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Janet Yellen’s Historic Meeting With The Right

At CPAC, recently, an estimated 10,000 conservatives and libertarians, together with many presidential aspirants, gathered across the Potomac. They did so amidst massive hoopla and intense media fascination. We in the media are nothing if not suckers for hoopla.

History, however, typically emerges without hoopla. Janet Yellen, meeting with 21 members of the center right, in Washington, at the very same time, may actually have made some real history. While this story was reported by the AP (as carried, among many publications, by the New York Times,  ABC, Fox Business, and Salon.com), the Wall Street Journal, Bloomberg, CNN, the Washington Examiner, and the Daily Signal, among others, there is more to report.

On February 27th, at the Fed headquarters at the corner of 20th and Constitution, the Chair of the Federal Reserve Board of Governors, Dr. Janet Yellen, and Governor Lail Brainard, met with a delegation of 21 center right figures. The delegation included some of the most influential free market thought leaders from the monetary and financial policy arena. A dozen attendees made thoughtful statements. The rest, myself included, were present as observers.

The ground rules of the meeting prohibit any characterization of the statements of Fed officials by participants. It does not, however, violate the ground rules to report that Chair Yellen and Governor Brainard were keenly attentive, well focused on each speaker, and presented respectful and intelligent questions to ensure they fully understood the statements made.

The delegation was assembled and led by the Hon. Steve Lonegan, monetary policy director of American Principles in Action. It included four other representatives from APIA: its chairman, Sean Fieler; APIA director and board secretary Ellen Barrosse; Dr. Marc Miles, an APIA consultant; and myself, APIA’s senior economic advisor.

Among the thought leaders were Cato Institute president (and former BB&T CEO) John Allison; economic historian Prof. Brian Domitrovic; Heritage Foundation economist Dr. Norbert Michel; and Atlas Network’s Dr. Judy Shelton.

Lonegan’s, and the delegation’s, core theme: liberals do not have a monopoly on caring about middle and low-income wage earners. This theme represents an authentic, and welcome, shift in the right’s discourse.  It represents a shift away from (although not inconsistent with) a utilitarian theme to a humanitarian one.

The right, with its signature championship of capitalism, has given an impression (assisted by a left-leaning academe and media) that it is committed to privileging creditors over debtors, capital over labor, and Ebenezer Scrooge over Bob Cratchit and Tiny Tim. Not so. Capitalism, properly constructed, is what causes workers to thrive.  To recall President Kennedy’s immortal phrase: “a rising tide lifts all boats.”

A new, unified, message by the right, at the Fed, was unmuffled: a free market strongly benefits workers. This message to Yellen may prove a watershed shift by the right. Could prove historic.

Lonegan observed that

While the Fed’s intentions are good, the current policies are leading to distortions that are hurting middle and low-income workers. This is not the Fed’s desired outcome. Our scholars will present evidence to that end and will be punctuated by representatives … who will give personal testimony. It is our desire to produce thoughtful and valuable research to Fed officials.

Prof. Domitrovic (himself a Forbes.com columnist and who here has set forth his remarks, well worth reading in full)) observed:

Over the forty some years since 1971, two sets of two decades mirror each other. The 1970s and the (now long) 2000s have proven eras of monetary discretion, and the 1980s and 1990s were those of classical policy, classical de facto if not de jure. Moreover, just as the 1970s and the 2000s are like to each other in being less classical in monetary orientation, so did the 1980s and 1990s jointly recall the decades of Bretton Woods: both of these eras were more classical in monetary orientation.

Economically, the effects were startling in their contrasts. In the 1980s and 1990s, growth was high, recessions rare (there was one from 1982 to 2000), entrepreneurialism common, and jobs abundant. In the 1970s and the 2000s (through today), recessions were either frequent or their recoveries slow and shallow, un- and under-employment sampled new high levels, and investment went into primary inputs ranging from oil to land (and gold) to an uncommon degree.

Dr. Shelton observed:

The ultimate forward guidance would be a clear rule for conducting monetary policy, well known and well understood by all. Even better, we should seek to build an orderly and ethical international monetary system.  … Any new system we might imagine could include the designation of  a universally-accepted reserve asset or currency — with existing national or regional monies linked through convertibility or sovereign financial instruments.   Gold comes to mind as a logical anchor. As the ECB recently affirmed: “Gold remains an important element of global monetary reserves.’ As Alan Greenspan noted before the Council on Foreign Relations in October: ‘Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it.’ … [I]t was striking to hear former IMF managing director Jacques de Larosiere declare at a conference last February in Vienna that nothing has replaced the discipline of an anchor in international monetary relations since Bretton Woods.  Inflation-targeting by central banks has resulted, according to Larosiere, in volatility, persistent imbalances, disorderly capital movements and currency misalignments….  The world’s existing monetary setting is something much worse than a ‘non-system,’ Larosiere concluded.  It amounts to an ‘anti-system.’

John Allison spoke eloquently of how the Fed’s new regulatory rules functionally disable community bankers from making loans on the basis of good judgment about the character of borrowers and of the social fabric of their communities, a depth of judgment which had enabled safe lending and the creation of new businesses and abundant new, good, jobs.

Dr. Norbert Michel, drawing upon the Bank of England’s 2011 seminal Financial Stability Paper No. 13, observed that under the post-1971 fiduciary monetary regime annual GDP growth has been a full percentage point lower; annual average inflation has been materially higher; downturns in median countries have more than tripled; banking crises have moved from one per decade to 2.5 per year; and the number of currency crises has doubled.

Against a range of economic metrics, the world’s major economies have performed more poorly since the breakdown of Bretton Woods. … There is enough evidence for the Federal Reserve Board of Governors, at the very least, to passively support the bipartisan Centennial Monetary Commission. Such a Commission, which would include a [representative] appointed by the Fed Chair, would fully evaluate economic performance under alternative monetary regimes.

Dr. Miles requested his presentation be kept off the record by this columnist. That request hereby is honored.

Sean Fieler closed with a reiteration of Dr. Michel’s call for Fed support of a monetary commission as a way to legitimize the discourse and create a space for a national conversation. Fieler stated the desire to help foment a fruitful discussion. In that spirit, he informed the Fed of APIA’s scheduling its own Jackson Hole symposium, overlapping that of the Kansas City Fed, next August, and announced that this symposium would feature former Fed Chairman Alan Greenspan.

The center-right delegation also included activists and members of the rank-and-file public telling their life stories about hardships inflicted by the contemporary economy. Herman Jung, Selina Stinson, Sue-Ann Penna, and Matt DeVries told their personal stories. Jim Martin, president of the 60 Plus Association, spoke on behalf of seniors and Jiesi Zhao, director of the Young America’s Foundation’s Center for Entrepreneurship, spoke on behalf of Millennials. Also present were Phil Kerpen, of American Commitment, Peter Sepp, president of the National Taxpayers Union, Deneen Borelli, Outreach Director for FreedomWorks, Richard Lowrie, Senior Advisor for Put Growth First, and Varditra Reid, a working single mother.

Fed Chair Janet Yellen and Governor Lail Brainard listened respectfully throughout the hour’s presentation. Dr. Yellen has set a new tone for the Fed, breaking many of its hermetic seals the better both to speaking and listen. Dr. Yellen, by extending the same courtesy to the right as she has to the left, is proving instrumental in elevating the national conversation about monetary policy.

It is too much to ask “even of officials of such admirable integrity, intellect, and heart as Janet Yellen (and Chair Yellen’s deeply admirable Vice Chair Stanley Fischer….)” as I previously have characterized the current Fed leadership, to do this unaided.  Time for a national conversation. As Dr. Yellen made clear to Chairman Jeb Hensarling in her most recent testimony before the House Financial Services Committee the Fed desires independence, not autarchy.

