The Big Picture |
- Discuss: Barack Obama is a Liberal Republican
- Taxpayer Relief Act-a misnomer to celebrate the swearing in of the new Congress.
- 10 Thursday PM Reads
- 2013 US Market Structure Predictions
- S&P 500 Index at Inflection Point
- Better Chinese services data
- 10 Thursday AM Reads
- Investment in a Time of Dysfunction
- The Story of ‘Keep Calm and Carry On’
- Big Banks Are “Black Boxes,” Disclosure is “Woeful”
- All Banking Incentives Are to Mislead Investors
- Economic History and a Thoughtful Look at the Federal Reserve at 100
| Discuss: Barack Obama is a Liberal Republican Posted: 03 Jan 2013 04:00 PM PST I have been having fun mocking friends and family on both sides of the political aisle. GOP colleagues who keep telling me BHO is a Socialist, while Dems think he is the next JFK. I enjoy disabusing them of their political biases by explaining to them Barack Obama’s actual politics. Politically, he is a modern day Richard Nixon. I don’t mean the Watergate, thing, I mean his budgets, policies and relations with the two parties. Sure, he is Pro-Choice, and is also pro Gay Marriage rights. But look at his actual track record:
I am not saying any of these things are good or bad — its merely an observation. But its hard to avoid recognizing that all of these major policies are much more GOP-like than Democrat-like things Discuss. |
| Taxpayer Relief Act-a misnomer to celebrate the swearing in of the new Congress. Posted: 03 Jan 2013 02:00 PM PST The Taxpayer Relief Act-a misnomer to celebrate the swearing in of the new Congress.
Thank you, Natalie. You speak the truth. Cumberland has obtained a private copy of a Senate staffer briefing memo. It includes the CBO scoring. It is the type of document that was employed in this debate. It is 16 pages long. Rest assured that few if any of the Senators or Congressman read the entire bill. The briefing memo is posted on our website, www.cumber.com , in the Special Reports section. The title is “12/31/12 Summary of final deal Tax Document.” It is enough to make one sick. Email me if your software cannot open it and I will send it to you. Here is a link: http://www.cumber.com/content/special/123112taxdeal.doc . Now let me be blunt. This “Taxpayer Relief Act” is a bunch of _ _ _ _! No one got relief except the pork-receiving, politically connected "special interests." As for the rest of us, in fact, this is one of the largest tax hikes in American history. In our firm of 28 people, everybody’s taxes went UP. Mine did, as I expected. My top rate is now 39.6%, and 3.8% is added to taxes on my investment income, except for my tax-free Munis. My long-term cap gains rate is 23.8%. So be it. The taxes on the higher incomes in our sub-S incorporated firm are enough money to hire several new people. If business growth is good enough, we will hire them anyway, but the government policy has carved no exception for small business. I only wish my government didn’t squander the money. But they do. And they lied to me. Nothing new here, either. Now to the "meat" of the Congressional failure. The 2% payroll-tax hike (because the previous reduction was not extended) hits every working person. 140 million Americans pay this on their EARNED INCOME. Sadly, the pork in the legislation remained. Moviemakers and auto racers and many others kept their special tax breaks. The system remains sick. Hollywood yes, but my $60,000-a-year employee has a $1200 permanent annual tax hike taken directly from her paycheck. Shame on the politicians who govern us. Markets celebrated, as one would expect. The uncertainty premium is impossible to measure, but it is there. Estimates are crude, but they show it is high. It peaked a few days ago and when there were reports of an impasse to the House vote. Now, it is shrinking. So markets are rising after the law is passed and the new rules are known. And the brackets are permanent. The estate tax is permanent. The AMT fix is permanent. We now have two legs of a three-legged stool: (1) Monetary policy is predictable for several years, and there will clearly continue to be a low interest rate worldwide for both short- and long-term debt. Global total sovereign debt issuance will actually shrink for the first time in many years. (2) US tax rates are predictable. Cap gains rates, income tax levels, and estate tax thresholds are set. It is hard to see them changing over the next two years. The Republican majority in the new House will not allow it. (3) America's debt and deficit levels remain to be hammered out in tough negotiations with the new Congress and re-inaugurated White House. These politics will not be fun to watch. In fact, the 2014 mid-term congressional races have already begun, and the antagonists are barely sworn in. That is our system and this is the way we do it, whether we like it or not. Meanwhile, global stock markets are headed higher. We have written about the whys and wherefores repeatedly. Now we can add that the risk of a fiscal cliff-induced recession is eliminated. That is a bullish development. We will stick with our slow-growth, gradually accelerating recovery forecast for the United States. We like the housing sector recovery and the energy sector growth. We remain fully invested in our ETF accounts. And we like tax-free Munis. The tax-equivalent-yield computation makes them even more compelling after the so-called “Taxpayer Relief Act” has become the law of the land. ~~~~ David R. Kotok, Chairman and Chief Investment Officer |
| Posted: 03 Jan 2013 01:30 PM PST My afternoon train reads:
What are you reading?
