Day: June 19, 2013

Redacted Version of the June 2013 FOMC Statement

Redacted Version of the June 2013 FOMC Statement

May 2013 June 2013 Comments
Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. No real change
Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. No change
Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. No change.? I?m sorry, but balanced budgets promote growth, because economic actors don?t fear their taxes rising in the future.
Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable. No change.? TIPS are showing falling inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is down near 2.25%, down 0.4% from May.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. No change

Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?

The Committee continues to see downside risks to the economic outlook. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. Shades up their view of the economy.
The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. No change. CPI is at 1.4% now, yoy.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. No change.

Does not mention how the twist will affect those that have to fund long-dated liabilities.

Wonder how long it will take them to saturate agency RMBS market?

Operation Twist continues.? Additional absorption of long Treasuries commences.? Fed will make the empty ?monetary base? move from $3 to 4 Trillion by the end of 2013.

 

Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. No change.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will closely monitor incoming information on economic and financial developments in coming months. No change. Useless comment.
The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. No change.
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. No change. Vacuous.
In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. No change
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. No change.

Promises that they won?t change until the economy strengthens.? Good luck with that.

In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. Not a time limit but economic limits from inflation and employment.

Just ran the calculation ? TIPS implied forward inflation one year forward for one year ? i.e., a rough forecast for 2014, is currently 2.20%, down 0.05% from May.? Here?s the graph.? The FOMC has only 0.30% of margin in their calculation.

 

In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. No change.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. No change.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. No change
Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. Bullard finally votes against, but the language is puzzling.? Defend the inflation goal which way? Should inflation be higher or lower?

?

Comments

  • This FOMC Statement was a nothing-burger.
  • I really think the FOMC lives in a fantasy world.? The economy is not improving materially, but they shade their view of the economy up.
  • Current proposed policy is an exercise in wishful thinking.? Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • In my opinion, I don?t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn?t work, what will they do?
  • Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
  • GDP growth is not improving much if at all, and much of the unemployment rate improvement comes more from discouraged workers.
Book Review: The AIG Story

Book Review: The AIG Story

AIG

I am biased on AIG.? It was never as good as proponents of its past have said.? But it was not as bad as current detractors allege.

AIG went through several eras, some of which are barely covered by this book.? There was the secular growth era, which existed from the beginning until the late 1980s.? It was easy to continue to grow in P&C businesses in the US until then.? After that growth would have to come from other ideas:

  • Life insurance in the US and abroad.
  • Foreign P&C insurance
  • Aircraft leasing
  • Asset management

And so, AIG moved from being primarily a US P&C insurance company to being a behemoth, big in life and P&C everywhere, as well as aircraft leasing and asset management.

Other Books on AIG

If you are reading this book, you ought to also read Fallen Giant. and Fatal Risk.? Excellent books both, but they cover different aspects of AIG.? Fallen Giant focuses more on the development of AIG by the founder Cornelius Vander Starr.? It spends relatively little time on the fast growth era which was the start of Greenberg tenure as CEO.

Fatal Risk focuses on the diversification era under Greenberg’s era, when AIG was so big in US P&C insurance that they began diversifying into risks that had more capital markets exposure — Life, annuities, derivatives, airline leasing, commodities, and asset management.

All three of the books spend disproportionate time on the failure of AIG, which is kind of a shame, because the failure was the simplest part of the story.

  • No risk controls because Greenberg was ousted.? That said, risk control should be institutionalized, not personalized.? That was Greenberg’s fault.? No one man should be in charge of risk for a whole company.
  • Too much subprime and other mortgage risk spread through the whole organization. (Investments in the life companies, securities lending, derivatives, direct lending, mortgage insurance, etc.)
  • True leverage was understated on the GAAP financials.

Notable Information

One aspect of AIG that The AIG Story tells is how AIG became a single company.? There were many minority interests, and when Greenberg was a new CEO he bought all of them in.? That decision allowed the company to focus, and not be concerned with minority interests.

In two breezy pages (122-123) we get Greenberg’s take on how he built his life insurance business, buying SunAmerica (1998) and American General (2001).? An aggressive company buys two more aggressive companies, overpaying in the process.? There should be no surprise why AIG’s stock price was basically flat from 1999 to 2007.? Greenberg overpaid for life insurance companies he did not understand.? He was a P&C guy, and did not get how life insurance companies worked.? He saw two aggressive companies willing to sell at exorbitant prices, and paid up.? Culturally, they fit, but buying overpriced assets always takes its toll.

