The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Washington’s Blog strives to provide real-time, well-researched and actionable information. George – the head writer at Washington’s Blog – is a busy professional and a former adjunct professor.

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How well has the Federal Reserve performed for America? Mainstream pundits, of course, say that Bernanke has saved the world . . . . but they said the same thing about Greenspan. So let’s look at the actual historical record to determine how well the Fed has done.

Initially, Milton Friedman and Ben Bernanke have both said that the Federal Reserve caused (or at least failed to cure) the Great Depression through its poor monetary policy.

Many also blame the Fed for blowing an unsustainable bubble between 2001-2007 through artificially low interest rates. If this sounds too much like an Austrian economics perspective, that may be true. But remember that Hayek won the Nobel prize in 1974 partly for arguing that artificially low interest rates lead to the misallocation of capital and to bubbles, which in turn lead to busts.

Moreover, one of the Fed’s main justification has been that it can provide a “counter-cyclical” balance. In other words, during boom times it can put on the brakes (“take the punch bowl away right as the party gets started”), and during busts it can get things moving again. But as economist Jane D’Arista has shown, the Fed has failed miserably at that task:

Jane D’Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit [has a] devastating critique of the central bank. The Federal Reserve, she explains, has failed in its most essential function: to serve as the balance wheel that keeps economic cycles from going too far. It is supposed to be a moderating force in American capitalism on the upside and on the downside, the role popularly described as “leaning against the wind.” By applying its leverage on the available supply of credit, the Fed can slow down a boom that is dangerously overwrought or, likewise, stimulate the economy if it is sinking into recession. The Fed’s job, a former chairman once joked, is “to take away the punch bowl just when the party gets going.” Economists know this function as “counter-cyclical policy.”

The Fed not only lost control, D’Arista asserts, but its policy actions have unintentionally become “pro-cyclical”–encouraging financial excesses instead of countering the extremes. “The pattern that has developed over the last two decades,” she wrote in 2008, “suggests that relying on changes in interest rates as the primary tool of monetary policy can set off pro-cyclical foreign capital flows that tend to reverse the intended result of the action taken. As a result, monetary policy can no longer reliably perform its counter-cyclical function–its raison d’être–and its attempts to do so may exacerbate instability.”…

The Fed is also supposed to act as a regulator for banks and their affiliates, but failed miserably in that role as well.

Indeed, the central bankers’ central banker – BIS – has itself slammed the Fed:

Read the rest of this entry »

With yesterday’s roaring stock market rally on the heels of the deal announcements, the action begs the question, is M&A activity a precursor to a good market or does it follow an already buoyant one. I believe its the latter but a good market can last a while as can the M&A deals, particularly strategic ones where growth is tough to come by. The US$ is getting a lift for a 2nd day after some help from some major trading partners. The Japanese Finance Minister, backtracking on recent comments, said they would intervene in the FX market if “currency markets move abnormally.” Also, a top EU official said they welcome the US government to insist on a strong $ and yesterday Trichet said it’s “extremely important that we can have a strong $” in terms of helping the global economy. Euro Zone economic confidence and Retail PMI both rose to the highest since ’08. Case-Shiller HPI and Consumer Confidence are key data points today.

Lately, I’ve noticed a card war brewing.

On one side, stand the Banks and Credit Card firms. They get paid a percentage of every sale when you swipe your Amex, Master Card or Visa in a credit card machine.

On the other side, are the Retailers.

In the middle, the Consumer. The battle between the two giant sectors means that choices (and potential costs) are multiplying — if consumers become aware of them.

The battle is over that 3% or so processing fee (it varies) when you swipe your card at a store. It is a big chunk out of Retailer profits, especially during an economic downturn. One recent retailer study found some stores paid as much as 63% more in transaction fees than they earned in profits.

“Choice Architects” — as Richard Thaler calls them in Nudge — working for retailers have been trying to cut down on these fees: An increasing number of stores have changed their default card settings to “Debit” from “Credit.”

I first noticed this during a visit to Target. I swiped my bank debit card — also a Visa — thru the machine. Sometime ago, the default setting was Credit, but now it seems the default setting was Debit.

So too is the default setting at the Supermarket. If you wanted cash back, you previously had to select Debit, than punch in a dollar amount. Now, the default is debit, and you are automatically asked if you want cash back (some consumer groups advocate sticking with credit over debit).

Interesting . . .

The banks aren’t sitting by idly while a big chunk of their profits disappear. Several majors have begun to emphasize cash back for credit card purchases, and have issued specific credit cards that pay a % back.

Next volley in the war: Look for the retailers to fire back:  I am waiting for a major chain to offer a 1% discount for using debit versus credit card.

