Interesting discussion in the FT Wednesday about a potential major shift in Fed philosophy: Maybe its a bad idea for Central Banks to passively wait for bubbles to pop.
I am not sure if the Fed will shift away from the Greenspan doctrine: "Inflate Bubbles & Clean Up he Mes After." Will the change be to something less disruptive, or will they throttle the growth side of the equation? That’s the risk.
Perhaps one idea worth exploring might be not to not blow these bubbles in the first place.
Here’s an excerpt from the FT:
"The US Federal Reserve is reconsidering the way it deals with asset price bubbles in the wake of the housing and credit bust, in a move that could see the central bank using regulation – or even interest rates – to fight unjustified increases.
Top officials are re-examining the Alan Greenspan doctrine that central banks should not try to tackle asset bubbles and should focus on mitigating the fallout when they burst.
They are open to the possibility that the Fed may have to adopt a different strategy in future. However, they have not reached any conclusions and could end up reaffirming their traditional hands-off stance . . .
The Fed has long stood out among central banks as the least willing to embrace the idea that it should "lean against the wind" when asset prices are rising rapidly. Former chairman Mr Greenspan famously argued that it was in practice impossible to identify bubbles before they burst, and attempts to prick them by raising rates were likely to do more harm than good."
Greenspan has claimed its impossible to identify bubbles in real time; Ben Bernanke has been more contemplative on the subject. He’s said its "difficult" to know for sure when we are n a bubble.
Chairman, let me suggest a few data points worth considering:
• Standard Price Deviations: Is the asset class trading 2 to 3 standard deviations away from its traditional price metrics?
• Inventory: Is there a huge inventory build? Bubbles create the incentive to produce a whole lot more, be it Miami condos or dot com companies.
• Fundamentals: Has something shifted in the fundamental supply/demand equation that is impacting pricers, or is it pure speculation?
• Regulatory Changes: Has the government altered some part of the equation that might have changed the game somewhat?
There are others, but these are a good beginning.
Note that the inventory metric is why I have doubted commodities are a bubble; also I have long claimed that we did not have a national Housing bubble, but instead had a lending & credit bubble — a subtle but important distinction.
By the same metrics, I agree with I agree Stuart Hoffman, chief economist of PNC Financial, who notes that the enormous volume of new condos in Miami in inventory are just that proof of a local bubble (I agree).
UPDATE: May 16, 2008 5:42am
First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there’s a bubble in commodities.
But how and why do bubbles form? Economists traditionally haven’t offered much insight. From World War II till the mid-1990s, there weren’t many U.S. investing manias for them to look at. The study of bubbles was left to economic historians sifting through musty records of 17th-century Dutch tulip-bulb prices and the like.
The dot-com boom began to change that. "You were seeing live, in action, the unfolding of lots of examples of valuations disconnecting from fundamentals," says Princeton economist Harrison Hong. Now, the study of financial bubbles is hot.
The Federal Reserve should try to aggressively deflate some types of asset bubbles before they can harm the economy, Fed Gov. Frederic Mishkin said Thursday.
But raising interest rates isn’t the way to prick a bubble, he said. And some types of bubbles, such as the dot-com bubble of the late 1990s, probably shouldn’t be pricked at all, he said.
On the other hand, the housing bubble of this decade was the type of bubble that should have been targeted with closer supervision and tighter regulation to prevent widespread economic damage, Mishkin said.
The Fed should watch for bubbles that are associated with a fast expansion of credit, he said, because these bubbles have the potential to inflate bank balance sheets on the way up and destroy them on the way down.
Fed looks at ways to fight asset bubbles
FT, Tuesday May 13 2008 18:05
Bernanke’s Bubble Laboratory
Princeton Protégés of Fed Chief Study
the Economics of Manias
WSJ, May 16, 2008; Page A1
Fed should deflate some bubbles, Mishkin says
Monetary policy ineffective, but supervision can break harmful feedback loops
MarketWatch, 7:04 p.m. EDT May 15, 2008
Another appearance on Kudlow & Co. tonite, from 7:00 to 7:30pm (ish).