Now it is time for a sympathetic Congress, one respectful of the high value of Fed independence, to engage. Time to take the national conversation to the next level by enacting a national monetary commission to evaluate empirically, in a nonpartisan fashion, what monetary policies have proven, in practice, most beneficial in the creation of a climate of equitable prosperity, job creation, and income mobility.

Next let the presidential contenders — of both parties — join this national conversation. Let the presidential aspirants respectfully place the importance of good money in the creation of full employment — and how best to get to good money — into the very center of the upcoming presidential debate.

Good money is key to abundant job creation.

Originating at Forbes.com: http://www.forbes.com/sites/ralphbenko/2015/03/02/janet-yellen-meets-the-right/

Economics

What’s in a Word?

[You can find the original here http://truesinews.com/2015/02/27/whats-in-a-word/]

After yet another masterly performance before Congress – one which was immediately confounded by the usual cacophony of cross-talk from the Pigeons and Doves (no Hawks!) among her colleagues – Madame Yellen has left no-one really the wiser as to what the all-things-to-all-men Federal Reserve thinks it is actually doing with regard to monetary policy.

Is she ‘patient’ or not? And is ‘patient’ a nudge-nudge, wink-wink code for a period stretching beyond the next few FOMC meetings or is it just a tacit admission that the Fed will start checking its parachute harness only after the plane’s engines have at last caught fire?

Given all this prevarication, have you lost patience with the whole weary rigmarole, as have we, Dear Reader? If so, can we suggest you join us in setting aside your frustrations by concentrating on the one abiding truth of current policy: that even if theredoes exist a door marked ‘EXIT’ in the haunted house in which the world’s central bankers have long confined themselves, it would be one guarded by that most fearsome of all the ghastly bogeymen of economic myth – the Ghost of ’37.

But why not, you ask? Is the Fed not right to hold fire in this world of ‘secular stagnation’ Is it not only prudent to avoid tipping the country headlong into ‘deflation’ by spooking the financial markets and so risking a full-scale reprise of the Lehman moment of six years ago?

Perhaps not. For even as has been belatedly recognised by the ‘professional second-hand dealers in ideas’ who write, for example, for the FT – when not flitting to Davos or popping up to sing for their supper at self-flattering symposia sponsored by billionaire financial St. Augustins (‘O Lord, help me eradicate all inequality, but just not by setting a personal example’) – what the world urgently needs is not any further incentive to take on debt. but a means of expunging some of its gross, existing burden of the stuff.

Yes, without any acknowledgement of the error of their ways and lacking any display of contrition at the long misery to which their pontifications have greatly contributed, the Clerisy are starting to realise that they may as well help Atlas to shrug off his crushing load and that the world must thereafter be ordered to allow the newly liberated Titan to enjoy as much freedom as possible (‘structural’ reforms must be enacted, as they put it) if he is to help rebuild both his and our prosperity.

It is almost mischievous to say so but, in the circumstances, a genuine bout of deflation could actually represent a useful Plan B. After all, few can argue that the authorities’ Plan A has so far been a rather dismal failure; that the Powers-that-Be have not managed to alleviate the real impact of all that debt as they had planned, in an inflation of anything other than the price of prestige property, race-horse yearlings, modernist daubings, and all manner of financial assets. To their mounting frustration, their efforts so far have achieved little more than to ignite a version of inflation which has served only to aggravate the divide between the rest of us poor saps and the same plutocratic 1% which is so vilified by the very bleeding heart Progressives who are to be found at the forefront of the mob noisily advocating the current policy mix.

Without wishing to call the glib ‘liquidationist’ slur down upon our heads, one might point out that the one guaranteed way to cancel debt is to allow a sufficiently rapid deflation that creditors can no longer hold out for the soothing money-illusion balm of a repayment in debased coin but must instead face up to the reality that their debtors are unable to comply with the terms of their mutual contract as originally drawn up.

If you agree with a man that you will feed him and his co-workers for a month in exchange for them delivering a tonne of coal to you at the end of the period and he later finds he and his team cannot possibly comply with his undertaking, it serves no very great purpose to redefine the mass which makes up a tonne to half its former value in place of either accepting the reduced physical repayment your debtor can make for what it is, or of otherwise working out some alternative scheme of mutually-agreed recompense which will at least allow him and his mates the chance to continue to make a living – an activity from which you might yet hope to derive some ancillary benefits.

Inflation is not, therefore, a panacea, especially when the principal means of injecting the posion into the economic circulation is by encouraging people to continue to borrow more than they should.

Deflation in this sense is, of course, unmitigatedly ugly but it is at least a purgative. The soothing inflationary alternative nurtures a more chronic disease in place of that febrile crisis, but this is an illness whose mortality rate may well turn out to be higher, not lower, than its more acute cousin. Arguably, too, it is one which introduces even more inequity into the system for while neither the struggling debtor, nor the prudent, middling sort see any benefit from the asset-heavy, differentiated increase in prices, the members of  the speculative class make out like the state-sponsored bandits they are.

QE may thus prove to be little more in form than an issue of letters of marque to our era’s financial privateers on a truly unimaginable scale. Every new higher close on the stock market and every notch lower in bond yields and credit spreads should therefore be added to the charge sheet of financial larceny, even if the move does not end up inducing a panicky rush for the wheelbarrows.

But, in any case, what do we mean by ‘deflation’? In truth this should imply an increased perception that money has become more scarce, whether because the quantity available has actually shrunk or because money – final-settlement, trust-no-man money – is being demanded in place of the Good-time Charlie credit which was formerly allowed to assume some of its functions.

15-02-27 Bank Credit

On that score, we can hardly talk of the United States being at risk of ‘deflation’. To consult but two of the more timely gauges of the financial temper of the times, commerical bank balance sheets – minus the hoard of excess reserves they have been forced to pile up at the Fed – are again growing smartly, rising by 7.8% YOY, close to the best in five years and not too far removed from the 8.4% median of the two decades preceding the collapse of Lehman. Money proper is also not in short supply, rising 10.4% nominal, 8.1% real in the past twelve months and so moving far, far above the long-term trend.

15-02-27 USM1+

Even if we do succumb to the dubious practice of defining deflation by means of a simple fall in what we imagine to be the general price level, it is not at all clear that any ‘threat’ to any but the most confirmed sufferer of katatimophobia exists either at present.

Take the Cleveland Fed’ s Median CPI index, for example, an index whose primary virtue is that it throws out the outliers, high and low, and so is less affected by either positive or negative ‘shocks’ to small numbers of its constituents.

As it has for some little while now, this is giving a thoroughly, unexceptional, if not impressively stable reading: one which, moreover, manages to meet that cabbalistic ideal of modern central bankerhood of a rise of close to 2% per annum – at which sacred pace, we are constantly assured, the doors to earthly paradise will instantly be thrown open.

15-02-27 MCPI

And lest this observation give rise to the opposite argument that if the maintenance of this Babylonianly perfect rate requires no countermeasures on the downside, it need call forth no monetary tightening either, just be aware that, as for much of the past four years, this leaves the real Fed Funds rate at highly unsettling 2%-negative. For comparison, the seventeen years of the so-called ‘Great Moderation’ between 1992 and 2008 saw a typical CPI rate not much more elevated than at present – at 2.7% – but also experienced a nominal funds rate of around 4% and an ex-post real one of plus-1.2%.

Given that, with the benefit of hindsight, this supposed golden era was the one in which were actively sowing the seeds of our own ruin, it might give pause for thought about quite how much harm our masters ‘ stubbornly accommodative stance is causing us again today.

 

Money

Monetary Politics: The Biggest Money Player In Politics Is The Fed

Washington finally shows signs of coming to grips with the importance of money to politics. This is not about mere campaign finance. Recently there was a breakthrough in bringing the money policy issue out of the shadows and to center stage … where it belongs.

