Macroeconomics – Page 32

Sorted Weekly Tweets

Posted on 17 November 2012 by David Merkel

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

Pettis’ articles at the WSJ http://t.co/yS8vQMi3 & http://t.co/c78EI02P & at Foreign Policy http://t.co/8lNMbOUV Tough change $$ Nov 16, 2012
Xi Inherits an Economy That Needs Work http://t.co/bhS5DaC7 A decade of malinvestment should give way 2 a free economy, but it won’t $$ Nov 13, 2012
Examining China?s ?Shadow Stimulus? http://t.co/6Rv7HHGZ Avoid Chinese wealth management products, they are likely 2b Ponzi schemes $$ Nov 13, 2012
Wary of Future, Professionals Leave China in Record Numbers http://t.co/0pI04Bso Let them come 2 America! Throw the doors open 4 them! $$ Nov 13, 2012

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

Posted on 16 November 2012 by David Merkel

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

Posted on 15 November 2012 by David Merkel

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

Posted on 15 November 2012 by David Merkel

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:

Internationalization
Capital Account Convertibility
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

Posted on 15 November 2012 by David Merkel

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:

Stabilize and reduce govt debt
Structural reforms — flexibility
Reorganize & recapitalize banking sectors
Reform monetary union
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:

Real conversions and similarity
(sounded similar to 1)
Political consensus on fiscal & monetary union
Banking union
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

Posted on 15 November 2012 by David Merkel

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 2

Posted on 15 November 2012 by David Merkel

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

Posted on 15 November 2012 by David Merkel

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.

Sorted Weekly Tweets

Posted on 10 November 2012 by David Merkel

Politics

California Democrats seize super majorities in both houses of Legislature http://t.co/Wp2cVYTF CA businesses plan exit strategies $$ Nov 08, 2012
Harsher energy regulations coming in Obama’s second term http://t.co/JHDKAhok Fracking, chemical emissions, & more $$ -losing green energy Nov 08, 2012
US crop insurance a post-election target, farm bill elusive http://t.co/9OdbRVjy W/Ag doing so well over last 5 yrs, this should b ez, not Nov 08, 2012
Ethanol Going Ugly Turns Bush Plan Into Obama Test http://t.co/Pe6ixxc1 Should b a no-brainer, but Congress ag state politics r ugly $$ Nov 08, 2012
Could This Be End of Evil Filibuster? http://t.co/t72aR3OR Limit filibusters to actual votes & require physical presence on the floor $$ Nov 08, 2012
Obama Win Means Health Overhaul to Move Ahead in States http://t.co/ybXggsLt Destroy health care 2 replace it w/single-payer system $$ Nov 08, 2012
Yep, There Have Been Problems With Email Voting in New Jersey http://t.co/lZjzVNrG In general, probability of fraud in voting is rising $$ Nov 07, 2012
Defense Fund Rockets to Four-Year High: Romney Rally? http://t.co/3fzUDRTH Discounting Obama’s change of heart after election $$ 😉 Nov 06, 2012
Romney Threatens Pimco?s Gross With Bernanke-Dumping Plan http://t.co/xO6Tm0aF 2 many links in the chain of reasoning; low prob correct $$ Nov 06, 2012
Southfield Twp. voter appears to die, then asks ‘Did I vote?’ http://t.co/2ZwRgotp I found his words to his wife 2b touching in many ways $$ Nov 06, 2012
Tuesday Is Election Night, Be Careful What You Tweet http://t.co/UdPPMYiJ Measure twice, cut once, tweeps. & bring a dose of skepticism $$ Nov 05, 2012
Three Men Make a Tiger http://t.co/eX1PziJK John Mauldin predicts Romney as victor; piece is mostly about eliminating confirmation bias $$ Nov 05, 2012

China

China: Worse Than You Ever Imagined http://t.co/Kp69IC1n 40MM+ people were killed during the “Great Leap Forward.” Mao deserves derision $$ Nov 08, 2012
China’s leadership challenge in new era: douse “inequality volcano” http://t.co/pJiAksUl Widespread poverty in China scares Communist Party Nov 08, 2012
A Cheerleader for Mao’s Cultural Revolution http://t.co/d3RhdV95 Lied about Cultural Revolution & The Great Leap Forward. Millions died. Nov 08, 2012
The Chinese Credit Bubble – Full Frontal http://t.co/MDZn1jCs As I have argued for some time, total debt in China is quite high $$ #danger Nov 07, 2012

