david: he grew up in a middle-class family in washington with a father who talked interest rates with him instead of sports, and a mother who taught him a love of learning. roger ferguson took his pension for learning about the world of finance into harvard, where he was one of the first african-americans to get both a juris doctor and phd in economics. ferguson was tapped to be vice chair of the federal reserve, the only board member there when terrorists hit new york and washington on 9/11. now, roger ferguson leads tiaa, managing over $1 trillion in assets for five million teachers, researchers, and

medical professionals, drawing on all his learning and experience to ensure financial security for retirees and avoid what he sees as a developing crisis in america. this week on "bloomberg big decisions," roger ferguson. roger ferguson, welcome to "big decisions." roger: thank you. it is a pleasure to be here. david: you have devoted your career to the subject of financial security. why? roger: what do people want in their lives? first and foremost, they want security. one of the areas that is most mysterious to people is finance. and so, the notion of creating security around this thing that is a little mysterious becomes very, very important. david: this idea, how deep is it inside of you? i know that you have talked about your father, who grew up during the depression. that made an impression on you. roger: the depression made an impression on my father because it was a moment of incredible

financial insecurity for millions of americans and around the world. and he wanted to understand why this was the case. he was not an economic historian, but he was really interested in these banks, how did they work, why did they fail? in our household, when most dads are talking about sports scores, golf games, my father was fascinated with interest rates, banks, bank capital and what made a bank secure. david: it was also important he share that with you. roger: absolutely. as i got older, and again, we had no money, but we would sit around our black and white tv eating popcorn on friday night, an african-american family with no money, and you think we had millions of dollars listening to them talk about what was going to be up and what was going to be down. it became a natural part of our lives, so the notion of financial literacy and financial well-being, that is what we used

to talk about, like sports, the weather, what aunt josie was doing. for me, it was bread and butter stuff. david: what does it take to have financial security over your lifetime, not just now, but for tomorrow? roger: great question. folks tend to focus on the saving part, but over the lifetime, we have to recognize that any individual may spend 20 to 30 years in retirement, so what they need for financial security in retirement is some source of guaranteed income they can't outlive. we call it lifetime income or an annuity. the whole point is frankly to make sure somebody else takes the risk, and an insurance company through an annuity can help create a steady stream that allows you to get a paycheck every week, every month in retirement. david: i have a former boss who said i want to run out of time before run out of money. roger: the truth of the matter is about half the people who

live to be 85 will run out of money before they run out of time, and this is why annuities are important. we have an increased life expectancy in this country that creates an increasing risk that somebody, half of us, may run out of money before we run out of time. that is one of the reasons tiaa exists, to make sure people have money as long as they have time. david: if you look at households across the united states of america right now, you have to go fairly far up the food chain before you find people with positive net income in a given month. they are borrowing money just to survive. how critical is that for a lot of our populace? roger: now you are taking it to the other challenge we are confronting, and it has been more visible, but confronting it quietly last 40 years, which is income distribution. you have two challenges. first is that middle-class wages have been stagnant for 20 or 30 years.

so, that is one challenge. the other challenge is we have other job classes where incomes have been skyrocketing. you put those two things together and we are confronting a large number of people who statistics show can't put together $400 in an emergency, and you have other people who are clearly making huge amounts of money and building up fortunes that are very large by historical standards. david: what are the causes that went into that phenomenon? is that technology, is that globalization, is it tax policy? roger: the answer is yes. to some degree it is technology because the jobs that used to exist have been replaced by new technologies. some of this is globalization. i don't want to overstate it, but we can't understate the fact that some jobs we used to do here that created solid middle-class incomes are now being done as part of the global labor force. tax policy has come into play. two or three times we have cut marginal tax rates on higher

earners, so what is to be done? first, recognize that some of these things cannot be undone. we are not going to undo globalization. we are not going to undo technology. i think what we have to do is educate people, which is a multiyear process, to work with new technologies and to recognize that even if technology has made some jobs obsolete, there will be new jobs. i always start with education as part of a long-term solution. in the intervening time, we can figure out what we can do around social safety nets, and confront the questions of tax policy, the real question of redistribution as well as part of the social safety net issue. david: you have responsibility for a lot of pensions, a lot of people, their retirement money. give us a synopsis of where we are as a country in providing for people's retirement.

