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.
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.
Believes that the Fed is de jure independent, but not truly independent.
History supports a dependent Fed.? Inflation was a result of loose policy 1965-85.
Reading transcripts shows Fed members pay attention to politics.
Inconsistency literature suggests independent central banks will generate inflation at times.
Low correlation between central bank independence and inflation.
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.
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.
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.
After writing Eliminating the Rating Agencies, I felt there was room for improvement.? Part of that stems from reading critiques of the rating agencies that really don’t understand why ratings exist.? Ratings don’t exist to help average people, they exist to allow regulators to evaluate the credit risks of financial institutions.
The beauty of my prior proposal is that it can be applied to any credit instrument, even private placements for which there is no market.? Let me give an example.? In mid-2002 with the ten-year Treasury yielding 4.5% an investment banker approached me with a private bond deal — $50 million in total to finance the owner of real estate where the US Government had old computers that would be difficult to do away with.? The yield offered was 8% for 10 years, and S&P shadow-rated it “A.”? We bought 20% of the deal.? We were the biggest holder at $10 million.
Following my procedure in the prior article, the amount of capital that would have to be put up would be almost $2.2 million.? Now, that is likely too severe, but maybe the regulators would choose a percentage of that amount as the right amount for all fixed income securities.? Other securities that are not hedges would be considered deductions from capital.
Is the bond illiquid?? More spread -> more capital required.? The beauty of this system is that it does not care where the excess spread is coming from.? It just measures the present value of the uncertain spread, and realizes that it is a very good proxy for credit risk.? It can be applied to any bond, preferred stock, etc. fairly easily.
There would have to an additional analysis for asset-liability mismatch, but existing methods for measuring that are adequate.? In any case, the rating agencies would no longer be needed for measuring credit risk.? Regulators would simply review the calculations of the actuaries/quants, as they file their annual/quarterly statements.? The value of the uncertain portion of the fixed income assets would be the proxy for the total credit risk of the firm.? No rating agency needed to calculate that.
For that last tweet, full disclosure, long $AIZ for clients and me Oct 24, 2012
Assurant Reports 3rd Quarter 2012 Financial Results http://t.co/pTbHUunV Over 8.75 yrs $AIZ has shrunk its share count from 142M to 78M $$ Oct 24, 2012
Weschler Rise From Grace Leads to Role Advising Buffett http://t.co/uUlYUPVK Interesting tale of a guy who can deal4 & value companies $$ Oct 22, 2012
Goldman Sachs Creates a Dividend+Buybacks Measure, & 4 Insurer Stocks Shine http://t.co/myQ8Ga1e I own 2 of them 4 clients. Which 2? $$ Oct 22, 2012
Central Banking
Here Comes the Dollar Wave Again http://t.co/5EO5Ejve Defend exports, import inflation, asset bubbles “Our currency, but your problem.” Oct 25, 2012
Approach risks ?distorting? decisions & ?it might be economically inefficient 2try2 push prices up so much,? Shiller http://t.co/Bs5GJPGX Oct 24, 2012
Redacted Version of the October 2012 FOMC Statement http://t.co/2jOMkLje Note: CPI inflation is at 2%, also inflation expectations rising $$ Oct 24, 2012
“We fail 2c the direct link, or even an indirect link, btw the size of the Fed’s balance sheet & the unemp rate” http://t.co/bM149U5Z $$ Oct 24, 2012
Buffett: ‘”I get a little worried about continuously expanding” the Fed’s balance sheet, he said on CNBC.’ http://t.co/KWIVYBIS $$ Oct 24, 2012
Traders Calling Singer?s Bluff on Intervention as Koruna Gains http://t.co/Y1ml4EZ4 Czech National Bank playing with fire, will burn $$ Oct 22, 2012
Would mean that the external effect of loose monetary policy have been played out, & the next big move is coming (but from where)? $$ Oct 22, 2012
Worst Carry Trades Show Central Banks at Stimulus Limit http://t.co/IDxi6uVq Interesting thought: if carrytraders can’t make money… $$ Oct 22, 2012
Fiscal Cliff
Firms Hit Brakes Before Fiscal Cliff http://t.co/z1Plcc9z Tap brakes is more like it. Most think we won’t go over the cliff #gridlock $$ Oct 26, 2012
Aha! Here’s The REAL Reason Corporate Executives Are Freaking Out About The Fiscal Cliff http://t.co/oS8VZpsi Favors initiatives of Dems $$ Oct 22, 2012
Other
How Supap Kirtsaeng?s Textbooks Idea Led to Supreme Court http://t.co/h1CDWk1q What rights exist to re-sell something that you bought? $$ Oct 26, 2012
The Plot to Destroy America’s Beer http://t.co/3ElPpvvx A tale of cost-cutting, quality reductions. Light beers ascendant. $$ Oct 26, 2012
Sandy Nears Jamaica, Forecasters Weigh New England Threat http://t.co/R1HNSDm8 High Incidence, Low Power 4 Tropical Storms in 2012 $$ Oct 24, 2012
Calling All Germs http://t.co/BkfuReQq Cellphones Are Great for Sharing Photos?and Bacteria; Cleaning May Harm Screens $$ Oct 23, 2012
Romney?s Air Force Comparison Misses U.S. Edge in Jets http://t.co/3lFkg4KL There r some situations where more lower tech jets would help Oct 24, 2012
