Showing posts with label Greenspan. Show all posts
Showing posts with label Greenspan. Show all posts

Thursday, October 23, 2008

Greenspan at the Confessional

I hate to kick a man when he's down, but the NY Times beat me to it:

http://www.nytimes.com/2008/10/24/business/economy/24panel.html

I remember Greenspan raising interest rates towards the end of his tenure (ah, the days of earning 5% on basic money market accounts). Greenspan did see the excess--just not soon enough.

As Tom "American Treasure" Toles implies in this 3/4/05 Washington Post cartoon, how independent was Greenspan? Was much of Greenspan's unwillingness to raise rates was because of the Bush administration's policies and Greenspan's desire not to lose his job?

Friday, August 15, 2008

Greenspan Wants More Educated Immigrants

According to yesterday's WSJ (8/14/08, David Wessel, A1), Greenspan agrees with my pro-immigration views, at least with respect to educated immigrants:

"The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said...

"Perhaps 150,000 of [new households] are loosely classified as skilled...A doubling or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale--and hence stabilize prices."


So far, so good; however, the Journal makes a mistake when it tries to do its own analysis:

The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes would accomplish that...

The Journal doesn't seem to understand that skilled immigrants mainly come to the States by way of H1-B visas and would settle in already-strong economic areas, such as San Jose, San Francisco, Chicago, and other large, diverse cities.

The housing crisis is mainly in places where mortgage brokers and lenders granted credit to low-income employees or workers with unsteady incomes.

Las Vegas, NV is a prime example. Although Vegas is a strong union town, too many uneducated people entered the market with hopes of making it to the middle-class. The city simply couldn't absorb all of its new entrants. As for attracting educated foreigners, how many M.A.s in Physics does a casino need?

Stockton, CA and Merced, CA have become notorious for their high rate of foreclosures. Their residents are mainly non-college-educated workers. While that situation may change because of the new UC in Merced, for now, if you have a PhD in engineering, would you end up in Merced, CA or San Jose, CA? (And yes, that's a rhetorical question.)

When residents bought homes outside but near Boulder and Denver, Colorado, they forgot the law of supply and demand. When you live near cities with only 1/2 million (Denver) and 100,000 (Boulder) residents, there's not enough demand to justify a large, immediate increase in supply. While Denver does have Qwest and ProLogis, there aren't enough companies there to sustain an inflow of high tech talent. In contrast, in Santa Clara County, I get lost driving in Sunnyvale because there are so many little streets that lead to massive warehouses filled with tech companies I've never heard of.

Greenspan is still correct in his pro-immigration view, but there's a missing step. We need companies to open new branches outside of the major cities. Perhaps if the government changed the H1B program to increase the cap on companies willing to place educated workers in mid-sized or smaller cities, educated immigrants could be a boon to overlooked cities suffering from the economic downturn.

Greenspan has recovered some of his credibility--he said this in November 2002:

It's hard to escape the conclusion that at some point our extraordinary housing boom...cannot continue indefinitely into the future.

Then again, this is the same person who said this in October 2004:

[Home price declines] "likely would not have substantial macroeconomic implications... (2004)

And this gem comes from October 2006:

I think the worst of this [housing price decline] may well be over. (2006)

At the end of the day, we need more skilled immigrants or immigrants willing to work hard, but the question is where should they go? State governments and smaller to mid-sized cities should be more active in working with national and local corporations to set up the infrastructure necessary to attract foreign talent. It's
a win-win situation for everyone. Local residents and businesses would benefit from higher prices due to increased demand. Foreign talent gets to come to America and make more here than they would elsewhere. I hope the local governments of Merced and Stockton are reading and thinking outside the box--if they don't follow the Rafat Rule ("being pro-immigration necessarily means being pro-capitalism"), more Southern cities like Louisville, KY, will beat them to the punch.

Thursday, May 29, 2008

Federal Reserve President Richard Fisher at the Commonwealth Club

Richard Fisher, the CEO and President of the Federal Reserve Bank of Dallas, spoke at San Francisco's Commonwealth Club (595 Market St.) on May 29, 2008. Some highlights:

1. Mr. Fisher is a big fan of Bill [McChesney] Martin, known for his statement that the job of a central banker is to "take away the punch bowl just as the party gets going."

2. Mr. Fisher said that the Dallas Federal Reserve's inflation numbers incorporate food and energy/gas prices. See http://dallasfed.org/research/ for more information. I believe that what Mr. Fisher was referring to is the the "trimmed mean PCE" numbers, but I could be incorrect. What seems clear, however, is that the PCE numbers are probably more accurate than the CPI numbers, which are usually "excluding food and energy." As you can see in the next link, the PCE numbers are usually at least one percentage point higher than the CPI numbers. See http://www.dallasfed.org/data/pce/index.html

Mr. Fisher indicated that only his bank and the Cleveland Federal Reserve Bank published these more comprehensive numbers.

3. Mr. Fisher's speech sounded like a more number-heavy speech that the former Comptroller David Walker would give. He warned us to do something about government spending, saying that we are "falling victim to complacency and recklessness." He mentioned the "frightful storm of untethered government debt." [He probably meant to say, "unfettered," not "untethered."]

8 years ago, we had a surplus of 236 billion dollars, with a Republican Congress and Democratic president (Mr. Fisher emphasized that these issues were non-partisan.)

Today, the expected deficit in 2008 is at least 410 billion dollars.

Our underfunded liabilities, using an infinite horizon discounted value, is 13.6 trillion dollars for social services.

