Enough about the President. Now, let's talk about me. The issue struck a chord with me because I've given many commencement addresses, including two at the nation's finest university, Texas A&M. For the first one, the A&M President, Bob Gates, gave me a much-appreciated book of Texas Flags. For the second one, almost two years later, he gave me another copy of the same book on Texas flags. I appreciated it too, but consistent with the law of diminishing marginal utility, I appreciated it a little less than the first one. No mention was made of an honorary degree.

As Chancellor, I gave several commencement addresses at the other universities in the Texas A&M System. No honorary degrees there either. While Chancellor, but not because of it, I addressed the graduating class of a very special high school in Joplin, Missouri. I looked forward to that one so I could tell some Janis Joplin stories. It turned out that Janis Joplin and Joplin, Missouri, had no connection to each other. I knew she was from Port Arthur, Texas, but I thought they may have named the school after her anyway. I got no honorary degree there either.

While still at the Fed, I gave commencement address at several universities-not in the A&M System-and one high school. No honorary degrees from any of them. So far, I was batting zero.  My first address was a special honor because it was Texas Woman's University, once an all-women college. Women still constituted a large majority of the student body. I'd always liked girls – let's drop the political correctness for a moment – and I was pleased that a whole university full of them wanted to hear my wisdom. By the way, I was formally invited by a neat lady, who was president of the university. She was neat, but not as neat as the current president, who is really something. Anyway, there was no honorary degree.

One unusual situation was when I gave the commencement address for Texas Lutheran University. They gave an honorary degree, but not to me. I made the talk, and Red McCombs got the honorary degree. To quote Roger Miller, "I was a man of means, by no means," but Red McCombs was a man of considerable means, which may have played a role in who got the degree.

Texans know Red primarily for his many car dealerships and other business ventures. Others may know him as a former owner of the Minnesota Vikings. The two of us had dinner with the president of the university before the ceremonies, and listening to Red McCombs' stories was a rare treat.

What I said above is true, but not the whole truth, which would include the fact that Red was also a scholar, a gentleman and a generous supporter of higher education, as evidenced by the McCombs Business School at the University of Texas. I know he's a genuine scholar because he used to read my stuff at the Dallas Fed and send me hand-written comment letters.

My biggest commencement honor was being invited by students of Midland High School, a very large and very good public high school in Midland, Texas. For a few years the Fed had conducted "Fed Challenge" competitions for high school students. The students would form a team, usually under the guidance of a high school economics teacher – there were two really good ones at Midland – and study the economy, learning everything that was relevant to an FOMC meeting. The competition was to conduct a FOMC meeting before Fed judges and then respond to questions from those judges.

The Dallas District had won the national competition the first three years with all three wins going to Bryan High School, one of two public high schools in Bryan/College Station, Texas, the home of Texas A&M. A school from another Fed District won our fourth year, and we were now in our fifth year of competition.

The Midland High School team won the District Competition and went to Washington to compete for the national championship at the table inside the Board of Governors building where the real FOMC meets. Well, you know I wouldn't be telling this story if the Midland team hadn't won, with a very cute female person playing the role of "President McTeer." Alan Greenspan presented the championship trophy.

Now, to get to the point finally, I was in the lobby of the hotel when the victorious Midland team arrived in what could only be described as a state of rational exuberance. After a round of high-fives and some recounting of some of the high points – high points of an FOMC meeting? – the students asked me if I would give the commencement address at their upcoming graduation. (Just writing that made me verklempt.)

I told them I doubted they had the authority to make such a request on behalf of the school, but I said if such a request did come from the principal, I would be inclined to accept. When the principal called a few days later and extended the official invitation, I happily accepted, even though by then I'd learned I'd have to cancel a bankers meeting with excellent live entertainment to be there.

You can find my address here on my web site.

Tired of coming away from these events empty handed (this was before the Texas Flag books), I made a bold request of the principal. I asked if he could have an inscription made of a T-shirt that designated me as an honorary graduate of Midland High School. I still wear that shirt proudly even though some college graduates smirk at the old guy wearing a high school shirt.

They gave me the T-shirt, but not an honorary degree on fancy, embossed paper. My record remained perfect – many commencements, no honorary degrees, either as President of the best Reserve Bank for almost 14 years or Chancellor of the best large state university system for over 2 years.

Five months after I retired from my second career and joined NCPA, the best little think tank in the country, I got a call from the president of Austin College, an outstanding liberal arts college in Sherman, Texas. He didn't say they wanted me to give a commencement address. He said they wanted to give me an honorary degree, and, by the way, would I give the commencement address as well?

