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Well, I’m back in suburban Baltimore after the struggle of getting to the the center of DC and back. ?It takes a lot of energy to write 4000 or so words, tweet 26 times, meet new people, old friends, etc. ?Here are some thoughts after the sip from the firehose:

1) There was almost no media there this time. ?Maybe it’s all the action associated with a new president being elected. ?All the same, I see almost nothing on the web right now aside from the Twitter hashtag #CatoMC16?and my posts echoed at ValueWalk.

2) I came out of the conference thinking that I need to read three of the papers, the ones by:

• Hanke & Sekerke — color me dull, but it finally dawned on me the potential degree to which structural regulatory change has been fighting ZIRP.
• Jordan — his idea on how to sop up excess liquidity sounds interesting.
• Goodspeed — I am a sucker for economic history — it broadens the categories that you think in. ?His presentation was very data-oriented, and I thought the methodology was clever for analyzing alternative deposit guarantee methods back in a time when the states regulated the banks. ?(Please bring back state regulation of banks; it works better. ?Many more failures, but they are all small.)

3) Jim Grant is always educational to listen to. ?I also appreciated O’Driscoll, Thornton, Orphanides, and Hoenig.

4) I would not invite back Spitznagel (irrelevant), Allison, Todd, and Gramm (three living in fantasyland).

5) That brings me to the fantasies of the conference as I see them. ?This is what I think is true:

• The Community Reinvestment Act [CRA] was not a big factor in the crisis, aside from the GSEs. ?Intelligent banks make decent CRA loans; I’ve seen it done.
• Subprime lending was the leading edge of of bad lending on residential real estate, but regulators did not do their jobs well in supervising lending.
• Tangible bank leverage was way too high, and was a large part of the crisis. ?So was a lack of liquidity from losing the wholesale funding markets, which disproportionately hit the big banks.
• The big banks were disproportionately insolvent, though a few of them did not need more capital, like US Bancorp BB&T, and Wells Fargo. ?Many more small banks were insolvent also, but they weren’t big enough to move the systemic risk needle.
• Banks are?a little over-regulated, but given the poor ways that they managed liquidity prior to the crisis, you can’t blame Dodd-Frank for trying to avoid that problem again.
• The big bank stress tests are not real in the US or Europe; they exist to mollify politicians and bamboozle the public. ?If they ARE real, then publish the data, methods and results in detail.
• Banks?need a strong risk based capital formula. ?The one for insurers works very well. ?Perhaps banks should imitate the stronger and smarter solvency regulations that insurers use. ?They might even find them looser than what they currently do, but be more accurate as to real risks.
• Inverting the yield curve is?necessary in a fiat money system. ?You need to deflate and liquidate bad lending so that new lending in the next part of the credit cycle can recycle the capital to better projects.

6) That brings me to the realities of the conference as I see them. ?This is what I think is true:

• Fannie/Freddie were a large part of the crisis. ?Undercapitalized relative to the amount of default risk they were taking.
• Housing prices were pushed too high as a result of too much debt getting applied to finance them. ?Loose monetary policy aided the creation of this debt. ?Falling housing prices were the main cause of the crisis, as many loans became inverted, and a slowing economy led to many losing their ability to pay their mortgages.
• We needed a different bailout where bank stockholders lost all, and debtholders lose also, only after that should the FDIC have been tapped to protect depositors.
• Bank solvency is important for the long run for the economy. ?A crisis like the last one erases a lot of the growth that would occur from looser bank regulatory policy. ?Things may be tight now, but once the system adjusts, growth should resume.
• A?healthier economy has lower debt and less debt leverage/complexity. ?Debt and layered debts make an economy inherently fragile.
• A gold standard does not increase instability, unless banks are mis-regulated for solvency.
• The wealth effect is tiny, and the Fed should stop pretending that it does much.

7) While at Cato, I noticed the area named for?Rose Wilder Lane, the same Rose in the “Little House on the Prairie” books (daughter of Laura and Almonzo Wilder). ?She was a libertarian later in life, and knew Ayn Rand. ?Their pictures are near each other in Cato’s basement. ?Just a little trivia.

8 ) There was a lot of sympathy for the idea of not paying interest on excess reserves, and certainly not same rate as on required reserves.

That’s all.

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PANEL 2: MONETARY MISCHIEF AND THE ?DEBT TRAP?

Moderator: Josh Zumbrun -?National Economics Correspondent, Wall Street Journal

Athanasios Orphanides -?Professor of the Practice of Global Economics and Management, MIT Sloan School of Management

H. Robert Heller -?Former Member, Federal Reserve Board of Governors

Daniel L. Thornton -?Former Vice President and Economic Advisor, Federal Reserve Bank of St. Louis

Zumbrun introduces the panel, saying they are monetary policy practitioners.

Athanasios Orphanides begins by praising Friedman, mentioning the book Monetary Mischief. (Note: Amazon Commission)

Limited space for fiscal policy given high debt levels. ?Monetary and fiscal are always linked, though central bankers are loath to discuss it. ?Puts up a graph of rising government debt 1998-present. ?Also graphs Italy, Germany, Japan. ?Is there a debt trap now? ?Is there monetary mischief, inflation, now?

