In Hub, a vital voice on policy

Boston bank chief wins national, local adherents

Boston Fed leader Eric Rosengren is a constant presence at economic meetings. (Erik Jacobs for The Boston Globe)

Flash back to a year ago. The US economy was slowing, but employers were still adding jobs. The Dow Jones industrial average remained above 13,000. Oil prices were taking off. And policy makers at the Federal Reserve agreed that only a modest cut in interest rates was needed to keep the economy on track.

All but one. Eric Rosengren, little more than four months into his tenure as president of the Boston Federal Reserve Bank, made the lone call for more aggressive action to offset the impact of turbulent financial markets, plunging home prices, and an emerging credit crunch. His colleagues, he argued, were underestimating the threat to the broader economy.

That dissent now looks prescient, with a deep recession underway and the Fed yesterday slashing its benchmark interest rate almost to zero, trying to revive the economy. It also thrust Rosengren into the spotlight and signaled the reemergence of the Boston Fed as a prominent player not only in New England, but on the national economic scene.

Since his appointment as Boston Fed president in July 2007, Rosengren has dramatically raised the profile of the institution, revving up its research and community development units to tackle such local economic issues as foreclosure prevention, skilled worker shortages, and poverty in Springfield.

He is a regular on the speaking circuit, addressing New England business groups, community groups, and groups of economists. He helps interpret economic reports for Governor Deval Patrick, who e-mails them to Rosengren seeking plain-English explanations. Rosengren even recently briefed Boston city department heads on economic conditions, said Mayor Thomas M. Menino.

"He's making the Federal Reserve Bank a part of the community, showing that it's not some foreign agency from Washington," Menino said. "He's a figure we can see and hear and touch and seek advice from."

Rosengren has also emerged as a key advocate for aggressive action by the Fed to battle the effects of the financial crisis. For example, even as soaring energy prices last summer put pressure on the Fed to raise interest rates to restrain inflation, Rosengren argued that oil price shocks were transitory and the Fed needed to maintain low rates to prop up a fragile economy.

And in September, when credit markets froze and panicked investors began pulling out of money market funds, the Fed's Board of Governors turned to Rosengren to run a lending program to provide the cash the funds needed to remain solvent. In 10 days, the Boston Fed lent more than $150 billion.

"The way you influence Fed policy is through your arguments, and he's been very influential," said Ethan Harris, cochief US economist at Barclays Capital in New York and author of "Ben Bernanke's Fed," about the Federal Reserve under chairman Ben Bernanke. "Rosengren was one of the guys who caught on very early to the dimensions of the credit crunch, and he's been right."

Rosengren recognized the potential impact of a credit crunch because he lived through one. As a young economic researcher at the Boston Fed, he studied how bank failures following New England's real estate bust of the 1980s made a bad recession much worse, because companies couldn't get routine loans they needed to stay in business.

In many ways, Rosengren, 51, finds himself at the right place at the right time as he helps fight a recession brought on by malfunctioning financial markets. Having followed his work on the New England credit crunch with groundbreaking research on the Japanese banking crisis of the 1990s, he became a leading expert on how problems in the financial system can spread to the broader economy.

"There's very few people who know as much about the business of banking as Eric," said Anil Kashyap, a professor at the University of Chicago's Booth School of Business.

Rosengren has served as president since July 2007, overseeing an institution of about 900 employees. The Boston Fed, like the other 11 regional banks in the Federal Reserve system, plays a variety of roles, including regulating banks, conducting research, promoting economic and community development, distributing cash to banks, and running the system that keeps money flowing between financial institutions.

Federal Reserve banks operate as nonprofit corporations, generating revenues from fees they charge banks for services and interest from loans and other holdings, such as government securities.

Regional banks also develop specialty areas of research, typically related to the local economy. The Boston Fed, for example, is known for its expertise in financial services, particularly mutual funds; behavioral economics, studying how people make decisions; and the housing crisis, including the risky mortgage loans known as subprime.