The real issue of money in politics is about the Fed, not the Kochs. The Fed’s political impact is orders of magnitude greater than all the billionaires’ money, bright and dark, left and right, combined.

There was a real breakthrough in the discourse last week. This breakthrough deserves far more attention than it yet has received.

The Washington Post’s Matt O’Brien, one of the smartest cats in the (admittedly small and dark, but crucial) monetary policy alley, published a column at the Post’s Wonkblog entitled Yes the Federal Reserve has enormous power over who is president. 

O’Brien states:

The arc of the political universe is long, but it bends towards monetary policy.

That’s the boring truth that nobody wants to hear. Forget about the gaffes, the horserace, and even the personalities. Elections are about the economy, stupid, and the economy is mostly controlled by monetary policy. That’s why every big ideological turning point—1896, 1920, 1932, 1980, and maybe 2008—has come after a big monetary shock.

Think about it this way: Bad monetary policy means a bad economy, which gives power back to the party that didn’t have it before. And so long as the monetary problem gets fixed, the economy will too, and the new government’s policies will, whatever their merits, get the credit. That’s how ideology changes.

O’Brien’s column may, just possibly, represent a watershed turn in the political conversation. Game on.

O’Brien demolishes not one but two myths. The first myth is of the Fed as politically independent. The second is that monetary policy properly resides outside the electoral process.

As I wrote here in a column Dear Chair Yellen: Mend the Fed:

As journalist Steven Solomon wrote in his indispensable exploration of the Fed, The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, 1995):

Although they strained to portray themselves as nonthreatening, nonpartisan technician-managers of the status quo, central bankers, like proverbial Supreme Court justices reading election returns, used their acute political antennae to intuit how far they could lean against the popular democratic winds. “Chairmen of the Federal Reserve,” observes ex-Citibank Chairman Walter Wriston, “have traditionally been the best politicians in Washington. The Fed serves a wonderful function. They get beat up on by the Congress and the administration. Everyone knows the game and everyone plays it. But no one wants their responsibility.”

Moreover, as to the political delicacy of this position, I wrote:

To consistently be in what iconic Fed Chairman William McChesney Martin called “the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up” is just asking too much of most mere mortals.  It asks too much even of officials of such admirable integrity, intellect, and heart as Janet Yellen (and Chair Yellen’s deeply admirable Vice Chair Stanley Fischer, most recently seen talking with protestors at Jackson Hole).

Monetary policy has been relegated to the Fed and largely excluded from the formal electoral process for almost two generations. This is, at it happens, and as O’Brien states forthrightly, a historical anomaly.

Monetary policy was a white hot topic at the Constitutional Convention of 1787. Thereafter, it was crucial to the success of George Washington’s administration, one of the few matters in which cabinet members Thomas Jefferson and Alexander Hamilton concurred.

Monetary policy — in the North, “Greenbacks” — was a huge (and later litigated) issue during and after the Civil War.

Monetary policy was a fundamental issue for Grover Cleveland.

Monetary policy was the issue that propelled the young William Jennings Bryan to national prominence and three presidential nominations, beginning with his famous “cross of gold” speech.

Monetary policy was a, perhaps the, prime issue on which William McKinley campaigned (and won).

After the Panic of 1907 monetary policy was a central issue for U.S. Senator Nelson Aldrich, then called America’s “General Manager.” Aldrich chaired the National Monetary Commission.  He wittily noted, in a 1909 speech, that “[T]he study of monetary questions is one of the leading causes of insanity.”

Thereafter — with the creation of the Fed — monetary policy became a key issue for Woodrow Wilson. As recorded in Historical Beginnings. The Federal Reserve by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

On December 23, just a few hours after the Senate had completed action, President Wilson, surrounded by members of his family, his cabinet officers, and the Democratic leaders of Congress, signed the Federal Reserve Act. “I cannot say with what deep emotions of gratitude… I feel,” the President said, “that I have had a part in completing a work which I think will be of lasting benefit to the business of the country.”

FDR’s revaluing gold, on the advice of agricultural economist George Warren, was crucial to lifting the Depression. This was a matter so politically dramatic as to land Warren on the cover of Time Magazine.

The importance of FDR’s action cannot be minimized. As I have elsewhere written:

As (conservative economic savant Jacques) Rueff observed in The Monetary Sins of the West (The Macmillan Company, New York, New York, 1972, p. 101):

“Let us not forget either the tremendous disaster of the Great Depression, carrying in its wake countless sufferings and wide-spread ruin, a catastrophe that was brought under control only in 1934, when President Roosevelt, after a complex mix of remedies had proved unavailing, raised the price of gold from $20 to $35 an ounce.”

As investment manager Liaquat Ahamed wrote in his Pulitzer Prize winning history Lords of Finance: The Bankers Who Broke the World (The Penguin Press, New York, 2009, pp. 462-463):

“But in the days after the Roosevelt decision, as the dollar fell against gold, the stock market soared by 15%.  Even the Morgan bankers, historically among the most staunch defenders of the gold standard, could not resist cheering.  ‘Your action in going off gold saved the country from complete collapse,’ wrote Russell Leffingwell to the president.”

“Taking the dollar off gold provided the second leg to the dramatic change in sentiment… that coursed through the economy that spring. … During the following three months, wholesale prices jumped by 45 percent and stock prices doubled.  With prices rising, the real cost of borrowing money plummeted. New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.”

Of course, FDR did not take the dollar off gold.  He revalued.  That FDR did not have a firm grasp on the implications of his own policy is evidenced by his Treasury’s sterilization of gold inflows, arguably a leading factor leading to the 1937 double dip back into Depression.

Monetary policy figured more than tangentially in President Nixon’s “New Economic Policy,” announced in a national address on August 15, 1971. The inflationary consequences of Nixon’s closing of the gold window — and the easy money policy he bullied out of the Fed — figured prominently in the Ford and Carter administrations. The symptom of bad monetary policy — runaway inflation — was a major contributing factor in the election of Ronald Reagan.

A period that has been called the Great Moderation — under Fed Chairman Paul Volcker and the first two terms of Chairman Greenspan — followed. This saw the creation of almost 40 million new jobs, and economic mobility.  This tookmonetary policy largely off the political agenda for almost two generations.

Then, of course, came the unexpected financial meltdown of 2008.  That event — and the ensuing soggy recovery — helped propel monetary policy back into the realm of electoral politics.

The Republican Party national platform of 2012 called for the establishment of a monetary “commission to investigate possible ways to set a fixed value for the dollar.” This is something for which American Principles in Action (which I professionally advise) was and is a leading advocate.

This plank, widely noted around the world, directly led to the introduction, by Joint Economic Committee chairman Kevin Brady (R-Tx), of Centennial Monetary Commission legislation, which attracted 40 House and two Senate co-sponsors.  It is expected to be reintroduced early in the 114th Congress.

The monetary commission legislation meticulously is bipartisan in nature.  It includes  ex-officio commissioners to be appointed by the Fed Chair and Treasury Secretary. It has been widely, and universally, praised in the financial press … including the FT, the Wall Street Journal, and Forbes.com. It is purely empirical in intent and has attracted the public support of many important civic leaders in the policy and political arena.

Last winter the commission received a unanimous resolution of support from the Republican National Committee. Democrats and progressives, of the kind of progressive Democrat President Cleveland, also well can support it.

There are a number of things about which one might quibble in O’Brien’s column. (O’Brien, for instance, reflexively opposes the gold standard. Yet the facts and analysis on which he rests his objections are incomplete.)

That said, O’Brien gets the big thing right: “The arc of the political universe is long, but it bends towards monetary policy.” Such an important columnist for the Post getting the big thing right is in and of itself a Big Thing.

Good money — and how to make our money good — is a matter that belongs at the center of our national, and, especially, presidential, politics. Good money is central to restoring job creation, economic mobility, equitable prosperity, the integrity of our savings and the solvency of our banks.