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See also:
Retailers Look to Save by Cutting Credit Card Fees
Andrew Asch
Apparelt News, September 25, 2009

http://www.apparelnews.net/news/retailing/092509-Retailers-Look-to-Save-by-Cutting-Credit-Card-Fees

Retailers Ready for Fight on Credit-Card Fees
JANET MORRISSEY
Time, Sep. 17, 2009

http://www.time.com/time/business/article/0,8599,1924409,00.html

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This morning at 8:00 am, I am on a panel with Ed Yardeni discussing the economy and the markets. Its sponsored by my old firm, Maxim Group.

The Current State of The Equity & Credit Markets

Third Annual Maxim Group Growth Conference
September 29, 2009
The Grand Hyatt, New York
www.maximgrp.com/growthconf

Sneak in and say hello!

Good Evening: After wobbling a bit last week in the wake of the FOMC meeting, U.S. stocks sharply rallied today. Wednesday’s FOMC communiqué was light on the exit strategy hints some market participants had feared prior to the meeting, so investors decided to bid share prices higher almost as soon as the Fed’s statement hit the wires last week. However, once the S&P 500 reached 1080 and had investors dreaming about an “11 handle” on the widely watched benchmark index, stocks reversed course and went lower into Friday. One source of last week’s desire to take profits was an opinion piece in the Wall Street Journal by Fed governor, Kevin Warsh (see below). Mr. Warsh used soaring prose to present the Federal Reserve as an institution brimming with responsible central bankers, ones who might just be able to leap tall buildings in a single bound to save our economy.. Capitalism in a democratic republic is just slightly more complicated than the “we won the battle; now let’s win the peace” situation portrayed by Mr. Warsh. In the final analysis, the Fed has too much in common with the G-20 and the ECB’s Jean-Claude Trichet to be credible on stimulus removal. They are all trying to talk tough, but their actions belie their words.

After the downbeat finish last week on Wall Street, stocks overnight in Asia were weak. Japan’s Nikkei, Hong Kong’s Hang Seng, and China’s CSI 300 all declined by 2% or more on Monday. U.S. stock index futures poked into red territory for a spell early this morning, but rallied when Europe held firm and the week’s first M&A deals hit the wires. With large companies like Abbott Labs, Xerox, and Johnson & Johnson on the prowl as acquirers, the Monday morning blahs were soon dispatched. There were no economic releases this morning, so investors were free to wonder just how quickly share prices might rise if strategic acquisitions once again became de rigueur. Stocks ramped higher as soon as the opening bell rang, and the major averages were up between 1% and 2% within the first hour of trading.

Rather than forging a disciplined blueprint for global financial regulation, this weekend’s G-20 meeting produced the usual bombast without the corresponding policy bombshells (see below). Thus encouraged, investors kept right on seeking equities, especially those of the technology variety. The indexes then stayed within a whisker of their highs for most of the rest of the session. The major averages finished with gains ranging from 1.25% (Dow & Dow Transports) to 2.4% (Russell 2000). Treasurys rallied modestly, and yields fell between 2 and 7 bps against the backdrop of a flatter curve. The only threat to risk appetites came in the form of ECB president Trichet’s plea for a “strong dollar” (see below). Since it was issued by a central banker not from these shores, investors saw fit to levitate the greenback against only the European currencies. The yen and commodity currencies (e.g. Canada, Australia) remained aloft, though gold did lose some of its early luster to finish flat. But led by a 1.5% rise in crude oil prices, the CRB index rose 0.6% on Monday.

In a fairy tale told to me once upon a time, a wolf dons a sheepskin in order to look harmless as he sneaks up on an unsuspecting herd. Fooling both the sheep and their guardian Shepards, the wolf ends up enjoying a lamb dinner. These long ago Shepards have been succeeded (at least in modern finance) by regulators and central bankers. With inflation low during the 1990′s and early 2000′s, interest rates also stayed low, or were held low by central banks. Coddled as they were by the bargain cost of capital, borrowers also enjoyed an increase in the supply of capital when regulators decided to look the other way at ever more shoddy lending practices. When even complex and leveraged contraptions like CDOs and CPDOs flourished in this protected setting, the wolves of a credit crisis gathered under these disguises. Looking for threats from without, the Shepards of our financial system didn’t closely scrutinize the lupine predators that posed as sheep within their midst. In the ensuing financial slaughter of 2007 to 2009, many innocents came to grief and the survivors were asked to make do with mutton as the Shepards spent vast sums reconstituting the flock.

I bring this old tale to life with a modern setting not just because it rings true to me, but also because it still applies one year after the great tumult — this time with a twist. Politicians and central bankers have thrown every dollar, euro, yen, and sterling not nailed down at the financial crisis; when more were called for, they were simply called forth by governments via deficit spending and by central bankers via money printing. Voluntarily blind and deaf during the great boom that preceded the Great Recession, the regulators have seemingly been struck mute as well. They await instructions from their policy masters in government, and, as the G-20 proved only too well this weekend, the only agreement these large nations could find was in the definite promise to keep trying to find policies to agree upon.