REITs Gained in 2012 on Economy, Housing |
| 2013 US Market Structure Predictions Posted: 03 Jan 2013 12:00 PM PST
Yes friends, it is that time of the year. It is the time when we start anew, carefully analyze market structure trends in the US equity markets, and release our predictions for what you can expect to happen this coming year in our capital-raising marketplace. This is not an exact science, mind you – it is an art form that has taken us years to perfect. Two years ago we got one of our predictions correct, and last year we improved and saw 1.5 of our predictions come to fruition. Let us delay no longer – here goes:
Happy New Year and here is hoping that we don't beat last year's forecasting success! |
| S&P 500 Index at Inflection Point Posted: 03 Jan 2013 08:30 AM PST Dr. David P. Kelly of JP Morgan Asset Management quarterly deck is out. Its a regular favorite of mine, laden as it is with great charts that look at the very long term. You can download the entire 69 page deck here.
click for ginormous chart |
| Posted: 03 Jan 2013 07:00 AM PST The South Korean finance ministry announced that it is to spend 72% of its 2013 budget in H1 this year, with 45% in Q1, citing economic uncertainties; Governor Shirakawa seems to be more willing to work with Mr Abe, who has announced that the BoJ must increase its inflation target and ease monetary policy materially. However, pre Christmas, Mr Shirakawa seemed somewhat reluctant – Abe must have sent the heavies to visit Mr Shirakawa over Christmas. The BoJ announces its decision on 22nd January, with Mr Abe urging that the BoJ announce that it is prepared to move ahead of the meeting. Whatever, the Yen looks as if it will weaken further, though a risk off move, in response to the impending political fight in the US, could provide the currency with some support. However, I remain short the Yen; China’s non-manufacturing December PMI came in at 56.1 M/M, higher than the 55.6 in November and the fastest pace in 4 months. Construction services reported the largest increase, confirming the improvement of activity in the sector. Transportation was weak, suggesting that the export sector remains under pressure; Surprisingly, Spanish unemployment declined by 59.1k in December, significantly better than the rise of 62.5k expected and the increase of 74.3 in November. The decline was the 1st in 5 months. Can't understand the reasons for such a sharp improvement – it does not make sense; Austerity fatigue in Portugal. The Portuguese President has ordered a legal inquiry into the austerity measures implemented by the current administration. Countries such as Portugal have seen the much better deal offered to Greece and not surprisingly want the same. this year, pressing further austerity will result in push back from peripheral countries and, indeed, may well result in material social unrest starting in Spring. Furthermore, the impact of fiscal multipliers suggests to me that an austerity only policy will just make the situation worse in these countries – unemployment has risen to 16.3%, from 13.7% at the start of last year. GDP is expected to decline by -1.8% this year, according to the OECD (I believe by over -2.25%), with debt to GDP rising to over 135% – unsustainable. Growth policies will be needed. Budget deficit targets for a number of these countries will not be met and the country's debt will need to be restructured. (Source Daily Telegraph); German unemployment increased by just 3k to 2.942mn in December M/M, lower than the 10k increase expected. The seasonally adjusted unemployment rate remained at 6.9%, in line with expectations. Whilst in the short term unemployment may rise marginally, I believe that unemployment will decline this year as German exports rebound and the domestic sector, including construction, remains firm; UK December construction PMI came in at 48.7, lower than the 49.5 expected and 49.3 previously and the weakest since June 2012. A BoE survey reports that it will be easier for borrowers to access mortgage financing. Should be positive for the UK residential construction and building materials/home improvement sectors; Moody's warns that they will assess the US credit rating once the outcome of the proposed spending cuts and the proposed increase of the US$16.4tr debt ceiling are know. They added that further deficit reduction measures were necessary to avoid a downgrade; BoA is to increase mortgage and corporate lending this year, according to its CEO. I believe that US banks generally will increase lending to both businesses and consumers, whilst reducing tight lending standards. The access to credit will be a major boost for the US economy and will support the housing sector, as well. I remain positive on US financials, ex likely declines in the short term due to the next fight between Republicans and Democrats over spending cuts and the need to increase the debt ceiling; The ADP December report reveals that 215k jobs were created, much