Posts filed under “Think Tank”
Killing the Goose
October 9, 2009
By John Mauldin
Killing the Goose
What Were We Thinking?
Let’s Play Turn It Around
Detroit, the Red Sox and the Yankees, and Traveling Too Much
Peggy Noonan, maybe the most gifted essayist of our time, wrote a few weeks ago about the vague concern that many of us have that the monster looming up ahead of us has the potential (my interpretation) for not just plucking a few feathers from the goose that lays the golden egg (the US free-market economy), or stealing a few more of the valuable eggs, but of actually killing the goose. Today we look at the possibility that the fiscal path of the enormous US government deficits we are on could indeed kill the goose, or harm it so badly it will make the lost decades that Japan has suffered seem like a stroll in the park.
And while I do not think we will get to that point (though I can’t deny the possibility), for reasons I will go into, there is the very real prospect that the upheavals created by not dealing proactively with the problems (or denying they exist) will be as bad as or worse than the credit crisis we have gone through. This is not going to be something that happens overnight, and the seeming return to normalcy that so many predict has the rather alarming aspect of creating a sense of complacency that will only serve to “kick the can” down the road.
This week we look at the problem, and then muse upon what the more likely scenarios are that may play out. This is a longer version of a speech I gave this morning to the New Orleans Conference, where I also offered a path out of the problems. This letter will be a little more controversial than normal, but I hope it makes us all think about the very serious plight we have put ourselves in.
Let’s review a few paragraphs I wrote last month: “I have seven kids. As our family grew, we limited the choices our kids could make; but as they grew into teenagers, they were given more leeway. Not all of their choices were good. How many times did Dad say, ‘What were you thinking?’ and get a mute reply or a mumbled ‘I don’t know.’
“Yet how else do you teach them that bad choices have bad consequences? You can lecture, you can be a role model; but in the end you have to let them make their own choices. And a lot of them make a lot of bad choices. After having raised six, with one more teenage son at home, I have come to the conclusion that you just breathe a sigh of relief if they grow up and have avoided fatal, life-altering choices. I am lucky. So far. Knock on a lot of wood.
Category: Think Tank
The American Enterprise Institute in Washington hosted this discussion on the steps taken by the government to stabilize the financial markets. In the first session, AEI resident scholar Vincent R. Reinhart presented his findings gleaned from a series of conversations with market participants. Angel Ubide of Tudor Investment Corporation; Greg Ip, the U.S. economics editor…Read More
With the persistent weakness in the US$, a 4% rally this week in the CRB index, much better than expected job’s data from Australia and Canada, a rate hike from the RBA, and a weak 30 yr US bond auction, inflation expectations in the 5 year TIPS has risen 11 bps on the week to…Read More
The European view is from a major trading desk morning comment, where the author cannot be cited:
European markets have come off their best levels this morning and are currently percolating just below the “unch” mark: DAX -0.2%; CAC -0.2%; FTSE -0.1%.
The miners are taking a breather after nice gains yesterday (Lonmin -1%; Xstrata -1.6%; Vedanta Resources -3.2%). Tech and financials are weak (although the weakness in the financials is more pronounced in London and Paris than in Switzerland or Frankfurt), while energy and industrials are weaker. My guess would be that European markets are a tad more rattled by Ben Bernanke’s comments than were the Asian markets. (Bloomberg)
Chairman Ben S. Bernanke
At the Federal Reserve Board Conference on Key Developments in Monetary Policy, Washington, D.C.
October 8, 2009
To fight a recession, the standard prescription for a central bank is to lower its target short-term interest rate, thereby easing financial conditions and supporting economic growth. In the current downturn, however, the Federal Reserve has faced two historically unusual constraints on policy. First, the financial crisis, by increasing credit risk spreads and inhibiting normal flows of financing and credit extension, has likely reduced the degree of monetary accommodation associated with any given level of the federal funds rate target, perhaps significantly. Second, since December, the targeted funds rate has been effectively at its zero lower bound (more precisely, in a range between 0 and 25 basis points), eliminating the possibility of further stimulating the economy through cuts in the target rate. To provide additional support to the economy despite these limits on traditional monetary policy, the Federal Open Market Committee (FOMC) and the Board of Governors have taken a number of actions and initiated a series of new programs that have increased the size and changed the composition of the Federal Reserve’s balance sheet.
I thought it would be useful this evening to review for you the most important elements of the Federal Reserve’s balance sheet, as well as some aspects of their evolution over time. As you’ll see, doing so provides a convenient means of explaining the steps the Federal Reserve has taken, beyond conventional interest rate reductions, to mitigate the financial crisis and the recession, as well as how those actions will be reversed as the economy recovers. I laid out some of these points in April at a conference sponsored by the Federal Reserve Bank of Richmond, but a lot has happened in the intervening period and so an update seems timely.1
For those of you who might be interested in learning more about the Federal Reserve’s policy strategy, by the way, an excellent source of information is a feature of the Board’s website titled “Credit and Liquidity Programs and the Balance Sheet.”2 This source provides extensive and regularly updated information on our programs and goes well beyond the basic balance sheet data that we publish every week.3
To get started, slide 1 provides a bird’s eye view of the Federal Reserve’s balance sheet as of September 30, the quarter end, with the corresponding data from just before the crisis for comparison. As you can see, the assets held by the Federal Reserve currently total about $2.1 trillion, up significantly from about $870 billion before the crisis. The slide shows the principal categories of assets we hold, grouped (as I will explain) so as to correspond to the various types of initiatives we’ve taken to address the crisis. The liability side of the balance sheet, also summarized in slide 1, primarily consists of currency (Federal Reserve notes) and bank reserve balances (funds held in accounts at the Federal Reserve by commercial banks and other depository institutions). Later in my remarks, I will discuss the relationship between Federal Reserve liabilities and broader measures of the money supply. I will also discuss ways we can manage the link between the size of the Federal Reserve’s balance sheet and the broader money supply during the transition back to a more familiar framework for monetary policy. Our capital, the difference between assets and liabilities, is about $50 billion.
