Month: November 2012

Sorted Weekly Tweets

Sorted Weekly Tweets

Cato Institute Monetary Policy Conference

 

  • @ToddSullivan Good conference, videos will b posted here: http://t.co/wu2DCMY2 & Plosser’s talk will b here: http://t.co/VH1zLn30 #CMC30 $$ Nov 16, 2012
  • Plosser: “Such an exit depends on the Fed?s ability to be systematic and transparent about its policy decisions.” $$ #CMC30 Nov 15, 2012
  • Plosser: ” Avoiding these risks is dependent on the Fed executing a graceful exit from this period of extraordinary accommodation” #CMC30 $$ Nov 15, 2012
  • Plosser: “The fourth principle is to strive to ensure central bank independence.” $$ #CMC30 Nov 15, 2012
  • Plosser: “The third principle is to be clear and transparent in communicating to the public the policy actions that are taken.” #CMC30 $$ Nov 15, 2012
  • Plosser: ” One way to do this is for the central bank to articulate a reaction function or rule that will guide policy decisions.” #CMC30 $$ Nov 15, 2012
  • Plosser: “…by describing how they will conduct policy in a way that is consistent with those goals. ” $$ #CMC30 Nov 15, 2012
  • Plosser: “The second principle is for policymakers to make a credible commitment to their goals…” #CMC30 $$ Nov 15, 2012
  • Plosser: “And in so doing, policymakers must acknowledge what policy can and cannot achieve.” $$ #CMC30 Nov 15, 2012
  • Plosser: “The first principle is to be clear and explicit about the goals and objectives of policy.” #CMC30 $$ Nov 15, 2012
  • Plosser: “I believe sound and effective central banking should focus on 4 guiding principles.” $$ #CMC30 Nov 15, 2012
  • Plosser: “Moreover, it is unlikely that regulatory reform as embodied in Dodd-Frank has substantially addressed the TBTF problem.” #CMC30 $$ Nov 15, 2012
  • Plosser: “The ability of monetary policy to influence employment has long been recognized as tenuous at best.” $$ #CMC30 Nov 15, 2012
  • Plosser: “It is very hard to quantify the risks associated with our unconventional policies. But they are real.” $$ #CMC30 Nov 15, 2012
  • Plosser: Blurring the boundaries between monetary & fiscal policies can pose institutional risks 4the central bank & its independence #CMC30 Nov 15, 2012
  • Plosser: “Moreover, it is difficult to identify the appropriate moment to begin tightening policy, even in the best of times.” #CMC30 $$ Nov 15, 2012
  • Plosser: “Yet, history tells us that central banks tend to find it easier to lower interest rates than to raise them.” #CMC30 $$ Nov 15, 2012
  • RT @PhilFedComDev: Read Plosser?s speech: ?Good Intentions in the Short Term with Risky Consequences for the Long Term.? #CMC30 http://t … Nov 15, 2012
  • Chen: “Rise of the individual in China.” McDonald’s in China originated “I’m loving it.” #CMC30 $$ Nov 15, 2012
  • Huang: Being a reserve currency lowers trading costs, lends prestige. Serves as a “Trojan Horse” for reform in China. Seiniorage. #CMC30 $$ Nov 15, 2012
  • Huang: 400 years ago, China was a reserve currency with 30% share of Gross World Product. $$ #CMC30 Nov 15, 2012
  • Schwartz: Monetary must be rules-based because we don’t really understand what monetary policy does in the intermediate-term #CMC30 $$ Nov 15, 2012
  • Schwartz: Debt Intolerance: Debt> 90% GDP in developed countries. 60% in emerging markets. Spain at 90%+ in 2013. #CMC30 $$ Nov 15, 2012
  • Schwartz: Quasi-gold standard — ECB was supposed to be independent. No exploiting money illusion. No devaluation. No excessive debt. #CMC30 Nov 15, 2012
  • Wolfgang M?nchau: Fundamental problem of Eurozone: No bailout, no default, no exit (inconsistent). #CMC30 $$ Nov 15, 2012
  • Stark: Crisis policies not well thought out, ad hoc, reactive, leaves too much to the ECB to do, too little done by govts #CMC30 $$ Nov 15, 2012
  • Stark: Countries did not get the practical impacts of sharing a currency. $$ #CMC30 Nov 15, 2012
  • Stark: Some countries were allowed to join the Euro who really were not qualified. Rules were not upheld. #CMC30 $$ Nov 15, 2012
  • Stark: ECB will ride to the rescue of European Governments. This is not a sustainable policy. Adjustments need to take place. #CMC30 $$ Nov 15, 2012
  • O’Grady: Opens by saying that the Euro was started with good intentions. (DM: low praise that it was not designed to fail.) #CMC30 $$ Nov 15, 2012
  • Taylor: Dual mandate came in when monetary policy was way too loose, and inflation high. Leads 2 2 much discretion in monetary policy #CMC30 Nov 15, 2012
  • Taylor: Argues that the policy of promising to hold Fed funds low to 2015 inconsistent with where the Taylor rule would indicate #CMC30 $$ Nov 15, 2012
  • Taylor: Argues that Fed funds were too low for too long 2003-2004, and that regulatory rules were not enforced. Partially blames GSEs #CMC30 Nov 15, 2012
  • Taylor: Last 30 years — 1982-2002 good monetary policy, in his opinion. 2002-2012 bad monetary policy. $$ #CMC30 Nov 15, 2012
  • Warsh: Fed is a price-maker, not a price-taker, affects risk-free rate, & it affects the pricing of all assets, distorting investment #CMC30 Nov 15, 2012
  • Malpass: Capital allocation is getting warped by the Fed, leading to higher prices for gold and corporate bonds, mortgage bonds, etc. #CMC30 Nov 15, 2012
  • Malpass: Fed is sucking duration out of the fixed income markets more rapidly than the Treasury is issuing. $$ #CMC30 Nov 15, 2012
  • Malpass: The Fed is a giant, heavily leveraged SIV, borrowing short and lending long, w/only $55B of equity capital. #CMC30 $$ Nov 15, 2012
  • O’Driscoll: Failure to forecast the Great Recession lessens the legitimacy of the Fed to engage in discretionary policy. #CMC30 $$ Nov 15, 2012
  • Warsh: Price stability should b the main mandate. Maximizing sustainable employment is important, but outside the remit of the Fed #CMC30 $$ Nov 15, 2012
  • Warsh: Communications matter, but they are not everything. What the Fed does is more important than what the Fed says. #CMC30 $$ Nov 15, 2012
  • Warsh: Argues that 2008 was a panic and Fed actions were justified. Today, that’s not so, where monetary policy is weak. #CMC30 $$ Nov 15, 2012
  • Warsh: Diminishing returns to monetary policy. Monetary policy can be really strong at some moments, and very weak in others. #CMC30 $$ Nov 15, 2012
  • Poole: Current economic problems are not monetary in nature. ECB has violated or circumvented many strictures in its charter. #CMC30 $$ Nov 15, 2012
  • Poole: QE2 was a mistake — there were already excess reserves at the banks. $$ #CMC30 Additional reserves will not solve the problem Nov 15, 2012
  • I asked my question on asset-liability mismatch — Hoenig: the answer was the usual that you can’t end maturity transformation #CMC30 $$ Nov 15, 2012
  • @ToddSullivan Hoenig: Misguided, too complex, need simpler regs and more discretion for regulators #CMC30 $$ Nov 15, 2012
  • Hoenig: Unlimited liability would be good, but you will politically never get there. #CMC30 $$ Nov 15, 2012
  • Hoenig: Need to rethink the capital approach. Dump Basel. Simplify, it is too easy to game. Need a simple tangible capital ratio #CMC30 $$ Nov 15, 2012
  • Thomas Hoenig suggests that we are sowing the seeds of the next financial crisis #CMC30 $$ Says we should be skeptical of new regulations Nov 15, 2012
  • Bernanke cut rates 8/2007-9/08 in the midst of a solvency problem as opposed 2a liquidity problem. Cutting rates wld/did not work $$ #CMC30 Nov 15, 2012
  • If incomes do not grow to meet the need to finance incremental debts incurred, you set up a debt financing crisis. #CMC30 $$ Nov 15, 2012
  • Vernon L. Smith, “Leverage cuts far deeper on the downside than on the upside.” #CMC30 $$ At the Cato Institute’s 30th Monetary Policy Conf Nov 15, 2012