Dean, Marathon Split-Offs on Tap http://t.co/m5OLbAuI Post-split $DF looks interesting, if boring. More room 2 focus $$ Oct 22, 2012
Energy
Shale Glut Becomes $2 Diesel Using Gas-to-Liquids Plants http://t.co/sjUDsrVK This is the Holy Grail, because gasoline is tough2produce $$ Oct 26, 2012
The internal combustion engine is far from dead http://t.co/Ewa60lrw Most real improvements in energy efficiency deal w/fossil fuels $$ Oct 22, 2012
Americans Buying Fewer New Cars in Lifetime http://t.co/viB6dIlU long-term probably not a good sign; autos drive a lot of the economy $$ Oct 22, 2012
The Myth of Affordable Energy – Interview with Ed Dolan http://t.co/8jWI1faC Energy efficiency is increasing. Full cost pricing desirable $$ Oct 20, 2012
Demographics
Russian Funds Band Together to Repel Government Cash Grab http://t.co/72KWo3Bg Gotta b careful on pension funds cuz govts like 2 raid them Oct 26, 2012
More Americans delaying retirement until their 80s http://t.co/dZM4Tmqm This is the way it should be. Retirement s/b 4-5 years at most Oct 25, 2012
Can Japan?s Elderly Become Its Growth Engine? http://t.co/eqhsu54i This seems like wishful thinking to me. Spending from savings <> wages $$ Oct 24, 2012
Financials
U.S. securities regulator questions need for new broker standard http://t.co/iNUVJKIp Extending fiduciary standards 2 brokers in question Oct 24, 2012
Forcing frequent failures http://t.co/OL6WSfOM @interfluidity hits a home run in dealing with bank failures, & how to regulate Oct 24, 2012
Low Rates Pummel Banks http://t.co/577Fsc1i Borrowers Benefit, but Industry Lending Profits Hit Lowest Level in Three Years $$ Oct 23, 2012
Marsico: When Going Private Goes Wrong http://t.co/Vxyc40u7 June 2007 was the wrong time 2 LBO, then performance lags $$ My sympathies2them Oct 23, 2012
The end of stock market crashes? http://t.co/VjIALNEm I’m sorry, but the conclusion is bogus. Even if its works, only some could escape $$ Oct 23, 2012
Mortgage risks underestimated, economists conclude http://t.co/TFDpqz70 FHA uses a model that leads it to underestimate delinquency risk $$ Oct 22, 2012
Annaly Says Michael Farrell Dies After Cancer Diagnosed http://t.co/n5VNgi8m He was kind2me ~2000; willing2share ideas w/little me $$ $NLY Oct 22, 2012
Mortgage REITs: Not Just Yet http://t.co/20kPVBs2 I would be careful here & reduce exposure… they are always unstable vehicles $$ Oct 21, 2012
The Winner for Investors Is… http://t.co/eBQM5Ws4 @jasonzweigwsj points out the connection between returns & politics is tenuous $$ Oct 21, 2012
Economy
Firings Highest Since 2010 as Ford to Dow Face Slump http://t.co/9q87q63I This is the US economy. We can’t support workers relative2profit Oct 26, 2012
Weak Tea at Unilever Persists Amid Innovation at Rivals http://t.co/ryqjkEof Did not even know that Lipton was a Unilever brand $$ $UL $UN Oct 24, 2012
Doom Heralded at Hayman by Widening Trade Deficit: Japan Credit http://t.co/CZS09whs Japan?s debt is the ?cleanest dirty shirt.? Not. $$ Oct 23, 2012
Hunger Stalks My Father?s India Long After Starvation End http://t.co/dkVTXxaO Long article, makes me grateful that I can feed my kids $$ Oct 23, 2012
Electrolux, Philips Warn Of US Slowdown http://t.co/6k5hxTe2 Another soggy data point; less demand 4 bigger-ticket consumer items $$ Oct 22, 2012
Retweets
Ya, true RT @glenntyrpa: @barnejek @AlephBlog @sikorskiradek Yea. When did Japan invade China? Was that 1930? 🙂 we Americans forget. Oct 26, 2012
RT @PragCapitalist: Today’s financial tip: don’t ever buy a boat. Instead, find a friend with a boat. If necessary, buy the friend. … Oct 24, 2012
Clever RT @BradErvin1: @AlephBlog @PragCapitalist This is Buffett, courtesy legacy @kevindepew articles @Minyanville http://t.co/dGTNG9kl $$ Oct 24, 2012
Stinks, just stinks RT @ritholtz: THE SELLSIDE: SAME AS IT EVER WAS Courthouse News Service http://t.co/K9LDmj5m via @CourthouseNews $$ Oct 24, 2012
RT @KathrynTully: The last of Sarah Thornton’s top reasons for quitting art market surely belongs in top 10 reasons not to be a journo. … Oct 24, 2012
RT @emckean: LOVE THIS RT @aniajakubek: There’s a Polish saying that means “Not my problem” & literally translates to “Not my circus … Oct 24, 2012
SIFMA gets an infamous big name to speak to them RT @LaurenLaCapra: #greenspan http://t.co/rjVlCfV5 Oct 23, 2012
At my house too RT @retheauditors: Halloween is dead to me. Oct 22, 2012
@TraderNewsFeed No, I don’t think that. I think we should enjoy our work, and enjoy it for as long as we can, until we can no longer work $$ Oct 26, 2012
@rjwile True, but that’s the price of not saving enough. There is no right to a retirement. Someone send the EU the memo. $$ Oct 26, 2012
@OVVOFinancial I largely agree. Reducing the real value of debts would help. My only fear is that nominal incomes might not grow much $$ Oct 25, 2012
@OVVOFinancial Missed that, thanks. Still, the Chain-weighted PCE deflator is 1.5% yoy at present. Oct 25, 2012
@barnejek oops Oct 24, 2012
@PragCapitalist A boat is a hole in the water into which you pour money $$ That said, the recession created a lot of used boats 4 sale Oct 24, 2012
@tebaho I am not a Romney backer Oct 24, 2012
@EddyElfenbein lifted the stake above 50% by 1995. Oct 24, 2012
@EddyElfenbein In 1977, GEICO was ~6% of his public investments, before $BRK.B acquired 33% of the company by 1980, and buybacks + Oct 24, 2012
@EddyElfenbein In 1981, GEICO was ~30% of his public investments — no data on how big his private investments were then $BRK.B $$ Oct 24, 2012