I am now a proud holder of a "Doctor of Humane Letters" degree from Austin College. My pride is not lessened by diminishing marginal utility because it is the first and only.

One more thing: I've looked and I've looked at that embossed diploma. Nowhere on it does the word "honorary" appear. I am a "Doctor of Humane Letters," not an "Honorary Doctor of Humane Letters." What does it mean? I'm not sure, but I think it means I can write good, or at least humanely.

I haven't watched television for a couple of days; so I don't know how the flap turned out. But, if it didn't happen today, Mr. President, be patient. Your day will come.

It's good to be back in Hong Kong, the poster child for free enterprise and a stable currency. My first visit was to speak at a conference on currency boards, at the Hong Kong Baptist University.

How many Baptists do we have in the audience?

Me neither.

I was raised as a Baptist but I soon learned that being Baptist doesn't keep you from sinning; it just keeps you from enjoying it.

Back then, Hong Kong and Argentina were the two largest economies with currency boards-involving a hard peg to the U.S. dollar.

Argentina couldn't hold on as Hong Kong did.

I think the lesson is that fiscal discipline is necessary, as well as monetary discipline.

On my first time in Beijing, in 2003 I think, the dollar and the yuan were declining together.

Depreciation was probably appropriate for the U.S., with its huge current account deficit, but not for China, with its surplus.

I visited the Chinese agency in charge of maintaining the exchange rate, and they asked me to write something in their guest book. I wrote, very diplomatically, I thought, something like,

"Congratulations to China on its rapid growth rate. May our currencies remain strong together."

If only my friend, Tim Geithner, were so diplomatic.

The last time I was in China, in October 2006, I did a lengthy TV interview, in which every other question, it seemed, was whether the newly appointed Fed Chairman, Ben Bernanke, would be able to fill Alan Greenspan's shoes.

I said yes.

I think I was right, even before Greenspan's shoes shrank.

During my first China visit, I was part of a group received by the new Premier, Wen Jiabao.

He went around the room asking his guests for any advice for the new premier. Just before my turn, a distinguished Harvard Professor-as I recall–emphasized how important it was for the young males coming into the cities to work to bring their wives with them. He was concerned about social stability if too many unattached males were wandering around the cities.

My turn came next; so, I told the Premier that I thought the Harvard Professor had watched too many episodes of "Sex in the City."

(I don't think he got it either.)

More recently, my friend the Premier, has become more outspoken. At Davos, he pointed a finger, unnecessarily in my opinion, at the country most responsible for the worldwide financial crisis. Guess who.

And, more recently, he expressed publicly some concern about his country's U.S. investments, primarily in U.S. government securities. He said he was concerned about their safety.

If it's credit risk that concerns him, he should relax. We still have a printing press, and default is unnecessary, as well as tacky. If it's interest-rate risk he's concerned about, how low can rates go? Not much below zero.

They have already benefited from our going to near zero rates on their existing portfolio. New additions to their portfolio may be another matter.

China may diversify out of dollars, but all countries can't. They can only sell them to each other.

As long as the U.S. keeps running a current account deficit, surplus countries collectively will keep accumulating dollars. It's not a question of "will they continue to buy dollar assets?" If they don't accept American goods in payment, they must accept our debt.

It's not a separate question. The balance of payments always balances. The imbalance above the trade/capital line, must have an offsetting imbalance below the line. Our deficit and their surplus are the two sides to the same coin. It's arithmetic.

Turning now to the U.S. economy . . .

Officially, the recession began in January 2008 but if you're comparing its length to some norm, start counting around September, when the recession worsened. That makes it about 6 months old.

Employment declines were fairly mild until September, when they accelerated significantly and the momentum is still strongly downward.

The main dilemma we have is what Keynes called the Paradox of Thrift. Consumption used to be sustained by capital gains, in real estate, and the stock market, but now, both those positives have turned negative. Most U.S. families desperately need to save more, but the reduced consumption necessary to do so will deepen the recession.

We have declining consumption and declining investment. Until recently, a decline in our foreign trade deficit had been positive for GDP growth. But an inexplicable strengthening of the dollar puts that at risk.

My view on a stronger dollar is similar to St Augustine's view on chastity: He said, "Lord, make me chaste, but not just yet."

I say, "Lord, give us a stronger dollar, but not just yet."

In recent months, our exports have declined, reflecting weakness abroad, but our imports have declined more, reflecting weakness at home. The trade deficit has shrunk, but so has total trade. This pattern is true worldwide. No matter their trade balance, most countries are experiencing a decline in both imports and exports.