(DM: Phil Gramm just sat down next to me.)

Can debt be sustainable over the long run? WIll there be policies that kill growth? ?Inflation is too low? ?Are there policies that raise the cost of financing debt? (Financial Repression)

Japan was already experiencing deflation prior to the crisis. ?ECB gets its own crisis as a result of their structure.

Puts up a graph of policy of ECB, BOJ, and Fed. ?Suggests that quantitative easing was warranted, and other abnormal monetary policies. ?Suggests that BOJ QE was mild until 2013.

Puts up a graph of Central Bank balance sheet sizes. ?Then one of average interest rates for government debt. ?Then one of real per capita GDP, suggests that Japan has not done much worse than the US, though demographics are a problem.

Comments that QE is a help to governments in financing their debts. ?Look at gross debt net of central bank holdings.

ECB great for strong economies, and poor for weak economies.

Fed — should we be concerned about the balance sheet? ?IMFsays we can grow out of the huge balance sheet if the balance sheet does not grow.

Unsound fiscal policy overburdens central banks.

Heller: everything I want to say has been said already. ?Monetary mischief: Monetary policy does not serve the nation. ?Debt trap: the det grows faster than GDP inexorably.

Suggests that a 0-2% target would be better than 2% for inflation. ?2% consensus under Greenspan — but that is not price stability — eventually Bernanke defines 2% as price stability.

QE was ineffective, and the Fed always overestimated its value. ?Limited room for future stimulus. Perverse effect on savings. ?Must save more to get the same amount of future funds. ?Growing income and wealth inequality.

Hyman Minsky: “Every expansion creates the seeds of its own destruction.”

Pension funds suffer and are underfunded. ?Life Insurers suffer a little. ?Stock market tracks QE. ?The rich do well as a result.

Moving closer to a Federal Debt trap. ?(Guy next to me says “Kaboom” when looking at the debt graph.) ?Interest payments double as interest rates normalize. ?(DM: that’s why they won’t normalize — at least not willingly.)

Thornton: The Fed’s policies are a disaster, and they are ongoing. ?QE and forward guidance on long-term yields. ?Risk-taking is reduced, and GDP grows more slowly. ?No empirical support for QE. ?Keynesian economics have led to a credit trap.

Puts up a graph of CD rates versus t-bills. ?Then Baa yields minus Aaa yields — markets had stabilized by 2010 by these measures. ?Bernanke also argued that QE reduced term premiums, but markets are not segmented.

That said, FOMC’s low interest rate policy, helped make long rates low. ?As the ’90s progressed, Fed funds became uncorrelated with long Treasuries. ?Detrended, after May 1988, behavior changed because the FOMC used the Fed funds rate as the main policy tool, which affects short rates predominantly.

Graph with high negative correlation between the Fed funds rate and the spread between 10 and 5-year Treasury yields. ?Quite striking. ?(DM: this is all bond math)

Graph of household net debt as as fraction of disposable income. ?New bubble of stocks plus real estate.

Argues that credit trap has been going on for 50 years or more. ? Reliance on credit is evident from the growth ?in government debt, which is a function of Keynesianism.

Q&A

Q1 Chris Ingles, CPA: Isn’t the Fed enabling the growth of a socialist state? ?Isn’t growth coming from government deficits?

Orphanides says blame governments, not central banks. ?CBs get forced into enabling the politicians in order to keep things stable.

Q2: Mike Mork, Mork CApital Management — wouldn’t it be better to let interest rates float to aid the market’s allocation of capital?

Thornton: Fed can’t really control interest rates. ?We could get out of the zero lower bond at any point by selling bonds and adjusting policy. ?Take away the excess reserves and the market will find its own level.

Orphanides: can use balance sheet or rates — focus on the results of price stability

Heller: Money supply prior to mid-80s under Volcker gave way to Fed funds under Greenspan. ?Existence of money market funds was a reason for that.

Patricia Sands from George Mason U: ?Were the central banks really surprised? ?Why do Central Banks exist in the first place?

Orphanides: we want to avoid inflation via monetizing the debt. ?We sometimes get second and third best solutions. ?We want to avoid the worst cases.

Heller: CBs can’t bail out governments without risking hyperinflation.

Thornton: interest rates are not the solution. ?They don’t create big changes in spending. ?(DM: Yes!)

Moderator: Craig Torres -?Financial Reporter, Bloomberg News

John A. Allison?-?Former President and CEO, Cato Institute, and former Chairman and CEO, BB&T Bank

Mark Spitznagel -?President and CEO, Universa Investments, LP

James Grant -?Editor, Grant?s Interest Rate Observer

John Allison: Talk about Monetary vs Real economic effects. ?Wall Street did not cause the crisis. ?Was a combination of CRA and the GSEs, aided by the Federal Reserve.