Also on tonite: David Malpass, Bear Stearns chief economist, Jimmy Pethokoukis, senior writer at U.S. News & World Report, Andy Busch, global FX strategist at BMO Capital Markets, Jim Awad, chairman of WP Stewart Asset Management, and Don Luskin, chief investment officer, Trend Macro.
Note that Jimmy Pethokoukis and I have a bet as to whether or not there is a recession or not.
UPDATE: May 14, 2008 11:47pm
Considering it was 4 on 1, I thought I held up pretty well.
Its that time of year: New York City is flooded with tourists. Thanks to the weak American Peso, the place is just thick with ‘em.
There are lots of standard guides you might find helpful to use (i.e., NYC Guide for Tourists), but they are primarily designed for that gullible visitor, the double decker riding, Hawaiian shirt wearing, one born every minute visitor — the Rube.
That’s not you. You are much hipper than that. You want to be in the know, plugged in, well connected. Well, ya came to the right place. I’m going to give you the straight dope, the inside info that the guidebooks don’t tell you about. This is real insider trading, "Blue Horse Shoe Loves Anacot Steel" type stuff that people go to jail for. Not you or me, but people. Some people. Mostly tourists.
Anyway, instead of relying on a Fodors or Let’s Go NYC, consider these suggestions from a born and bred Nu Yawkah (I even got dah aksent dat gos wit da place). A Brooklyn born guy who works in finance and has worked in NYC most of his Adult life, this guy knows a thing or two about Gotham.
These suggestions will help make your stay in the city enjoyable and safe. It well help you get the most out of your visit here. As an added bonus, I get to keep all of you birkenstocked, rucksack wearing, slow walking, camera snapping touristas out from underfoot of us locals.
A New Yorker’s Guide for Tourists: 20 Ways to Make Your Stay in New York City More Enjoyable
1. DO NOT DRESS ALIKE. This is for your safety, as well as for the benefit of the typical New Yorker’s highly refined aesthetic sense. At all costs, avoid wearing identical
matching outfits. Worse than looking like hicks from the sticks, you will look like a group of out-of-towners begging to be mugged.
I don’t mean literally mugged by a criminal element, but rather, robbed by
unscrupulous taxi drivers and retail merchants alike. They will spot you
as a rube, and be all too happy take advantage of your apparent
naivete to lighten your wallets.
You might as well carry a sign that says "Rob Me!" — and they
The corollary to this is to avoid festooning every item of clothing you have on with "New
York, NYC, or Yankees" logos — No one is THAT big of a fan — for the same reason as above.
2. BATHROOMS: Here’s the thing: There just aren’t many public bathrooms in NYC.
Why? Its a long story, which I don’t have time to go into, but there just aren’t that many. Plan accordingly.
Barnes & Noble/Borders Bookstores
The nicest public toilet in the city is Bryant Park at 42nd Street between 5/6. Sometimes there is a wait.
For those of you who have real, um, reallygottagonow issues, its best that you plan ahead. Get a copy of Where to Go: A Guide to Manhattan’s Toilets. Thats right, the NYC toilet situation is so absurd that someone wrote a book about it.
On the plus side, the Rainbow Room and the Grand Havana Club have some of the nicest bathrooms I’ve ever been in — floor to ceiling windows, right next to the urinals!
3. Tipping: The city has a service-based economy, and tipping is encouraged/demanded/insisted upon.
Some basic suggestions: 15% of the bill for "Fair" service, 20% for
"Good" service. This applies to waiters, waiteresses, bartenders, cab
drivers, call girls, etc. Note that you can easily ballpark 15% by
doubling the tax (~16%). Chamber maids should get $5 per day.