This hurts trade-dependent countries, like China and Japan, more than countries that are relatively more self sufficient, like the U.S.

Last time I looked we exported 12 percent of GDP and imported 17 percent, with a deficit of 5 percent. It may be down to 4 percent by now.

As world trade declines, the world runs a great risk of renewed protectionism, and nationalism, by Jingo. Traditionally "beggar my neighbor" policies take the form of attempts at currency devaluation, which cancel each other out as they destroy trade. But they can take the form of discriminatory bailouts, as in we'll bail out GM, but not their European affiliates, with Europe considering the same from their side.

The U.S. has been pretty good so far in letting our currency rise as others' fall. But Congress did put a "Buy American" clause in recent legislation. Congress also just formally abrogated a part of NAFTA allowing Mexican trucks to operate inside the U.S. Naturally, Mexico just announced retaliatory tariff increases. We're on a very dangerous slippery slope here.

Turning to Government actions to thaw credit markets and stimulate the economy. You are aware of U.S. Treasury actions through TARP and other programs to unfreeze credit and save the banking system . . . 

and the extraordinary and unconventional efforts of the Federal Reserve,

and the efforts of both to prevent failure of systemically important financial institutions and stimulate the economy.

While they all get lumped together to get a dollar total, let me point out that some of these measures are more important than others,

some are more effective than others, and some are more costly.

The $787 billion stimulus bill reminded me of a hunting experience a few years ago. The stimulus bill is like shooting hogs with a shotgun.

[See blog: Shooting hogs with a shotgun]

Unlike the stimulus bill, which is old-fashioned spending, as in down a rat hole, government support for the banking system involves, not old-fashioned spending, but "investment" in financial assets that may later be sold at a profit, or at a loss far less than the original outlay, whether it be preferred stock in banks,

or, the purchase of their illiquid assets.

I think there's a good chance that the taxpayer

may ultimately earn a profit, not necessarily on every transaction, but at least in the aggregate. 

Not only are these efforts less costly; they are more important. Stabilizing the banking and financial system is a prerequisite for economic recovery.

While I think the Fed has done a good job under terrible circumstances, and the Bush Treasury did a pretty good job, one government agency has been MISSING IN ACTION. That is the SEC (the Securities and Exchange Commission).

In my opinion the SEC should have reinstituted the "uptick rule" in short selling, and enforced vigorously the rule against "naked shorts." By the way, regarding "naked shorts," you do know the difference between "nude" and "naked," don't you? Nude is when you don't have any clothes on, and naked is when you don't have any clothes on and you're up to something.

But, most importantly, the SEC has not leaned on FASB, the Financial Accounting Standards Board, to rescind or modify "Mark-to-Market" Accounting. Franklin Roosevelt got rid of M2M accounting during the Depression-1938, I believe.

When the SEC was contemplating bringing it back in the early 1990s, the head of the Federal Reserve (Alan Greenspan), the head of the FDIC (William Taylor), and the Secretary of the Treasury (Nicholas Brady) all wrote letters arguing that, while M2M might be appropriate for traders, it was not appropriate for banks, whose business model involved holding assets over time, often to maturity. The SEC didn't listen-obviously.

M2M in its current form dates to 2007.

Thousands of banks, thrifts, and other financial institutions, who had nothing to do with making or securitizing subprime loans, invested in them as liquid and safe assets, as evidenced by their AAA rating.

When individual sub-prime mortgages in big mortgage pools began to go bad, the market for mortgage-backed securities dried up.

You might say some of the mortgages were toxic, but the securities are illiquid.

Under mark to market, the whole ball of wax had to be written down when only a few of the underlying mortgages became impaired, if they were in an account indicating they were available for sale.

This was true even if the bank was both willing and able to hold onto the illiquid security until the market recovered, partially recovered, or even to maturity if necessary.

The big problem is that these write-downs, much larger than necessary, destroy regulatory capital dollar for dollar. Potential or hypothetical, losses some time in the future, under mark to market, destroy real capital in the here and now.

I participated in Congressional hearings on this issue last Thursday, which prompted a meeting of FASB yesterday. I understand that

FASB made some modest adjustments to the rules, probably too modest since the stock market didn't react.

I don't have more time here, but my testimony is posted on my blog if you are interested. [McTeer testimony]

Go to http://www.bobmcteer.com/ and click on blog.

The most knowledgeable and credible advocate for M2M reform is former FDIC Chairman, William Isaac. His testimony is the latest posting on my blog. [William Isaac testimony]

Thank you.