Companies

Peltz Takes Stake in Danone http://t.co/P1AdRe9G Danone $DANOY is a French firm, will be difficult to encourage change $$ Nov 08, 2012
Prudential Records $618 Million Loss on Derivatives http://t.co/6ZQK1Uk5 I worry about life industry; the acctg 4 secondary gtees: yuck $$ Nov 08, 2012
Nucor Galvanizes Gas Hopes http://t.co/NmfZ9fmJ $NUE provides capital 4 development of gas resources of $ECA -Gets 50% stake in wells $$ Nov 08, 2012
Office Depot-OfficeMax Deal Seen Rescuing Value http://t.co/bNsFKuJU The failure of office retailers as the non-profit $AMZN undercuts $$ Nov 07, 2012
SapuraKencana Agrees 2 Buy Seadrill Tender Rigs http://t.co/XXrAsjFj Interesting deal, clever investor; expands Malaysia exposure $SDRL $$ Nov 05, 2012
Sharp blunted, and it?s not alone http://t.co/5jTHzKuN Argues that Japanese electronics mfg & exports r getting killed by strong yen $$ Nov 04, 2012

Federal Reserve

Inflation, QE and forcing the banks to lend http://t.co/XuPgRPJm I’ve subscribed 2 The Economist for 25 years; they r getting dumber $$ Nov 04, 2012
Casting Dual Roles, at Treasury & the Fed http://t.co/kIwpAzZ3 Bernanke’s Last Supper & The Return Of Larry Summershttp://bit.ly/Sp9PBZ $$ Nov 04, 2012
Off of the last tweet, it would be nice 2c Bernanke retire; he really may b tired of the abuse. His prob was he thought he knew what 2 do $$ Nov 04, 2012
& as a result, could not c that Neoclassical macro does not work with an overindebted economy. We need fewer economists at the Fed & Tsy $$ Nov 04, 2012
Wrong: Seth Klarman Goes Nuts On The Fed In His Latest Investor Letter http://t.co/G6gAkMfU Y I think value investors should run the Fed $$ Nov 04, 2012
Seth Klarman, like most value investors, is farsighted & not just thinking about how to goose GDP for the next year. Klarman 4 Fed chair $$ Nov 04, 2012

Eurozone

Convergence between the core and the periphery economies in the Eurozone http://t.co/2oD2exeV Drowning PIIGS pull Germany & France under $$ Nov 08, 2012
ECB & Fed: Worlds Apart http://t.co/zZuaFiXU Axel Merk praises the ECB & disses the Fed. Argues that ECB has not gone fiscal as the Fed has Nov 08, 2012
Unsteady Greek Coalition Faces More Strikes http://t.co/dxQJYzmw Suspect they make it through; Greeks don’t want 2 leave Eurozone yet $$ Nov 05, 2012
The peripheral threat to France http://t.co/0atOAKZq Many of the PIIGS r getting more competitive relative 2 France. No E-zone w/o France Nov 04, 2012

Rest of the World

Old People Versus Babies, In One Graph http://t.co/Erk2Mu8z Global demographic crisis in one very easy to manipulate graphic $$ Nov 08, 2012
Iceland Sees Mortgage Bubble Threat From Foreign Cash http://t.co/djtYZDxw The problems of capital controls start to bite $$ #nofreelunch Nov 06, 2012
Turning Trash Into Tidy Profit http://t.co/FvM32C3a Optimistic story on turning trash into durable building materials in Senegal $$ Nov 05, 2012