Leaving a 5-10% tip is considered a complaint — but stiffing
(leaving nothing) is not perceived as a complaint, but as a sign of
Note that for large parties (6 or more) some restaurants
automatically add the tip to the bill, so double check that bill (don’t
4. See a LIVE TV Show: This requires some advanced planning, usually 6 months to a year ahead of time. I suggest Late Show with David Letterman, The Daily Show, The Colbert Report, Late Night with Conan O’Brien, and Saturday Night Live (email SNL TIckets).
If you did not plan in advance for this year, no worries: Just diary this for next December or January to order tickets for Summer 2009.
Imagine where the US Dollar will be then — we’ll practically be paying you to come here!
5. Do a bunch of local New York things: Hang out in
Central Park, Explore Brooklyn, wear black, enjoy the
free WiFi in Bryant Park (use the bathroom there — nice). Attend a
lecture at the 92nd ST Y, go to
Chinatown in Queens. Buy junk at a street fair, and eat street meat (don’t ask). Have a cigar at the Grand Havana Room (members only). Catch an author speak at a Barnes & Noble (use
the bathroom while you are there).
Spend a weekend at Fire Island or the Hamptons (make arrangements first). Go to a designer sample sale. Do the NYT crossword puzzle on mass
transit. Jog around the reservoir in Central Park. Go to a
Woody Allen retrospective. See the Mets at Shea.
The ultimate New Yorker
activity? Buy the Sunday NY Times late Saturday night; skim it, then
lounge around early Sunday morning, with the paper — and a pot of
strong coffee — in bed Sunday morning. Heavenly!
6. iPod walking guides
Today we have an an interesting guest commentary from Jack McHugh.
I found it thought provoking, and thought you would too. Call it The Power of Positive Thinking, Market Edition.
"It makes sense to approach life with a positive frame of mind.
Positive thinking lightens the load at work, makes the goals in
life feel easier to achieve, and allows both friends & family to
more often enjoy your company. Even family pets know the difference
between a smile and a scowl.
But when it comes to investing, I’ve
always tried to be a little more demanding, even skeptical. As a
result, some may mistake the tone or subject matter of these
commentaries as more properly belonging to a sourpuss of the Doubting
Thomas school of economic thought than to one who looks forward to each
and every day. I humbly disagree, and as evidence I offer up more than
just my usually sunny disposition: I always maintain net long
positions in my personal portfolio (hedged to various degrees, yes, but
always net long).
These scribblings are mostly about risk management,
and as such, I will always be on the lookout for the next problem, the
dangers which may not be clear and present, and the events which can
otherwise harm the returns of investors — especially those trusting
souls who believe in things like the "Greenspan/Bernanke put". I
subscribe to the adage: "Be trustworthy to all and optimistic in all
your dealings, excepting those of a financial nature."The
trusting and the skeptical have been doing battle all year, and the
stark contrast offered by the market action on Friday and today
are only the latest examples. That AIG has sprung a second and massive
leak of red ink in as many quarters (which prompted its former Chairman
to claim the company is "in crisis" — see below) was the news that sat
so poorly with Mr. Market on Friday. Today looked like it would fare
little better when Fed Ex announced yet another shortfall over the
weekend and MBIA served up another loss this morning (also below).
Market participants would have none of it, and after an opening dip,
they powered stocks higher almost all day. Not even a
prediction from one of their heroes, Jamie Dimon, that the "recession
is just starting" could deter the optimists, nor could a pronouncement
from the Carlyle Group that "enormous bank losses" still have yet to be
recognized (see below). The rally came, saw, and conquered because of
the final quartet of news items you see posted below. HSBC reported
lower write-downs than had been feared, Apple
announced it was running out of I-Phones, and it was revealed that HPQ
has an amorous interest in EDS. It also helped that some retailers
posted better than expected results, causing many to think a recession
won’t visit these shores (see these charts).
These " it’s all about the future" thoughts
are nicely summed up by the following quotation: