Recently Cumberland Advisors published a report titled, “LCR: Is The Fed’s Balance Sheet Too Small?”. While we have the greatest respect for David Kotok and his firm, we disagree with this analysis. Jeff Snider’s response (my contribution was merely editing) was sent to David Kotok last week. Not only did he respond but he invited us both up to Leen’s Lodge in Maine to fish and discuss the issues. He did, of course, defend Cumberland’s analysis and disagree with ours. But we are grateful for the debate in any case and hope to continue it. Unfortunately, Jeff and I had prior commitments and could not accept David’s gracious invitation to Maine. We hope he doesn’t hold it against us and invites us back next year. I suspect there will still be plenty to debate.

We do believe this is an extremely important issue, not only for markets but also for the future conduct of monetary policy. Not only do we think the Fed is pushing on a string but quite possibly the wrong string entirely. Policy has been, to date, ineffective but we don’t think that is a function of the size of the Fed’s balance sheet.

If you have been reading Jeff Snider’s work and wondered at times what the heck he was talking about, then please take the time to read this. I think it will answer a lot of your questions. It traces the causes and effects of the crisis better than anything I’ve read from any other source (I might be biased). And it shows why QE has not been effective in restoring growth to its previous trajectory.

Joe Calhoun
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