 

US Politics

 

  • Changing the Conventional Wisdom on Wall Street http://t.co/HzU13GRB Ideas 4 tough leaders 4the SEC. 2 more: @ritholtz & @reformedbroker $$ Nov 17, 2012
  • Obama Said to Reject Request to Ease Corn-Based Ethanol Law http://t.co/9LWxZi2h Increases pollution too. Ag states win again $$ Nov 16, 2012
  • What the New President Should Consider http://t.co/Ah99K6tx Paul Volcker tells us that we need to balance the budget & grow the economy $$ Nov 16, 2012
  • Why Hispanics are Natural Democrats and what the GOP can do about it http://t.co/XKLbPPcq IMO the GOP can’t do much about it at all $$ Nov 14, 2012
  • Receivership Does NOT End GSEs http://t.co/qrEbx3Di The current law forbids the receiver 2 “revoke, annul, or terminate the charter” $$ Nov 14, 2012
  • 10 Leadership Lessons from Simpson Bowles http://t.co/6JC5CLzc 11. Everything must be on the table. Everything. Including Medicare & SS $$ Nov 14, 2012
  • http://t.co/hxqRMzaG Series on economic “cliffs” in the world today. If US cliff only costs 1% of GDP, might b worth doing 2 balance bdgt $$ Nov 14, 2012

 

Credit Markets

 

  • Do Junk-Bond Investors Have Garbage for Brains? http://t.co/ZYYvK1db Financial repression tempts investors 2 take underpriced risks $$ Nov 16, 2012
  • ‘Junk’ Bonds Sing Postelection Blues http://t.co/Rf4isEqO Room 2b constructive here, cash flow is adequate 2 service most HY now $$ Nov 16, 2012
  • BlackRock?s Junk-Bond ETF Has Record Withdrawals as Rally Fades http://t.co/C79GC6Gl Poster child 4 the current risky debt panic $$ Nov 14, 2012
  • Credit-Fueled U.S. Car Sales May Need Help From Incomes http://t.co/0iRq46j1 Been here b4; can incomes cover debt pmts w/room 4 error? $$ Nov 14, 2012