@EddyElfenbein 1996-7 around 16% of pretax income. Prior to that, it was not wholly owned, and so Buffett acctd 4 it as an investment $$ Oct 24, 2012
@EddyElfenbein $BRK.B would not want to live without GEICO, but in my opinion, it could live without it Oct 24, 2012
@EddyElfenbein It’s about 5% of BRK’s pretax profits. The float it generates is very short and is only 5% of liabilities. Oct 24, 2012
@PragCapitalist It’s a conglomerate fueled by a set of huge insurance companies, where assets r sourced privately & publicly $$ $BRK.B Oct 24, 2012
@PlanMaestro @aarontask @TheStalwart I think it is spurious correlation b/c I c many other variable that r weak. US economy is flat. $$ Oct 24, 2012
@felixsalmon In the NT Greek, there r2 words for God’s will, &1 tells u God ordains everything, the other, he doesn’t approve everything Oct 24, 2012
@CflGator I would ask the question, how is $TGT going to deploy the capital? The answer probably lies there. Oct 24, 2012
@LDrogen America’s politicians have always made appeals based on religion, & then abandoned the religious voters that support them (not new) Oct 24, 2012
@joshuademasi I realize with Japan, it is unlikely 4 there 2b an external default, until the external debt gets big enough Oct 24, 2012
@aarontask This is a stock versus flow issue. The banks reap capital gains now, but it will reduce their future interest margins/income $$ Oct 24, 2012
@CflGator Think they are trying to free up capital for alternative uses. Oct 24, 2012
@LDrogen But all people have unprovable a priori opinions, and many will affect their views on public policy, whether “religious” or not Oct 24, 2012
@LDrogen It becomes the same paradox that philosophers go through with respect to the concept of free will vs determinism Oct 24, 2012
@LDrogen Even 2a Christian like me, God’s will is a highly nuanced, b/c there r 2 words in NT Greek 4 “will” & they mean different things Oct 24, 2012
@LDrogen One of my close friends came into existence as a result of a rape. Two good people adopted him; biological mother was courageous Oct 24, 2012
. @aarontask will look for it — if anyone has a link 2 it, pass it 2 me Oct 24, 2012
@joshuademasi Nations with their own currencies don’t have to default on debts. I think some will choose to default for political reasons $$ Oct 23, 2012
“This brings up something @ritholtz would say ~ blog traffic goes up during a crisis?” ? David_Merkel http://t.co/9U0OxjLe $$ Oct 23, 2012
@joshuademasi Not sure he will lose; he has a decent chance of being correct. Japan has preceded the global economy for past 20 years $$ Oct 23, 2012
“5. Tadas, as you have said before, investment/finance blogging is hard. And many of the best of us?” $$ David_Merkel http://t.co/EuaE0hmB Oct 23, 2012
@StephenShiflett I distrust polls generally. I am not a Romney supporter. Most statistical comments in the media r not well-founded $$ Oct 23, 2012
@StephenShiflett Stratification matters more. The size was smaller than most polls I c, & instant senses of who 1r often not correct Oct 23, 2012
@DUNNER2 @CBSNews Now there was a poll that no one asked for, the sample size was far too small, but actually had a real impact. Sad. Oct 23, 2012
@Shwaver should be more like 5% if the poll is well stratified, and most polls aren’t Oct 23, 2012
@thejudge1082 @cbsnews I would criticize that as well. Most polls are too small and not well stratified Oct 23, 2012
@nmariecrumbie @DJDougMadrid @cbsnews I am *not* a backer of Romney. I am voting for the Constitution Party. I am a statistician, are you? Oct 23, 2012
@Justsaying1104 @CBSNews size *always* matters. I am a statisticiam by training. The hyper-short news cycle forced out a poll Oct 23, 2012
@Justsaying1104 @cbsnews of course size matters — what I object to is trying to get instant answers to what people are thinking $$ Oct 23, 2012
@ituzzip On a 500 person poll the error bounds are wider +/- 5%. But Rs answer polls less often than Ds. Oct 23, 2012
@JW28 Sorry, I am not a Romney backer Oct 23, 2012
@DJDougMadrid I don’t believe in instant, & I am voting 3rd party. Oct 23, 2012
@StephenShiflett Most polls I see are double that, it was still small, given the short time after the debate. Oct 23, 2012
@CBSNews Small sample size Oct 23, 2012
@TheStalwart I think you are fair and balanced, because A third of the time I agree, a third I disagree, and a third I an in-between. $$ Oct 23, 2012
@wallstCS FD: long $SFG — You do realize that revenue is not a useful valuation metric for insurers, right? Earnings & Book r relevant $$ Oct 22, 2012
@groditi @GaelicTorus it drives a lot of technology development, materials science, design (or lack thereof), advertising, energy efficiency Oct 22, 2012
@BradErvin1 No, the point is that corrupt governments tend to spawn corruption in society Oct 20, 2012
. @paulnovell It will be public in a few days — they e-mail it out to friends & clients b4 posting it here: http://t.co/pZ4jJrQ1 $$ Oct 12, 2012
Prior tweets courtesy of Van R. Hoisington & Lacy H. Hunt, Ph.D. Whole thing will be posted here http://t.co/pZ4jJrQ1 in a few days $$ Oct 12, 2012
@wanderinggull Which? I don’t know. What was meant to produce “ever closer union” seems to be producing the opposite. Nobel = Pollyanna Oct 12, 2012
Until the excessive debt issues r addressed, the multiyear trend in inflation, & thus the long Treasury bond yields will remain downward $$ Oct 12, 2012
“During all of the Fed actions since 2008 the velocity of money has plummeted and now stands at a five decade low” Hoisington & Hunt Oct 12, 2012
