Movie Review: Money for Nothing
Why will you like this film?
You get to meet clever traders, investors, and business thinkers, policymakers, historians, and Fed Governors – some who have doubts, and many that are still true believers. The contrasts are considerable.
Here is the cast list, shamelessly copied from Wikipedia:
Federal Reserve Officials
- Paul Volcker – Chairman of the Federal Reserve (1979–1987)
- Janet Yellen – Vice Chair of the Federal Reserve (2010–Present), President, Federal Reserve Bank of San Francisco (2004–2010)
- Alice Rivlin – Vice Chair of the Federal Reserve (1996–1999)
- Alan Blinder – Vice Chairman of the Federal Reserve (1994–1996)
- Peter Fisher – Undersecretary of the Treasury (2001–2003), Executive V.P. of the New York Fed (1994–2001)
- Richard Fisher – President, Federal Reserve Bank of Dallas (2005–Present)
- Thomas Hoenig – President, Federal Reserve Bank of Kansas City (1991–2011)
- Jeffrey Lacker – President, Federal Reserve Bank of Richmond (2004–Present)
- Charles Plosser – President, Federal Reserve Bank of Philadelphia (2006–Present)
- William Poole – Economist, President, Federal Reserve Bank of St. Louis (1998–2008)
- Laurence Meyer – Economist, Governor of the Federal Reserve Board (1996–2002)
- Marvin Goodfriend – Senior V.P., Federal Reserve Bank of Richmond (1993–2005)
Economists and Financial Historians
- Michael Bordo – Economist, Rutgers University Professor, Director, Center for Monetary and Financial History
- David Colander – Economist, Middlebury College Professor
- James Grant – Economist, Editor – Grant’s Interest Rate Observer
- Martin Mayer – Scholar – The Brookings Institution, Author – The Fed
- Allan Meltzer – Economist, Author of “A History of the Federal Reserve”, Carnegie-Mellon University Professor
- Raghuram Rajan – Chief Economist – International Monetary Fund(2003 – 2007), University of Chicago Professor
- Richard Sylla – Economist, New York University Professor, Chairman – Museum of American Finance
- Bill White – Chief Economist, Bank for International Settlements, (B.I.S.) (1995 – 2008)
Traders and Investors
- Peter Atwater – President and CEO – Financial Insyghts, LLC, Former Head of Asset Finance – J.P. Morgan
- Tony Boeckh – Economist, Chairman – B.C.A. Research (1968–2002), Founder – The Boeckh Investment Letter
- Jeremy Grantham – Investor, Financial Historian, Chairman – Grantham, Mayo Van Otterloo
- Todd Harrison – Derivatives Trader, Hedge Fund Manager, Founder and CEO – Minyanville.com
- John Mauldin – President – Millennium Wave Advisors, Author – Endgame
- Barry Ritholtz – Washington Post columnist, Author – Bailout Nation, CEO – Fusion IQ
- Gary Shilling – Economist, Forbes columnist, Author, President – A. Gary Shilling & Co.
- John Succo – Derivatives Expert, Hedge Fund Manager
A Rough Outline of the Film
Why is the Fed controversial?
It’s controversial because those who run it are appointed rather than elected, and so their actions are shielded from direct action by voters. It is also a secretive institution, which does not reveal its actions/discussions rapidly.
Why was the Fed created?
The Panic of 1907 unnerved people, and led politicians to argue for a central bank. It would have been smarter to tighten regulation of banks, but that is water under the bridge. Most crises are due to misregulation of banks – too much leverage, bad credit risks, and borrowing short to lend long.
What was the initial impact of the Fed?
Not much impact in WWI. When the Roaring ‘20s came into existence, it was driven by loose monetary policy from the Fed, which led to…
The Great Depression
When debt grows rapidly, an eventual correction will come – this one was sharp. Like today, not sure the Fed could do anything to make things better, aside from not having been loose previously.
WWII to the End of the Gold Standard
The Bretton Woods conference linked the currencies of the developed world to the Dollar, which in turn was linked to gold. Sadly, the Fed adopted a dual mandate, which said it must focus on consumer price inflation, and labor unemployment. It didn’t work well then, and it works less well now – the link between goods price and wage inflation is a weak one.
The link of the US Dollar to Gold worked will until the mid-‘60s, when the pressures from fighting in Vietnam plus trying to create the Great Society stretched resources too thin. William McChesney Martin caved when LBJ pushed him (perhaps beat him physically), and lowered rates in 1965, leading to inflation.
Over the ‘60s and into the very early ‘70s, as inflation in the US rose, foreign central banks, particularly the French, began to request gold rather than dollars. Eventually in 1971 Nixon ended Bretton Woods, ceasing redemption of US Dollars for gold internationally. And all of this led to…
The Great Inflation
Nixon leaned on the Fed to be loose, and Arthur Burns facilitated it. William Miller continued it in the Carter Administration, leading to higher inflation. Volcker was appointed by Carter, and as he pointed out in the movie, what he would do would be painful. He resisted pressures to be easy and started inflation on a downward course by reducing growth of the money supply. (Do you remember the news networks flashing the M-numbers on the screen each week, and the newspapers featuring them near the top of the business section? You are old, like me.) Volcker was not reappointed by Reagan in 1986 because he was viewed as an independent player (good), and not submissive to the administration. Thus we got the toady Greenspan, who led to…
The Great Moderation
No one could have predicted that Greenspan would be such a political compromiser. But in 1987, after the crash, he assured liquidity to financial firms that might have been impaired from a 22% drop in the Dow. This led to the concept of the Greenspan put. Bad news? Greenspan has your back, willing to inject liquidity when times are bad.
You can look at the pattern of interest rates over the period of his chairmanship. Rates kept making lower lows, amid rapidly growing private debts.
Then we had a series of crises: Long Term Capital Management, where Lehman also almost went under. The NASDAQ soared and fell hard 1998-2002. Low interest/mortgage rates from 2002-2007 further encouraged a Debt/Housing Bubble. The Fed was never a great regulator of the banks or mortgages. They assumed the lesser regulators would do the job. But deregulation gutted the regulators, particularly because banks could choose their own regulators. Hubris permeated the Fed, and Mortgage Equity Withdrawal fueled consumers, until there was nothing more to borrow against, leading to…
The Great Recession
Why did the Fed act as they did once the crisis broke? Part of it was due to the dual mandate. Another part was that Fed models were weak because they did not model the financial sector. As James Grant would point out they were fixing prices via interest rates. Once they started QE the Fed pushed the private sector to take risk because of a lack of safe assets with decent yield. Other points:
- Inflation is difficult to measure
- Insufficient skepticism, according to Hoenig
Hoenig comes off as an honest dealer versus the rest of the Fed, suggesting that many errors were made under pressure.
My Disagreements with the Movie
1) Bailouts were not needed in the way they were done
We could have rescued the operating subsidiaries that matter to average people, and let the holding companies fail. Instead, we did the worst thing, and bought the equity of firms that were bankrupt.
2) Derivatives played no role in 1987
Unless you are willing to call futures derivatives, then derivatives played no role in the 1987 crash.
3) The net capital rule really wasn’t an issue.
4) Yes, the Fed has been monetizing the debt, and it will bite us eventually, when the demographics shift from saving to spending. It will come in the next ten years.
Would you like the Movie?
I think most people would like the movie. It gives the establishment sorts enough room to defend their actions, while offering wiser men the ability to say that the Fed was utterly wrong, and obviously so.
Twice before in our republic, we have eliminated a central bank. Let us have the courage of our predecessors and eliminate the Fed. It would be hard to do worse than the Fed did; they amplified economic shocks – they did not mute them.