We are in what trenchantly has been called “uncharted territory.” Among issues which deserve a “national conversation” good money deserves the place at the head of the line. Fed Chair Yellen has been described, astutely, by Politico as having the Toughest job in Washington.  It is high time for our elected officials — and presidential aspirants — to shoulder more responsibility. It is high time for monetary policy, after being in political near-hibernation for almost two generations, to enter the 2016 presidential debate.

Originating at Forbes.com: http://www.forbes.com/sites/ralphbenko/2015/01/19/monetary-politics-the-biggest-money-player-in-politics-is-the-fed/

Economics

The Real Fed Tug Of War: the Yellen Doctrine vs. the Volcker Doctrine

The financial markets are on a hair trigger as to when, and how quickly, the Fed will tighten and raise interest rates.  Billions of dollars will be won or lost by investors on this wager.

For the rest of us, getting it right — as did Chairman Volcker and (during his first two terms), Greenspan is crucial to the creation of a climate of equitable prosperity in which jobs are created in abundance.  39 million jobs were created during the “Great Moderation.” We haven’t seen anything remotely like that since.

Getting it right is crucial to economic mobility — raises, bonuses, and promotions — to let us workers climb the ladder to decent affluence. Thus, just when to raise rates is much less important than the bedrock issue.

For over a decade now job creation has been poor. Poor, too, has been economic mobility.  The left is very much on record as calling for extended ease — keeping interest rates down.  The right has been critical over the Fed’s “zero interest rate policy.” Yet the real tug of war is over whether the Fed should follow a monetary rule or exercise discretion; and, if a rule is preferable, what rule?

Yellen has been on a campaign to demonstrate her empathy with workers.  Less well known: this empathy is shared by many conservatives and libertarians. I, among others, find Yellen’s new openness to rank and file workers and activists a refreshing change of tone from that of the formerly hermetically sealed “Temple.” There are few matters on which I agree on with Sen. Sherrod Brown. This is one of them. As Sen. Brown told Politico:

“I love that Chair Yellen and three Fed governors actually had public meetings,” said Sen. Sherrod Brown of Ohio, an outspoken member of the Senate Democrats’ liberal wing, commending Yellen and her colleagues for recently meeting with progressive activists. “She wants to set a different tone there where they’re listening to the public and listening to people who have lost jobs, listening to people who have seen their life savings evaporate….

Yellen’s descent from Temple Mount to we plain people of the plane is a notable shift. It well accords, at least in style and possibly in substance, with the new populist spirit abroad in the land.  It is imperative, however, that it prove substantive and not merely cosmetic.  And substantive means an intellectual openness to a diversity of views.

The right is not the party of Ebenezer Scrooge.  The right is all for job creation and a rising tide lifting all boats. Yet Yellen has been connecting, so far exclusively, with the left. In her first year, Yellen visited a trade school and donned a welding mask (a terrific photo op, truly); toured a low income neighborhood before speaking, to wide note, at a Boston Fed conference where she advocated for the social safety net and social services (notably, mysteriously, not speaking about monetary policy); met with President Obama on the eve of the 2014 election; and recently took an unprecedented meeting with what Bloomberg.com called “labor and community organizers.”

It is my guess that Janet Yellen reaches out to the social-democratic left because it represents her native intellectual milieu. They speak her language.  Many progressives simply find the right foreign, our language alien. (Memo to Yellen: If all I knew about my team was what I read from Paul Krugman I, too, would disdain me. The mainstream media portrayal of the right is a grotesque caricature.  We’re not the way we are portrayed.  We are, however, skeptical of the efficacy of central planning.  For good reason. And, Dr. Yellen? America is a center right nation.)

Soon we shall stop guessing and find out if Janet Yellen truly is open to hearing a diversity of views … or whether this really is merely a “charm campaign.” One of the leading monetary integrity advocacy groups (and the lead gold standard advocacy group) on the center right, American Principles in Action, which I professionally advise, recently hand-delivered to the Fed a request to Madam Yellen that she meet with representatives of the right.

The letter, signed by 20 high profile figures on the right, stated:

This is to endorse the pending request by American Principles in Action’s Steve Lonegan for a meeting with you, Vice Chair Fischer, and others of your selection, to gather and exchange views with a delegation of monetary policy thought leaders from the center-right.

The left by no means has a monopoly on concern for unemployment and wage stagnation.  To balance a meeting with a group composed of, as described by Bloomberg News, “labor and community organizers” with one of the leading representatives of the center right experts would honor that principle of “a diversity of views”. An evenhanded insight on achieving our shared goal of job creation and economic mobility would facilitate steps toward realization of this mutual objective.

The letter is noteworthy and may portend a significant shift in the discourse. The “money quote:”The left by no means has a monopoly on concern for unemployment and wage stagnation.” This is a thematic development that Yellen would do well to encourage. The difference between members of the humanitarian left and humanitarian right is one of means, not ends.

All agree that money matters, and that the Fed is the fulcrum of the world’s monetary system.  The left believes that discretion is the recipe for more equitable prosperity. The right believes that a monetary rule will yield greater equitable prosperity. Both cannot be right.  Yet this is, and should be treated as, an empirical, not doctrinal, matter. It is not, at heart, a “left vs. right” issue.

In a way, it’s “Yellen vs. Volcker.”  Contrast a statement by Madam Yellen with one made by former (and iconic author of the Great Moderation) Fed Chairman Paul Volcker, reprised in an earlier column:

Madame Yellen [at hearing of the House Financial Services Committee chaired by Chairman Jeb Hensarling earlier this year] stated that “It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule.”  Contrast Madame Yellen’s protest with a recent speech by Paul Volcker in which he forthrightly stated: “By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success.  In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth. … Not a pretty picture.”

Not all rules are mathematical.  There may be room for agreement implicit in Yellen’s statement.

There is no generic rule. And a bad rule, or a rule badly implemented, could be worse than no rule at all. If a rule is to be preferred, which rule?

There are contending schools of thought. These prominently include the Taylor Rule, NGDP targeting, inflation targeting, commodity price targeting, and the gold standard. Of the latter, Paul Volcker, not himself a proponent of the gold standard, once had this to say in his Foreword to Marjorie Deane and Robert Pringle’s The Central Banks (Hamish Hamilton, 1994):

It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’

Which rule would most likely be optimal for fomenting equitable prosperity as well as price stability? Each regime has eloquent advocates.

It is, in fact, an open question.

Thus the safest path forward out of the uncharted territory in which we find ourselves appears to be the proposed Brady-Cornyn monetary commission introduced in the 113th Congress. It reportedly is certain to be re-introduced in the 114th.

The proposed commission, widely praised in the financial media, is designed to be strictly bipartisan and meticulously empirical.  It is chartered to make an objective assessment of the real outcomes of the various rules now being propounded. While many commissions are designed to derail an issue, a monetary commission would be very much in order. Monetary policy is intricate and potent, not amenable to political towel-snapping-as-usual.

This proposed commission is not in at all inimical to the Fed. The Fed Chair gets an appointment of an ex-officio Commissioner to ensure that the monetary authorities have a dignified voice in the review process.  The Treasury Secretary gets to appoint an ex-officio commissioner as well.

Politico has termed Yellen’s the “Toughest job in Washington.” This surely is apt.   In taking a step away from her crystal ball and connecting with the rank and file Janet Yellen may have unleashed a healthy dynamic that could prove beneficial to making progress.  But only if she listens to all sides.  Moreover, the Commission would provide a civil buffer from the sobering reality that, as Politico reported, “Republican leaders and staff said in interviews that they plan to use their new dominance on both sides of Capitol Hill next year to target the Fed for much greater scrutiny, including aggressive hearings ….”