A jump in daily essentials has a more profound negative impact on living standards in economies with lower levels of real per capita income. Oct 12, 2012
How the Fed expects economic traction from higher stock prices when rising commodity prices r curtailing real income & spending is puzzling Oct 12, 2012
These three studies show that the impact of wealth on spending is miniscule?indeed, ?nearly not observable.? Hoisington Oct 12, 2012
“Fed Chair Ben Bernanke and other Fed advocates believe the ?wealth effect? of QE3 will bring life to the economy.” Hoisington Oct 12, 2012
Prior Tweet a quotes Hoisington & “unintended consequence of these Federal Reserve actions, however, is to actually slow economic activity” Oct 12, 2012
QE3 is a tacit admission by the Fed that earlier efforts failed, but this action will also fail to bring about stronger economic growth. $$ Oct 12, 2012
Please follow Cato Scholar and JHU professor that I learned a lot from: @steve_hanke Oct 10, 2012
Market Dynamics
As an aside, there’s kind of a rule of thumb for Bermuda insurers on buybacks: >1.3x tangible book: special dividends. <1.3x TB buybacks $$ Oct 12, 2012
The Buyback Epidemic http://t.co/l9SvTwZM @reformedbroker notes that buybacks make less sense, the higher valuations get. I concur $$ Oct 12, 2012
New Regime http://t.co/L2JaQC2J @reformedbroker notes a sea change in the markets. I’ve been heading that way; still thinking about it $$ Oct 12, 2012
CNBC: Jim Rogers vs. Marc Faber (FULL) 10/04/2012 http://t.co/b5sEOEZb Faber & Rogers on the same segment? What a hoot! $$ $GLD $SPY $TLT Oct 12, 2012
Bubble-Era Financing Returns as Profits Falter http://t.co/yhxBEFxq Pay-in-kind bonds return, very nice. 2 years of rally left at most $$ Oct 11, 2012
Wrong: Bullish Sign for Stocks: Leverage Is Up http://t.co/1Qvcdkh9 What matters more is whether leverage will rise in the future $$ Oct 09, 2012
Rest of the World
Zhang Weiying: China’s Anti-Keynesian Insurgent http://t.co/TGNGlo9e Fascinating tale of an Austrian economist surviving in China $$ Oct 13, 2012
Hollande Robbed of Growth Engine as Companies Cut Investment http://t.co/ZGdrllIG Logical 2 invest less when EU & France r a mess $$ Oct 12, 2012
EU Wins Nobel Peace Prize http://t.co/VoTaN3ZK Nobel committee finally “jumps the shark.” The EU is unstable; a war waiting 2 happen $$ Oct 12, 2012
Spanish Bonds Risk Forced Selling as Rating Approaches Junk http://t.co/yO8XWNl4 The Rating agencies r flawed, but on credit they r honest Oct 12, 2012
IMF?s Blanchard: Healing From Crisis Could Take Decades http://t.co/NXYmLjU3 Crisis won’t b healed until total debt levels normalize $$ Oct 11, 2012
IMF Sees ?Alarmingly High? Risk of Deeper Global Slump http://t.co/B7Dg9Ah9 A stopped clock is right twice/day, $ the IMF is right now $$ Oct 09, 2012
Iran Low on Options as Hyperinflation Concerns Spark Gold Dash http://t.co/rYqDjinO Hyperinflations spawn currency substitutions: gold, $$ Oct 09, 2012
Chavez Win Called by BofA Sparks Selloff as Barclays Flops http://t.co/DNPxpVzO Sad that Chavez won, but the bonds reflected a loss $$ Oct 09, 2012
Why a U.S. buyout firm is investing in Greece http://t.co/26oB31e9 ht: @danprimack – Companies w/global markets insensitive 2 local probs $$ Oct 08, 2012
Sicily, a Portrait of Italian Dysfunction http://t.co/w3dn2JFe Core Europe is to Italy as Italy is to Sicily. $$ gone & hard work starts Oct 08, 2012
Cheapest Chinese Stocks Since ?97 Not Enough to Signal Rally http://t.co/rTEm2MNF Noneconomic actors compete & drive down future profit $$ Oct 08, 2012
The Iran Hyperinflation Fact Sheet http://t.co/bitjVaqn From my former professor @ JHU, Steve Hanke. Financial sanctions r biting in Iran $$ Oct 07, 2012
US Real Estate
OCC Forced JPMorgan, Wells Fargo to Write Down Home-Equity Loans http://t.co/qxXjXBoS FD: + $WFC – ’bout time. Recoveries poor on HEL $$ Oct 12, 2012
California Leading U.S. Out of Housing Bust http://t.co/oEaOG4nf I would be wary of “dead cat” bounces here $$ Oct 12, 2012
Tech Firms Become Real- Estate Trusts http://t.co/GrHU2bo5 Tech firms that own a lot of real estate take advantage of becoming REITs $$ Oct 11, 2012
Not New York Towers Rise With Embrace of Yield http://t.co/3MKpRdVi When vacancy rates r this high, ordinarily rents fall. Y not now? $$ Oct 08, 2012
Agriculture
Milk-Cow Drought Culling Accelerates as Prices Jump http://t.co/WvHEturP Anything involved in animal husbandry is having tough time now $$ Oct 11, 2012
Midwest Drought Claims Poultry Producer http://t.co/9K4cL3Gx Many firms involved in the meat biz r having a rough time now. $$ Oct 11, 2012
Other
I’m not much of an #Orioles fan, but don’t you have to love a team of nobodies who can challenge the highly paid #Yankees? $$ Oct 12, 2012
The UN has declared today as the International Day of the Girl Child http://t.co/L0nS6wtd Sex selection abortion kills the most girls $$ Oct 11, 2012
If Only T. Boone Pickens Had Died http://t.co/tpXYGeCV Score: TB Pickens 0, Wealthy donors 0, Oklahoma State Univ. 0, Life Actuaries 1 $$ Oct 08, 2012
Musk?s SpaceX Launches Craft for Space Station Deliveries http://t.co/Z3MH68Ud Space age begins as governments r less of a factor $$ Oct 08, 2012
California Facing $5 Gasoline Stirs Brown to Relax Rules http://t.co/uQUPOz8f There is a pain point 4 everyone, just found 4 CA gas $5 $$ Oct 08, 2012
Comments
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“Good post, Josh. You have identified many of the best. No one of us covers it all; it’s a strong list” ? David_Merkel http://t.co/3Qg6WWZk Oct 10, 2012