 

China

 

 

Eurozone

 

  • Pettis on Spain: “Given how rapidly the political environment is deteriorating, I have little doubt it will leave the euro.” $$ Nov 16, 2012
  • Multinationals Find Loopholes Galore in Europe http://t.co/EZlRNNNY Wonder when the developed countries reconcile corporate tax policy? $$ Nov 16, 2012
  • Europe Gives Greece 2 More Years to Reach Deficit Targets http://t.co/N34PPFWQ Extend & pretend, no way Greek Debt/GDP gets below 120% $$ Nov 13, 2012
  • Ex-Goldman Bankers See Crisis Opportunity in Greek Insurance http://t.co/XvzZRWYE There may be value scouring the PIIGS for investments $$ Nov 13, 2012
  • Rajoy Aims to Stem Evictions as Suicide Darkens Crisis http://t.co/LdKVjUv5 Spain has it tough. Not much the government can do though $$ Nov 13, 2012
  • EU budget talks collapse http://t.co/6SvZ6nrC Austerity works when the problems are small; when problems are big, inflation is the cure $$ Nov 13, 2012

 

Rest of the World|

 

  • Funds Bet Against Japan Inc. http://t.co/6rIDALbP Hedge funds buy protection on the CDS of large Japanese companies, timing a problem $$ Nov 16, 2012
  • Jordanians Protest Fuel-Subsidy Cut, Demand King?s Ouster http://t.co/hMdSsnrY When conditions r poor, even small changes lead 2 panic $$ Nov 16, 2012
  • Japan Megabanks? $6.7 Billion Stock Losses May Spur Selloff http://t.co/gNOLmkuY Losses will b taken; banks disentangling from industry $$ Nov 15, 2012
  • Canadians Aren?t Heeding Debt Warnings http://t.co/nv2Pbt9R Debts grow as low rates lead to overleverage in the Canadian economy $$ Nov 14, 2012
  • US Conference Board fears Brics miracle over as world faces decade-long slump http://t.co/zXyjNdmU Overindebted world growth soggy $$ Nov 14, 2012
  • Hedging China risks, Japanese firms turn to booming Southeast Asia http://t.co/mmiuBPGB Japan spreads its manufacturing risk 2 new places $$ Nov 14, 2012
  • http://t.co/OtaZcRhc How are debt levels in Israel? Are they catching the disease creeping up on Australia, Canada, & Sweden? $$ Nov 14, 2012
  • Brazilian Stocks Squeezed by Rousseff as Valuations Increase http://t.co/PnNddJun This is why I have sold my Brazil holdings: Dilma $$ Nov 13, 2012

 

Companies

 

  • SandRidge Investor Revolt Mounts Over ?Critical Failures? http://t.co/zSmC0YlK $SD mgmt bets natgas prices will rise relative 2 crude $$ Nov 16, 2012
  • Twinkie Maker Hostess to Shut Down After Strike http://t.co/sAq4PrCb Delivers a sweet loss 2 all stakeholders, but Twinkies will return $$ Nov 16, 2012
  • Amazon and the art of evasion http://t.co/0DA7kIgj You have to understand, at its heart, $AMZN is a nonprofit enterprise, killing many $$ Nov 15, 2012
  • Goldman Using Technology to Become Wal-Mart of Wall Street http://t.co/h8pGuaSe Low cost wins in commoditized space, but machines err 2 Nov 14, 2012

 

Wrong

 

  • http://t.co/cWlyHVR8 Too many neoclassical economists. They didn?t foresee the last crisis; how will they do better next time? $$ Nov 14, 2012
  • Wrong: 6 Ways to Profit from the “New Saudi Arabia of Energy” http://t.co/md6bNR81 One stray misunderstood “fact” can do a lot of harm $$ Nov 13, 2012
  • Wrong: Is the Insurance Industry Doing Enough to Address Climate Change? http://t.co/06gAsTgF Climate always changes; nothing has changed $$ Nov 13, 2012
  • Wrong: ‘Baby Berkshire’ Leucadia matures with Jefferies deal http://t.co/HYo4f3MA $LUK does not have the cheap finance of $BRK.B $$ Nov 13, 2012

 

Other

 

  • Federal deficit hits $120 billion in October; bad start to fiscal year http://t.co/Bo3TQqZx By 2017 Obama might triple debts of 2009 $$ Nov 14, 2012
  • Public pension funds face vast shortfall http://t.co/R2qMQJe1 <- Summary article. Protections 4municipal bens-> http://t.co/xDkQKW8n $$ Nov 14, 2012
  • Buffett company to close Va. newspaper, cut 105 jobs http://t.co/51FGQGE9 Small newspaper not far from DC; no reason 4 it to exist $$ Nov 14, 2012
  • $BAC Offers to Buy $MBI Bonds to Block Amendment http://t.co/VTAeeIW0 $300M goes from stockholders to 5.7% bondholders $$ #poof Nov 13, 2012
  • 5 money moves a post-bubble buyer is making now http://t.co/8HqPJRWe Main idea: buy what is despised now. Don’t take normal risks $$ Nov 13, 2012
  • 10 things 401(k) plans won?t tell you http://t.co/o0VWXmim Main point is that average people are not good at managing pension assets $$ Nov 13, 2012
  • New DNA Techniques End Mystery of What Ails Baby Patrick http://t.co/3SrJ9R7j Analyze DNA after an abnormal birth. 2nd order effects? $$ Nov 13, 2012