The central bankers have yet to face such divisiveness within their ranks. They all agree that the best policy is to keep the pedal to the floor. Near zero short rates and quantitative purchases of fixed income securities are the official policy lines from Tokyo, to Brussels, and from London to Washington. But this unanimity has come with a price. Note, please, that these policies undermine those who wish to save and/or stay safe, while rewarding those who wish to borrow and/or speculate. If these policies seem familiar to you, it is because they’ve been tried before — though with lesser vigor than in 2009. When the stock market bubble aided by low interest rates burst in 2000, the Maestro lowered rates, opened the monetary gas valve, and inflated a housing bubble. Now that both bubbles have burst, the central bankers have turned to the same solution. This time they’ve upped the pressure and upped the ante in the hope of once again inflating asset prices in order to save us from — you guessed it — falling asset prices.

If the problems we face and the so-called solutions being applied are starting to sound circular to you, you’re not alone. The central bankers know it, too. They are asking us to just have faith and trust in them to do the right thing. Fed governor Warsh’s WSJ piece was more about confidence building and instilling trust than it was about policy prescriptions. He wants us all — including our foreign creditors — to know that the Fed “gets it”. He wants the world to have faith that his teammates on the FOMC have the right amount of “clairvoyance” (his word, not mine) to determine just the right moment to remove all the overly simulative policies in force today. Just not yet. Reading from almost the same script, even the supposedly more disciplined ECB said the same thing today. As for the Far East, the BOJ has for almost two decades not seen an interest rate that couldn’t be just a fraction lower. I’m sure they, too, will relent at just the right moment. Just not yet.

We can curse the politicians all we want, and we can blame the central bankers, too, but at least we can’t complain that history isn’t repeating itself. The Bank for International Settlements (the BIS – the central bank to the world’s central banks) warned of this possibility back in June (see below). Like me and many others, the BIS feels the biggest risk to the current quantitatively easy policies is exiting too slowly. Three months (and likely one quarter of positive GDP) later, not one of the G-3 central banks has moved closer to the door marked “exit”. These days, it is the BIS and not the FOMC that is looking clairvoyant. The simple truth is that it now requires tough talk, pretense of the desire to tighten policy, and other forms of play acting by our central bankers just to hold inflation expectations in check — thus preventing either the bond market or the dollar from collapsing. As the chosen asset class of make believe, stocks love it when central bankers talk tough and act easy. Equity investors seem to intuitively know that the central bankers are simply donning costumes to prevent the flock from bolting. Kevin Warsh included, they are themselves sheep — but in wolves’ clothing.

– Jack McHugh

G-20 Plans to End ‘Financial Balance of Terror’ After Summit
Trichet Says Strong Dollar Is ‘Extremely Important’
The Fed’s Job Is Only Half Over
BIS Sees Risk Central Banks Will Raise Interest Rates Too Late
Traders Juggle Krone, Krona, Kiwi in Central Bank Bet

heh heh:

I’m a big fan of XKCD — I just ordered their first book.

Bill Dunkelberg is currently a professor of economics at Temple University where he served as dean of the School of Business from 1987-95. Prior appointments were at Purdue, Stanford and the University of Michigan. He has served as the Chief Economist for the National Federation of Independent Business for 35 years, is the Chairman of Liberty Bell Bank (NJ) and Economic Strategist for Boenning & Scattergood (1914, Philadelphia).

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The debate over health care “reform” has been confusing indeed and its meaning seems to have eluded even those who are attempting to write the legislation that is supposed to “reform” the system. For some, this is about efficiency, delivering the same or more health care at a lower cost. For others, it is about “redistribution”, giving access to the “poor”, funded by taxpayers. And some are concerned about “fairness”, desiring all people to have access to health care, regardless of their health (and have this access funded regardless of the cost, thus protecting families from dreaded medical bills that result in financial ruin). Most recently, the debate has focused on “insurance”, guaranteeing insurance to everyone regardless of cost, rather than on “efficiency”, reducing the cost of delivering the current level of care. Failing to distinguish clearly among these objectives is responsible for much of the turmoil surrounding the issue.