higher than the 140k expected and the upwardly revised 148k in November. However, initial jobless claims rose to 372k, higher than the 360k expected and the upwardly revised 362k. Continuing claims rose to 3.245mn, higher than the 3.21mn expected and 3.201mn previously; Brazil's 2012 trade surplus came in at US$19.4bn, the lowest since 2002. Exports declined by -5.3%, with imports -1.4% lower. HSBC PMI declined to 51.1, down from 52.2. With inflation likely to rise, Brazilian interest rates, currently at a record low, will have to rise. The Real looks as if it will weaken further. I am bearish on Brazil; Outlook Asian markets closed higher following yesterday's rally in the US, though China and Japan were closed. European markets are lower, following yesterday's surge. Concerns over the impending discussions over further spending cuts and measures to increase the debt ceiling in the US are weighing on markets. US futures suggest that markets will open lower. The Euro is particularly weak, declining to around US$1.3112. The selling seems overdone, though I certainly don’t share the bullish Euro calls (up to US$1.45) by a number of analysts for the current year. Spot gold is trading around US$1678, with February Brent weaker at US$111.86 – still way too high in my view. Having been particularly bullish in anticipation of a deal in respect of the US fiscal cliff, I believe that uncertainty over the next round of particularly contentious negotiations by the US Congress over the next 2 months will weigh on markets. I will look to reduce my equity holdings over the next few weeks. Kiron Sarkar 3rd January 2013 |
| Posted: 03 Jan 2013 06:30 AM PST My morning reads:
What are you reading?
Risk Seen in Some Mortgage Bonds |
| Investment in a Time of Dysfunction Posted: 03 Jan 2013 05:30 AM PST Investment in a Time of Dysfunction
Mad Mad World… In 2012, despite slowing growth, deepening sovereign debt problems and lack lustre earnings, equity markets advanced strongly. In 2012, the MSCI All-Country World Index of equities increased 16.9% in 2012 including dividends. 23 out of 24 benchmark indexes in developed markets increased. The US S&P 500 Index climbed 13%, the highest increase since 2009. European markets rallied with Greece, Germany and Denmark increasing almost 30%. Only Spain's IBEX 35 fell but only by a modest 5%. Despite its embalmed economy, Japan's Nikkei 225 Stock Average rose 23% in the largest rally since 2005. Bonds of all types returned around 5.7% on average. Safe haven buying and demand for yield increased fuelling demand for bonds. Ever lower interest rates and risk margins did nothing to discourage buying. Despite continued debasement of currencies through central bank quantitative easing, the S&P GSCI Total Return Index of 24 commodities rose 0.1%. Highlighting the perversity, even debt of beleaguered European nations was in demand. Astute investors doubled their money on Greek bonds, in a surreal bet on an economically dead nation incapable of paying backs its debt. "Tis a mad world, my masters." Investors could easily delude themselves into thinking that "happy days" have returned. As smart investors know, investment genius is a long position, leverage and a rising market. A rising tide, as they say, lifts all boats. But that may now be all in past. There has been a marked shift in the investment climate. The world is also shifting to a much lower growth path. Investment outcomes are now heavily dependent on government and central bank policy decisions. Investors must re-shape investment practices for dysfunctional times. Decent returns can be still earned during periods of great uncertainty. They just require different investment approaches. Ch-Ch-Changes… Investment outcomes are now influenced more by government and central bank policy decisions than fundamental factors. The rally in the Euro and European bonds and stocks following the European Central Bank's announcement that it would purchase unlimited quantities of peripheral country debt demonstrated the risk of mis-reading policy. Major central banks dominate markets. Their collective balance sheets have increased from around US$6 trillion before the crisis to more than US$18 trillion, an unprecedented 30% of global gross domestic product ("GDP"). Government and central bank strategy is targeted at growth and creating inflation using non-conventional monetary policies, quantitative easing and specific inflation targets. High nominal growth would make existing debt levels more sustainable. Inflation would help reduce debt in real terms. But the strategy may not work. While central banks are providing ample liquidity, the effects on credit creation, income, economic activity and inflation are complex and unstable. The velocity of money or the rate of circulation has slowed. Banks are not using the reserves created and money provided to increase lending, reflecting a lack of demand for credit by stretched households and businesses