Not mentioned is the debacle that was the attempt to take over The Equitable in 1991.? AIG assumed that a New York company would have a distinct advantage versus AXA, a French company that was the eventual buyer.? AIG made the following errors:

  • Scared Equitable’s management team into the arms of AXA, who would treat them well.? Yes, Equitable’s management team was incompetent, and needed to be shown the door, but you didn’t have to tell them that directly.
  • Assumed that the Real Estate portfolio would not rebound.
  • AIG offered to buy The Equitable for very little, while AXA offered $1 billion of funny money, surplus notes and convertible debt.? Strange, but the funny money was worth more than almost nothing.

Unlike the purchases of SunAmerica and American General, the purchase of The Equitable would have been cheap.? Very cheap.? And AIG missed it, and also under-rated the abilities of AXA.? I was there; I know.

This brings me to a significant point over what was included, and what was excluded… this is the story as Greenberg wants it to be told.? He excludes his errors, and focuses on his achievements.? He was not as good of a CEO as often credited in the 1990s.

On page 127, Greenberg talks about leaving markets where AIG could not earn an underwriting profit, but by the 1990s, AIG was so big that that flexibility was gone.

Closed Culture

AIG’s culture bound employee? fortunes to the stock price of AIG.? Options, participation in C.V. Starr, and a number of other programs created significant incentives for people to stay, and trust in the continual increase in the price of AIG shares.? That created a culture of “lifers” if if survived long enough.

Also, in the 1980s and 1990s the board of AIG had more insiders than most, but when corporate governance rules changed, by 2005, the AIG board was populated by enough incompetent businesspeople, that there was no way that they could control the risks inside AIG.? They tossed out Greenberg at the behest of Spitzer, and then could not supply the moxie that Greenberg had.

The Financial Crisis

The post-2008 Greenberg understands the financial crisis.? Let me quote:

A financial crisis was brewing due to a combination a including: (1) U.S. policy overstimulated appetites for home ownership and kept interest rates low for too long, (2) regulation of institutions was poor, as commercial banks fed the appetite for home ownership with generous mortgages while investment banks demand with complex financial products and increasing leverage; (3) rating agencies failed to analyze many financial products adequately, and the lack of trading in such products on organized markets made them difficult to value; and (4) regulators at the SEC failed to monitor the leverage of many financial institutions, whose debt levels rose to as much as 30 to 40 times capital and, in AIG’s case, regulators at the? Office of Thrift Supervision, which had authority because AIG owned a savings and loan association, simply ignored any signs of trouble.

Hindsight is 20/20… there were many mortgages insured by AIG before Greenberg left, and many mortgage bonds purchased by his life subsidiaries as well.

Greenberg tries to make out the problems of AIG as a liquidity crisis, and not a solvency crisis.? I’m sorry, but in a panic, there is no difference.? If you can’t produce cash when needed, you are insolvent.? It’s that simple.? AIG had enough incremental demands for cash in the crisis, that it should have gone into chapter 11.? Maybe the Fed should have rescued the derivatives counterparty, and charged it back to AIG, but beyond that, it should not have acted.? Much as Greenberg complains, AIG was insolvent, and should have been reorganized.? He would have gotten far less as a result.

He also takes umbrage against Ed Liddy, a good man who attempted to do what the stupid government wanted — liquidate in a hurry, but Greenberg does not recognize that he set much of this process (though not all of it) in motion himself.

Greenberg won the suits against himself.? He personally did nothing materially wrong.? But the mismanagement of AIG in the Greenberg era and the time thereafter did deserve to be punished with chapter 11, not coddled with a bailout and tax incentives.

Quibbles

The book is worth reading, but what you are getting here is court history — the history as approved by the King.? It has elements of history in it, and it is mostly true, but you have to consider the source.? A lot of true history was purposely omitted.

Who would benefit from this book: If you are an AIG buff, you can’t get the full picture without knowing what Greenberg purports.? If you want to, you can buy it here: The AIG Story.

Full disclosure: The publisher sent me a copy of the book for free.

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