Category: Think Tank
The August Trade Deficit unexpectedly narrowed to $30.7b and was $2.3b less than forecasted and down from $31.9b in July. The composition of the reduction in the deficit was good in that exports rose and imports fell. But, imports fell because of a reduction in the amount of crude imported. Imports ex this would have…Read More
Governor Daniel K. Tarullo
At the Phoenix Metropolitan Area Community Leaders’ Luncheon, Phoenix, Arizona, October 8, 2009
In the Wake of the Crisis
I am pleased to be here in Phoenix at the invitation of President Yellen. Having come across the country to speak to you today, I thought I would not confine myself to a single subject, but would instead address a number of areas about which I have been thinking. Lest you fear that means a potpourri of unrelated observations, let me assure you that there is at least some thematic unity in my remarks–namely, the challenges we face in the wake of the financial crisis. So, with your indulgence, let me strike that rather grand theme by covering the current state of the economy, the task of financial regulatory reform, and some broader comments on credit markets.1
The Economic Outlook
Turning first to the economic outlook, let me begin by stating the obvious: After a period in which there seemed to be only two plausible scenarios–very bad and even worse–financial and economic conditions have steadied. A year ago the world financial system was profoundly shaken by the failures of large financial institutions here and abroad. Significant liquidity problems that had been building since early 2007 turned into a full-blown liquidity crisis. The economy deteriorated at a pace that was both rapid and sustained. The period ending in the second quarter of this year was the first time the United States had suffered negative GDP growth in four consecutive quarters since the Great Depression.2
As we closed out the third quarter last week, it was apparent that economic growth was back in positive territory. Financial markets continued to stabilize and, in some respects, improved. Consumer spending was showing signs of firming. Housing-related economic indicators have turned positive. Industrial production rose significantly in the summer, and not just for the auto industry, which was effectively restarting after the disruption caused by the bankruptcies of General Motors and Chrysler. Growth in foreign markets, particularly emerging Asia, has been encouraging.
This turnaround is certainly welcome, but it should not be overstated. Although we can expect positive growth to continue beyond the third quarter, economic activity remains relatively weak. The upturns in industrial production and residential investment, for example, follow startling declines in the first half of the year. Improvement is gradual and beginning from very low levels.
Category: Think Tank
Thornton Parker is the author of “What If Boomers Can’t Retire? How to Build Real Security, Not Phantom Wealth” and has worked for the Department of Commerce and the Executive Office of the President. He focuses on retirement plans and investing in stocks to solve the ongoing Social Security problem. He defines phantom wealth as “the returns from corporate stocks that are based on market prices” as opposed to real wealth that is based on “work, earnings, and solid accomplishments, instead of just hopes.”
Paul Krugman explained, in “How Did Economists Get It So Wrong” (The New York Times Magazine, September 6, 2009) how economists’ oversimplifying assumptions and models led to the present crisis by hiding important realities of the financial system and the real economy. He also described differences between the “salt water” economists at universities along the Atlantic and Pacific coasts and the “fresh water” economists of the Middle West, particularly the University of Chicago.
Today’s crisis grew out of problems on the credit and consumption sides of the economy. This essay builds on Krugman’s article and explains why problems on the equity and production sides, that few economists, political leaders, or corporate executives seem to understand or are willing to admit, are likely to cause another crisis.
Most salt water economists agree that creating jobs on Main Street is important. That will require extensive private sector investments, but the term “investment” has several meanings that can hide the different ways that stocks can affect jobs, wealth distribution, and the economy. The differences stem from three aspects of stock investments; types of investment, investors’ objectives, and stock flows.
Types of stock investments
Stock investments are productive or parasitic. The line between them can be fuzzy sometimes, but the differences are usually clear. Productive investments, which are called direct investments when made in other countries, provide capital to start and expand businesses in the real economy. They pay for the things, knowledge, and services that a company needs to operate. Young companies that are intended to become large need productive investments that usually come from the founders, their friends and families, and early stage investors such as angels and venture capitalists who take active interests. Because investments in these young companies involve many risks and are hard to liquidate, the companies depend on stock and rarely borrow very much. If they are successful, they may raise more productive capital from an initial public offering (IPO) and maybe from secondary offerings. If they continue to grow and establish a credit record, they may borrow money for productive investments, but equity capital is required for most early stage development.
Category: Think Tank
Wholesale Inventories in August fell by 1.3%, .3% more than expected and July was revised lower by .2%. Because sales rose 1%, the inventory to sales ratio fell to 1.20 from 1.23 and is at the lowest level since Sept ’08. It’s now well below the high of 1.34 in Jan but also remains well…Read More