Your FOMC, Ladies and Gentlemen
Ask and ye shall receive. Only a few days after noting how curious it was that the 2008 FOMC meeting transcripts had not yet been posted, today they arrived. Unfortunately for me, it means I will be stuck reading through (yet again) the arrogant slop of all-too-comfortable monetary mystics.
At the September 16, 2008, FOMC meeting, the day after Lehman’s bankruptcy filing, there is no real sense of direction and purpose, and certainly no sense that they had even minor grasp on what was not in the near-future, but unfolding as they laughed and joked around the conference table. Mixed within the arrogance is utter contempt for anyone not in their same “class.” To wit:
NATHAN SHEETS, Staff Economist, “Yes. Yesterday the PBOC cut its main policy rate 27 basis points. I guess they felt that 26 would not have been enough and 28 would have been too much. [Laughter] And 27 was just the right number. I’d say a couple of thoughts were there.”
RICHARD FISHER, “Thank you.”
CHAIRMAN BERNANKE, “Three is a lucky number in China. Don was going to tell you that 3 cubed is 27.” [Laughter].
DONALD KOHN, “He was also going to wonder, Mr. Chairman, whether we needed to harness the mystical powers.” [Laughter]
CHAIRMAN BERNANKE, “I think we have good feng shui here.”
MR. SHEETS, “The science of monetary policy.”
The “science” of monetary policy, indeed. While mocking the Chinese, Mr. Sheets had just finished his presentation, along with staff economist Dave Stockton, in which the Fed’s best monetary “scientist” economists were predicting only a modest impact on GDP from the mess in which they had a heavy hand in creating. Blundering about through crisis was, to them, the epitome of sophistication.
DAVE STOCKTON, “We didn’t seem to get any of it right, but it all netted out to just about nothing. [Laughter] Retail sales came in considerably weaker than we had anticipated, enough by themselves to have knocked about ½ percentage point off third-quarter GDP growth. But some of that was offset in higher retail inventories, and the rest was offset by a stronger-than-expected merchandise trade report for July. It all left us still feeling very comfortable with our forecast because it looks to us as though economic growth is going to drop below 1 percent on average in the second half of the year.”
Science is the study of observation, yet modern economists are far more likely to believe their math and models than actual observations.
DAVE STOCKTON, “What I think is really remarkable about that is that this weakness is occurring even though we still think spending is probably receiving some boost from the rebates. So excluding that effect, we’d be looking at something even weaker. Now, as you know, we’ve been head-faked a number of times by the retail sales data, which are subject to some pretty substantial revisions. So I wouldn’t necessarily take that report at face value.”
In other words, the “Bush stimulus” was thought to be effective so they preferred to downgrade or even ignore retail sales figures that were more than suggesting something far worse on the way. And that pointed to not only future weakness, but substantially so. Ideology cares not for observation.
DAVE STOCKTON, “Furthermore, on net, we’ve revised down our projected growth in GDP over the next two years—admittedly just a bit—and that was in response to two pretty strong crosscurrents. One was the significantly lower oil prices that we have in this forecast. We do think they’re going to provide some support to underlying disposable income and spending. But the positive effect of that on our forecast going forward was more than offset by a significant marking down in our forecast for net exports—which Nathan will be discussing—in response to an appreciation of the dollar and a further downward revision to our outlook for foreign activity. On net, that left us with a little lower growth rate and carrying forward a noticeably higher unemployment rate over the forecast period. Now, those were pretty small adjustments. I don’t think we’ve seen a significant change in the basic outlook, and certainly the story behind our forecast is very similar to the one that we had last time, which is that we’re still expecting a very gradual pickup in GDP growth over the next year and a little more rapid pickup in 2010.”
It would be exceedingly difficult for the FOMC to get this “forecast”, using all their scientific prowess, more wrong. By what right do these people have to mock the Chinese for their “mysticism” when Federal Reserve has ossified a strain that is not only less “scientific”, but far more prone to disaster – and global disaster? In the years since, it has only been the Chinese adoption of Federal Reserve mysticism that has led China to its current situation.
There is so much more to be said about the finance side of the FOMC meetings, particularly liquidity and understanding it, but that will come later. For now, to drive home the level of contempt evident in the discussions, one that reveals so much of why and how the system has evolved as it did, the FOMC members wanted to make clear that any dollar action they took (swaps) were limited to only the G-10 central banks. That has implications not only for analysis, but what is unfolding right now. Emerging markets were/are not allowed:
DONALD KOHN, “One more clarification, Mr. Chairman—this is intended for G-10 central banks, to include the ECB. Just to be clear, if somebody asks, this is not to give to central banks of emerging-market economies.”
BILL DUDLEY, “I presume so.”
MR. KOHN, “I think we should presume so. If the other were to happen, we would come back to the Committee.”
MR. DUDLEY, “Yes, this is about the major financial centers and the ability of large banks that operate globally to obtain dollar funding.”
Not a large global money center? Good luck on your own in the very eurodollar system the Fed helped create after ditching gold. Any guess as to why there has been so little resistance to the cartelization after TARP/bailouts? We have all heard the promises that “too big too fail” was destroyed as a concept in Dodd-Frank and other regulatory regurgitations, yet banks are now bigger and far more concentrated. It makes the FOMC’s job that much “easier”, assuming they could actually get it right in the first place.
It was eurodollars where the panic took place, a contagion that spread from London. But it was fragmentation that was the agent of contagion, not just geographic, but the very size strata that the Fed “scientists” were so willing to ignore.
BILL DUDLEY, “The big thing, where there has probably been the most severe stress in the market, is in dollar liquidity for foreign banks. As you remember, foreign banks, especially in Europe, have a structural dollar funding shortfall, and they look to execute foreign exchange swaps or borrow in the dollar LIBOR market to fund that. There was significant upward pressure in that market—overnight LIBOR rates today were 6.44 percent—and that pressure in Europe is leaking over into our market.”
“So at the current time I think we will see essentially a lot of firmness in the funds rate in the morning and then the funds rate trading down to zero late in the day. Where the funds rate averages relative to the target is going to be somewhat difficult to say. Yesterday, despite the collapse in the funds rate to essentially zero at the end of the day, the funds rate was quite firm relative to the target.”
That meant that when London was open there was intense pressure on dollar availability, causing, among other things, LIBOR to rise without federal funds crossover. As Europe closed, there was “too much” funding left in NYC since US banks were withdrawing from Europe. But withdrawing from Europe did not just mean the large money center banks, it meant most especially all eurodollar participants, including emerging market and smaller European and Asian (particularly Japanese) banks. The Fed cared nothing of them and they were left to wither into panic.
As I said earlier this week, the release of the transcripts might hold the evidence to discrediting the entire philosophy. In what I have seen so far, that appears to be the case (if it wasn’t ignored by the establishment of politics and media). Much more to come.
Click here to sign up for our free weekly e-newsletter.
“Wealth preservation and accumulation through thoughtful investing.”
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, contact us at: firstname.lastname@example.org