From RealMoney:

		David Merkel
		FOMC: Fanning Our Monetary Conflagration
		3/18/2008 2:16 PM EDT

The Federal Reserve Open Market Committee lowered the Fed funds target and discount rate by 75 basis points. The vote was 8-2, with Fisher and Plosser dissenting. The growth risk assessment is weakness.

The prices risk assessment is balanced.

Overall, FOMC makes noises about some inflation, lending markets, and economic weakness.

The 10-year Treasury yield was down 2 basis points in yield after two minutes. The S&P 500 was down 80 basis points.

We now return you to our regularly scheduled programming. The fixation is ended! Trade!

Position: none

Okay, so 75 basis points isn’t 100. 75 is still pretty aggressive, and combined with all of the other actions that the FOMC has taken, it provides some stimulus. It would provide a lot more stimulus if they stopped immunizing all of their unorthodox policy measures, but hey, they are trying for a hat trick:

• Solve the problems in the lending markets.
• Don’t permanently add to the monetary base, and so restrain price inflation.
• Stimulate a weakening economy.

Personally, I think they will eventually have to stop giving with the right hand and taking with the left, but for now, they can continue this policy. It might even work if nothing else material blows up. Credit spreads are considerably tighter today, but one day does not a recovery make.

I’ve put together a PDF file that summarizes the current Federal Open Market Committee.  My objective in this exercise is provide a handy way of getting data on the various Members of the Federal Open Market Committee.  It was also a way for me to better understand who is making out monetary policy, and from a social angle, try to understand their biases.

Most of the data in the PDF file (Excel file available here), comes from the Fed’s own websites.  I reorganized it, and deleted some bits of data that I thought were less important.  I added links to their bio, books, speeches, academic papers, etc.  (Full disclosure: if you buy a book from Amazon using one of the links, I get a small commission.)

When I look at this data, what jumps out at me is the number of Ph. D. economists – they are 10 out of the 15 here, then three MAs in Economics and related fields, one MBA (Fisher) and one JD (Warsh).  (Personally, I would want to limit the number of Neoclassical economists on the committee to five, and put in a few Austrian School economists.  Monetary policy is too important to be left to a bunch of Neoclassical economists.)  Beyond that, among the economists, there are many of them that have done direct work on the inter-linkages between monetary policy and financial markets  (Bernanke, Kohn, Kroszner, Mishkin, Plosser, Evans, and Lacker).  A number of them have written about central banking and financial markets under conditions of stress.

Historically, it would be hard to find a group of Fed Governors more prone to using unorthodox methods to try to fight a crisis in the financial markets.  They have the training for it, and they do not want to go down as not having learned from the received wisdom on monetary policy regarding the Great Depression.  They will be fast, not slow.  Unorthodox, not orthodox, and bending/breaking the rules where possible.  They will tolerate a possibly large permanent increase in inflation, and avoid the Japanese experience 1990-Present.  They will pursue a unilateral course of action, and ignore foreign grumbling.

This is the FOMC that we have today, and the composition of the committee matters when considering how they will execute monetary policy.   Expect aggressive responses, with considerable volatility.

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Two postscripts: To me, the Committee seems young, with an average age of 51.  Second the compostion of the committee will likely change after the elections, because Congress is holding up the nominations that President Bush has put forth.  The nominees are Fed Governor Randall Kroszner, whose term officially ended Jan. 31, Capital One Financial Corp. executive Larry Klane and Virginia community-banker Elizabeth Duke.  Kroszner can continue to serve at the Fed until a successor is appointed.   

The two businessmen would have been an interesting addition, but will not likely be approved because of the politics.  The one that wins the presidential election will have a large impact on the Fed, because he will get to appoint three board members.  The current economic volatility will have a large impact on the skill set of those that get nominated.

As WordPress counts, every 100 articles, I take a step back, and think about blogging.  I wasn’t sure what I was getting myself into when I started the blog.  I was unsatisfied with my work and my other writing outlets when I decided to start Alephblog up.  I wanted more creative control, and an ability to build a brand of my own.  That’s why I started the site.

So far, so good. The support from other blogs has been significant (in order): Abnormal Returns, Alea, The Big Picture, FT Alphaville, Seeking Alpha, the Kirk Report, and Naked Capitalism.  I also appreciate the overall blogging community on finance issues; it is fascinating to see the relatively high quality of opinions that get expressed on the web.  It is more than competitive with the print media (and we get paid peanuts, if anything…).

In the near term, I will be updating my blogroll.  I want it to reflect what is on my RSS reader.  I updated my “leftbar” recently.  I  did it because I wanted to highlight the books that I have reviewed, and I wanted to push the Google ads further down the page.  I don’t make that much from them; at some point I may discontinue them.

Along with that, I will be doing some blog maintenance to make the top of my blog clickable to return to the homepage, update a few of my old static pages, and turn off comments on posts older that a month.

It’s been interesting to meet new people through the blog.  I appreciate those that e-mail me, and those that comment here, though my time to reply is limited.

Finally, I haven’t run out of things to write about, and given what I wrote here and at RealMoney, this economic environment was made for me.  Volatility — what will break next?  Reminds me of 2002, and owning too many BBB bonds.  But future topics may include:

•  Academic Finance Lies (okay, assumptions that aren’t true)
• Rescuing Capitaism from Capitalists (half-written)
• Fundamentals of Market Bottoms
• CP-T2 as a panic gauge
• Risk Management vs VAR vs ERM
• Can Central Banks Lose Money?
• The Main Ignored Problem in Taxation (by both political parties)

Finally, I thank my family, I thank God, and I thank my new employer, Finacorp Securities, for their support.  Let’s keep this up; I enjoy the writing and the feedback.

Late in the day, I looked at a table of valuations of the remaining major investment banks, and thought, “Huh, they’re priced like Bermuda Reinsurers.  Price-to-book near 1 or lower, and expected P/Es in the middle single digits.”  Well, that got me thinking… how are those two groups of companies alike?

•  When losses come they can be severe.
• Both have strong underwriting cycles where a lot of money is made in the boom phase, and a lot gets lost in the bear phase.
• Earnings quality can be poor, unless management teams have a bias against meeting Street expectations, and allowing earnings to be ragged.
• The opacity of the investment banks’ swap books is matched by that of the reinsurers’ reserving.
• Both businesses are highly competitive, and global in scope.

Now, what’s different?

• The reinsurers typically don’t have asset problems, only reserving problems.
• The Bermuda reinsurers know that one day a change in their tax status may come (somehow forced to pay US tax rates — ask Bill Berkley), and that would lower earnings.
• The financial leverage of the reinsurers is a lot lower.
• The financing of reinsurers is a lot more secure.

The risk-reward seems balanced to me across the two groups.  The reinsurers are lower-risk/lower-reward, and the investment banks are higher on both scores.  Choose in accordance with your risk tolerance — as for me, I’ll look at the reinsurers.