roger: retirement is a challenge, if not a crisis. for some individuals, it is a crisis. that has been driven by three things. first, in the old days, 1940's, 1950's, 1960's, people have defined benefit plans. the company would provide for them. you would work for 25 or 30 years and you would get a salary in retirement. now far fewer than half of americans have access to a defined benefit plan. the second challenge is that the bedrock retirement for everybody, social security, is clearly under threat. in the last week or two, the social security trustees came forward and said in 15 or 16 years, we will find we can only pay three quarters of the benefits. the third problem that has been driving the retirement challenge or crisis is just as defined benefit plans have gone down and been replaced by defined contribution plans, those plans require people participate and

save. we have discovered, to your point, that people are simply not saving enough for retirement. david: is there a further problem you are seeing that even if they are saving, they are directing investments themselves? if it is up to me, i am not sure i trust myself. roger: one of the challenges in all individual-led savings, they tend to be pro-cyclical, so as the market goes up, they get more and more excited. and then as the market goes down, they get more excited. individuals tend to sell out at the bottom, they don't get back in in time. without a doubt, one of the challenges of retirement or savings is the fact people don't know enough about how to manage market cycles. david: is this a place where the government can help? that is to say, fine, you can set the money aside yourself, but we will limit the options you have? roger: my view is before the government needs to step in,

those of us running retirement plans already know a lot of the answers. we can structure our plans and away they give people the right outcomes. you put your finger on one of them, which is all the economics tell us if you give people fewer choices, they are likely to make better choices. secondly, we should use some elements of behavioral economics and have people automatically enrolled in these plans. and we should also use behavioral economics. as they make more, they should the saving more. that is called automatic escalation. the government can help by not dictating or mandating, but setting parameters to say it is ok to have automatic enrollment, automatic escalation, and we fully understand fewer choices are probably better. the final thing i think the government can do is to recognize that while we are talking about savings, equally important is what happens when you get to retirement, so having that income for life through the form of an annuity.

there are certain rules the government can put into place to make annuity easier to have as a retirement option. david: you were in washington, d.c. on september 11, 2001. what did you confront? roger: our most important role was to keep the financial system open and operating. ♪ david: you served as vice chair

of the federal reserve board. a very important position. what took you to the fed to begin with? roger: when i was young, we talked about my father and how he created financial literacy in me. he was very interested in interest rates. when i was 14, 15, 16 years old, lyndon johnson nominated andrew bremmer to be the first black governor of the federal reserve. i grew up in washington, d.c.. this was headline news in "the washington post."

for me, it was a twofer. it was an african-american guy coming from nowhere to be something important. i didn't know what quite what it was, but then it was the federal reserve. my father had been talking about interest rates and how they go up and down, and i found this government entity that sets interest rates. at a young age, 14 or 15 years old, this notion of being associated and understanding the fed became one of the motivating forces in my life. david: for many people, they would not think that is a straight line. that is not a normal career path. i'm not saying you necessarily said, i want to be a federal reserve governor, but did you have that direction in mind? roger: i always thought it would be interesting to be a federal reserve governor, but since i wasn't going to be an academic economist, it wasn't an obvious path.

two things happened in my life. one, i kept the fed policy in the background as something to read. then, i became interested in the law and regulations surrounding financial services firms. what took me, got me into being a credible candidate was an understanding of monetary policy and an understanding of bank supervision and regulation that came from working at davis polk and working at the financial institutions group at mckinsey and company. david: what did you bring to the fed that they might not have had? and what did you take from it? roger: great question. i think what i brought was the notion of diversity. not the physical diversity, though that was part of it. but remember, i said i was coming into this with a deeper understanding of regulations. when i joined the fed, most of the people on the board were academic economists and had that angle. i brought that to it.

