TED talk. Even the rich are happier when society is more equal.
Thursday's with Mishkin - Inflation Anchoring (Inception-Godfather edition) Part 2
Probably the key point in Mishkin's talk was about how vital it is for the Fed to anchor inflationary expectations. He says that inflation expectations become unanchored (page 34) when inflation expectations rise above 3% per year. This runs counter to many of the arguments made by market monetarists that I criticised here.
Mishkin lays out (and minimizes) the problems facing the policy choices of the Fed in a recent paper.
On page 21-22 "OVER THE CLIFF: FROM THE SUBPRIME TO THE GLOBAL FINANCIAL CRISIS"
Shrinking Central Bank Balance Sheets
Actions by central banks to contain the global financial crisis resulted in huge expansions of their balance sheets. The expansion of balance sheets arising from liquidity provision is typically easy to reverse because most of the liquidity facilities have provided loans at interest rates that are higher than market rates during normal times. As financial markets return to normal, market participants are no longer willing to borrow at above-market ranks, this source of balance sheet expansion naturally reverses itself as the financial system recovers—which is exactly what has happened.
The asset market purchases of long-term mortgage-backed securities are not selfliquidating in this way. Over $1 trillion of the mortgage-backed securities have maturities of ten years or more. Thus, a strategy of just letting them run off will leave the Federal Reserve in this market for a long time, which raises several issues. First, by holding these securities the Federal Reserve will be exposed to both credit and interest rate risk. Second, the presence of private securities on the Federal Reserve balance sheet means that the Fed has become directly involve in perhaps the most politicized financial market in the United States. The public and Congress may begin to hold the Fed accountable for what happens specifically to mortgage rates, rather than to interest rates in general. Politicians may tend to see the Fed as institutionally responsible for developments in the housing markets.
Can the Fed extricate itself from this situation by selling the mortgage-backed securities? The experience of the end of the purchase program for mortgage-backed securities at the end of March 2010 is encouraging. For some months before this date, the Fed had been in essence the sole buyer in this market. However, given that financial markets had stabilized and that the end of the purchase program was well publicized, the Fed’s exit from the market did not cause any disruption. The spreads of mortgage-backed securities over Treasury bills did not rise after April1, 2010. This experience suggests that if the Fed announces a program of asset sales well in advance and financial markets are functioning normally, it should be able to liquidate its positions. Of course, if this turns out not to be the case, then the Fed could discontinue its sales and announce that its sales are contingent on the market continuing to function normally.
A final concern sometimes raised is that the expansion in the monetary base will necessarily be inflationary, but this is unlikely to be the case in the current environment. The reason is that banks are perfectly happy to hold huge amounts of excess reserves—thus essentially neutralizing the effect this money would have on demand or the price level— as long as they are paid interest on the reserves, as is now the case. However, purchase of long-term government bonds has raised concerns that the Fed is willing to accommodate profligate fiscal policy by monetizing government debt, and this does have the potential to unanchor inflation expectations, which could have inflationary consequences in the future."
I am less sanguine about the Fed's ability to manage expectations. The anchoring of expectations depend on the Fed (reversing)
liquidating the holdings it acquired under QE. It is therefore likely that the Fed will have to sell its bond holdings at precisely the time when inflationary expectations are rising and therefore the yield curve is moving up. This will push yields up even faster (in a nonlinear fashion i) and will almost certainly be a significant drag on economic activity. Should this event occur in the next 24 months before the economy has had a chance to stabilize the Fed will have to make a Sophie's choice and may be tempted into thinking it can fool all of the people all of the time. My guess is that when eventually the Fed will be forced to make some very unpleasant trade-offs and bond market volatility and tail event outcomes are very likely. What he Fed will choose is not apparent so it makes playing the scenario difficult.
To quote the Godfather
Michael Corleone: Just when I thought I was out... they pull me back in.
I wrote about how Risk Management, Portfolio Management and Hedge Fund Management all seem to be converging, on September 11. last year. Here is a piece from Credit Suisse that argues in a similar vein.
(Right click to download.)
Former CBO Budget Director, Orszag, gives the Dems their election year wedge issue
Orszag suggests that once tax cuts expire and mandatory spending cuts begin at the end of 2012, they would result in a 5% GDP deficit reduction, too much front loaded austerity for a weak economy.