At this rate, growing tobacco should be prohibited. Oh, wait, we tried that with alcohol. Never mind. $$? http://t.co/hU9nI6l2 Oct 09, 2012
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On Angela
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@PavChyt @matinastevis Her *former* husband. She kept the name b/c it was good politics. She did not keep him. Oct 08, 2012
@PavChyt @MatinaStevis I received the name Merkel at birth. Angela got it from her 1st husband. At least people r spelling it right now $$ Oct 08, 2012
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Retweets
RT @MuniCredit: Citi Muni Presentation: http://t.co/ONrQe9gA #muniland h/t: @bondgirl Oct 12, 2012
I appreciate retweets RT @LSilverspar: Not enough for the value of your posts. If you value the retweets, I will do so far more often. $$ Oct 12, 2012
My week on twitter: 22 retweets received, 22 new followers, 16 mentions. Via: http://t.co/SPrAWil0 Oct 11, 2012
RT @danprimack: Every time people get all worked up over a national presidential poll, I wonder if the electoral college was eliminated … Oct 08, 2012
True of many notable CEOs w/earnings 2 smooth RT @rcwhalen: GE’s Jack Welch Knows All About Cooking the Books http://t.co/5vJeRux6 $$ Oct 08, 2012
RT @Convertbond: “Markets are increasingly distorted by Central Banks, attempts to squeeze drops of growth from overindebted developed w … Oct 07, 2012
Shock! $$ RT @BarbarianCap: Revised Greek GDP figures show recession deeper than thought http://t.co/FCspv2gU. > data released friday night Oct 06, 2012
Chavez ?Likely? to Lose, Supporting Bonds, Barclays Says http://t.co/zcufsNLN Something optimistic 4a Friday afternoon; but will he go? $$ Oct 05, 2012
Spain Sees Divorce Driving Breakup of Towns in Recession http://t.co/J423DVhS Badly handled, economic problems lead2 relationship problems Oct 05, 2012
BOJ Seeks Help Against Deflation http://t.co/G1ONwoA7 Contrary to popular belief, low central bank policy rates inhibit growth $$ Oct 05, 2012
Longest Rally in Nine Years for JGBs on Deflation http://t.co/dCzC59cM 6th straight quarter of gains: matches a similar stretch in 2003 $$ Oct 02, 2012
Norway?s Wealth Fund Targets U.S. Real Estate by End 2013 http://t.co/JQalAy2U They have a long time horizon; this isn’t 4 speculators $$ Oct 02, 2012
Spain Expects a Wider Budget Gap http://t.co/5AHLEGGI No surprise, Eurozone numbers r routinely gamed, b/c there is no enforcement $$ Oct 02, 2012
Trade Slows Around World http://t.co/YkTFRBDE Kind of a soggy feeling w/China slowing, huge gov’t deficits & loose $$ policy Oct 02, 2012
Regulations help create shortages because gas in 1 area can’t be used in another. Time to simplify & have fewer blend? http://t.co/Y925MhFg Oct 04, 2012
Companies
Jet-Lease Billionaire Udvar-Hazy Takes On $AIG Hand That Fed Him http://t.co/04THKwF7 When AIG bot ILFC, took stock to avoid taxes, oops Oct 05, 2012
Apple?s Steve Jobs: What He Knew in 1983 http://t.co/JyLPvlbW Jobs was an amazing guy. What he foresaw makes him even more amazing. $$ Oct 04, 2012
Dan Loeb and Boyz II Men: Break Up Murphy Oil http://t.co/MdPhjujW $MUR doesn’t want to break up, but many oils cos r going that way $$ Oct 04, 2012
Federal Reserve
When central banks feel they need to reveal more & show action, they fall into a trap of over-acting, which leads to a liquidity trap $$ Oct 05, 2012
Fed Seeks to Clarify Plans http://t.co/DzOT2NXj Fed transparency is a bad idea. Fed managed $$ policy better when it revealed little Oct 05, 2012
Rubik?s Revolutions http://t.co/Q3SAYuJ6 @izkaminska takes us through the vagaries of why QE doesn’t do that much. We r Japan now $$ Oct 03, 2012
Don?t call it money printing, rubiks cube edition http://t.co/Eo5vkEkN No, QE is not money printing, but it won’t be easy 2 undo $$ Oct 03, 2012
Bernanke Seeks Gains for Stocks in Push for Jobs http://t.co/Xby6Bvd9 Monetary policy favors the rich over the poor in the current Fed $$ Oct 03, 2012
Despite Gains, Many Flee Stock Market http://t.co/JRhWY0c8 Y retail investors tend to lose- fail 2 buy & hold @ a moderate risk level $$ Oct 05, 2012
Investors Jump Off the ‘Junk’ Pile http://t.co/iqbZRo5b New record in junk issuance, & a very low proportion of BBs, feels like 2006 $$ Oct 05, 2012
Merrill Lynch, Morgan Stanley, Wells Fargo Keep Losing Market Share, And They May Be OK With It http://t.co/1gKpSevF RIAs Ascendent $$ Oct 04, 2012
My (Not so) Golden Rules About Investing (& Not Investing) http://t.co/YNReadXs HT: @reformedbroker 25.75 tungsten-filled investing rules $$ Oct 04, 2012
Early Impact Of 401(k) Fee Disclosure Rules http://t.co/HBdtk7Oy This will be big. When you really c how much expenses they charge, ouch $$ Oct 04, 2012
They’re back! Yield hunt pushes funds into CLOs, CDOs http://t.co/x47V6xSc Into the final phase of the credit rally. Wind it tighter! $$ Oct 04, 2012
Stop Me Before I Do Something Stupid http://t.co/tOjyLW7R Tips for becoming a more disciplined investor?and boosting your returns $$ Oct 03, 2012
The Three Most Overrated (& Underrated) Financial Planning Recommendations http://t.co/eIMjtTjt Worth a read $$ Oct 03, 2012
For Warren Buffett, the cash option is priceless http://t.co/srmJcalh If you have the discipline, the cash option has value, if not no $$ Oct 03, 2012
Damages http://t.co/MzXBB2QR Bill Gross takes an inflationary view, & assumes that the deflationary forces of the world will go away $$ Oct 03, 2012
Dylan Grice Writes His Most Negative Note Ever http://t.co/VIhFGEEc Notes that the present QE policy favors the rich over the poor $$ Oct 02, 2012