frankly, a bit more of an international focus. i had a number of international engagements at mckinsey and company. i joined the fed in 1997. you may or may not recall, but that was at the height of the asian financial crisis. i was tasked with working with asian central banks to work through that, because i had more international exposure than others. the other thing i had done at mckinsey was i was interested in some of the payment systems institutions. fairly technical, arcane things, but the fed runs both the large dollar payment system and the small payment systems for individuals. at my point, i was the only governor who was really interested in that, so i became the person who was overseeing the regulation of the payment systems. david: you were in washington, d.c. on the morning of september 11, 2001. the only fed member who was there at the time. take us back to that. what did you confront? roger: the first thing that you confront, that anybody confronted, was this massive

uncertainty. one did not know what was going on, but you knew it had to be bad when both of the twin towers are on fire, and i turned on the tv and saw the second plane go into the second tower, and i looked out my window and saw smoke coming from the pentagon out my window. one knew that whatever was going on was big and had hit the financial capital and the political capital of the country, and everything was chaotic. so, you confront uncertainty. the most important thing to decide was that we at the fed really understood how the financial system worked, how fragile it could be, and what we had to do to make it resilient. this was centrally important because, back to the point i made about understanding the way payment systems operate, when the towers went down, that was right next to both the new york stock exchange and also bank of new york mellon, which is a

major payment system operator, so i knew the system itself would be in trouble. i decided our most important role was to keep the financial system open and operating. so, what did we do? a number of things parallel. first was clear communication, , therief, very distinct fed is open and operating. full stop. the fed stands ready to back the needs of the monetary system. that created a lot of confidence. then we had to live up to those words using a number of technical tools the fed has at its disposal. the third thing we had to do was make sure this severe crisis that was occurring in new york and washington did not span across the country and around the globe. so, it was leveraging every tool the federal reserve had, bringing currency to atm's in new york, keeping payment systems up and operating 24/7,

lending u.s. dollars at a massive scale to other central banks so they could lend to foreign banks that needed that money. for two or three days, it was basically flooding the system with excess cash, currency, excess reserves, and the federal reserve balance sheet, having gotten up to $4 trillion, i had to oversee it when it broke over $1 trillion on september 11. so it was a massive effort to keep the system calm and to maintain a high degree of confidence. fortunately, it worked. david: you served as vice chair of the fed. there was talk you might get moved up to chair. if that had happened, how would it have changed your life and changed your career? roger: in the unlikely event, i would have been a more public person. i happen to like the status i have now, which is i get to come on these great shows and talk about things, but i also walk up and down the street without

people knowing who i am. so that would have been very big difference. being the chairman of the fed is often taking the ultimate responsibility. the vice chair assists, advises, takes responsibility for a number of things, but the big monetary policy decisions, while there is a committee, they tend to fall in behind the chairman. we have seen now several very superior in my estimation chairs that have been central to helping us get through the crisis and move beyond. david: how do you assess the risks that the interest rates are so low it could be encouraging bad decisions? roger: we got to these low interest rates for a reason. we have observed that inflation is also relatively low and contained. the fed, as we are doing this taping, it is clear they will be patient, and that is the right decision. having said that, i'm sure the point you make is true, which is

when money is relatively inexpensive, what happens is that investors reach for yield, which is to say they look for one or another project in nominal terms that has a chance of returning more, so in hindsight, i'm sure there will be some investments where we look back and say too much went into the asset class or another asset class. but that, frankly, is the price to pay for keeping the economy itself going, and trying to keep inflation at a level that is consistent with the fed's long-term goals and objectives. david: what do you make of the student debt problem in the united states? roger: even for those who can manage the debt, it is forcing the delay of other decisions. ♪ david: education has loomed

