Tuesday, March 10, 2009

Bernanke Calls for Formation of Governmental Authority to Monitor the Economy

At the Council on Foreign Relations in Washington, D.C., this morning, Fed Chairman Ben Bernanke is calling for a huge new bureaucracy to monitor the economy. He wants a biggie:

Financial stability, however, could be further enhanced by a more explicitly macroprudential approach to financial regulation and supervision in the United States. Macroprudential policies focus on risks to the financial system as a whole. Such risks may be crosscutting, affecting a number of firms and markets, or they may be concentrated in a few key areas. A macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets.

How could macroprudential policies be better integrated into the regulatory and supervisory system? One way would be for the Congress to direct and empower a governmental authority to monitor, assess, and, if necessary, address potential systemic risks within the financial system. The elements of such an authority's mission could include, for example, (1) monitoring large or rapidly increasing exposures--such as to subprime mortgages--across firms and markets, rather than only at the level of individual firms or sectors; (2) assessing the potential for deficiencies in evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products to increase systemic risks; (3) analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms; and (4) identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole. Two areas of natural focus for a systemic risk authority would be the stability of systemically critical financial institutions and the systemically relevant aspects of the financial infrastructure that I discussed earlier.

Introducing a macroprudential approach to regulation would present a number of significant challenges. Most fundamentally, implementing a comprehensive systemic risk program would demand a great deal of the supervisory authority in terms of market and institutional knowledge, analytical sophistication, capacity to process large amounts of disparate information, and supervisory expertise.

Other challenges include defining the range of powers that a systemic risk authority would need to fulfill its mission and then integrating that authority into the currently decentralized system of financial regulation in the United States. On the one hand, it seems clear that any new systemic risk authority should rely on the information, assessments, and supervisory and regulatory programs of existing financial supervisors and regulators whenever possible. This approach would reduce the cost to both the private sector and the public sector and allow the systemic risk authority to leverage the expertise and knowledge of other supervisors. On the other hand, because the goal of any systemic risk authority would be to have a broader view of the financial system, simply relying on existing structures likely would be insufficient.
Of course, Bernanke did not mention that the most important piece of data to monitor the business cycle is money supply growth, which it appears that I am one of the very few who monitors in its pure form (three month annualized M2 nsa), but which is available for calculation direct from the data on Fed's web site on a weekly basis in its H.6 release.

Bernanke also did not mention that at the height of the money printing and subprime fueled real estate boom, two New York Fed economists, Jonathan McCarthy and Richard W. Peach, had their theories so twisted that they could have all the data about the economy delivered via IV and they still wouldn't have seen the real estate bubble. They came out with a paper that stated there was no real estate bubble, when it was pretty clear to me that these Fed economists were making a serious error, and, indeed, I said so in a rebuttal to their paper:

McCarthy and Peach have blinded themselves to the real estate bubble that does exist. They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."
My rebuttal caught their attention, and they used the quote above in their slide presentation, as a "dissenting view," when they went around the country presenting their view that there was no real estate bubble. Presumably, the slide was a real thigh slapper at the time. I haven't heard any reports of them using the slide lately. But, the point is, if you have bad theories (like these New York Fed economists), it doesn't matter how much data you have.

When you understand the lack of mention by Bernanke of the money manipulatons that can be easily monitored and that cause the entire problem, you realize that this new call for monitoring the economy is simply a further expansion of the government payroll. Very cool stuff to be managing, if you are already on the inside, but little to do with actually creating great new insights about the economy.

With the data currently available, you can monitor the economy pretty well with a lap top and an internet connection, and make some pretty damn impressive predictions. And, I know that for a fact.


  1. What we need is a Government Economic Planning Committee ;)

    Which should develop a five year plan to deal with our economic problems.

    Not to forget production quotas and prizes for those who exceed them. :)

  2. Oligarchs say oligarchs should have more power.

    @James: That'll go nicely with our Czars but you might have wait till we're a bit further down the road. Though if you want to compare to Russia you may want to have a look at this presentation on Social Collapse Best Practices.

    @Robert: Is there an special reason for focussing on 3 month annualised M2 nsa? I also noticed you have an different way of annualising it to me, otherwise it would be even higher!

  3. @Tsundere

    Three months just seems to me to be a good period to catch any significant changes in Fed policy.

    If you go shorter, you are going to catch too much short-term randomness. If you go longer,say 12 months, it may take too long to catch trend changes.

    For example, with the Fed money slowdown this summer, I was able to pick it up within roughly a month of its start, same thing with the trend reversal in late Sept, I was on it by mid-Oct.[In both cases, with 12 month data, it would have been a lot longer before you detected the trends, from ore than just blips.]

    As for my method of annualizing, I am really trying to get a generalized sense of the trend rather than an exact number.So either way works, if what you are doing is compounding. Technically, however, it is probably more difficult to justify compounding because you are compounding a three month period over a year--and the Fed is probably looking at simple growth rates over say a year. Thus if it is 15% currently, they will adjust to keep the trend in line at 15% over a year versus the compounded rate of 15%, which would truly put a rocket under the M's over a 12 month period.