with over capacity. The reduction in velocity offsets the effect of increased money flows and limits the pressure on prices. Uncertainty about the effectiveness of policy complicates investment choices. If policy makers succeed in restoring growth with modest inflation, then equities may prove the best investment. If the policies result in high or hyperinflation (such as that experienced in Weimar Germany or Zimbabwe), then real commodities and precious metals such as gold may be the best investment to protect against the erosion of the value of paper money. If the policies prove ineffective, then a period of Japan-like stagnation may result. In such an environment bonds or other fixed income instruments will be the favoured investment. In recent times on a number of occasions, equities, bonds, commodities and gold have rallied simultaneously reflecting investor confusion. For investments denominated in foreign currencies, the effect of loose monetary policies on currency values is an increasingly important influence on investment returns. US Federal Reserve policies are designed to devalue the currency to reduce the value of outstanding US dollar government debt held by foreign investors and also improve export competitiveness. With all developed countries competing to weaken their currencies, the impact of foreign exchange fluctuations on investments -directly or indirectly through their effect on company earnings- is unpredictable. Bondage & Discipline…. Given the scale of the problems, governments have resorted to "financial repression". Governments are implementing a range of policies to channel funds to official institutions to liquidate debt. These include explicit or implicit control of interest rates, which are negative after adjustment for inflation. This helps governments decrease debt servicing costs and reduce the real value of its debt. There will be increased interference in financial markets, as governments intervene, overriding normal market mechanisms. Prohibitions on short selling, bond purchases and currency intervention are examples. Investment and borrowing restrictions, to create captive domestic market for government debt, via reserve requirement or explicit investment constraint, may be implemented. Free movement of funds internationally may be restricted via capital controls. Changes in taxes, a government seek to garner revenue, will also affect returns. Successful investment now requires recognising and minimising the adverse effects of financial repression. Theoretical Problems… Investment theory may not provide succour in this environment. Governments bonds are no longer risk free safe havens. The risk of default or loss of purchasing power either through devaluation of currency or diminution of purchasing power is prominent. As Jim Grant of Grant's Weekly Interest Rate Observer observed government bonds now offer "return free risk". Risk premiums are frequently negative as investors flock to safe assets or the latest bestest investment – US and German bonds, high yield corporate bonds or high dividend stocks. Diversification to mitigate risk is difficult as correlation between different investment assets has become volatile. The fundamental risk of domestic shares, international shares and property is similar in the current economic environment. Even returns on cash are positively correlated to risky assets as interest rates have fallen in the recession. Investors have assumed policy measures have reduced tail risk, the chance of large and frequent increases and decreases in prices. In fact, the opposite may be true. Attempts to suppress volatility, without addressing fundamental problems, increases the risk of major market breakdown in the future. Picking Stocks… As the global economy resets, the prospects are for lower returns and increased volatility. The US stock market took 25 year to regain its highs after 1929. Japanese stocks (down some 70+% from its peak) and property markets (down between 50-70%) have still not recovered the levels of 1989. Low growth will affect corporate earnings and equity values. Recent strong corporate earnings were driven by cost cutting, government stimulus and low interest rates. Slow growth will constrain already indifferent revenue levels. Without underlying demand for their products, corporate profits margins and earnings will be under pressure. Corporate earnings in emerging markets will be affected by the sluggish growth in developed markets and the slowdown in China, India and Brazil, the regional powerhouses. The Viagra of investment – leverage – which drove high returns in the pre-2007 is unavailable as the global economy reduces debt. Since 1912, as Pimco's Bill Gross has argued, equities have returned 6.60% per annum in real terms, above real GDP growth 3.5% per annum. The additional return has, in part, been driven by leverage, which is less likely to influence future equity returns. “Official” interest rates are low but credit