Robert T. Parry is arguably the nation’s most important banker west of the Rockies. As president and CEO of the Federal Reserve Bank of San Francisco, he overseas the Fed’s 12th District, the largest in the Federal Reserve system, encompassing the nine Western states.

Parry, former chief economist for now-defunct Security Pacific Corp., is regularly in Washington and participates in Federal Open Market Committee meetings in setting monetary policy, including the fine tuning of interest rates.

Last week he sat down with the Business Journal.

Question: The Asian troubles have impacted several industries, such as manufacturing, aerospace and entertainment. At what point will these sector problems eat into the overall economy?

Answer: I would have thought that it would have shown up by now. Normally my estimate would be that we would see weaker numbers next year. But that’s just not obvious at this point because year after year we have been underestimating the strength of the U.S. economy. Our projections are that economic growth will be 2.5 percent next year.

We have revised up our forecast a little and there are a couple of reasons why. From its high point, the dollar came down a little, and that should stimulate the economy a bit. The equity market is quite a bit higher relative to August. That’s producing a higher forecast. Interest rates have come off a little and the Fed has reduced rates three times. If you assume that rates will stay where they are, it illustrates why we have revised up our estimates a little.

Q: The Fed’s decision to cut interest rates again, even though the U.S. economy remains strong, prompted speculation that your primary intention was to support economies and financial markets overseas.

A: I don’t think any of the cuts were directed at improving the economies of any of the countries in Asia. I think what we do is take into account what is happening throughout the world because it has a significant effect on the U.S. economy. So we do pay attention to international developments, but it is a mistake to think that we would cut the rate to increase growth in Japan or Indonesia. I don’t think that would be a very smart Federal Reserve policy.

Q: Your jurisdiction includes nine Western states, including California. Just how much weight does the district have on the overall decision-making of the Federal Reserve?

A: The choice of the districts was made in 1913. The nine Western states at that time didn’t have a very significant impact economically. If you were to redo the districts today, you would have a very different configuration. As a matter of fact, you would probably have California as a separate district. As a result, you could say that the current configuration does not give enough weight to developments in the West. But after 12 years in this process, I can’t say we’ve been shortchanged. When I talk at all the FOMC meetings, people know that I’m representing an area that accounts for 20 percent of the population of the United States and almost 20 percent of the economy.

Q: Are there any moves to change the configuration?

A: It would be a very easy thing to do for an economist or political scientist, but impossible for a politician to do. For example, how would you get Missouri to give up one or both of its Federal Reserve district headquarters (Kansas City and St. Louis)?

And the voting system is very complex. The seven Federal Reserve governors vote at each FOMC meeting. The president of the New York District also votes at each meeting, because that is where the financial markets are. The remaining 11 presidents rotate on a yearly basis. Chicago and Cleveland alternate each year because in 1913 they were exceedingly important economically. The remaining districts alternate every third year. I alternate with Minnesota and Kansas City, so I only vote one year out of three.

Q: The Federal Reserve Bank of New York created a stir when it intervened in preventing the possible collapse of hedge fund Long-Term Credit Management. Was that widely applauded among other Federal Reserve bank presidents, and would you make a similar move if a major financial institution in the West was about to collapse?

A: Normally, our position is and should be to let them go under. That’s the way the market works and that’s what you really want to do. But the decision was made, primarily by William McDonough (president of the Federal Reserve Bank of New York) and Alan Greenspan, that if that was allowed to occur it would have serious systemic risk to the economy. So the Fed contacted the major investors (in LTCM) and said, “There is a problem and you guys should come down here and work this thing out.” And that is what they did. There was not a dollar of taxpayer money used. And it seems to be working OK.

Will this set a bad precedent? We worry about that. You don’t want to give any market participant the impression that if they bet the store they are going to get bailed out. But any time the Fed or any other government agency does something like this, you run that risk. It is not black and white by any means.

Q: As a banker and economist, are you concerned about the dissolution of the wall between banks and investment brokerages?

A: No, I’m not. I think there is room for banks to get into a lot of other businesses that in fact might actually decrease their exposure to risk. That’s because of portfolio diversification. If we can set aside the recent hedge-fund incident, which is an extreme case, it seems to me that it makes sense for banks to get involved in almost any type of financial activity, especially when you are serving businesses and consumers.

Q: What’s your sense of why Los Angeles has lost so many of its large financial institutions in recent years.

A: I think it was chance, just the way things worked out. In 1986, when I moved to San Francisco, I probably would have said that the trend would have been the exact opposite to what actually happened. At the time, First Interstate Bank was trying to buy Bank of America. Wells Fargo & Co. was talking to Security Pacific. If they had joined at the time, I think that the headquarters would have ended up in Los Angeles. The one thing that did have a profound impact on this area was the recession.

Q: Considering the economic data on California that you are collecting, how is the landscape changing?

A: In the last year or so Southern California has done better than the Bay Area, although the city of L.A. itself has not done that well. It’s been mostly Orange County and the surrounding areas. I think the reason is that Northern California doesn’t have the same diversification as Southern California. The reliance on high-tech manufacturing is a little greater up there and that has been affected more by problems in Asia.

Q: The stock market has recently made a dramatic recovery. Are you concerned that it may be overvalued?

A: I must admit I’m a little surprised how fast the market has come back. If you use conventional valuation models it would seem that the market is saying that the Federal Reserve is wrong with its forecast, that corporate earnings are going to do much better than we are predicting. I am really hesitant to say that the stock market is overvalued. But what the market is telling you is that the current strong economic growth is going to continue for a number of years. And that’s just not my forecast about the economy.

Q: Considering the influence that the Federal Reserve has on the financial markets, are you allowed to personally trade securities?

A: I’m not required to keep my money in the top drawer of my dresser. But I can’t own bank stocks or any institutions that may borrow money from the Federal Reserve. The way I do it is to invest in mutual funds. There are obviously banks in there, but it is also obvious that I am not buying it on the basis that I can affect the stocks. We are very careful and are advised not to make major financial decisions a week before an FOMC meeting.

Q: The fact that the Fed cut interest rates again sparked speculation that it was expecting some bad economic news in the near future.

A: You can understand why people thought that, because there really wasn’t much weakness in the economy. And obviously that issue was discussed at the Federal Reserve meeting. And I just have to say that we thought that there were some continuing weakness in financial markets that suggested it would be good to reduce the rate another quarter of a percent.