susan s bies : retirement savings, equity ownership, and challenges to investors speech by ms susan s bies, member of the board of governors of the us federal reserve system, at a joint presentation to the national economics club and the committee on the status of women in the economics profession of the american economic association, washington, d. c., 27 february 2003. * * * good afternoon. i am delighted to be here to speak about some of the new challenges and opportunities that american families face from changes in retirement savings and equity ownership in the united states. i know that many of your members are economists who work in policy advisory roles in government. as an economist who enjoys getting back to her ph. d. roots, i want to also address how traditional economic theory about consumer behavior and corporate governance are, at times, in apparent conflict with the practices that we observe. this in turn raises issues about the appropriate economic and policy frameworks for decisionmaking. there has been a dramatic shift in employer - sponsored retirement plans over the past two decades - a shift from plans in which pension managers controlled most investments and retirees received preset benefits to plans in which workers directly control their investment portfolios and keep their investment returns. many american families have responded by purchasing corporate equity - frequently through investments in mutual funds or other institutional accounts. with increasing control over their pensions, and broader participation in equity markets, americans have far more options for financial planning than they did twenty years ago. but with the new opportunities come risks and responsibilities. households with more control of their resources for retirement have a greater need to employ sound financial planning. moreover, though many might be unaware of it, stock - owning households share responsibility for oversight and governance of the corporations they own. the headlines of the past couple of years have highlighted the importance of these risks and responsibilities. we have all witnessed a precipitous fall in stock prices and some spectacular corporate failures and have read accounts of retirement savings accrued over long careers only to be lost in a matter of weeks. some of those corporate meltdowns were accompanied by the revelation of shoddy auditing practices and stock analyses tainted by conflicts of interest. and those who should have been ensuring sound corporate governance were often unwilling or unable to protect the interests of shareholders. recent developments suggest that households may, in coming years, take on even more responsibility for their retirement saving and assume additional responsibilities for corporate governance. the president's recently released budget for 2004 would considerably expand taxpre

you don ’ t teach the banking system a lesson by letting it collapse once in a while, but by ensuring proper regulation and supervision, even if some people don ’ t like it. similarly, you don ’ t make countries improve their fiscal discipline by making it possible for them to easily get away with restructuring their debts. this may actually create a disincentive, i. e. an incentive not to adopt the corrective measures which are needed to reform the economy. this is what actually happened in the case of greece last spring. as talks of restructuring spread from some euro area capitals, the greek government started thinking that this could be a nice way to go easy on the adjustment effort and it delayed some of the measures agreed in the programme. questioning the signature of the sovereign has very negative effects on the confidence of wholesale and retail investors, both at home and abroad. since public debt instruments play a key role in domestic financial markets and are an essential means of saving for the population, restructuring has very large wealth effects, with direct repercussions on the economy and also on society and on the democratic system. it is no coincidence that nearly all countries which have restructured their debt in the past were relatively poor and often undemocratic. as a result, psi, when applied to states, may end up costing taxpayers even more. in particular, additional financial assistance must be provided to a country which restructures its debt in order to avoid an abrupt interruption in the flow of credit and the collapse of the domestic financial system. such additional assistance may even be as large as the savings obtained from the restructuring of private sector credits. the 21 july agreement with greece, for instance, which aimed at saving around €50 billion of debt held by the private sector, required the disbursement of about €20 billion of extra assistance to recapitalise the greek banking system to avert its collapse and a larger amount to enhance the credit rating of greek bonds to be used as collateral for refinancing with the eurosystem. what ’ s the solution in this case? to prevent countries from getting again into the same difficulties as they experienced prior to the crisis we need tougher governance, with more stringent rules – not only on fiscal discipline but also on banking supervision – automatic sanctions and greater stringency on domestic decision - making for countries which request financial assistance. the negative experience with the stability and growth pact over the last decade should not undermine efforts to further strengthen the