Rosengren has moved quickly to establish the Boston Fed as a key player in the region, reaching out to political, community, and business leaders. In August, the Boston Fed brought together a score of lenders and thousands of borrowers at Gillette Stadium in Foxborough to help prevent foreclosures. It is working with the Greater Boston Chamber of Commerce to devise strategies to attract and retain young, skilled workers for the region's knowledge economy. In Springfield, it recently completed a study on the city's stubborn poverty, the first step to help turn around the long-struggling community.

"This is a guy who thinks of economics as more than theory," said Governor Patrick. "He's out there working."

Rosengren grew up in Ridgewood, N.J., a New York suburb, and came to New England to attend Colby College in Waterville, Maine. He had originally planned to become a lawyer, but a summer job in the Maine attorney general's office changed his mind.

"People weren't all that happy coming to work, and that was a sign I wanted to try something different," Rosengren said. "So I became an economist."

After graduating with highest honors from Colby, Rosengren won a Watson Fellowship to study efforts in Australia to regulate that nation's freewheeling trucking industry. He spent a year barreling across the continent with truckers, and concluded, "They definitely needed safety regulations."

Rosengren returned to the United States to pursue his doctorate at the University of Wisconsin, which specialized in public policy and data-driven economics. Unlike many graduate students of that era, Rosengren wasn't interested in theory, but in how the economy works in the real world, said Mark Gertler, one of Rosengren's professors.

Rosengren worked as a teaching assistant in a money and banking class, a job that required him to run the Federal Reserve in a simulation of the banking system, said Donald Hester, who taught the class. Students operated banks, and Hester introduced financial shocks over the course of the simulation.

"The game is set up so some banks fail," said Hester, "but Eric was very successful in guiding the system."

Gertler, now an economics professor at New York University, described Rosengren as serious about his studies, but fun-loving. Mostly, Gertler said, he remembered Rosengren's laugh.

That laugh, deep, hearty and rollicking, explodes from Rosengren's chest. It carries through the room and makes a lasting impression on most who hear it. He is personable and gregarious, enjoys a beer, and can really work a room.

Although Rosengren has a reputation as a fearsome player, the slight spread in his physique made Art Rolnick, research director at the Minneapolis Fed, confident that he could prevail in a recent tennis match.

"You can quote me on this," said Rolnick. "I'm in much better shape, and you would think he wouldn't be able to take me, but he cleaned my clock."

Rosengren first joined the Boston Fed in 1985, as a researcher in the financial markets section. A few years later, he began a collaboration with Joe Peek, then a visiting scholar at the Fed and now a professor the University of Kentucky.

Beginning with a study of the New England credit crunch, Rosengren and Peek would slip into a small room off the research department on the eighth floor and bounce ideas off each other, Peek recalled. These discussions would often turn into arguments, with each trying to find data to support their views.

"It was the best atmosphere I was ever in for research," Peek said. "Eric argued, he listened, and he was very open to people disagreeing with him. He only cared about getting the right answer."

Peek and Rosengren next studied the Japanese banking crisis of the 1990s, and tackled a question that economists had long debated: whether banking downturns hurt the larger economy or just tend to happen during an overall downturn.

Peek and Rosengren found that even though the US economy was expanding, American real estate markets in which Japanese banks were major lenders were struggling. The reason: Japanese banks, needing to conserve capital to ride out the recession in Japan, reduced their lending, cutting off the flow of credit that local businesses depended on to grow and hire.

The Japanese banking crisis, which led to the long period of stagnation in Japan known as the "lost decade," is frequently raised as cautionary tale for the current US crisis. Many economists believe Japanese policy makers did not act aggressively enough to support the banking system and stimulate the economy.

Rosengren may have had these lessons in mind when he cast his dissent a year ago in favor of more aggressive action by the Fed. He said he did not do it lightly.

"You shouldn't do it unless you strongly disagree, and that was a time where conditions were such that I disagreed strongly," he said. "It's not an easy thing to do, but I did it because it was the right thing to do."

Robert Gavin can be reached at rgavin@globe.com.