 

Replies

  • @CJEHunt @euromoney Many thanks, Christopher. Remember that 1 fondly. Remember discussing theses w/ @Steve_Hanke @ Balt CFA mtg ~2000-1 $$ Nov 17, 2012
  • @euromoney Thanks for the #FF . U did an article in 1998 that was prescient about troubles the Euro would have. Could I get a copy of it? Nov 16, 2012
  • @BloombergView don’t know who to send this 2, but big disimprovement on the US bonds page on the BB web: http://t.co/2sJ5NEDK less data $$ Nov 16, 2012
  • ‘ @TheCreditBubble Akre and Hawkshaw Nov 16, 2012
  • @EddyElfenbein But it is not too much if it is a non-profit. After all, an absurd valuation is still absurd at double absurd. $$ Nov 15, 2012
  • @researchpuzzler My mom used to say that 2 me, but positively because her parents were bright Nov 14, 2012
  • . @ctindale @BlackRaven999 Eric Hovde used to say that. We don’t repeat our parents mistakes, we repeat those of our grandfathers $$ Nov 14, 2012
  • @thinkingtrades I remember getting heckled writing pieces at RealMoney on the husing bubble 5/2005 & Subprime RMBS 11/2006 Can b forseen $$ Nov 14, 2012
  • @BlackRaven999 @ctindale U r right that if they had an effective model, steps might b taken 2 avert a crisis. Tough 2 fight a boom though $$ Nov 14, 2012
  • @ctindale @BlackRaven999 Used to work 4 a hedge fund that was predicting the crisis. Problem was we were 2 early. Made $$ at end though Nov 14, 2012
  • @euromoney Yes, that is why in developed mkts. Also, the knock-on effects hit GDP more rapidly from a sell-off in bonds than equities $$ Nov 14, 2012
  • @euromoney I worry about that too. Unintended consequences in the bond markets would b much more severe than in equity markets $$ Nov 14, 2012
  • @felixsalmon & terminated in 12/2008: 10Y Tsy avgd 2.42% then… prob a good move in hindsight, though terminating 1yr earlier/later better Nov 14, 2012
  • @felixsalmon This story says the swaps were put on in 2004: http://t.co/n3dWsLMF 10Y avgd 4.27% then. Nov 14, 2012
  • @felixsalmon @jennablan They put on the swaps while he was President 2001-6, not enough data, but the 10Y avgd 4.40% over his Presidency $$ Nov 14, 2012
  • @mickwe @BradErvin1 and thanks to both of you — I got 4 notes on this; I appreciate my readers. Nov 14, 2012
  • @mickwe @BradErvin1 Mistake in pasting HTML that left code behind that was invisible in the editor, but visible once published. Fixed now Nov 14, 2012
  • @PlanMaestro Maybe $MBI could offer to sell itself 2 $BAC, or offer a minority stake in the healthy sub in exchange 4 their consent $$ Nov 13, 2012

 

Retweets

  • Will certainly turn out moist $$ RT @BarbarianCap: Bacon-wrapped Thanksgiving turkey. The American Eater wins again. http://t.co/Il1RaiET Nov 16, 2012
  • Both RT @researchpuzzler: Q from @jasonzweigwsj: is it HY investors that are crazy or policymakers? http://t.co/hneJaRrq how about both? $$ Nov 16, 2012
  • That tweet just fell on my head. Ow. RT @EddyElfenbein: So Newton was right. $AAPL does obey gravity. Nov 16, 2012
  • Interesting CEF sorter, thanks RT @abnormalreturns: A big jump in the number of CEFs trading at a +15% discount. http://t.co/XORvF8eA $$ Nov 16, 2012
  • You can say that again. Yahoo too $$ RT @gilaniali: If that use Gmail they should turn on two factor authentication. http://t.co/5YyAlYF2 Nov 16, 2012
  • Cultural prob $$ RT @niubi: ?@ChinaGeeks: NEW 2NON POST: Why Rural Chinese Kids Don’t Go to College http://t.co/QEVlINtG the meritocracy… Nov 15, 2012
  • RT @researchpuzzler: RT @DavidSchawel: One of the first days in a LONG time that the credit markets have shown some cracks – will be int … Nov 14, 2012
  • War threats via Twitter. Twitter has arrived $$ RT @kept_simple: Until Obama RTs the IDF, how can we be certain he supports Israel? Nov 14, 2012
  • The central point RT @ctindale: @BlackRaven999 it’s the central differentiator neo classical don’t factor in debt levels Nov 14, 2012
  • Talking about dealer mkts $$ RT @moneyscience: Financial markets going through worst period in decades, says ICAP boss http://t.co/3haobsSa Nov 14, 2012
  • Not surprised $$ RT @kaylatausche: BREAKING: House report released tomorrow to show decisions by Corzine led to #MFGlobal collapse. Nov 14, 2012
  • Last year of 10Y Tsy: http://t.co/KisbqSMv RT @felixsalmon: Whoa, when did that happen? RT @jennablan: Oh, wow, 10-year now at 1.60% $$ Nov 14, 2012
  • +1 😉 RT @ReformedBroker: .@LukeRussert doesn’t understand that for Nancy Pelosi to step down, someone from Kansas must drop a house on her Nov 14, 2012
  • $$ Will kill us if Fed Chair RT @pdacosta: Fed’s Yellen says rates may need to stay near zero until early 2016 to forcefully lift employment Nov 13, 2012
  • RT @joshuademasi: @AlephBlog “purpose of studying eco is not to acquire a set of answers to eco ?s, but to learn how to avoid being dece … Nov 14, 2012
  • +1 RT @JonathanProber: @AlephBlog Perhaps many economists would agree we should try to become less reliant on economists in general? Nov 14, 2012
  • RT @prchovanec: Funding of China’s investment-led growth is shifting from bank lending to alternatives promising higher returns on same … Nov 13, 2012