America?s new subprime boom: This time it?s cars http://t.co/EBkXqw0a This will b a positive trend for 2 yrs; worry out in 2014 $$ Oct 02, 2012
6 reasons to dump a bad mutual fund http://t.co/IleCG33t Could b simpler: sell when you find a fund w/better prospects net of loads $$ Oct 02, 2012
Politics
The Romney Reboot Arrives http://t.co/ViEoTb5L I’m voting 3rd party, but it is interesting 2c the presidential contest liven up $$ Oct 04, 2012
How to Make an Ailing World Economy Even Sicker http://t.co/XDiOkq5U The idea of gradually reducing the deficit is politically naive $$ Oct 03, 2012
Romney’s Middle-Class Tax Sale http://t.co/qywvSVXM The devil is in the details, & true of Obama as well. Ended up being Bush-plus $$ Oct 03, 2012
Romney Floats Idea of Itemized Deduction Cap http://t.co/E5nkUUO3 Has to be a cleaner way 2 do this. Ah, return to TRA ’86. Simple $$ Oct 03, 2012
Obama Cabinet Flunks Disclosure Test With 19 in 20 Ignoring Law http://t.co/Nt07Bgwu Less transparent than Bush http://t.co/NZ6A3PIs $$ Oct 02, 2012
Bank Regulation
Bank-Friendly US Regulator Shifts Focus to Revamp Reputation http://t.co/xUVY1UOE OCC is actually going to regulate banks?! Who knew? $$ Oct 04, 2012
Freddie’s Foreclosure Plan Hits Roadblock http://t.co/XrUeAjze We don’t get it. After 2 much debt financing housing we seek more debt $$ Oct 03, 2012
Banking should be a low ROE business.? High capital levels keep the banking system safe. $$ http://t.co/uUntNaXw Oct 03, 2012
Intelligence Exits Washington, Vacancies Rise http://t.co/VJt1y4KU Will b interesting 2c how comm RE pricing shifts as Wash DC retrenches Oct 03, 2012
Banks Like Munis; Mom-and-Pop Investors Don’t http://t.co/ugDPBL4F I don’t get how banks w/short liabilities can buy long munis $$ Oct 03, 2012
Sheila Bair: The one thing banking regulators should do now http://t.co/tu5jGYx4 Her solution is to raise capital requirements $$ Oct 02, 2012
A Very Strange Way to Assess the Safety of Banks http://t.co/8u05kbZO Simpler metrics than Basel r needed; complex ones r easy 2 game $$ Oct 02, 2012
Other
Big Picture Conference 10/10/12 http://t.co/IrsvZtU0 Lineup: Barofsky, Grice, Yamarone, O’Shaughnessy, Ritholtz, Rosenberg, Bianco & more $$ Oct 04, 2012
Bill Gross calls for a balanced budget so that all Treasury bonds & his bonds will get paid in full. $$ http://t.co/lTzq5zmf Oct 02, 2012
SEC Leads From Behind as High-Frequency Trading Shows Data Gap http://t.co/H6YnjVWr SEC way behind $NDAQ & $NYX in understanding HFT $$ Oct 02, 2012
Comments
RE: She bought Paypal, the most valuable part of $EBAY . What more could you ask for? $$ http://t.co/tfEVghRF Oct 04, 2012
Commented on StockTwits: Name 3 insurers that have managed Life & P&C operations well… I am a former insurance buy… http://t.co/aMsgW4nN Oct 03, 2012
Commented on StockTwits: Pretty certain that the DTAs would be divided up in a breakup. Insurance acctg tracks DTAs … http://t.co/NGmkWSmk Oct 03, 2012
RE: @bloombergview This really seems like wishful thinking. Huge difference in the way most Muslims & Westerners thin? http://t.co/rMt8w3zf Oct 03, 2012
Commented on StockTwits: $HIG has issues with variable products 2a higher degree, even though $AIG has the same issu… http://t.co/JWzZSvrV Oct 03, 2012
Commented on StockTwits: There r no synergies btw each of the 3 groups: no advantage to having P&C, Life & Other tog… http://t.co/sRU7zWys Oct 03, 2012
Commented on StockTwits: I would split P&C & Life & everything else — still a valid idea. http://t.co/FPAXZZUX Oct 02, 2012
RE: @PS46MMUCF4PDUIQ4LRUF3DMW2A That doesn’t solve “fat finger” problems, rogue automated trader, or feedback loop pr? http://t.co/EgjYsqbZ Oct 02, 2012
Replies
@incakolanews Could be… or maybe Barclays is trying to reduce its VZ bond inventory… Oct 05, 2012
. @The_Analyst The life insurance industry got burnt on CDO crops 1 (1998) & 2 (2001), but not 3 (2008), what will crop 4 yield? $$ Oct 04, 2012
@BlackRaven999 Both stock & flow are important, that is what makes this complex 2 understand Oct 03, 2012
@DividendMaster I think that either a significant recession &/or inflation is unavoidable. Delayed deficit decline means no deficit decline Oct 03, 2012
@BlackRaven999 Waiting till maturity leaves QE deposits in the system 4a long time due to twist. All removal of policy accommodation is hard Oct 03, 2012
@hook910 Take it up w/Buffett who has done it successfully. Intelligent businessmen do it: buy cheap assets when opportunities allow. $$ Oct 03, 2012
@hook910 With a long enough time horizon, and patient capital, market timing can succeed, value mgrs do this. This is what Buffett & FPA do Oct 03, 2012
@hook910 So you admit that the value of dry powder does change over time. Thanks! 😉 Oct 03, 2012
@hook910 It is not on option on cash, but cash can b thought of as an option on other assets. Was dry powder valuable in late 2008? Yes $$ Oct 03, 2012
@wanderinggull I think it is a bit of a stretch Oct 02, 2012
@DividendMaster They r attempting to lock in a smaller loss. Wonder when the yield on the 30-yr TIPS goes negative? $$ Oct 02, 2012
@ReformedBroker I respect Chuck Royce, but basically he is estimating the odds of deflation as being very low. What if China shrinks? $$ Oct 02, 2012
@TheStalwart Big installed base for LIBOR, easy to offer something better: even total up all US interbank lending 4a day, calc avg rate $$ Oct 02, 2012
Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year.
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months.
Unchanged GDP view.
Growth in employment has been slow in recent months, and the unemployment rate remains elevated.
