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Archive for November 16th, 2012

Cato Institute 30th Annual Monetary Conference, Epilogue

Friday, November 16th, 2012

I’m back home, and now I can give my opinions on the presenters at the Cato Monetary Conference.

Vernon Smith was relatively realistic.  He understands that this is a debt crisis, and that reducing debt is the main priority.  Overindebted economies don’t grow well.  Households and corporations that have too much debt tend to be reluctant to spend.

Thomas Hoenig had a number of good points.  Argues for simple capital regs, with harder regulators adding to the capital as they judge riskiness.

Jeffrey A. Miron had issues.  I think it is simpler to regulate banks than to try to fix crises.  My reasoning is that average people don’t differentiate between banks, and can’t understand balance sheets.

Lawrence H. White argued that if we remove guarantees, people will be more careful.  The boom-bust cycle suggests otherwise.  People cast away care during booms, and get skewered during busts.  If you’re going to have a fiat currency, better to lean against debt levels, than inflation or unemployment.

Poole criticized loose monetary policy in the late 90s and 2003-4, but why does he not go after Greenspan from 1986-98?  Debt levels screamed higher during that era.  Greenspan facilitated the growth in bad debt, and while it worked, he became the “Maestro.”

The main point of Warsh was that loose monetary policy won’t work.  If you have a lot of excess reserves, more excess reserve won’t help.

O’Driscoll argued that the Fed was by nature no independent of the US Government.  It is a statutory creation.

David Malpass stirred opinions.  Many liked his statements, many disliked.  His main point was that the Fed was sucking Treasury Duration out of the fixed income markets.  Personally, I think that eventually it will erase two years worth of seiniorage.

John Taylor was mostly against policy rules that were too volatile, whether reacting to the output gap, asset prices, or anything else.  Pointed out that the current Fed is overpromising versus the Taylor rule, in projecting that they will hold Fed funds low until 2015.  (2016 for the overly loose Yellen.)

All of the commenters on the Eurozone were too optimistic.  It is only a matter of time before the the pain of holding the Eurozone together becomes greater than the pain of breaking it apart.  On the bright side, future generations will not consider the dopey idea of currency unions without political union.

The China panel was ridiculous.  The first speaker dared to say that Chinese economic policy was better than that of the US, and as a result I signaled my disapproval.  China has no idea for what it is doing.  They are blind, and their slack resources are running out.

China will not have a reserve currency, it cuts against more important goals.  Democracy is also unlikely in China, unless the Communist Party is overthrown.  Unlikely, but looking forward to that.

Plosser is concerned for the institutional image of the Fed, and trying to be more orthodox, and rules-based.  He wants the Fed to move away from the relatively unorthodox policy currently followed.


All that said, the Fed moves on.  They don’t care that their ideas don’t work.  They don’t care that their ideas harm/distort investment markets.  They just pursue the wrongheaded ideas of Ben Bernanke, who assumed that the Great Depression occurred because banks would not lend, when the banks had overlent in the past.

I met my share of cranks today, both liberal and conservative.  We need a new paradigm where debt levels are an important factor in economic decisions.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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