?

Comments

  • “How is $FB counted in this? IPO shares, shares unlocked, or total market cap?” ? David_Merkel http://t.co/TOX6vQuF $$ http://t.co/CyrvguQ8 Nov 16, 2012
  • “Anything that can survive a nuclear war can certainly survive a mere bankruptcy!” ? David_Merkel http://t.co/l3KAxKo4 $$ cc: @danprimack Nov 16, 2012
  • Three of my friends had their email accounts hacked today. Anybody else experience something similar? $$ Nov 16, 2012
  • I track 76 13F filings — oddest thing of the qtr is that two of them sold everything down to only one long position. $$ Nov 16, 2012
  • “I think you made the right decision, Tadas. All bloggers have to have sustainable lives, including you” Merkel http://t.co/yPaYpLj7 $$ Nov 15, 2012
  • “You know things are tough in the Middle East when there r groups more extreme than Hamas” ? David_Merkel http://t.co/zKMtnAJs $$ Nov 15, 2012
  • I think Buffett instructs whoever files the 13F for $BRK.B to make it as difficult as possible to import into Excel Nov 14, 2012
  • Professional investors would be sad if retail left the mkt. Lucy would feel the same if Charlie Brown gave up trying to kick the football $$ Nov 14, 2012
  • 13F filings are so much fun; so many ways to obscure the data Nov 14, 2012
  • Carnage among levered CEFs that hold risky debt — many down 3%+ Nov 14, 2012
  • After the hurricanes in 2004-5, ppl said it was global warming, just in time to get 6 low hurricane damage years. 1 storm creates panic $$ Nov 13, 2012
  • “Though you are not new, of bloggers originating since 2009, you are my favorite.” ? David_Merkel http://t.co/PPw0N6SR $$ Nov 13, 2012
Cato Institute 30th Annual Monetary Conference, Epilogue

Cato Institute 30th Annual Monetary Conference, Epilogue

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.

Cato Institute 30th Annual Monetary Conference, Part 7

Cato Institute 30th Annual Monetary Conference, Part 7

Charles I. Plosser
President, Federal Reserve Bank of Philadelphia

Plosser?s speech: ?Good Intentions in the Short Term with Risky Consequences for the Long Term.?

Since Plosser is reading his speech almost verbatim, for me to take notes would be superfluous.? I have to run to get my car, so I won’t be here for the Q&A.

In short, 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.

I’ll have a summary post this evening with my views of the meeting as a whole, and where I think various speakers hit and missed.

Cato Institute 30th Annual Monetary Conference, Part 6

Cato Institute 30th Annual Monetary Conference, Part 6

Moderator: Tao Zhang
U.S. Bureau Chief, Caixin Media

Capital Freedom for China

 

Eswar S. Prasad
Tolani Senior Professor of Trade Policy, Cornell University

Renminbi as a reserve currency 3 conditions:

  1. Internationalization
  2. Capital Account Convertibility
  3. Do other countries hold Renminbi assets as protection against payments crises. (DM: also, do you want to have a lot of debt for foreigners to invest in.

Much progress on #1, little on #2 and 3.

Second order effects of opening: Institutional market development, financial market development.? Try out experiments in Hong Kong.

Size of China, macroeconomic policy potentially allow for? reserve currency, but the banking and financial markets are not capable of absorbing the volatility.

PBOC creating Renminbi swap lines.? IMF more involved w/China; SDR basket membership coming.? Renminbi becoming a bigger factor in the global economy.

Yukon Huang
Senior Associate, Carnegie Endowment for International Peace

400 years ago, China was a reserve currency with 30% share of Gross World Product.

Being a reserve currency lowers trading costs, lends prestige.? Serves as a “Trojan Horse” for reform in China. Seiniorage.

Triffin dilemma, conflict between domestic and foreign goals, adds to currency risk.

China has partially internationalized with capital controls.

Also, reserve currencies are typically issued by democracies.

Chinese authorities use banks to motivate growth and development.? Not markets.

Capital flight happening.? Huang thinks that is good: diversification and other benefits.

Zhiwu Chen
Professor of Finance, Yale School of Management

Money used to settle increasingly more transactions in China, whether it is housing, wages, etc.? Everything is no longer tied to the government.? “Rise of the individual in China.”? McDonald’s in China originated “I’m loving it.”