The goal of adding “47 million” alleged uninsured to the health care market while lowering costs appears logically impossible to achieve (without reducing the level of medical care received by currently insured individuals). Resources are limited and it takes a decade to increase the supply of doctors. On the day of Census measurement, there may have been 47 million who told the Census they were uninsured. But far fewer are uninsured for long periods of time (they get jobs). Roughly 10 million of these people are non-citizens, and taxpayers should be able to decide how much if any care they wish to provide to this group. Another 9 million are covered by Medicaid, but haven’t signed up because they haven’t accessed the medical care system (or may not view this as insurance). When they do, they are covered. Similarly, about 4 million “uninsured” children are covered under SCHIPS, but have not been enrolled. About 10 million are from families making enough money to buy health care (income exceeding 300% of poverty line) but choose not to, some paying for care out of pocket, others, many young, preferring to spend the money on a better car and take their chances, knowing that if they have an accident, the hospital will take care of them. Using “47 million” is misleading and not helpful for identifying the nature of the issues and what might be done. Indeed, many critics of reform point out that everyone gets health care today since none are turned away. This is inefficient, but suggests that we aren’t going to add “47 million” new people to the system, creating doctor shortages, because they are already in the system and their care is paid for by explicit and implicit subsidies (hospital room charges cover bad debts for example).

Most industrialized countries set a health care budget and manage (ration) delivery to meet the budget. In the U.S., we don’t know how much we spend until we add it up at the end of the year. One observer noted that the goal of managed systems is to “save money” while the U.S. goal is to “save lives”. There is an important kernel of truth in that statement. All health care is paid for by consumers, directly, or through private insurance, or through taxes (to pay for Medicare, Medicaid and SCHIPS for example). In that sense, the government’s concern about its budget is misplaced, it is just one conduit we use to pay for the medical care we want. Characterizing the large share of our GDP paid for health care as a “crisis” is not appropriate if one believes that the task of markets is to deliver what consumers want. It is appropriate to worry about inefficiencies (including price distortions like a “free” doctor visit or excessive law suits) that cause us to misuse or overuse our valuable medical resources. But as the baby boomers age, they will spend more on health care and it is inappropriate (if you believe in consumer sovereignty and markets) to attempt to reduce the care retirees take.

Read the rest of this entry »

Lawrence K. Fish
Simon Johnson PhD ’98
September 24, 2009
Running Time: 53:17

In a lively discussion with Simon Johnson, Lawrence Fish deconstructs the near collapse of the banking system and points out the multiple factors that have contributed to the financial crisis.

Topics in the discussion include the banks that did not fail, how Canadian and other countries’ banking systems also did not fail, the political landscape of banking regulation, ethics, bonuses in the banking industry and the ethics oath signed by 50% of the students at the Harvard Business School

Hat tip Infectious Greed

Barry emailed me this AM to ask about the commentary last week by Jonathan Weil of Bloomberg News regarding the FDIC:

FDIC Is Broke, Taxpayers at Risk, Bair Muses: Jonathan Weil

http://www.bloomberg.com/apps/news?pid=20601039&sid=aEKc7Yh8ogXw

The thrust of the piece is that “FDIC’s insurance fund is going broke, and Sheila Bair is wondering aloud about how to replenish it. This means one thing for taxpayers: Watch your wallets.”

This makes for sensational and salacious copy. Unfortunately, the entire thesis of the article is wrong.

I have gotten used to the media butchering stories about the FDIC’s deposit insurance fund, but this piece from a writer an intelligent  and thoughtful as Weil demands rebuke.  As Barry said to me, we all expect Bloomberg to get stories right.  When they miss something as basic as this, it makes both of us scratch our heads.

Let’s first look at the lead of the comment quoted above. Last week, in an open blast to the media taking Bloomberg to task, I said the following:

“Repeat after me: The FDIC does not run out of cash.  The FDIC does not run out of cash. FDIC can confiscate all of the net assets and earnings of all FDIC insured banks. That is trillions in total liquidity.  FDIC can borrow from Treasury, the Fed and even from FDIC insured banks. They can also issue notes.”

I then reminded Weil et al that the BANKING INDUSTRY pays for not only the operations of the FDIC, but for the deposit insurance fund (“DIF”) as well. So Weil’s comment that taxpayers should reach for their wallets is just scare mongering.

I continued to spank Weil: “Our worst case loss to the FDIC fund is $300-400bn THROUGH THE CYCLE. Where is the problem? It is in your minds and the minds of your editors. If you can’t get your collective minds at Bloomberg News around the nuances of federal finance and the workings of the FDIC, THEN STOP WRITING ABOUT IT.”

Read the rest of this entry »

Today’s unusual market related project comes via Uniform Chaos:  STOC Stock Ticker Orbital Comparison.

It is a data visualization of the S&P 500 from the NYSE programmed in Processing:

“Each circle in the visualization represents one of the stocks in the S&P, with characteristics of each visualizing different data points for each. There is a legend in the project that will explain the relationships between data and visuals, as well as a list of the controls for interactivity. In the very near future we will be posting a tutorial video as well as the podcast ACM recorded of my Siggraph presentation.

Below is a screen grab, and you can see video here.

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Hat tip information aesthetics