Sandy and Disaster

Frederick County teen wins regional science competition http://t.co/F72thGx3 The software can read a picture & tell where it is. $$ Nov 08, 2012
Sandy’s Aftermath: Samuel Pritt Develops Geolocation Software http://t.co/InnwZaGe Young friend won Siemens US Science Competition $$ Nov 08, 2012
Insurance divides haves from have-nots after Sandy http://t.co/NngZdchm Insurance is for catastrophes; scrimp on frequency, not severity $$ Nov 04, 2012
Reserved Buoyancy, Down-Flooding, and Living Off the Grid http://t.co/TXxn9f6e The value of slack in physical systems, especially boats $$ Nov 03, 2012

Market Dynamics

FIRE IN THE DISCO! http://t.co/YComOnGA @reformedbroker warns us that a recession is coming, & talks about a decline in corporate profits $$ Nov 08, 2012
Even 6.75% is too high. Looking at the Q-ratio, CAPE10, & long high quality bond yields would make 4% more realistic http://t.co/vjP0X7y1 $$ Nov 06, 2012
Lightening the Pension Load http://t.co/bi2j6cdJ Never thought I’d c terminal funding return; can b bad 4 annuitants if insurer fails $$ Nov 06, 2012
Fitting Factors Into the Formula http://t.co/35speWwR Bob Arnott& Cliff Asness discuss quantitative investing; long article worth reading $$ Nov 06, 2012
TAGP expiration will put downward pressure on short-term yields http://t.co/YgwmR2bu Once guarantee goes, much S-T $$ will look 4a home $$ Nov 06, 2012
Cash as Trash, Cash as King, and Cash as a Weapon http://t.co/fWS1TOTl In different environments & hands, cash has different properties $$ Nov 06, 2012
Wrong: Is Your Manager Skillful?or Just Lucky? http://t.co/vJu2tTrd Bill Miller neglected “margin of safety” & reaped bad results $$ Nov 05, 2012
http://t.co/VRj1k4Vg They didn’t read paper closely. Performance of anomalies diminished, not destroyed, by publishing academic research $$ Nov 05, 2012
For John Maynard Keynes, Economic Theory Was a Sideline http://t.co/IVdB6Gyc He was a better investor than he was an economist $$ Nov 05, 2012
It?s the Earnings, Stupid: ?Atrocious? Q3 Turns Josh Brown Cautious http://t.co/a2ChJKTL Time 2b cautious says @reformedbroker. Calendar? Nov 05, 2012
“All I know: The next bankruptcy cycle, whether in 2 or 3 or 4 years, is going to be one for the ages. Count on it.” http://t.co/xtHy7lqj $$ Nov 03, 2012

Policy

A New Idea of How to Fix the Ratings Agencies http://t.co/fTEECPUP by @carney | My response: http://t.co/3dWFo2Pv $$ Nov 06, 2012
Investors won?t read the fine print http://t.co/t2W8Nrk9 Even many institutional investors become overworked, lazy, etc. & don’t read $$ Nov 06, 2012
Hero of the day, CPDO edition http://t.co/wIxyPo2T I remember 2006 when @alea_ @interfluidity & I (@ Realmoney) were criticizing CPDOs $$ Nov 05, 2012
Health-Care Law Spurs Shift to Part-Time Workers http://t.co/0ui2LGvm Law of unintended consequences: How 29-hr workweek got created $$ Nov 05, 2012
10 things walk-in clinics won?t tell you http://t.co/qKPj3D3R Major factor is the loss of continuity u have w/doctor who knows u $$ Nov 05, 2012
After Bailout, Giants Allowed to Dominate the Mortgage Business http://t.co/K9HZZWDu “Is this what we saved [the financial system] for?” $$ Nov 04, 2012

Retweets

Can say that again RT @bespokeinvest: Wow, big selloff in the last couple minutes of trading. Dow down 430 points since Tuesday’s close. $$ Nov 08, 2012
Some gift RT @pdacosta: Gift that keeps on taking: France, Belgium agree to pump 5.5B euros into bailed-out Dexia http://t.co/qgq8PI6R Nov 08, 2012
RT @ReformedBroker: This Greek austerity bill is the equivalent of slapping a Kick Me sign on the Troika’s back. Gives us one day’s peac … Nov 07, 2012
Rupert goes back to sleep $$ RT @felixsalmon: RT @dansabbagh: Pearson says FT is not for sale. “This particular Bloomberg story is wrong. ” Nov 06, 2012
RT @SimoneFoxman: you’ve got to be kidding me. — Southfield Twp. voter appears to die, then asks ?Did I vote?? http://t.co/2ZwRgotp Nov 06, 2012
First of many 2 come RT @FrancesDenmark: Indiana is the first state to drop its pension return expectations below 7.0% http://t.co/ir8anqN4 Nov 06, 2012
Murdoch would b interested $$ RT @ReformedBroker: The Financial Slides RT @TheStalwart: Who will buy the FT? Maybe BI in a reverse merger? Nov 06, 2012
Bite your tongue 🙂 Janet Yellen has exceeded the Peter Principle $$ RT @fundmyfund: precious metals say = janet yellen here we come Nov 06, 2012
Easy 2 talk tough, hard 2 not repay $$ RT @munilass: So much for cities standing up to Calpers http://t.co/xWIciI4C Nov 06, 2012
marriage changes u $$ RT @moorehn Surprising: single & married women are further apart politically than men & women r http://t.co/b4adY1pc Nov 06, 2012
Probably priced in $$ RT @kyles09: isn’t the exp of TAG a negative for the big bank stocks or do you think it is already priced in? Nov 06, 2012
I was just looking forward to the end of the political season, sigh RT @jfahmy: Hillary Clinton listed as current 2016 favorite (6:1 odds). Nov 05, 2012
Dog bites man RT @TheStalwart: National Review endorses Mitt Romney http://t.co/ZBAptg8Q Nov 05, 2012
Wow $$ RT @businessinsider: New York Magazine’s Breathtaking Cover Shows Manhattan From Up In The Sky by @KimBhasin http://t.co/FaTgCqA1 Nov 03, 2012

Replies

@valuewalk Thanks. $DANOY might do what they can to improve margins, but might play badly in France. Has mgmt been s/h-friendly in past? $$ Nov 08, 2012
@Frank_McG Very cool. We homeschool — only 4 left, 1 senior, 2 freshmen & a 5th grader. My wife is having a blast. $$ Nov 08, 2012
@TheOneDave You’re welcome — you do some great stuff Nov 07, 2012
@TheOneDave Hey, Dave, don’t see where we can get the Chart… Nov 07, 2012
@amacker Floating NAV, hehe Nov 07, 2012
@TheStalwart My friend and former boss Eric Hovde would have beaten Baldwin, and handily… Nov 07, 2012
@kyles09 My actuarial conservatism, and knowing that God can do whatever he wants with me Nov 07, 2012
@carney I hear you: I’m going to write a piece where I take my “eliminate the rating agencies model” and clarify it http://t.co/x4WsWaj3 $$ Nov 06, 2012
@PragCapitalist Thanks, Cullen. I applied that idea to corporate board elections when writing 4 Realmoney, Shame it didn’t get traction $$ Nov 06, 2012
@michaelroston Yes, but there is a lot of $$ on both sides, and the phones ring. WV & PA gambling firms & Christians vs MD gambling firms Nov 06, 2012
@michaelroston However, if you live in MD all u hear about is 7, the ballot measure expanding gambling. Other measures: <crickets> $$ Nov 06, 2012
@BradErvin1 That’s what I am saying — they r taking consensus risks $$ Nov 05, 2012
@BradErvin1 But my point about the balanced funds is this: in the selection he could invest in, they r all taking the same broad risks Nov 05, 2012
@BradErvin1 57, Married, one kid at home, significant assets good job, wife w/good health, 52, he not so healthy, has saved aggressively Nov 05, 2012
@FriedrichHayek I knew that Keynes got bailed out once (or was it twice?), but he learned from his losses, & was far better at the end $$ Nov 05, 2012
@MarketIntegrity @CFAInstitute @CFAcareers @CFAevents You might want to get different logos; it makes you look like u r RT-ing yourself $$ Nov 05, 2012
@japhychron Bingo. You got it. Nov 04, 2012
@TeamHeadwaters Forgot about that.. those are some of the best limestone deposits in the world, in an area ideal 4 potato farming, right? Nov 04, 2012
@nelson3748 That seems correct, but doesn’t S. Korea have the same issues w/the Chaebol, & they r functioning ok, seemingly… Nov 04, 2012
@munilass Thanks. I put it on my wish list. We discussed mishedging in the finance markets, Soros, &c. Nice of him 2 spend time w/little me. Nov 03, 2012
@munilass What’s the title of the book? I spent about ten minutes talking with him in early 2000 at a Complexity Theory conf @ Columbia U Nov 03, 2012