As rule of law diminishes across Chinese industries, state ownership tends to rise.? The more free the movement of capital in Chinese industries, state ownership tends to fall.

China late to develop limited liability corporations in the late 19th century.

SOEs ran into major losses in the 1980s, and private corporations came back.? But most large firms are still controlled by the government.

Q&A

Possibility of democracy in China?

Prasad: No.? Communists have largely delivered the goods.? Regional problems.

Chen: Yes. Options for the Communist Party are limited. Change may be forced when the good can’t be delivered any more.

Huang: property rights are uneven, and Party members abuse their power.

Cato Institute 30th Annual Monetary Conference, Part 5

Cato Institute 30th Annual Monetary Conference, Part 5

Moderator: Mary Anastasia O’Grady
Member, Editorial Board, Wall Street Journal

Lessons from the Euro Crisis

Opens by saying that the Euro was started with good intentions.? (DM: low praise that it was not designed to fail.)

George S. Tavlas
Director, Bank of Greece

Euro was anticipated to reduce economic problems in Greece, and it worked for a while after 2001.? Interest rates fell and became stable.? Government deficits rose.? Net public saving fell.

Crisis hit. Yields screamed up. Real GDP falls 20% 2008-present, maybe another 6% next year.

Difficult to run large external deficits under a gold standard.? Relatively easy to do so in the short run in the Eurozone.? Mundell’s optimal currency union requiring flexible wages and prices is necessary but not sufficient.

Under a gold standard, credit spreads are high and restrain government borrowing.? Eurozone membership facilitated Greek overborrowing.

Can’t hold a peg without credible fiscal policies.

J?rgen Stark
Former Chief Economist, European Central Bank

ECB will ride to the rescue of European Governments.? This is not a sustainable policy.? Adjustments need to take place.

ECB — principles & rules based. (DM: somewhat subverted at present).? Some countries were allowed to join the Euro who really were not qualified.? Rules were not upheld. Countries did not get the practical impacts of sharing a currency.

Five points to overcome the crisis:

  1. Stabilize and reduce govt debt
  2. Structural reforms — flexibility
  3. Reorganize & recapitalize banking sectors
  4. Reform monetary union
  5. ECB provides liquidity to banking sector

Crisis policies not well thought out, ad hoc, reactive, leaves too much to the ECB to do, too little done by govts

 

Wolfgang M?nchau
Associate Editor, Financial Times

OMT policy not started yet — will it work?? Fundamental problem of Eurozone: No bailout, no default, no exit (inconsistent).? Believes Greece will eventually be bailed out… would go easy on austerity as a policy in Greece.

Banking union necessary to get ECB out of the OMT problem.

Argues that low level economic reform necessary in order to create a economic union.? Political union would likely be needed.

Five conditions for a currency zone:

  1. Real conversions and similarity
  2. (sounded similar to 1)
  3. Political consensus on fiscal & monetary union
  4. Banking union
  5. A willingness to bend political/fiscal priorities in a crisis

Thinks Eurozone will not break up.

Pedro Schwartz Giron
Professor of Economics, San Pablo University, Madrid

How the Eurozone could survive.? Quasi-gold standard — ECB was supposed to be independent from all.? No exploiting money illusion. No devaluation. No excessive debt.

Debt Intolerance: Debt> 90% GDP in developed countries. 60% in emerging markets.? Spain at 90%+ in 2013.

Monetary must be rules-based because we don’t really understand what monetary policy does in the intermediate-term

Inflation will happen instead of default or dissolution

Q&A

Tavlas: Argentina 2001 vs Greece now — like gold standard in Great Depression, those that left early did best.? Leaving euro: capital flight, new currency has extreme risks, foreigners would not accept new drachma, contagion effects.? Credit Anstalt failure turned a recession into a depression (DM: something would have failed… too much debt.)

O’Grady: Argentina: convertibility, not a currency board.? Very different.? Argentina has not had good results.

Stark: Latvia, Ireland austerity may be working.? Austerity fatigue in the south.

Munchau: Can Germany leave the EU?? Not likely and only Americans ever suggest it.? Unthinkable politically.

Stark: Anyone suggesting this does not understand European history or politics.

Basel II impacts on the crisis 1.6% capital lending to Greece, 8% to a German corporation?? Stark: this is not a key problem.

Cato Institute 30th Annual Monetary Conference, Part 4

Cato Institute 30th Annual Monetary Conference, Part 4

John B. Taylor
Professor of Economics, Stanford University

Money, Markets & Governments: The Next 30 Years

Last 30 years — 1982-2002 good monetary policy, in his opinion. 2002-2012 bad monetary policy.

Economic performance deteriorated during the great moderation.

Inflation rate came down dramatically.

Argues that Fed funds were too low for too long 2003-2004, and that regulatory rules were not enforced. Partially blames Fannie & Freddie.

Reserve Balances at Federal Reserve Banks boomed 2008 and on.? QE1 & QE2 have had little effect on employment, contra the papers by the Fed.? Aids the government, banks & the housing sector… plays favorites.

Hard to measure output gap.? QE is predicated on a modified Taylor rule much more responsive to economic changes, not what was used in the 80s and 90s for policy.

