Packed elbow to rib in a cacophonous six seat paint-can shaker implausibly airborne 800 feet above the ground, fighting for breath against senses of entitlement inflated to SUV size by a sham economy addicted to cheap debt, carrying a desperate need to out consume and out do rooted in a lifetime diet of spoon fed commercials and the easy calories of celebrity worship, mindless of nature's rigors or the rewards of patient cultivation of character or virtue, grimly wondering if their enemies below have surface-to-air or a surprise welcoming committee at the LZ - so begins the US holiday weekend for capitalism's winners according to Bloomberg News.
Fear not for m* however. For one thing, m* took the Rolls earlier in the week. (No shaking, forced intimacy, or cortisol floods and door to door, about the same). For another, while the clamoring masses of fake-tan attorneys, has-been movie stars, and assorted financial eel and remora are heading east, m*, ever the contrarian, will be heading back from whence they came to the wonderfully peaceful and empty late summer city.
While the holiday signals the official end to summer and the impending reality of m*'s packed fall agenda, idyllic thoughts of majestic mountain vistas, sparkling clear streams, sun drenched hikes, and yes, heated campfire discussions of monetary policy offer a temporary reprieve. m* is referring of course to the annual Kansas City Fed Symposium and central bankers' working holiday this weekend in Jackson Hole.
m* will not be attending of course, but in honor of the event and the final weekend of summer will be sitting down with two very recent papers from Michael Woodford, an occasional co-author with Chairman Bernanke and the esteemed intellectual godfather of inflation targeting and rule driven central bank decision-making now very much embedded in the thinking of current CB-ista. Why? Know thine enemy. It is Woodford of course who's work shows that monetary aggregates are largely irrelevant to the conduct of modern monetary policy, a viewpoint widely accepted among leading monetary economists today, implying of course that m* is not simply elusive but nonsensical too (and well, m* would have to agree!)
Of course, an effective inflation targeting policy requires an accurate and transparent measure of inflation. Dissenters to inflation targeting in the US frequently point to the vast discrepancy between government price indices and consumers' reported "sense" of inflation. No where is this more apparent than in the spread between the reality of rapidly rising home prices over the last ten years and the stagnant behavior of the much derided statistical construction, "owner equivalent rent."
As an illustration, consider the BOE. While the BOE follows an explicit inflations targeting mandate and thus adheres closely to many of the protocols expected in that regard, it also rather unusually includes direct asset prices (in particular home prices) into its price measures. The relevance of asset prices to measuring inflation is still open to debate in the academic world. But the BOE apparently believes that asset price levels do contain signaling information for inflation and an ability to influence the very important expectations component.
It may not be a coincidence then that Woodford believes the BOE comes closest to his idealized inflation targeting Central Bank. It is certainly no coincidence that the BOE has had m*'s vote for the hardest bank over the last three years - witness the performance of Sterling over that period. It will be interesting to see, now that inflation targeters are in charge in the US too and confronting a home finance crisis with larger potential ramifications, whether some greater recognition of the indicator that Greenspan pointedly ignored in price measures is warranted, particularly as popular sentiment views home price declines as analogous to a depressionary deflation. The announced theme of this weekend's symposium is housing, housing finance and monetary policy so this could be interesting.
Two papers by Woodford:
"How Important is Money in the Conduct of Monetary Policy?"
"Globalization and Monetary Control"
Meanwhile, Greg Ip in the WSJ "Bernanke Breaks Greenspan Mold" does a smashup job of burying former Fed Chairman Greenspan's crisis response approach of listening to the markets in relation to Chairman Bernanke's attempts to let the real economic data tell the story. Ip relates a quote from Greenspan during the deliberations on the 1998 LTCM crisis that shows dramatically how far apart the two philosophies for managing policy are.
"It would be wrong to say that the change in psychology is all ephemeral just because we have not seen it in the hard data yet," he told colleagues. "It is the change in value judgments that alters the real world."
In m*'s opinion, Greenspan saw his role as one of actively managing monetary policy, especially during times of crisis, through a forecast (using a very personal mosaic of indicators) of the animal spirits at work in the economy. Undoubtedly these forecasts were colored by his baptism in the 1987 crisis, and following this more intuitive policy, he fell back on the (appropriate) response to that crisis time and again. It is quite clear that in later crises, Greenspan gave the markets significant weight, really too much weight, in his assessments of future risk taking appetite in the economy and acted, erroneously, on those assessments.
It is the personal nature of those assessments, in the face of widespread evidence to the contrary (in particular the dramatic increases in mortgage debt and real estate values), the mistaken signals sent to the economy via inappropriate interest rate policy in response, and the long term consequences for the nation's standard of living as a result of the serial asset price bubbles, mal-investment and overconsumption, unprecedented explosion in debt, and inflation from a devalued dollar that incite Greenspan's critics, m* among them.
Bernanke, on the other hand and like Woodford, is an advocate of inflation targeting. Though he does not have that mandate at the US Central Bank, he has clearly discussed his desire to hew much more closely to the more mechanical adjustment mechanism such targeting espouses, with a healthy appreciation for expectations of course as befitting one of the foremost scholars on the Great Depression. Ironically, Greenspan's Vice Chairman, Alan Blinder, was also a proponent of for data-dependent incrementalist approach but he seems to have been less influential than one would have thought.
As has been widely reported during the current crisis, Bernanke has said while he will of course take whatever action necessary to preserve stability, he is attempting to hold off policy adjustments that effect the real economy as much as possible until data show a policy change is required. Not said but also clearly implied is that Bernanke supports an unwind in the degree of leverage promoted under his predecessor provided it can be done without dramatic effect on the real economy. While this may seem unresponsive to a vocal sector of the financial markets, it is a view widely shared, it seems to m*, in the central banking community globally.
The likelihood of success of that de-levering, whether success is even possible, even the actual definition of success are to m* still very much open questions. The problem is that it may be just one crisis too late to take that harder line. With a global system as leveraged as the current one, it's highly doubtful there is much less they can do than the inevitable blunt rate stimulus.
Happy Capital Day.
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