Wednesday, June 10, 2009
The Fed's Trojan Horse
"Richard Fisher [RF] says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now. His bigger concern these days would seem to be what he calls 'the perception of risk' that has been created by the Fed's purchases of Treasury bonds, morgage-backed securities and Fannie Mae paper. ... The looming challenge, he says, is to reassure the markets that the Fed is not going to be 'the handmaiden' to fiscal profligacy. 'I think the trick here is to assist the functioning of the private markets without signalling in any way, shape or form that the [Fed] will be party to monetizing fiscal largess, deficits or the stimulus program.' The very fact that a Fed regional bank president has to raise this issue is not very conforting. It conjures up images of Argentina. ... In a speech at the Kennedy School of Goverment 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.' ... Regarding what caused the credit bubble, he repeats his assertion about the Fed's role: 'It is human instinct when rates are low and the yield curve is flat to reach for greater risk and enhanced yield and returns.' ... 'The second thing is that the regulators didn't do their job, including the [Fed].' ... And finally, 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.' ... '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. ... '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. ... He surprises me by siding with the deflation hawks. 'I don't think that's the risk now.' Why? One factor influencing his view is the Dallas Fed's 'trim mean calculation,' which looks at price changes of more than 180 items and excludes the extremes. Dallas researchers have found that 'the price increases are less and less. Ex-energy, ex-food, ex-tobacco you've got some mild deflation here and no inflation in the [broader] headline index.' ... It's good to know that a guy so obsessed with price stability doesn't see inflation on the horizon. But inflation and bubble trouble almost always get going before they are recognized. ... '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.' The committee knows very well, he assures me, that 'you cannot have sustainable employment growth without price stability. And by price stability I mean we cannot tolerate deflation or the ravages of inflation.' ... Policy makers have to be 'always mindful that whatever you put in, you are going to have to take out at some point. And also be mindful that there are these perceptions [of the possibility of monetizing the debt], which is why I have been sensitive about the issue of purchasing Treasurys.' ... 'I wasn't asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the [US]. That seemed to be the issue [Asians] are most worried about.' ... '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 undfunded 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.' ... 'The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street. ' ... At heart, Mr. Fisher says he is an advocate for letting markets clear on their own. 'You know that I am a big believer in Schumpeter's creative destruction,' he says referring to the term coined by the late Austrian economist", my emphasis, Mary O'Grady (MO) interview of RF at the WSJ, 23 May 2009, link: http://online.wsj.com/article/SB124303024230548323.html.
Reassure the markets", hmm. "Without signalling", aha. RF means deceive. He worries about deflation. Do you believe RF? RF is the Fed's Trojan Horse or "Bad Cop" as opposed to Zimbabwe Ben the "Good Cop". So "obsessed with price stability"? What is MO talking about? This is more WSJ Fed boosterism. RF "doesn't know a single person on the FOMC who is rooting for inflation". I think RF speaks the truth. No single person is, they all are! "Whatever you put in, you are going to have to take out", in 100 years. Offset? No, the regional banks were created to make the Fed system more palatable to the populace and convince it the regional banks worked for them as opposed to the NY banking establishment. What rubbish, RF. "At heart", but not in practice, RF?