When the dot-com bubble deflated, Greenspan ran monetary policy too loose, and deliberately inflated a housing bubble. ?Greenspan (DM: Bernanke) talked about the global savings glut. ?When rates rose, they rose rapidly in percentage terms rapidly.

Bernanke inverts the yield curve, incenting banks to take undue credit risk. ?Bernanke said that there would be no recession amid all of the bubbles. ?Many mainstream businessmen felt fooled by the Fed.

Average businessmen expect businessmen expect inflation, but it is not happening. ?Now they behave conservatively.

Regulation was worse than monetary policy. ?Risk-based capital. Privacy act. Sarbox.

A big deal, and I am the only one talking about it: Early ’80s: attacked bad banks and they failed — a good thing. ?Good banks kept operating. ?This time regulators saved bad banks and regulated good banks more heavily — perverse. ?Totally irrational.

Sheila Bair should not be viewed as a hero. ?Closed barn door after cow got out. ?Later “solutions” not useful.

Bernanke’s book: on the verge of global armageddon… JA thinks contagion was far smaller than perceived.

Liquidity requirements are restraining lending. ?Thinks that banks can’t aid in creating jobs. ?Lending standards are tight.

Likes a bill coming out that would loosen matters. ?Talks about the ’90s when BB&T opposed regulation on supposed racial discrimination in lending.

(DM: What a dog’s breakfast of clever and stupid)

Mark Spitznagel — management and hedging of extreme risks.

Mises — No laboratory experiments can be performed with respect to human action.

Talks about equilibria, correcting processes, etc. ?(DM: Loquacious, not going anywhere… boring.) ?Mentions Tobin’s q-ratio.

(DM: I remember that I didn’t give his book a good review. ?His talk validates that review.)

Tobin, a Keynesian, looked at the q-ratio as a monetary policy tool. ?But investment doesn’t get affected much by the q-ratio.

Shows how the q-ratio is negatively correlated with future returns, and the left tails get bigger as q-ratios get higher.

Trump can stimulate, but crashes will bring correction.

James Grant: Gruber, Obamacare founder said that it passed because the American people are stupid.

New ideas: what to do now after the election? Grant suggests older policies that existed over one century ago. ?Or, more modern: Taylor Rule? ?Friedman’s constant growth rate of money…

Monetary policy has been debated for the last 250 years… the Fed was viewed as a solution to the Money Trust, but brought its own problems. ?Pension fund problems…

The Fed has paid no price for its manifold failings. ?Double Liability would be a better method. ?Bank shareholders should bail out, not taxpayers. ?Monopoliies: PhD economists w/tenure, Federal Reserve.

$15 Trillion of government bonds have been sold with negative yields. ?A promise to store fiat money at a loss.

Panics used to occur at 10-year intervals, w/gold backing and double liability. ?The economy grew rapidly then.

Overstone: “the trouble with money is credit, and the trouble with credit is people.”

We like being spared volatility. ?How many truly want to have a Old Testament-level bear market?

Swiss National Bank? Creates francs to tamp down the currency and buys up euros, dollars, then stocks.

QE is a cautionary tale. ?It failed politically because it did not work. ?Failure of the PhD standard will lead to new thinking.

Q&A

Mark Q1: Trump sounds monetarist, not radical. ?Who will bring change? ?Who will swim against the tide of Statism?

Grant: Will swim against statism. ?Yeah!

Q2: Could gold trading be viewed by the US as a currency exchange? (lower taxes)

Grant: would be easy to do, but difficult to get done politically.

Q3: Isn’t the cost of funny money low productivity growth? ?(True everywhere it has been done)

Allison agrees. ?So does Spitznagel.

Q4 Julie Smith: recent events in India — the war on cash. ?Comments?

Grant talks about Ken Rogoff, and remove $50 and $10 bills so that negative rates can prevail. ?Someone picked up a copy in India — and it will be self-destructive. ?It murders the cash system, which is the real banking system in India.

Q5: Alex Billy Grad Student at Georgetown: Did the Mexican crisis in 1995 have an impact on future developments?

Allison: big New York banks got bailed out of an irrational risk. ?The cure for too big banks is to let them fail. ?Wall Street was bailed out at the cost of Main Street.

Bert Ely Q6: Support for Basel III is sagging. ?What would the effects be?

Allison: Great. ?Let’s just have a leverage ratio.

Me Q7: ?Risk based capital vs liquidity Life insurers vs Banks?

Allison: doesn’t see it that way. ?Insurers are very different than Banks. ?Buying too much MBS at banks as a result.

Q8: “Ships are safe in harbors, but that is not what ships are for.”

Grant: agrees. Goodhart: Banking and the finance of trade in New York. ?Banks had to remain liquid and well capitalized in order to survive. ?It was a good system.

Q9 (Torres): What should we do now?

Allison: Modify Dodd-Frank such that bank with a 10% leverage ratio could opt out of Dodd-Frank.

Grant: How to modify the Fed: End Humphrey-Hawkins. ?Don’t take a poison chalice… reform wisely after there has been a real crisis and want real solutions.

Spitznagel: end low rates so that economic actors don’t take marginal risks.