's Truck Stop when he hesitates and adds, "Except something always comes along, and I don't know what that something will be. The '90 recession was caused by Iraq invading Kuwait. We just had this one caused by September 11, and there are so many people in the world plotting right now to do us in. We do have to worry about that."

There is no doubt that the chaos in the economy, and in the world, has made the frog want to jump out of the pot. With the War Economy, everybody knows that the paradigm is shifting. McTeer understands why some of the hawks seem to have "told-you-so" smirks on their beaks.

"With the new economy, we were eliminating redundancies, cutting out middlemen, getting by with lower inventories and leaner supply chains. We were producing more with a given labor force. September 11 has really damaged that. Now, suddenly, without getting any more security than we thought we already had, we're going to be putting a lot more resources into the military, and into security at airports, borders, just about everywhere. We're going to be reintroducing some redundancies, so the economy's taken a big one-time hit.

"I mean, let's say a million people are engaged in giving wonderful back rubs at $20 an hour. So there's a lot of pleasure in the world. Now let's take that million people and put them in the airports checking baggage and pay them $20 an hour. That doesn't affect GDP [Gross Domestic Product], but all those back rubs aren't getting done. The pleasure has gone down, the GDP hasn't.

"Before September 11, I would have argued that the reverse was happening. Medical breakthroughs in biotech and so forth were improving our lives, while not necessarily improving GDP. That's still going on, but we've had this sudden increase in the overhead cost of the economy that's made us poorer without making much of a dent in measured economic growth."

McTeer's common sense for the common man has made him a vocal and vigilant framer of the New Paradigm.

"Within the Fed, I guess I have been more outspoken than my colleagues on a lot of issues. I just find it fun to go out and talk, whereas everybody else is so buttoned down and careful. People got used to saying the economy can't grow faster than 2.5 percent without inflation, and people got used to saying you can't push employment below 6 percent or at least 5.5 percent without inflation. That became a mantra and nobody ever questioned it.

"So, I come along and say, 'Inflation's not going up, so let's not tighten, let's see, let's wait and see,' and that was regarded as very naive, because they were certain it would go up, and I was just asking for trouble.

"Well, I lucked out. It worked out beautifully. Chairman Greenspan was not nearly as optimistic as I was, but he gets a lot of credit for being optimistic, and for not tightening in a period where it shouldn't have happened. What's amazing is the depth and breadth of that guy's knowledge, and how he is able to demonstrate that knowledge. And he has the thing that makes a good Fed chair—not knowledge, but courage. In the last couple of years, the other side thinks they've won it back."

McTeer gives his frog ring another twist. "Time will tell," he says. "Part of it is how you view the evils of inflation versus other evils. That's not really an economic thing as much as a value judgment thing."

Value judgments, and values, are what being a cowboy folk hero is all about. McTeer knows from experience that people, if given the chance, will make better lives and a better economy for themselves. Just watch How the West Was Won. All they need to learn to do is ride out that churn and come out better, and McTeer seems genuinely excited to be along for the ride. He can also make those around him excited, and that may be the most important of his gifts.

"Bob stands out in a crowd as someone who is willing and able to see things a different way," says Jack Guynn, McTeer's colleague on the Federal Open Market Committee and head of the Federal Reserve Bank of Atlanta. "He has a wonderful, practical aspect to him, a nice marriage of the practical and the theoretic. He is his own person, and he's very comfortable being different." Lonesome Bob wouldn't have it any other way.

Reprinted with permission of Georgia Magazine.

Illustrations by Jack Davis. About the Authors Jack Pendarvis is a writer from Bayou La Batre, Ala., and Charles McNair is a Pulitzer Prize-nominated novelist, living in Atlanta. This story first appeared in Terry magazine, which granted reprint rights.