Argues that the policy of promising to hold Fed funds low to 2015 is inconsistent with where the Taylor rule would indicate.

Also argues that a monetary policy like Milton Friedman’s would work better at the zero bound than QE.? Excess discretion has led to a nonsensical monetary policy.? Policy uncertainty is a negative for the economy.

Q&A

NGDP targeting — what would the rule be for guiding monetary policy?? Not clear.

Expanded Taylor rule including asset prices?? No, would be too volatile.

Dual mandate came in when monetary policy was way too loose, and inflation high. Leads to too much discretion in monetary policy.

Cato Institute 30th Annual Monetary Conference, Part 3

Cato Institute 30th Annual Monetary Conference, Part 3

Moderator: William Poole
Senior Fellow, Cato Institute

The Fed has practically given up its independence.? It is independent with the confines in the government.

QE2 was a mistake — there were already excess reserves at the banks.

Current economic problems are not monetary in nature.? ECB has violated or circumvented many strictures in its charter.

Current Fed has too much of a short-term focus.? Dual mandate has been tilted too far toward unemployment.

Criticizes easy monetary policy in the late 90s and 2003-2004.

Kevin Warsh
Distinguished Visiting Fellow, Hoover Institution

Diminishing returns to monetary policy.? Monetary policy can be really strong at some moments, and very weak in others.

What regime are we in?? An important question when setting policy.

Argues that 2008 was a panic and Fed actions were justified.? Today, that’s not so, where monetary policy is weak.

Fiscal contraction would allow for more aggressive monetary policy, but that is not true today.? Today the fiscal is aggressive, and the Fed is buying the Treasuries being issued, giving a feel (though not reality yet) of debt monetization.

Fed is weakening credibility by their current actions.

Communications matter, but they are not everything.? What the Fed does is more important than what the Fed says.? Communications policy has limits.

Price stability should be the main mandate. Maximizing sustainable employment is important, but outside the remit of the Fed.? Bank regulation is not as effective as it should be.

Monetary policy can’t make up for bad trade and fiscal policies.

Gerald P. O’Driscoll Jr.
Senior Fellow, Cato Institute

Believes that the Fed is de jure independent, but not truly independent.

  1. History supports a dependent Fed.? Inflation was a result of loose policy 1965-85.
  2. Reading transcripts shows Fed members pay attention to politics.
  3. Inconsistency literature suggests independent central banks will generate inflation at times.
  4. Low correlation between central bank independence and inflation.
  5. Central banks are creations of the State and cannot be fully independent.

De facto independence of Fed is questionable.

Volcker could only act independently because Reagan supported him.

Failure to forecast the Great Recession lessens the legitimacy of the Fed to engage in discretionary policy.

Policy rules when they lead to good results give a central bank more room to run, more discretion.
David Malpass
President, Encima Global

Argues that present monetary policy is contractionary.? Hurts savers, end misallocation of capital…

The Fed is a giant, heavily leveraged SIV, borrowing short and lending long, w/only $55B of equity capital.

Fed is sucking duration out of the fixed income markets more rapidly than the Treasury is issuing.

Capital allocation is getting warped by the Fed, leading to higher prices for gold and corporate bonds, mortgage bonds, etc.

Favors corporate profits over wages… Government and large companies favored over small.? M2 not growing rapidly, even though monetary base has gone up significantly.? Traditional policy transmission mechanism not working.

Does a gold model inferior to Eddy’s & mine.

Q&A

Malpass: stability of monetary policy/inflation would promote growth.

GDP growth tend to raise interest rates (DM: like the old classical view), as people bid for the ability to borrow to buy growth.

Warsh: Fed is a price-maker, not a price-taker, but it affects the risk-free rate, and it affects the pricing of all assets, distorting investment

Cato Institute 30th Annual Monetary Conference, Part 2

Cato Institute 30th Annual Monetary Conference, Part 2

Moderator: Zanny Minton Beddoes
Economics Editor, The Economist

Thomas Hoenig
Vice Chairman, Federal Deposit Insurance Corporation

Tells us to be skeptical of changes in financial regulation.? Incentives have not changed to favor increased leverage in financial institutions.? Protecting big banks has further worsened incentives.

Safety net started w/FDIC — insuring bank deposits makes payments system safe.? Investment banking, more volatile stays outside.? As commercial and investing banks were made to compete, the safety net expands, de facto.

1) Banks should spin out their investment arms into separate entities.

Lehman had a short-financed balance sheet, and relied on the government to protect them.

2) Need to rethink the capital approach.? Dump Basel.? Simplify, it is too easy to game.? Increase capital levels.? (DM: As I say, dumb regulation is good regulation.)? Need a simple tangible capital ratio.? Need to negotiate a tangible capital ratio, and a transition period.

Tangible capital during unregulated periods 13-16%.

3) Re-establish bank supervision as a tool to uncover risk.? Real supervision would find risks, and raise capital when needed.? (DM: how do we get mean regulators back.)

Jeffrey A. Miron
Senior Fellow, Cato Institute, and Director of Undergraduate Studies in Economics, Harvard University

Should we try to avoid market crises?

1) Avoiding crises is not a main goal of policy.

