Monday, May 25, 2009

Further Comments on Richard Fisher's Observations

I commented briefly below on WSJ's Mary Anastasia O'Grady's interview with Dallas Federal Reserve chairman Richard Fisher. My comments were limited to the feedback that Fisher received from the Chinese with regard to the dollar. The Chinese thinking about the dollar is obviously a very important global matter at this time. However, Fisher touched on a number of other topics in the interview. PEU Report/State of the Divison has linked to the Fisher story in a comment below, in an effort to get me to dig further into Fisher's comments. So here goes. The O'Grady/Fisher's comments are in italics:

I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program.

I don't know what Fisher means by "assist the private markets", the Fed has, to use a favorite Bernanke term, only one real "tool" , i.e. the ability to print money. If you are assisting in this fashion, you are " monetizing fiscal largess, deficits or the stimulus program." This, to me, appears to be one of those talk a good game, but print money anyway comments.

In September he told a New York audience that "rates held too low, for too long during the previous Fed regime were an accomplice to [the] reckless behavior" that brought about the economic troubles we are now living through. He also warned that the Treasury's $700 billion plan to buy toxic assets from financial institutions would be "one more straw on the back of the frightfully encumbered camel that is the federal government ledger."

I concur and would only add that the government bailout has done nothing but shoveled funds to the privileged elite.

In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion."

$99 trillion is the largest estimate I have seen. I suspect he is arriving at this number by estimating the present value of the future stream of social security and medicare costs. While I believe social security and medicare are disasters waiting to happen, the present value method of presenting the crisis is a bit deceiving. It is the same as taking a 20 year old's future stream of rent payments and saying his rent obligation is 12 (months) times 45 (years) times the rent, then discount to the current value and reach a "rent obligation" number of one million dollars. Well yeah, but tell me what the monthly rent is so I can judge that versus cash inflow.

The $99 trillion number standing alone is as unhelpful as the $1 million "rent obligation" number.

Fisher says that part of the bubble comes as a result of the fact that

the regulators didn't do their job, including the Federal Reserve
This is true in the sense that the Fed economists didn't have a clue. But the further point that Fisher doesn't understand, or neglects to mention, why should we expect regulators to "do their job"? What makes them different as human beings that they, for example, will be able to see bubbles that others can not. The answer is they do not have super powers. In fact they are constrained by politics. Market maintemance should be left to the markets so that everyone is not herded in one direction, which occurs when government regulation kick in. Further, the big herding was done by Federal Reserve money printing where Fisher sits as branch president and occasional policy voting member!

This is really like a fox bitching he doesn't have enough input over the design of the hen house.

He says, there was the 'mathematization' of risk." Institutions were "building risk models" and relying heavily on "quant jocks" when "in the end there can be no substitute for good judgment

The quants weren't the ultimate cause but they were an extenuating factor.

What about another group of alleged culprits: the government-anointed rating agencies? Mr. Fisher doesn't mince words. "I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside." He says he also saw this "inherent conflict of interest" as a fund manager. "I never paid attention to the rating agencies. If you relied on them you got . . . you know," he says, sparing me the gory details. "You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That's why we never relied on them." That's a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio.

Isn't this nothing more than saying the private sector knows how to sift out BS and the government doesn't?

I want to make sure that your readers understand that I don't know a single person on the FOMC who is rooting for inflation or who is tolerant of inflation.

It should be made clear that there are two types of inflation, monetary inflation and price inflation. Monetary inflation is responsible for the business cycle. Price inflation is the definition of climbing prices. You can have monetary inflation without price inflation, which is pretty much the current situation (although price inflation is starting to edge up). Given that Fisher tells us that the Fed is concerned about "inflation", he has to mean price inflation, since monetary inflation is currently out of control. But, if he is not focusing on monetary inflation, then he doesn't understand its destructive consequences.

This he confirms as he continues his comment: price stability I mean that we cannot tolerate deflation or the ravages of inflation.
Hans Hermann Hoppe clearly shows that deflation is not such a bad thing.

Throughout history," he says, "what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can't run away from it.

This from a man who is a key member of a central bank that has been printing money. up until recently, at a 15% annualized rate!

1 comment:

  1. Many thanks for your comments. I too wondered about the PV of any obligation.

    An employer could conduct the same analysis on wages. The present value of thirty years of worker pay would be huge, but is that a reason to lay off all employees immediately?

    As for shoveling funds to the privileged elite, Tim Geithner just about snickered while justifying AIG counter party payments. It was telling.

    I appreciate your reading between the economic lines when leaders speak.