The best laid plans
Last night I had big plans. The President was making his highly anticipated “jobs” speech and the first NFL game of the season was on TV. I figured I’d listen to the jobs speech, have a few beers, catch the game, then hit the rack around midnight. I had no work to do…it was gonna be awesome.
Just as the jobs speech began I got an important and interesting e-mail. This e-mail was full of questions that came out of yesterday’s Federal Reserve Symposium on Asian Banking and Finance. Like the nerd version Batman I grabbed my iPad and a laptop and I sprang into action answering questions and addressing these timely issues. Some amount of time later I hit save, then send, and when I looked up it was midnight. I hadn’t seen the speech or the game…and I had consumed no beer. Don’t feel too badly for me though, the exercise gave me some perspective, and if all goes well I’ll be fishing by this afternoon.
Two years after the recession “ended” our economy is still stuck at stall speed and everyone in the world is talking about ways to improve the situation. This just highlights the fact that things can stink pretty badly even if you’re not technically in a recession.
The Fed has taken drastic steps over the past few years on the monetary policy side. The Fed Funds rate is at zero, their balance sheet has swelled to over a trillion dollars, they just pledged to keep rates low through 2013…and they are STILL discussing ways to do more.
To their credit they have made a lot of noise about not being able to solve all problems with monetary policy. Fed members have repeatedly urged the federal government to take the reins on the fiscal policy side of things. It is no secret at this point that our current fiscal trajectory is unsustainable. The path we are currently on has us landing in a spot that looks a lot like Greece sometime in the not-too-distant future. Not the “Parthenon and Mediterranean” Greece…I’m speaking metaphorically about the “sovereign default and riots in the streets” Greece.
Fiscal Policy
Bernanke spoke recently on monetary and fiscal policy. With respect to the fiscal policy side of things he said that while we need to alter our fiscal course, we don’t need to necessarily do it all at once. Bernanke’s preferred method for altering our fiscal trajectory can be viewed in terms of changing lanes in your car. You don’t change lanes by jerking the wheel and trying to get into the other lane immediately. You use a turn signal and then you gradually move the wheel in the direction you want to go. This results in a smooth and safe transition from one lane to the other. I realize that there are exceptions to this rule for people that live in places like Los Angeles, DC, Miami, and Houston but please bear with me for the sake of the example.
In the Fed Chairman’s view this is what we need on the fiscal policy side…a smooth lane change. Government spending has to a large degree replaced private sector spending over the course of this recession. Given that we are still in a place where the recovery is fragile, Bernanke doesn’t want to see an abrupt end to government spending that would add to the already stiff “headwinds” that are restraining the economic recovery. This abrupt lane change would endanger our recovery and could very well cast us back into recession.
His preferred course of action would be a gradual shift with a turn signal. The turn signal would allow everyone to see where you intend to go, then the gradual shift would allow you to get there without wrecking your car. In practice this would call for the Government to signal that they are changing our fiscal trajectory, then to gradually shift toward that goal so that you don’t abruptly pull government spending away from a fragile and developing recovery.
Monetary Policy
On the monetary policy side he began with the obligatory statements on how we got the car in the ditch. From there he went on to describe how they originally thought that the slowness in the first half of the year was mainly due to transitory factors, and how they now recognize that some of those were actually persistent factors. That is Fed-Speak for “we thought things just stank a little…but it turns out they stink a lot”.
He names all of the usual suspects as drags on the economy in this speech; housing, unemployment, slow household spending, the downgrade of US Debt, etc. What I found interesting in this speech was the mention of “sharp volatility and risk aversion in markets” in reaction to sovereign debt issues in Europe. All of these items are mentioned to get the speech to this point: “…there seems little doubt that (these events) have hurt household and business confidence, and that they pose risks to growth.” Linking European sovereign debt concerns to risks to domestic growth gets my mind working overtime.
At this point I’m looking at the puzzle pieces arrayed before me and I’m trying to figure out how they fit together. Two years into the “recovery” we have yet a new plan to generate jobs, a Fed stating that they have more tools in their monetary policy arsenal, sovereign debt problems raging in Europe, and a Fed drawing linkages between Europe’s problems and our problems. It has the look and feel of an environment that could bring about another round of coordination among the world’s major economic powers.
You might recall that in the aftermath of the Lehman Brothers failure we saw massive global coordination aimed at keeping the world’s financial markets from freezing. One such program had the Fed making enormous dollar denominated swap lines available to other central banks to keep liquidity flowing. Our Fed had arrangements in place with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank among others. This type of coordination was considered essential to tackle the problems at hand.
All of the pieces I see in front of me make me wonder if the Fed is talking with other central banks about a new round of global coordination to address the problems we collectively face. It’s easy to see the temptation involved with a plan that combines coordinated international fiscal and monetary actions to address the various issues that are restraining the global recovery. I’m not saying it’s a good idea, and I’m not convinced that they’ll do it…but it’s starting to smell like coordination is in the air.
If you have any questions or if there is anything I can be doing for you just let me know.
Steve Scaramastro, SVP
800-311-0707
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