On the surface it’s a tug of war between raising and lowering interest rates.  At root, it’s an argument about whether the Fed should be following a rule or making one up as it goes along.  If Yellen proves open to a diversity of viewpoints, and if the Fed puts its benediction on the Brady-Cornyn monetary commission legislation, 2015 well could see the beginning of a move in the direction of credit both affordable and abundant that could rival for job creation the Great Moderation.

Originating at http://www.forbes.com/sites/ralphbenko/2014/12/15/the-yellen-tug-of-war/

Money

Spare dollars

Last week I wrote that contrary to the prevailing mood US dollar strength could reverse at any time. This week I look at another aspect of the dollar, which almost certainly will become a significant source of supply: a global shift out of it by foreign holders.

As well as multinational corporations that account in dollars, there are non-US entities that use dollars purely for trade. And so long as governments intervene in currency markets, governments end up with those trade dollars in their foreign reserves. Some of these governments are now pushing hard to replace the dollar, having seen its debasement, which is beyond their control. This has upset nations like China, and that is before we speculate about any geopolitical angle.

The consequence of China’s currency management has been a massive accumulation of dollars which China cannot easily sell. All she can do is stop accumulating them and not reinvest the proceeds from maturing Treasuries, and this has broadly been her policy for at least the last year. So this problem has been in the works for some time and doubtless contributed to China’s determination to reduce her dependency on the dollar. Furthermore, it is why thirteen months ago George Osborne was summoned (that is the only word for it) to Beijing to discuss a move to urgently develop offshore renminbi capital markets, utilising the historic links between Hong Kong and London. Since then, it is reported that last month over 22% of China’s external trade was settled in its own currency.

Given the short time involved, it is clear that there is a major change happening in cross-border trade hardly noticed by financial commentators. But this is not all: sanctions against Russia have turned her urgently against the dollar as well, and together with China these two nations dominate and carry with them the bulk of Asia, representing nearly four billion rapidly industrialising souls. To this we should add the Middle East, most of whose oil is now exported to China, India and South-East Asia, making the petro-dollar potentially redundant as well.

In a dollar-centric currency system, China is restricted in what she can do, because with nearly $4 trillion in total foreign exchange reserves she cannot sell enough dollars to make a difference without driving the renminbi substantially higher. In the past she has reduced her dollar balances by selling them for other currencies, such as the euro, but she cannot rely on the other major central banks to neutralise the market effect of her dollar sales on her behalf. Partly for this reason China now intends to redeploy her reserves into international investment to develop her export markets for capital goods, as well as into major infrastructure projects, such as the $40bn Silk Road scheme.

This simply amounts to dispersing China’s dollars into diverse hands to conceal their disposal. Meanwhile currency markets have charged off in the opposite direction, with the dollar’s strength undermining commodity prices, most noticeably oil, very much to China’s benefit. And while the talking-heads are debating the effect on Russia and America’s shale, they are oblivious to the potential tsunami of dollars just waiting for the opportunity to return to the good old US of A.

Economics

Models, Damn Models and Statistics, or Math Gone Mad

Parliamentary committees are not especially noted for entertainment, but the November Treasury Select Committee hearing on the Bank of England’s Inflation Report is a refreshing exception. The fun starts on p. 30 of the transcript of the hearings with Steve Baker MP and Bank of England Governor Mark Carney light-heartedly jousting with each other.

Steve begins by asking Dr. Carney if the Bank is all model-driven. To quote from the transcript:

Dr Carney: No. If we were all model driven, then you would not need an MPC.

Q81 Steve Baker: All right. But we do have plenty of models floating around.

Dr Carney: I presume you feel we do need an MPC, Mr Baker?

Steve Baker: I think you know I think we don’t.

Dr Carney: I just thought we would get that read into the record.

[KD: First goal to Dr. Carney, but looks to me like it went into the wrong net.]

Steve Baker: I want to turn to a criticism by Chris Giles in The Financial Times of the model for labour market slack, which called it a nonsense. If I may I will just share a couple of quotes with you. He said that, according to a chart in the inflation report, the average-hours gap hit a standard deviation of -6, and this is something we would expect to happen once in 254 million years. He also said that the Bank of England is again implying the recent recession, as far as labour market participation is concerned, was worse than any moment in 800 times the period in which homo sapiens have walked on the earth. How will the Bank reply to a criticism as strident as this one?

[KD: The article referred to is Chris Giles, “Money Supply: Why the BoE is talking nonsense”, Nov 17 2014: http://ftalphaville.ft.com/2014/11/17/2045002/moneysupply-why-the-boe-is-talking-nonsense/#]

Dr Carney: Since you asked, let me reply objectively. Calculations such as that presume that there is a normal distribution around the equilibrium rate. Let me make it clear. First off, what is the point of the chart? The chart is to show a deviation relative to historic averages. It is an illustrative chart that serves the purpose of showing where the slack is relative to average equilibrium rates, just to give a sense of relative degrees of slack. That is the first point. The second point is that the calculation erroneously, perhaps on purpose to make the point but erroneously, assumes that there is a normal distribution around that equilibrium rate. So in other words to say that there is a normal distribution of unemployment outcomes around a medium-term equilibrium rate of 5.5%. So it is just as likely that something would be down in the twos as it would be up in the eights. Well, who really believes that? Certainly not the MPC and I suspect not the author of that article. It also ignores that the period of time was during the great moderation for all of these variables as well, so it is a relatively short period. These are not normal distributions. You would not expect them. You would expect a skew with quite a fat tail. So using normal calculations to extrapolate from a chart that is there for illustrative purposes is—I will not apply an adjective to it—misleading and I am not sure it is a productive use of our time.

Q82 Steve Baker: That is a fantastic answer. I am much encouraged by it, because it does seem to me it has been known for a long time that it is not reasonable to use normal distributions to model market events and yet so much mathematical economics is based on it.

[KD: Carney’s is an excellent answer: one should not “read in” a normal distribution to this chart, and the Bank explicitly rejects normality in this context.

Slight issue, however: didn’t the Bank’s economists use the normality assumption to represent the noise processes in the models they used to generate the chart? I am sure they did. One wonders how the charts would look if they used more suitable noise processes instead? And just how robust is the chart to the modelling assumptions on which it is based?]

Dr Carney: People do it because it is simple—it is the one thing they understand—and then they apply it without thinking, which is not what the MPC does.

Steve Baker: That is great. I can move on quickly. But I will just say congratulations to the Bank on deciding to commission anti-orthodox research because I think this is going to be critical to drilling into some of these problems.

Dr Carney: Thank you.

[KD: Incredulous chair then intervenes.]

Q83 Chair: To be clear, the conclusion that we should draw from this is that we should look at all economic models with a very high degree of scepticism indeed.

Dr Carney: Absolutely.

[KD: So you heard it from the horse’s mouth: don’t trust those any of those damn models. Still incredulous, the chair then intervenes again to seek confirmation of what he has just heard.]

Chair: Can I just add that it is an astonishing conclusion? I do not want to cut into Steve Baker’s questions, but is that the right conclusion?

Dr Carney: Absolutely. Models are tools. You should use multiple ones. You have to have judgment, you have to understand how the models work and particularly, if I may underscore, dynamic stochastic general equilibrium forecasting models, which are the workhorse models of central banks. What they are useful for is looking at the dynamics around shocks in the short term. What they are not useful for is the dynamics further out where—

[KD: Dr. Carney reiterates the point so there can be no confusion about it. So let me pull his points together: (1) He “absolutely” agrees that “we should look at all economic models with a very high degree of scepticism.” (2) He suggests “You should use multiple [models]”, presumably to safeguard against model risk, i.e., the risks that any individual model might be wrong. (3) He endorses one particular – and controversial – class of models, Dynamic Stochastic General Equilibrium (DSGE) models as the “workhorse models” of central banks, whilst acknowledging that they are of no use for longer-term forecasting or policy projections.