margins are high and with inflation low the real cost remains high. The overall supply of credit is likely to fall as European and American banks cut balance sheets size. Risk averse companies and individuals are also more cautious about borrowing, after recent near death experiences. But low interests which reduce holdings costs and dividend yields which are above bond interest rates have underpinned equity prices. The effect of policy actions on equity markets is difficult to gauge. Based on the Japanese experience, further rounds of central bank buying of risky assets can be expected. The range of assets bought may expand to include equities and corporate bonds which would boost prices. A Case of Style… Investment structures compound the investor's dilemma. Traditional mutual funds are structured to generate relative returns measured against a benchmark. Unfortunately beating a benchmark by 5% provides cold comfort to investors when the investment manager is down 15% and the market falls by 20%. Only absolute return now counts. Management fees and fund expenses are a significant drag on returns. Management fees and expenses of 2% are tolerable when the returns are 12% but difficult to bear when the returns are 5% or lower. In choppy markets, rapid changes in the composition of portfolio including switches between assets and instruments (physical versus derivative; symmetric versus asymmetric exposure) are required. Long periods of staying uninvested, holding cash or other defensive assets, may be necessary. Investment mandates require investment in a single asset class or limit switching, constrain the type of instruments used and force the fund to stay substantially invested at all time. This restricts the ability to generate positive returns. Traditional investment styles may not work. Value investing, buying stocks based on fundamental analysis when they look cheap, has historically been successful since the days of Benjamin Graham. The hidden value can be released through cash flow, dividends or acquisition in the long run. But since 2008, value investing has performed indifferently. Arbitrage strategies, such as relative vale trading and long-short equity or equity pairs trading, have also performed poorly. The failures reflect uncertainty about correct values, risk-on/ risk-off trading, risk aversion, illiquidity and the lack of convergence to theoretical values. Investment in the Time of Dysfunction… Investors may now need to consider comedian Will Rogers' advice: "I’m more concerned about the return of my money than the return on my money". Capital preservation will be the key to survival. A large sustained loss of capital is currently the major investment risk. This favours debt over equity or other risky assets, even though the safety of government debt is increasingly in question. It also favours defensive stocks or hard assets, like commodities. Investment income (dividends or interest) may be the major source of return. Capital gains will be more difficult as the period of consistent stellar rises in price may be less likely in the future. In bull markets, investment approaches focus on capital gains, income and capital return in that order. The current environment requires re-prioritisation of those objectives. Investors have increasingly embraced non-traditional investment. There has been strong interest in gold and other precious metals. Gold prices have risen strongly, although remaining below their 1980 peak in real terms. Hedge funds and private equity funds continue to attract money, despite variable performance. The attraction is a focus on absolute return and greater investment flexibility. Despite well documented problems, structured products, where investors assuming credit risk or fluctuations in interest rates, currencies or equity prices in return for a higher interest rate, are making a comeback, driven by low interest rates. Disillusioned with financial assets, the ultra rich are focusing on scarcity – farmland, prime real estate in world cities with desirable properties and collectibles (fine arts, rare cars). Even wine has emerged as an asset class, giving a new meaning to the term "liquidity". Increasingly investment approaches focus on matching future cash flows, irrespective of whether it is a known future liability or retirement income needs. Products such as annuities targeted at retirees or specific saving plans that provide a guaranteed lump sum are growing in popularity. A key element is capturing volatility to take advantage of large price fluctuations. This can be done by purchasing out-of-the money options which provide the investor unlimited gains from tail risk for a known fee. Alternatively, volatility can be captured by allocating a portion of investment capital to either stocks which benefits in periods of "irrational exuberance" (typically growth stocks) or "irrational pessimism" (defensive stocks). High levels of cash allow investors to capture volatility taking advantage of sharp falls in value. Warren Buffett's Berkshire Hathaway maintained high levels of cash running into the crisis – around US$20 billion. This liquid reserve was expensive to maintain as interest rates were close to zero. But it allowed Buffett to make lucrative and very high yielding strategic investments in Goldman Sachs, GE and (more recently) Bank of America. Shi… In Chinese, "Shi" is the art of understanding matter in flux. To preserve capital and the purchasing power of their money in these dysfunctional times, investors will need to understand the financial flux and negotiate its complicated cross currents. Imitation may be the best investment strategy. As Bill Gross has repeated frequently during the crisis, Pimco buys whatever the central banks are buying. It is like the scene from When Harry Met Sally when a woman having watched Meg Ryan fake an orgasm in Katz's Delicatessen tell the waiter: "I'll have whatever she's having". But predicting policy actions is difficult. Faced with electoral pressures, desperate policy makers and governments are frequently motivated by political and social consideration rather than economic or financial factors. Success also requires avoiding common pitfalls. Successful investors often succumb to what theologian Reinhold Niebuhr termed the "most grievous temptations to self-adulation". Success is always 10% skill and 90% luck but it is unwise to try it without the quotient of skill. Hubris has resulted in a greater loss of wealth than market crashes. Adjusting return expectations to more modest levels is essential. As Samuel Loyd, an Englishman who made his fortune in finance and was considered an authority on money and banking in his time, observed: "No warning can save a people determined to grow suddenly rich." ~~~
© 2013 Satyajit Das |
| The Story of ‘Keep Calm and Carry On’ Posted: 03 Jan 2013 05:00 AM PST A short film that tells the story behind the ‘Keep Calm and Carry On’ poster. Its origins at the beginning of WWII and its rediscovery in a bookshop in England in 2000, becoming one of the iconic images of the 21st century. Film, music, script and narration by Temujin Doran.
To find out more about Barter Books visit http://www.barterbooks.co.uk to download the ‘Keep Calm’ iphone app Concept and production by Nation http://www.studiocanoe.com/index.php?/profile/ |
| Big Banks Are “Black Boxes,” Disclosure is “Woeful” Posted: 03 Jan 2013 04:15 AM PST
This month’s must read cover story of The Atlantic was written by two of my favorite writers: Pulitzer Prize winner Jesse Eisinger of Pro Publica (and Portfolio, WSJ, and TSCM) and Frank Partnoy of University of San Diego School of Law, author of F.I.A.S.C.O., Infectious Greed, The Match King, and – most recently – WAIT: The Art and Science of Delay. They discuss an issue I have talked about here repeatedly — that banks are essentially opaque black boxes; banks have purposefully concealed what’s on their balance sheets; that they are not merely complex, but actually deceptive; investors have no idea what they are buying when they own one of the behemoth money centers like Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) or JP Morgan (JPM). Of course, no bank article would be complete without at least a mention of the bank frauds and illegal actions that are now merely a cost of doing business: Helping Mexican drug dealers launder money (HSBC); funneling cash to Iran (Standard Chartered); LIBOR fraud (Barclays and a cast of dozens); falsifying mortgage records/improperly foreclosing on borrowers (all the giant banks); routinely misleading clients (Merrill, Morgan Stanley, Citi); Selling securities known to be garbage (Goldman Sachs, Merrill); secretly betting against clients to profit from their ignorance (Goldman Sachs). Two discussion lines in the article stood out: The first is the number of former bankers now calling for a break up of the giant money center banks: Philip Purcell (ex-CEO of Morgan Stanley Dean Witter), Sallie Krawcheck (ex-CFO of Citigroup), David Komansky (ex-CEO of Merrill Lynch), and John Reed (former coâ€'CEO of Citigroup). Sandy Weill, another ex-CEO of Citigroup. The second is the heart of the article: How opaque, misleading, non-disclosing and — WTF, let’s just say it — fraudulent bank balance sheets are. Perhaps the most damning quote in the entire column comes from former Federal Reserve Board member Kevin Warsh. He suggested that the financial statements a big bank files with the SEC are worthless:
That is a damning statement. If the first rule of investing is know what you own, than how can anyone credibly own a major money center bank? The answer, at least for me, is that you cannot — owning bank stocks is not investing, it is pure speculation. Who wants to make a bet that insiders are going to act in good faith on what is an investor’s best interests? Not me. If that means I miss a sector that did well last year, it is something I have to live with. . .