Comments

I suspect that Obama ends up winning the popular vote as well, and maybe surpasses 50%, fwiw, which isn’t much… $$ Nov 07, 2012
Best thing about elections: they’re over. Second best: gridlock continues. Worst: Four more years of Bush-clone Obama. $$ Nov 07, 2012
“Stocks aren’t GDP futures, so its not a lock that they immediately fall during the recession?” ? David_Merkel http://t.co/CdH1CNuP Nov 08, 2012
Last pres election, took oldest child 2 vote. This time, took child #5 2 vote. If I live, next time will be kids 6 & 7. Time after, kid 8 $$ Nov 06, 2012
“Josh, the article is worth a read, but the Chronicle of Higher Education misreported on it. The?” ? David_Merkel http://t.co/BFGqCw04 $$ Nov 06, 2012
“People easily forget that the stocks of commodity producers are very different than buying the?” ? David_Merkel http://t.co/dDlMNxIY $$ Nov 05, 2012
Helping a client w/his 401(k). Common balanced fund risk factors chosen: Low Duration, Medium credit quality, Large Cap Blend Equities $$ Nov 05, 2012
The benchmark changes added jobs that were created at an unknown earlier point in time. If they were… http://t.co/TmRLG1vg Nov 03, 2012

Eliminating the Rating Agencies, Part 3

Posted on 9 November 2012 by David Merkel

There’s one thing that is a little odd about me: occasionally as I am waking in the morning, something that I have been thinking about comes crashing in on me, and I get a moment of clarity where everything seems obvious for a complex question.

So to begin, I would like to say that I was utterly wrong in part 1 and part 2 of this series.? It won’t work.? Here’s why:

When is it safest to buy high yield bonds — when spreads are tight, or when spreads are wide?? Of course, when spreads are wide.? When spreads are tight, it is risky to buy corporates.? But my method for allocating capital would do the reverse: it would force a lot of capital to be allocated when spreads are high, and little when spreads are low.? That’s the wrong way to do it.

Second, most bond defaults occur because the borrower chokes on an interest payment, not a principal payment.? If you can make the interest payments, under normal circumstances, you can refinance the principal.? That indicates that the risk of a bond will grow less than linearly with maturity.? It may even be flat.

The upshot of this, is that you would want to assign capital counter-cyclically if you could, but no one would go for that, it doesn’t fit human nature.? So maybe a compromise works where there is a fixed amount of capital assigned across the cycle, and not varying by maturity.? So how do you make adjustments for variable riskiness?

For corporate bonds that have a public stock trading, a contingent claims model can yield good results.? Egan-Jones does that, though many of the major raters have similar models, that they watch as a check on their fundamental reasoning.

But many bonds have no publicly traded equity to give them estimates of value and volatility.? Whether private corporates or securitized debts, there is no way to accurately estimate risks, unless you have a cash flow database of the underlying properties/assets, and aside from CMBS, that would be hard to get.

That brings us back to the rating agencies.? Much as they failed on rating novel types of debt that the regulators should not have allowed regulated entities to invest in, the rating agencies did a good job in rating seasoned corporate bonds, both private and public, incorporating private data to sharpen their estimates of creditworthiness.

I know that Dodd-Frank has required Federal Regulations to eliminate the use of credit ratings.? What have they substituted? Management judgement, simplistic statistical tests, nothing, and the ability to use quantitative rating schemes.? My view is this: there will be a series of scandals out of this, and there will be a return to the rating agencies, where human judgment takes in the factors that can’t be crunched into an equation.

Thus I return to my opinions expressed in: In Defense of the Rating Agencies ? V (summary, and hopefully final). You can’t live with them, but you can’t live without them.