I certainly agree that none of the models is of any longer-term term use, but what I don’t understand is how (1), (2) and (3) fit together. In particular, if we are to be skeptical of all models, then why should we rely on one particular and highly controversial, if fashionable, class of models, never mind – and perhaps I should say, especially – when that class of models is regarded as the central banks’ workhorse. After all, the models’ forecast performance hasn’t been very good, has it?

The discussion then goes from the ridiculous to the sublime:]

Chair: I am just thinking about all those economists out there whose jobs have been put at risk.

Dr Carney: No, we have enhanced their jobs to further improve DSG models.

Steve Baker: We are all Austrians now.

[Laughter.]

[A little later, Steve asks Sir Jon Cunliffe about the risk models used by banks.]

Q84 Steve Baker: Sir Jon, before I move too much further down this path, can I ask you what would be the implications for financial stability and bank capital if risk modelling moved away from using normal distributions?

Sir Jon Cunliffe: Maybe I will answer the question another way. It is because of some of the risks around modelling, the risk-weighted approach within bank capital, that we brought forward our proposals on the leverage ratio. So you have to look at bank capital through a number of lenses. One way of doing is to have a standardised risk model for everyone and there is a standardised approach and it works on, if you like, data for everybody that does not suit any particular institution and the bigger institutions run their own models, which tend to have these risks in them. Then you have a leverage ratio that is not risk-weighted, and therefore takes no account of these models, and that forms a check. So with banks, the best way to look at their capital is through a number of different lenses.

[KD: Sir Humphrey is clearly a very good civil servant: he responds to the question by offering to answer it in a different way, but does not actually answer it. The answer is that we do not use a non-normal distribution because doing so would lead to higher capital requirements but that would never do as the banks would not be happy with it: they would then lobby like crazy and we can’t have that. Instead, he evades the question and says that there are different approaches with pros and cons etc. etc. – straight out of “Yes, Minister”.

However, notwithstanding that Sir Jon didn’t answer the question on the dangers of the normal distribution, I would also ask him a number of other (im)pertinent questions relating to bad practices in bank risk management and bank risk regulation:

1. Why does the Bank continue to allow banks to use the discredited Value-at-Risk (or VaR) risk measure to help determine their regulatory capital requirements, a measure which is known to grossly under-estimate banks true risk exposures?

The answer, of course, is obvious: the banks are allowed to use the VaR risk measure because it grossly under-estimates their exposures and no-one in the regulatory system is willing to stand up to the banks on this issue.

2. Given the abundant evidence – much of it published by the Bank itself – that complex risk-models have much worse forecast performance than simple models (such as those based on leverage ratios), then why does the Bank continue to allow banks to use complex and effectively useless risk models to determine their regulatory capital requirements?

I would put it to him that the answer is the same as the answer to the previous question.

3. Why does the Bank continue to rely on regulatory stress tests in view of their record of repeated failure to identify the build-up of subsequently important stress events? Or, put it differently, can the Bank identify even a single instance where a regulatory stress test correctly identified a subsequent major problem?

Answer: The Northern Rock ‘war game’. But even that stress test turned out to be of no use at all, because none of the UK regulatory authorities did anything to act on it.

In the meantime, perhaps I can interest readers in my Cato Institute Policy Analysis “Math Gone Mad”, which provides a deeper – if not exactly exhaustive but certainly exhausting – analysis of these issues:

http://www.cato.org/publications/policy-analysis/math-gone-mad

1. http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/bank-of-england-inflation-report-hearings-session-201415/oral/15826.pdf

Money

The Truth Behind The Swiss Gold Referendum

A recent column in US News & World Report, The Swiss Gold Rush by Pat Garofalo, its assistant managing editor for opinion, is subtitled “A push for the gold standard in Switzerland is symbolic of Europe’s rising right wing.” US News & World Report hereby descends from commentary to propaganda. Who edits its editors?

To begin with, the Swiss referendum, decisively and sensibly rejected by the Swiss electorate, was not about “the gold standard.” It was a vote on a proposition requiring its central bank to increase its gold reserves from around 8% to 20% — implying the acquisition, over five years, of 1,500 tons (“costing at about $56.3 billion at current prices,” reports Bloomberg), never to sell gold, and to hold that federation’s gold within Switzerland.  That had nothing to do with the gold standard.

The Swiss voted 77% – 23% to reject this proposition. The Swiss National Council had rejected the initiative by 156 votes to 20 with 22 abstentions, and the Council of States by 43 votes to 2 abstentions. And the referendum may well have been a bad, or at least silly, idea.

With a Swiss GDP of around $650 billion (USD) per year the requirement to acquire $10B/year of this iconic shiny-and-ductile commodity while not insignificant, at less than 2% of annual GDP, hardly would have been crippling.  That said, the gold standard was not on the ballot.

As for the gold markets themselves, according to a 2011 report by the FT, reporting on a study by the London Bullion Market Association, there was a $240bn average daily turnover in the London bullion market. The annual mandated Swiss acquisition, then, apparently would have amounted to about … half an hour’s trading volume on one of the world’s major gold marketplaces.  Commodity investment, however, has nothing to do with the gold standard.

Demonetized (as at present), gold merely is a commodity. The gold standard is a quality standard, not a quantity standard, and is about maintaining the integrity of the currency, not limiting its supply. This Swiss referendum substantively was irrelevant to monetary policy. As Forbes.com’s own Nathan Lewis perceptively has pointed out the amount of gold held, under the gold standard, as reserves by banks of issue fluctuated dramatically and immaterially.

The Swiss referendum generated a modicum of international attention and considerable criticism. The referendum presented, in fact, as misguided. It did not, however, even imply a restoration of the gold standard much less prove itself, as Garofalo presented it, as a symptom of “Europe’s rising right wing.”

Garofalo stated that “the gold standard is the idea that a nation’s money supply should be tied to gold, rather than being fully controlled by its central bank.”  This is not even a crude approximation of the gold standard. The gold standard simply holds that the value of a currency shall be defined by, and legally convertible into, a fixed weight of gold.

Garofalo implies, and cites other writers who claim, that the gold standard constrains the money supply.  Not so.  As Nathan Lewis has pointed out, for instance, from 1775 to 1900 the amount of gold in the U.S. monetary system increased by 3.4x while the currency increased by 163x without causing a depreciation in value of the currency.

The gold standard is a qualitative, not quantitative, standard. It does not constrain growth of the money supply, merely calibrating it reasonably well (albeit imperfectly, perfection having never been attained by any monetary system) to the real economy’s money demand. Lewis:

between 1880 and 1900, the monetary base in Italy actually shrank by 4.8%.  However, the monetary base in the U.S. grew by 81% over those same years. Both used gold standard systems. So, the “money supply” not only has no relation to gold mining production, but two countries can have wildly different outcomes during the same time period.

As for whether the gold standard is superior to fiduciary management there is abundant evidence that the organic nature of the gold standard consistently outperforms the synthetic nature of central bank discretion.  Garofalo references a poll of 40 academic economists who dismiss the (admittedly unfashionable) gold standard.

In criticizing the performance of the gold standard Garofalo relies on The Atlantic’s Matt O’Brien.

Indeed, when it was in force, the gold standard brought with it a whole host of negative effects, and as Matt O’Brien wrote in The Atlantic, “was a devilish device for turning recessions into depressions.” It ensures that a central bank can’t respond to a crisis by putting more money into the financial system, greasing the wheels of the economy, since the money supply is restricted by an outside factor.

As for another celebrity on whom Garofalo relies, Nouriel Roubini, his ill-founded hysteria on the gold standard has been critiqued here and here. O’Brien and Roubini are entitled to their own opinions but not to their own facts.

As economic historian Professor Brian Domitrovic, also at Forbes.com, relates, The Gold Standard Had Nothing To Do With Panics and Busts,

Looking at the 19th century, before the gold standard became a ghost, a dead-letter in the early era of the Federal Reserve from 1913-33, there is no evidence that the good old thing was implicated in any panic or bust.