Orzag suggests that politically, Obama's preferred move might be to propose increase to base deduction limits and lower payroll taxes for everyone. Once tax cuts expire, Obama can propose tax reductions that still stabilize the deficit long term.
He suggests that if Romney wins, we are more likely to see a lame duck session and retroactive extensions of the Bush tax cuts (Assuming Republicans maintain control of the House).
Hmmm, sounds like he has either gifted, or is floating, the democratic talking points for this election. Dems can say that they are advocating tax cuts for the entire population, whereas, the Republicans only want to help the top 1%. They can point to Euro and say the austerity advocated by Republicans is destructive and counterproductive to the economy and yet justify their actions by suggesting that their plan stabilizes the long term debt picture. Finally they can say that by playing chicken with the debt ceiling, to the point of causing a debt downgrade, the Republicans have put political interests of the elites above national interests.
Certainly puts Romney in an awkward position. Congressional districts, because of redistricting, tend to be safe once you have secured a primary win. Hard to see how either candidate will produce a coat tail effect this year.
Whether the Dems can take advantage of this idea remains to be seen. Republicans have shown that, politically, good execution of poor ideas (prescription drug benefits, gay marriage, swift boats) trumps bad execution of good ideas (health care reform).
Ted Talk. This is why i have not allowed my boys to have cell phones. A little less conversation a little more solitude please.
CBS' s 60 Minutes talks to the lawyer who headed the investigation into Lehman Brothers. He says there is clear evidence of fraud and a cover up by Lehman and Ernst and Young, their accounting firm. A whistle-blower is interviewed. Report suggests that one reason (perhaps the main reason given the strong evidence) no charges have been laid is that the FED and SEC had an office inside Lehman where they oversaw daily transactions for at least the last six months before the collapse. They therefore were aware of the accounting tricks, such as repo #105, used to falsely suggest Lehman had an extra $50 Billion in capital.
Add corruption to the list of things I hate about the US policy response to the crisis. Oh yeah, the whistle blower who refused to sign off on the false accounting statements -he got "downsized" prior to Lehman’s collapse and remains unemployed. Dick Fuld, the x- Lehman president is back working as a consultant (presumably he has a lot to offer FIs on how to deal with regulators).
The narrative sounds like it has been taken directly from HBO’s “The Wire”.
Read this one by GMO.
"What Keynes defi nitely did say in the famous chapter 12 of his General Theory is that “the long-term investor, he who most promotes the public interest … will in practice come in for the most criticism whenever investment funds are managed by committees or boards.” He, the long-term investor, will be perceived as “eccentric, unconventional and rash in the eyes of average opinion … and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy.”"
"Today, the Fed has engineered a situation in which the really unattractive asset classes are the ones we have always thought of as low risk: government bonds and cash. And unlike the internet and housing bubbles, this time it isn’t a quasi-inadvertent side effect of Fed policies, but a basic aim of them. The Fed has repeatedly said that a central part of the goal of low rates and quantitative easing is the creation of a wealth effect by pushing up the price of risky assets. By keeping rates very low and taking government bonds out of circulation, the Fed is trying to entice investors into buying risky assets. The question we are grappling with today is whether we should take the bait."
IMF puts together $430 Billion to backstop bailouts. The IMF is trying to get to the point where the makrets believe they have done enough and a virtuous cycle is established.
My sentiments are best expressed by the words of the Talking Heads:
Hold tight wait till the party's over
Hold tight We're in for nasty weather
There has got to be a way
Burning down the house
Here's your ticket pack your bag: time for jumpin' overboard
The transportation is here
Close enough but not too far, Maybe you know where you are
Fightin' fire with fire
No visible means of support and you have not seen nuthin' yet
Everything's stuck together
I don't know what you expect starring into the TV set
Fighting fire with fire
Happiness and work- Ted Talk
Your brain at positive is over 30% more productive.
Behaviours that make you happier:
List 3 good things that happened to you today.
Journal about one good thing that happened to you today.(To relive it)
Execise - trains the brain that what you do matters.
Random acts of kindness. (Suggestion to write one positve email praising someone in your social circle).
Thanks Murray M!
Bush tax cuts are expiring, a $3.9 Trillion tax increase, and the super committee has come up with another $1 trillion in cuts. Erskine Bowles (minute 15) suggests the President and the Democrats should let the Bush taxes expire and then begin negotiations with the obstinate Tea-Party folks.
Looks like the crisis is on a trajectory to resolve itself. (Brent-you were right.)