Growth in employment has been slow, and the unemployment rate remains elevated.
No real change.
Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed.
Household spending has continued to advance, but growth in business fixed investment appears to have slowed.? The housing sector has shown some further signs of improvement, albeit from a depressed level. ?
Shades down business investment.? Shades up housing.
Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
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. Why bother saying this?
The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.
The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.
Monetary policy omnipotent.
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.
No change.
The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
Clarifies and tightens its policy objective. CPI is at 1.4% now, yoy, so that is quite a statement.
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it 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.
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 agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.? The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it 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.? These actions, which together will increase the Committee?s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
Commits to an open-ended purchase of low-coupon agency residential MBS.? Wonder how long it will take them to saturate that market?
Also continues the twist program in Treasury bonds.
Will reinvest maturing MBS in more MBS, and agencies in agencies.
Does not mention how the twist will affect those that have to fund long-dated liabilities.
The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation
The Committee will closely monitor incoming information on economic and financial developments in coming months.
Moved up from below, no real change
as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.
Conditions additional policy changes on the labor market.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
The FOMC promises what it cannot know or deliver.
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 expects to maintain a highly accommodative stance for monetary policy.
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 economic recovery strengthens.
Promises that they won?t change until the economy strengthens.? Good luck with that.
In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Extends low Fed funds out by around five months versus the last FOMC statement.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.
No change
Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.
Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.
No change. Only semi-sane person in the room.
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Comments
The FOMC pulls out all of the stops.? When this policy doesn?t work, what will they do?
The FOMC commits to conditional but potentially unlimited agency residential mortgage-backed securities [MBS] purchases, continues and extends the twist program, and lengthens the period of FOMC Fed funds policy accommodation.
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.
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 the unemployment rate improvement comes more from discouraged workers.? Inflation has moderated, but whether it will stay that way is another question.
A Statement to Dr. Bernanke:
More debt will not get us out of this crisis.? The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before WW two started.
Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply.? The investments in MBS only help solvent borrowers on the low end of housing, who don?t really need the help.? Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.
The problems with unemployment are structural, not cyclical.? Labor force participation rates continue to decline.? There is greater labor competition around the world, forcing down wages on the low end.? There is nothing that monetary policy can do to change this.? You can create stagflation through your policies, but not prosperity.
When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet.? The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.
You haven?t thought through all of the ?second order? effects of your policy.? Even the ?first order? effects, which favor the rich over the poor, seem to elude you.? Assets rise, helping the rich.? Interest rates fall, helping the rich who can borrow.? Commodity prices rise, harming the poor.
Insanity is doing the same thing over and over, and expecting a different result.? When will you realize that the policies of the Fed aren?t helping, and need to be abandoned?
How cynical are you? How close have you been to politics in DC?
I know a lot of people who work for the US Government directly or indirectly, and they are astounded at the waste and fraud.? They are honest people, and it weighs on them.
The more I watch it, the more I think that power needs to come back to the states, and slim the Federal Government.
Now, I’m a libertarian of sorts, but what if you come to discover this as a “true blue” member of the Democratic Party?
Most people initially come to politics idealistically, and so did the author, inspired by… Joe Biden.? Now, with Mr. Biden, I did not see the thrill when I was younger.? Yes, there was more complex rhetoric, but nothing materially different then compliance with the particulars of the coalition backing the Democrats.