very large in your life. your own education and your

concern about others. why is education so important to you? roger: we started talking about how my father brought financial literacy into my upbringing. my mother put equal weight on education. she herself came from a family that was not highly educated. she was very, very sharp. while her aunts and her relatives did not put much weight on it, there was a school principal who came by her house every morning to make sure that young alberta lawson got to school. so my mother taught me this notion that education is a phenomenal gift that somebody can give to you. her main message to me, while my father's message was save and invest wisely, my mother's message was stay in school, because education is the one thing they can't take away from you. that has proved to be incredibly true. that is where it comes from. david: you went to harvard, and

you got not just an undergraduate, you got a jd and phd in economics, if not the first, one of the first african-americans. roger: i think that is right. david: what was that to be something of a pioneer as an african-american from a middle-class family? roger: i was very lucky. i came along after brown versus board of education. i came along when affirmative action was widely regarded as the right thing to do. so, imagine being a young african-american guy who tests well at a point when the most elite schools were looking to bring more diversity on to campus. so, for me, being a so-called pioneer, i found harvard a very welcoming environment, in the sense that as competitive as it was, people really wanted me to succeed and give me a chance. i found it, frankly, invigorating, rewarding, and frankly, very nurturing. david: some people talk about critical mass. you did not have that experience? roger: i didn't. i was one of the very few.

i was one of two or three in all of the economics graduate school in my period. i have said being black is an important part of who i am, but it does not define all of who i am. i was not going to allow anyone else to define me by being in the minority. my view was i got into school. i earned it. my grades were good. i was not going to let being a racial minority in any sense undercut my sense of belonging. david: how did that affect your approach to diversity? roger: it affected it in two or three different ways. one, i talk about myself being a beneficiary of affirmative action, i don't look at bringing diverse populations in as an affirmative action activity. secondly, i have learned that having diverse teams ends up getting a better outcome. so even if you look around and think, i don't think everyone here belongs, the fact that you don't simply live and work in

an echo chamber, people all saying the same thing, allows you to make better decisions. david: you did not leave your commitment to education behind you when you went to harvard. you are very committed to it, to the present day. roger: absolutely. david: you have done work on challenges to education, including undergraduate. what are those challenges? roger: the biggest challenge that is left now around education is completion. in the 1920's, 1930's, the big challenge that we had was getting people through high school. we have now managed to get people through high school. then, we had a challenge around access to higher ed. now it turns out 90% of high school graduates have some exposure to post secondary education at some point in the first four or five years after they get out. we have taken care of high school. we have taken care of access. now, the big challenge is completion. we discovered on average only

about 60% of young folks who go into higher ed complete in four, five, or six years. the big challenge is no longer access. it is about getting people to and through schools. david: the challenge there is not that they don't just finish college, they also run up bills. they are taking on student debt, at community colleges and four-your schools. four-year schools. when you make of the student debt problem in the united states? roger: the individuals who often have the smallest debt load have the hardest problem, because those are the ones who did not complete. first, we have to focus on folks who take out small loans, but don't complete. that is one group. the second challenge around the student debt problem is for even for those who can manage the debt, it is also forcing them to delay other decisions, and so while young doctors and lawyers can maybe manage a debt burden $300,000, the way

they manage that is to delay buying a home, starting a family, or saving for retirement. we have two kinds of challenges and we have to attack each one separately. david: thank you very much. roger: thank you. ♪

manus: you watching the best of "bloomberg daybreak: middle east." the major stories in the headlines this week. stocks slumped across the gulf. geopolitical tensions rise as saudi arabia says to oil tankers -- two oil tankers were damaged in a sabotage attack. there are fears that conflict with iran could be in the cards. the minister of state for foreign affairs tells bloomberg cool heads must prevail. saudi arabia approves a plan to offer permanent residency to some foreigners. that as the imf says the kingdom might need to increase vat to battle the deficit. ♪