Rather than relying on commentators and academics, pro or anti gold, it might be pertinent to turn to the thoughts of central bankers. Herr Dr. Jens Weidmann, president of the Bundesbank, in a 2012 speech referred to gold as “in a sense, a timeless classic.”

And Garofalo makes no reference to the 2011 Bank of England Financial Stability Paper No. 13, summarized and hyperlinked by Forbes.com contributor Charles Kadlec here. This study by the prudential Bank of England — not for nothing called “the Old Lady of Threadneedle Street” — provides an empirical assessment of the fiduciary management approach ushered in by Presidents Johnson and Nixon and, at the time of the study, in effect for 40 years.

Financial Stability Paper No. 13 contrasts the world economy’s real performance under the Johnson/Nixon protocols relative to the Bretton Woods gold-exchange standard and the classical gold standard. The Bank of England analysis, based on the empirical data, concludes that fiduciary management greatly underperformed (for economic growth, financial stability, inflation, recession, and all other categories assessed) its predecessor systems.

Garofalo legitimately cites the weight of elite academic economic opinion against the out-of-fashion gold standard. That said, this august collection of economists, few if any of whom foresaw the panic of 2007 and ensuing Great Recession, seem to be guided by former U.S. Treasurer Ivy Baker Priest’s motto, “Often wrong, never in doubt.” Readers deserve to be provided with the weight of the evidence to, at least, supplement the weight of elite opinion.

More troubling are Garofalo’s innuendos tying gold standard proponents to sinister “right-wing” politics. There is no meaningful correlation between advocacy for the gold standard and, for example, anti-immigrant sentiment. I, a gold standard proponent, am very much on record for a generous, inclusive, immigration policy (including a path to citizenship for undocumented aliens). So is American Principles In Action, the gold standard’s most prominent advocacy group in Washington, DC (which I professionally advise).

The figure most synonymous with right-wing totalitarianism, Adolf Hitler, virulently opposed the gold standard.  The gold standard then was, as it now is, intrinsic to a liberal republican order. Hitler is recorded as saying:

I had no interest in gold— either natural or synthetic.Our opponents have not yet understood our system. We can be easy in our minds on that subject; they’ll have terrible crises once the war is over. During that time, we’ll be building a solid State, proof against crises, and without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off into a concentration camp ! That’s the bastion of money. There’s no other way.

Garofalo states that “In 2012, Republicans kowtowed to their more extreme members by including a call to return to the gold standard in their party platform.”   This, flatly, is wrong.  The 2012 GOP platform did not call to return to the gold standard.  It simply called for a ““commission to investigate possible ways to set a fixed value for the dollar.”  (Nor did it represent a “kowtow” to “more extreme members.”)

Instead of reciting the platform language Garofalo relied on a distorted description of it by commentator Bruce Bartlett, to which he links.  (Bartlett’s reference, in his New York Times Economix blog, to a “metallic basis” was to platform language referencing a commission established by Reagan, not the call to action in the 2012 platform.)

Garofalo states that “Kentucky Sen. Rand Paul – has mentioned the possibility of a return to the gold standard.”  The source to which he links states shows the Senator entirely noncommittal:  “Paul wouldn’t comment on whether a gold standard is needed or not….”  Sen. Paul, pressed by a questioner, simply called for a commission to study the matter, which has a subtle yet materially different connotation from having “mentioned the possibility.”

Garofalo’s misrepresentations are, at best, sloppy, giving readers good cause to wonder about the integrity of this writer’s work. His collected writings are a compilation of progressive nostrums: complaining that gas prices are too low, opposing corporate tax reform, criticizing President Obama for refusing to propose a gas tax, supporting the mandated minimum wage, throwing bouquets to the IRS, and so forth.

Garofalo is a propagandist rather than a commentator. Good on him: the discourse is made spicier by propaganda.

That said, the readers of US News & World Report deserve much better quality propaganda than this. The Swiss referendum may have been silly but it was not about the gold standard. The gold standard neither is “ugly” nor evidence of a “rightward lurch.” And, in the words of its foremost living proponent, Lewis E. Lehrman (whose eponymous Institute I professionally advise), “By the test of centuries, the true gold standard, without reserve currencies, is the least imperfect monetary system of history.”

Originating at Forbes.com: http://www.forbes.com/sites/ralphbenko/2014/12/01/the-truth-behind-the-swiss-gold-referendum-escapes-most-of-the-mainstream-media/

Economics

Segregated Cash Accounts

[Editor’s Note: this piece, by John Cochrane, first appeared here http://johnhcochrane.blogspot.ie/2014/11/segregated-cash-accounts.html]

An important little item from the just released minutes of the October Federal Open Market Committee meeting will be interesting to people who follow monetary policy and financial reform issues.

Finally, the manager reported on potential arrangements that would allow depository institutions to pledge funds held in a segregated account at the Federal Reserve as collateral in borrowing transactions with private creditors and would provide an additional supplementary tool during policy normalization; the manager noted possible next steps that the staff could potentially undertake to investigate the issues related to such arrangements.

A slide presentation by the New York Fed’s Jamie McAndrews explains it.

The simple version, as I understand it, seems like great news. Basically, a company can deposit money at a bank, and the bank turns around and invests that money in interest-paying reserves at the Fed. Unlike regular deposits, which you lose if the bank goes under, (these deposits are much bigger than the insured limit) the depositor has a collateral claim to the reserves at the Fed.

This is then exactly 100% reserve, bankruptcy-remote, “narrow banking” deposits.  I argued for these in “toward a run-free financial system” as a substitute for all the run-prone shadow-banking that fell apart in the financial crisis. (No, this isn’t going to siphon money away from bank lending, as the Fed buys Treasuries to issue reserves. The volume of bank lending stays the same.)


A second function of such deposits is that, like the new repo facility, it’s going to help the Fed to raise rates. When the Fed wants to raise rates it will pay more interest on reserves. The question is, will banks pass that interest on to depositors? If they were competitive they would, but that’s not so obvious. If large depostitors can access interest-bearing reserves through the repo program, or now through this narrow-banking program, it’s likely to more quickly transmit the interest on reserves to the wider economy.

Money

Janet Yellen, Politicizing the Fed?

Janet Yellen gave a widely noted speech, Perspectives on Inequality and Opportunity from the Survey of Consumer Finances, at the Conference on Economic Opportunity and Inequality held  by the Federal Reserve Bank of Boston on October 17th.

The speech presented as a if ghostwritten for her by Quincy Magoo, that beloved cartoon character described by Wikipedia as “a wealthy, short-statured retiree who gets into a series of comical situations as a result of his nearsightedness compounded by his stubborn refusal to admit the problem.” What was most interesting was how political was the speech… and what Madame Yellen didn’t say.

Her omission even raised an eyebrow of one of the commentariat’s most astute Fed sympathizers, The Washington Post‘s Ylan Q. Mui. Mui:  “Yellen did not address in her prepared text whether the Fed has contributed to inequality. Nor did she weigh in on whether it may actually be slowing down economic growth, an idea that is gaining traction among economists but which remains controversial.”

Yellen’s speech drew a public comment from the Hon. Steve Lonegan, director of monetary policy for American Principles Project and project director of its sister organization’s grass roots FixTheDollar.com campaign (which I professionally advise):

There is a strong correlation between the post-war equitable prosperity to which Madam Yellen alluded and the post-war Bretton Woods gold-exchange standard.  And there is a strong correlation between the increase in inequality under the Federal Reserve Note standard put into effect by President Richard Nixon to supplant Bretton Woods.

The monetary policy of the United States has a profound impact on wage growth and prices, both domestically and internationally.  Hence the importance of a thorough, objective, and empirical look at its policies — from Bretton Woods through the era of stagflation, the Great Moderation, and the “Little Dark Age” of the past decade.