Be that as it may, the author went through many changes in supporting Biden and the Democratic Party.? Here’s his bio:
Jeff Connaughton holds an MBA with honors from the university of Chicago and a JD from Stanford Law school. He worked for four years as an investment banker, first at Smith Barney and then at E. F. Hutton. in 1987, he joined Joe Biden?s presidential campaign as Deputy national Finance Director and thereafter became his special Assistant when Biden chaired the senate Judiciary Committee. After graduating from Stanford, Connaughton clerked for Chief Judge Abner Mikva of the united states Court of Appeals for the DC Circuit, then followed Mikva as his special Assistant when Mikva was appointed Counsel to President Bill Clinton. in 2000, along with Jack Quinn and Ed Gillespie, Connaughton founded Quinn Gillespie & Associates, one of DC?s premier lobbying firms. He lives in Savannah, Georgia.
That’s a lot of change in 20+ years.? The book takes you from his early days, interleaving the recent versus the past, until we get to the financial crisis, at which point, the author’s faith in the Democratic Party is severely tested.? He never abandons his principles, but he grieves for his party.
His real crisis comes after Barack Obama is elected with Joe Biden as VP, and he and his boss are excluded because they have been lobbyists.? But the boss is appointed to fill the Senate seat of Joe Biden, and the author comes along as his senior aide.
They have two years to do what is right, uncorrupted by the money of politics, because he isn’t running for re-election.
They take on High Frequency trading.? Regardless of tighter spreads, is the amount offered at the spread similar-sized, or smaller?? Further, what happens in a crisis?? Do the market makers and specialists hold to their roles, or conveniently abandon them, amid crisis.? The latter seems to be true.? The philosophy is: to the degree that we have laws providing structure to markets, so that many people can trade easily, knowing that things are basically fair, we must review all practices that give unfair advantages to some.
In the process of trying to reform HFT, Ted worries that something like the “flash crash” will happen in advance of its occurrence, further burnishing his reputation as a thinker on markets.? Ted Kauffman asked: who is served by ever-greater liquidity? (P. 185)? From my angle, studies need to be done studying “percentage liquidity” seeing how spreads divided by average bid/ask size have to be done — narrow spreads don’t mean much if you can’t do much volume there.
On pages 204-5 of the book, it describes the gamut of Ted’s ambitions regarding the financial crisis:
Back in the senate, Ted had three great insights.? First, this wasn?t a time for vague legislation that kicksthe can back to the very regulators who?d failed in the lead-up to the crisis; Congress needed to draw hard statutory lines, just as it had during the great Depression. Second, Wall street?s inherent conflicts of interest had to be resolved through structural reform, such as by reinstating Glass-Steagall or imposing size and leverage limits. Third, he wanted to take the fight straight to the megabanks on too-big-to-fail, makingWall street defend against structural reforms it opposed,at least to increase the chance that other provisionsopposed by the banks, like the Consumer Financial Protection Bureau, would pass.
One thing he knew that I knew then and now.? The banking regulators did not use the tools that they had to do their jobs.? They were quiet accomplices as the leverage bubble built.
On page 228, Ted introduces “…the safe Banking Act of 2010, the Brown-Kaufman amendment would have put limits on the
size of and leverage used by megabanks by:
imposing a strict 10 percent cap on any bank holding company?s share of the united states? total insured deposits;
limiting the size of non-deposit liabilities at financial institutions (to 2 percent of U.S. GDP for banks, and 3 percent of GDP for non-bank institutions);
setting into law a 6 percent leverage limit for bank holding companies and selected non-bank financial institutions.”
The most radical of the proposals is the middle one, which aimed to limit repo financing at financial institutions; it would have been much more effective than the Volcker Rule.? Most of the problems in a financial crisis stem from short-term liabilities financing long-term assets.? This attempts to address the short-term liabilities that do not stem from deposits.
As the author comments on page 229:
Remarkably, although there is a prudential cap on the amount of deposits the largest banks can hold, nothing limits bank liabilities like repos, which often must be rolled over every day.
This is insightful, and the insight should be extended to securities lending, and derivatives, where margining must be adjusted day-by-day.
As Ted proposes breaking up the too big to fail banks, he runs into a lot of resistance.? This includes pseudo-intellectuals like Larry Summers who argues on page 234:
Summers?s [sic] second argument was that, if we broke up the megabanks into smaller banks, ?it would actually make us less stable. Because the individual banks would be less diversified, they would be at greater risk of failing because they wouldn?t have profits in one area to turn to when a different area got in trouble.?
What Summers didn’t get is that complexity creates more risks than diversification erases.? Complex banks are typically not well-managed as far as bad times are concerned; diversification disappears during the crisis.? And if we had a lot of small banks, yes, we would have more failures, but no, the system would be more secure.? The system is at risk from the 4 to 20 banks that are so large that the US Government must bail them out.
As it was the Brown-Kauffman amendment failed, and a pity that it did.? Would that it had become law, as opposed to the watered-down “Volcker Rule.”
At the end the author leaves DC after his patron leaves office, and restarts his life in Savannah, Georgia.? He adjusts to the happiness of life outside the Beltway, and realizes that a life outside of politics can be pleasant.
Quibbles
Page 149 — there is no way that short-selling is behind 50% of trading on a normal basis.? If that is true, I have to rethink a lot.
Page 152 — Even with naked short selling, it is really difficult to move a stock’s price down.? I would encourage the SEC to try some experiments where they nakedly short a stock, and see if they can make money off it.? I bet they can’t.
Page 179 — spelling error: peak s/b peek.
Who would benefit from this book: ? This book will tell you how much DC is in thrall to the power of money.? Doesn’t matter which party, their ideals are up for sale.?If you want to, you can buy it here:?The Payoff: Why Wall Street Always Wins.
Full disclosure: The author’s PR Flack sent me a PDF file of the book.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