Source: |
| All Banking Incentives Are to Mislead Investors Posted: 03 Jan 2013 03:30 AM PST What's Inside America's Banks? |
| Economic History and a Thoughtful Look at the Federal Reserve at 100 Posted: 03 Jan 2013 03:00 AM PST  History is only as useful as the lessons it imparts. With that in mind, the Federal Reserve Bank of Cleveland kicked off events marking the 100-year anniversary of the Federal Reserve with a gathering of giants in the field of economic history. Presenters at the December 13-14, 2012 conference, titled Current Policy under the Lens of Economic History: A Conference to Commemorate the Federal Reserve System's Centennial, cast an analytical eye on the evolution of Fed policies over the past century. Conference organizers also used the occasion to celebrate the lifetime achievements of Michael Bordo of Rutgers University. Bordo, a longtime visiting scholar at the Cleveland Fed and other Reserve Banks, is one of the country's leading economic historians. He is known both for his detailed knowledge of monetary and central-bank history as well as his ability to discern lessons from the past and relate them to current events. This was no meeting of Fed partisans, per se, although many of the presenters hold or formerly held positions in the System. These were reflective economists who share a deep interest and sometimes concern about the abiding impact of central-bank policies. In studying the Fed's history, it's safe to say they hope to improve our economic future. Among them:
Eichengreen summed up the spirit of the conference when he noted that history’s ultimate utility may not lie just in its predictive or explanatory power, but in its capacity for giving us humility as we address current events. Watch for a full report on the conference and key takeaways in the next issue of Forefront. An Insider’s Perspective on the Eve of the Federal Reserve’s CentennialMark Sniderman, executive vice president and chief policy officer with the Cleveland Fed, welcomed participants to Current Policy Under the Lens of Economic History: A Conference to Commemorate the Federal Reserve System’s Centennial. I joined the Federal Reserve in 1976, fresh out of graduate school. Inflation was running at about 7 percent after having registered in the low double digits the year before. It looked as though the Federal Reserve was bringing inflation under control. I remember people feeling fairly confident. After all, we had what seemed to be good theory, good models, and certainly, good intentions. We know now that our optimism was misplaced—core inflation hit double digit rates again in 1980. Bringing inflation under control subsequently entailed two recessions, and 30-year Treasury debt required 14 percent interest rates at auction. Dissatisfaction with economic performance provided an opening for new ideas. The rational expectations revolution took hold for a good reason—it provided badly needed perspectives on macroeconomic theory, modeling, and policy design. The literature blossomed with new ways of thinking about expectations, macro model building and estimation, time consistency, and policy rules. Inside the Federal Reserve, these new ways of thinking took hold at different paces in different places. Eventually, what had been the old "conventional wisdom" was replaced by a new "conventional wisdom." Change did not come quickly, and it wasn't always pleasant. This happens in all areas of science. To paraphrase the physicist Max Planck, "Science advances one funeral at a time." Some of the people in this room were deeply engaged in the culture wars of those days. The policymaking framework at the Fed is quite different today from when I began my career. The amount of cumulative change has been rather significant, I think. Today, the Federal Open Market Committee (FOMC) publishes press statements after its meetings, releases minutes within three weeks of its meetings, and provides a summary of its economic projections each quarter, including a distribution of the participants' expectations of the timing of the liftoff of the federal funds rate from the zero bound. The FOMC has been making extensive use of forward guidance to help the public understand how the Committee intends to respond to changes in the economic outlook. Last year the FOMC published the principles that will guide its exit from nontraditional monetary policy; earlier this year it established explicit numerical objectives for its Congressionally mandated objectives of price stability and maximum employment. Despite these and other changes that are intended to keep the policy formulation and design process current with the "state of the art," we are working through a period of time of great stress in the global financial system, widespread deleveraging, and regulatory reform in the U.S. financial services industry. These developments, coming on the heels of a severe financial crisis and deep recession, have created an environment in which central bankers around the world are asking themselves what they can do to make positive contributions, and what constitutes a "bridge too far." A quotation from Abraham Lincoln might be appropriate here: "The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew." With the stakes as enormous as they are, and the situation as novel as it is, opinions on what has been done and what should be done are varied and sometimes heated. I'm eager to hear what everyone has to say about events of the moment, as well as events in the Fed's past. However, in regard to events of the moment—with no disrespect to anyone here today—I will be far more interested in what economic historians will say about them 26 years from now, on the Federal Reserve's 125th anniversary. Why don't we agree to reconvene then? |
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