Policy in his view is maximizing economic growth.? Growth was not materially affected by crises 1790-1915.? (DM: his log graph hides the real panics.)

Great Depression and 2008-2012 are unique events.? Criticizes Bernanke view of the Great Depression, where bank failures happened near the bottom of the cycle.

Reinhart & Rogoff — recoveries after panics are slow.? Happens because debts have to be reconciled.? (Has a variety of less realistic reasons for the slowness.)

2) Policies to stop crises may hurt more than help.

Policy should be neutral to the sectors of the economy.? Bernanke’s policies are not neutral, aiding housing.

People want to reduce volatility, but that could hurt more than help.

He argues that we should promote freedom and growth.? Reduce government, etc.

Lawrence H. White
Professor of Economics, George Mason University

Create an anti-fragile banking system, a la Taleb.? Anti-fragile: gets stronger from small problems.

Suggests reducing deposit guarantees, and eliminating central banking, because they increase fragility.

Banking is not naturally fragile, White says. (Lots of hand waving, and looking at foreign examples where small failures did not impair the system.)

Suggests that pledging not to bail out banks will make everyone more careful.

We have a less-diversified financial ecology where many are pursuing a single strategy.? Heuristics of having a high tangible capital ratio would aid regulation.? Basel III is the wrong idea — too complicated, and Basel I & II did not help.

Robert L. Hetzel
Senior Economist, Federal Reserve Bank of Richmond

What do central banks control, and how do they control it?? Macro models turn correlation into causation, and obscures the the buildup in debt, which eventually collapses.

If you want to understand causation, you have to have models.? Uses an example from the 1812-1820 period, where small Treasury notes expand the monetary base, leading to inflation, a run for gold, and later a collapse.

Runs out of time.? Suggests we need more intelligence regarding what central banks can and can’t do.

Q&A

Hoenig: Unlimited liability would be good, but you will politically never get there.

White: Banks arbitrage risk weights.? Zero risk weight for government debts were a fail.

Poole Q: Economics not hard, but the politics are hard.? Eliminating bailout support is impossible — in a crisis, bailouts happen, unless you eliminate the authority, or narrow the banking institutions.

Did existence of the FDIC cause the crisis? Risk-based insurance premiums?? Hoenig: we do risk-weight in some ways… but could you create a bank run from that?

Hoenig: FDIC has a reinsurer, the US Treasury.? White: clearinghouse model worked pre-Fed.

Hoenig: Sweden increasing capital standards above Basel.

I asked my question on asset-liability mismatch — the answer was the usual that you can’t end maturity transformation, and that taking duration risk is a risk like any other.

Cato Institute 30th Annual Monetary Conference, Part 1

Cato Institute 30th Annual Monetary Conference, Part 1

Note to readers: these are my notes from the conference, as such, they will be rough.

Keynote: Vernon L. Smith, Professor of Economics, Chapman University, and Nobel Laureate in Economics

Main points: 1) we get bubbles because we misfinance long-term assets, typically housing.? We borrow short to finance a long-term asset.? Examples: Great Depression and now.

Other housing distortions: waiving capital gains taxes, deduction for interest, offering credits to buy mortgages, GSE financing, etc.

Housing is the largest part of the growth in debt.

2) Leverage cuts far deeper on the downside than on the upside.? That’s because it is easier to buy a house than to liquidate an inverted debt.

If incomes do not grow to meet the need to finance incremental debts incurred, you set up a debt financing crisis.

Bernanke cut rates 8/2007-9/2008 in the midst of a solvency problem as opposed to a liquidity problem.? Cutting rates would/did not work.

Financing was short-term for housing in the Great Depression.

If you want to separate underwriting and investing, make incentives to underwriters proportionate to principal repayment.

3) How to fix a debt deflation slump:

WWII did not end the Great Depression — many debts compromised, paid off by 1941.

a) must pay off and compromise bad debts.

b) banks mark assets to market, some fail.? Alternative is Japan, where there is no recovery.

Without significant defaults, there is no way to eliminate a debt deflation.

 

The Rules, Part XXXVI

The Rules, Part XXXVI

It almost never makes sense to play for the last 5% of something; it costs too much. Getting 90-95% is relatively easy; grasping for the last 5-10% usually results in losing some of the 90-95%.

When I was a corporate bond manager, and doing my own trading, I had a first question in dealing with any broker: Am I getting a good deal?? If the answer to that question was “yes,” then the proper response is “Done.” Don’t haggle.? Even if you get a slightly better deal, it will damage your reputation.? The best reputation to have is between “reasonable” and “tough.”? Tough is worth more when you are driving the deal.? When the deal is offered to you, and it is a good one, reasonable preserves your reputation as a fair negotiator.

You never want to be seen as a pig.? Once you seem to be a pig, opportunities dry up.? The guy who followed me after my time as a corporate bond manager was a pig, according to my brokers, and as such, the ability to do deals suffered.

This is true of much of life.? In negotiation, leave something on the table for the other guy.? You want to be able to do more deals afterward, and a reputation for being tough but fair is the gold standard.

Kids play for all of the marbles.? Intelligent adults play to win a competent fraction of the marbles.? That is an intelligent way to view many aspects of life.? And so I encourage you to play fairly, but cleverly, for your share.

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