That is why the Brady-Cornyn Centennial Monetary Commission, and the Federal Reserve Transparency Act which recently passed the House with a massive bipartisan majority, are critical steps forward to ending wage stagnation and helping workers and median income families begin to rise again.  As President Kennedy once said, “Rising tide lifts all boats.”

Madam Yellen addresses four factors in what she calls “income and wealth inequality.”  Madame Yellen stipulates that “Some degree of inequality in income and wealth, of course, would occur even with completely equal opportunity because variations in effort, skill, and luck will produce variations in outcomes. Indeed, some variation in outcomes arguably contributes to economic growth because it creates incentives to work hard, get an education, save, invest, and undertake risk.”

Even with that ostentatious stipulation, the Fed Chair’s speech is amplifying one of the Democratic Party’s foremost election themes, “income inequality.”  The New York Times‘s Neil Irwin observed of this speech: “Nothing about those statements would seem unusual coming from a left-leaning politician or any number of professional commentators. What makes them unusual is hearing them from the nation’s economist-in-chief, who generally tries to steer as far away from contentious political debates as possible.”

Her speech could be read as an Amen Corner to Elizabeth Warren’s stump speech, on behalf of Sen. Al Franken’s reelection effort, that The game is riggedand the Republicans rigged it.Her speech could be read as a little election-season kiss blown to Sen. Franken (D-Mn), who voted for her confirmation and then glowed on Madame Yellen very publicly.

One cringes at the thought that the Fed even might be giving the appearance of playing politics.  To align the Fed, even subtly, with either party’s election themes during an election season would seem a deeply impolitic, and unwise, violation of the Fed’s existential principle of political independence.  House Financial Services Committee chair Jeb Hensarling and Sen. Mike Crapo (R-Id), should he accede to the chairmanship of the Senate Banking Committee, might just wish to call up Madam Yellen for a public conversation about avoiding even the appearance of impropriety.

The Fed’s independence is as critical as it is delicate. To preserve it demands as much delicacy by the officials of the Federal Reserve System as by the Congress. As Barack Obama might say, here is a “teachable moment” for our new Fed chair.

Also troubling is the decision by the Chair to focus her mental energy, and remarks, on four areas entirely outside the Fed’s jurisdiction: resources available for children; higher education that families can afford; opportunities to build wealth through business ownership; and inheritances.  These might be splendid areas for a president’s Council of Economic Advisors (which Madame Yellen chaired, commendably, under President Clinton).  Good topics for a professor emerita at the University of California, Berkeley, Haas School of Business, as is Madam Yellen.

They are, however, at best mere homilies from the leader of the world’s most powerful central bank. We would like to hear Madam Yellen talk about monetary policy and its possible role in the diminishing of economic mobility. It does not seem like too much to ask.

Since Madame Yellen, rightly, is considered an eminent Keynesian (or Neo-Keynesian), why not begin with Keynes? In The Economic Consequences of the Peace, Chapter VI, Keynes addressed this very point. The brilliant young Keynes was addressing the insidious power of inflation, not now in evidence and not portended by the data.  Yet let it be noted that there is more than one way to debauch a currency:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. … By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. …

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

America and the world needs, and rightly expects, the chair of the Federal Reserve to be that one in a million able to diagnose.  Madame Yellen is called upon to step up her game and pivot from pious homilies to the heart of the matter.  If Keynes could call out how bad monetary policy can strike “at confidence in the equity of the existing distribution of wealth,” perhaps so too ought his followers.

What is to be done? Wikipedia also observes of Mr. Magoo that “through uncanny streaks of luck, the situation always seems to work itself out for him, leaving him no worse than before.”  We devoutly hope that Madame Yellen — and, thus, the economy — will be the beneficiary of “uncanny streaks of luck.”  Hope is not a strategy.  Relying on luck tautologically is a dicey way of bringing America, and the world, to a renewed state of equitable prosperity.

Rely on luck?  It really is time to shift gears.  An obvious place for Madame Yellen to begin would be to register active support for the Brady-Cornyn Centennial Monetary Commission designed to conduct a thorough, empirical, bipartisan study of what Fed policies have worked.   What policies of the Federal Reserve have proven, in practice, or credibly portend to be, conducive to equitable prosperity and healthy economic mobility?

Should the correlation between the (infelicitously stated if technically accurate) “40 years of narrowing inequality following the Great Depression” and the Bretton Woods gold-exchange standard be ignored?  Why ignore this?  Should the tight correlation of “the most sustained rise in inequality since the 19th century” with the extended experiment in fiduciary dollar management be ignored? Why ignore that?

What might be learned from the successes of the Great Moderation inaugurated by Paul Volcker?  Is Volcker’s recent call for a “rules-based” system, a position from which Madam Yellen staunchly dissents, pertinent? Discuss.

Madame Yellen?  Let’s have a national conversation about monetary policy and its effects on economic mobility.  It really is time to bring to a decisive end many decades of Magooonomics and the disorders that derive therefrom.  Fire Magoo.  Show the world that you are Keynes’s one in a million.

Originating at Forbes.com: http://www.forbes.com/sites/ralphbenko/2014/10/20/janet-yellen-the-new-magoo-2/

Economics

Markets and reality disconnected

The behaviour of financial markets these days is frankly divorced from reality, with value-investing banished.

Markets have become distorted by Rumsfeld-knowns such as interest rate policy and “market guidance”, and Rumsfeld-unknowns such as undeclared market intervention by the authorities. On top of these distortions there is remote investing by computers programmed with algorithms and high-frequency traders, unable to make human value-assessments.

Take just one instance of possible “market guidance” that occurred this week. On Thursday 16th October, James Dullard of the St Louis Fed hinted that QE might be extended. In the ensuing four trading sessions the Dow rallied over 5%. Was this comment sparked by signs of slowing economic growth, or by a desire to buoy up sliding equity markets? Then there is the vested interest of keeping government funding costs low, which raises the question whether or not exceptionally low bond yields, particularly in the Eurozone, are by design or accidental.

Those who support the theory that it is all an evil plot will also note that governments and their central banks through exchange stability funds (set up with the explicit purpose of market intervention), wealth funds and state pension funds have some $30 trillion to direct as they see fit. The reality is that there is intervention across a range of markets; but most of the mispricing is in the hands of private, not government investors. For evidence look no further than the record level of brokers’ loans to buyers of equities, who with greed worthy of a latter-day South-Sea Bubble seek to gear up their speculative profits.

These are not markets with widespread public participation, buying dot-coms and the like. Instead ordinary people have given their savings and pension funds to professionals who speculate on their behalf. It is the professionals who talk about the Yellen put, meaning the Fed simply won’t let prices fall significantly. We can fret about who is actually responsible for market distortions, instead we should ask who benefits.

Governments: in the past they have covered their debts through a process dubbed financial repression, when artificially low interest rates and bond yields were the principal mechanism whereby wealth is transferred from savers to the government. This process still goes on today. Forget government inflation figures: when did a bank deposit net of taxes last give a positive return after your cost of living increases?

Zero interest rate policy lays the process bare, and turns savers into borrowers. Mr Average has replaced savings with mortgages and car loans. And while the elderly and other passive savers are still defenceless against financial repression, the process has taken on a new twist. The transfer of wealth to governments now targets investment managers.

Investment and hedge funds we invest with together with the banks which take our deposits speculate on our behalf. They think that with a Yellen or Draghi put underwriting markets a ten-year government bond with a two per cent yield is an attractive investment. In doing so they are transferring financial resources to governments in a variation on old-fashioned financial repression.

Our dysfunctional markets have become little more than the essential prerequisite, as Louis XIV’s finance minister Colbert might have said, to plucking the goose for the largest amount of feathers with the minimum of hissing.