[Now, I don't pretend to know what an infinite horizon discounted value is. For more information on infinite horizon projections, see

http://www.factcheck.org/article302.html

That article says that an infinite horizon model is misleading, but Mr. Fisher mentioned an infinite horizon "discounted value," which may be different.]

Mr. Fisher said that Medicare was the biggest problem. Medicare has three parts, A (hospitals), B (doctor visits), and D (drug benefits/prescriptions). He estimated a projected deficit of 85.6 trillion dollars for Medicare. Including the projected deficit of Social Security benefits, Mr. Fisher expects a 99.2 trillion dollar deficit in unfunded portions of entitlement programs. He said that this debt works out to be more than 300,000 dollars per person, assuming a population of 304 million, which includes nonworking adults and children. Income taxes have to increase 68%(?) to cover deficits, which is basically reaches confiscatory levels.

What to do about all this? Well, he didn't have much to say, other than it was our responsibility, because we elect the people who run the government.

4. Mr. Fisher dissented in the last three interest rate cuts. He is an inflation hawk and said that "inflation is the most insidious enemy of capitalism and prosperity." He also said that "running the printing press" [of money] is the worst option, because that causes inflation, and stable prices are necessary for growth.

5. Mr. Fisher mentioned a humorous story where someone asked a researcher, "Is there a difference between the Republicans or Democrats [Congresses] in terms of who spends more money?" The answer was, "There's only one difference--Democrats enjoy it more."

6. Mr. Fisher was more relaxed during the Q&A session.

When asked what his bank does, he said that among other things, the Federal Reserve lends money at the discount window; clears checks (which is a declining function--he said his children had never used a paper check--people are moving to online banking); assists the U.S. Treasury; and processes cash (his bank recently processed 12 billion dollars--cash is used more in TX).

Mr. Fisher ran for a U.S. Senate seat and lost. In his funniest remark, he said he calls the legislative branch "the lower intestine." This was after he said the best part of his job was that he was allowed to speak the truth, and most government officials could not do that because they had to get elected, or balance competing interests. The difference between his position and the other branches was that he "could tell the truth."

He said that the FOMC meetings were a civil deliberation and a process that emphasized civility.

Comparing Greenspan and Bernanke, he said both of them had a great sense of humor. Bernanke was "perditiously smart," understanding the Depression more than any other living human being. He said Bernanke's best experience was serving on the local school board in Pennsylvania. On Greenspan: he "listened very well," perhaps because he played the saxophone.

Mr. Fisher said we are in for a period of "anemic economic activity," but said he would not call it a recession. He said the "debauching of our credit system" hurts small businesses, which create jobs in America.

He also said that we are experiencing inflation and our current economic climate because "we won." In his most passionate remarks, Mr. Fisher commented that "Chairman Mao is dead--I won't say God bless his soul. Hồ Chí Minh is dead. In November 1989, the Soviet Union filed for bankruptcy. We won." Everyone wants to imitate our lifestyle, which raises prices and leads to a period of more competition as other countries adopt our successful capitalist model.

A question was asked about implementation of the Basel II Accord, but Mr. Fisher said the writer of that question should come up to him afterwards and speak to him about it directly, because it was a technical question.

Mr. Fisher said he was instrumental in getting NAFTA passed and was "proud of NAFTA." He referred to Joseph Schumpeter and "creative destruction," saying that it drove each of us to our "competitive advantage." but said that the media was skewed in its reporting. If a company shut down, the media was there, but it wasn't there to record an instance when a completely new job opened for that person who was laid off or in general. He said that only 1% of our economy was based on agriculture; 5% on mining; 11% on manufacturing; and the rest (84%) was services. To give us an idea of how the economy has changed, Mr. Fisher said that lawyers "produced" more GDP than auto manufacturers [a sure sign of over-legislation].

A question was asked about whether he believed that the numbers from the BLS were accurate. He said that he was more concerned about sufficiency of the data than its accuracy. There are apparently large swathes of the economy that aren't reflected in the numbers he receives.

Overall, it was a fun experience. I asked him a question privately, about which currency he believed would be the most stable over the next five years. Mr. Fisher said that he couldn't predict that far out, and a basket of currencies would be the most stable way of managing risk. He did say that the European Central Bank had only one mandate, which was to control inflation, while the Fed had a dual mandate [maximum sustainable employment and price stability]. His comments seemed to imply that the Euro might be the most stable currency, but for the long term, he said he favored the U.S. dollar. His refusal to give me a clear answer was astute. To give you an idea of just how quickly things can change, remember than as recently as November 2003, Mr. Bernanke is on record as saying that "the current risk of increased inflation is, for the time being at least, quite small." See

http://www.federalreserve.gov/BoardDocs/Speeches/2003/
200311062/default.htm

The job of American central bankers--especially given their recent inability to predict bubbles and busts--is to respect savers while minimizing unemployment. Hopefully, Mr. Bernanke will get back to the "respecting savers" part of the mandate by raising interest rates at the next FOMC meeting.

FYI: The San Francisco Federal Reserve is right up the street from the Commonwealth. Call ahead of time, but for now, they have tours open to the public on Fridays at noon. Otherwise, they are closed to the public.

Friday, December 7, 2007

The Age of Turbulence, by Alan Greenspan

Greenspan's new book is the opposite of his opaque speeches to Congress; here, he's remarkably human and clear. There are several funny tidbits about his life, including a very obtuse, meandering dedication to him in his father's book when he was young, which may have influenced Greenspan more than he may want to admit. His love for his wife comes through loud and clear, and the book includes a delightful picture of him at the piano with her.

However, Greenspan offers nothing new or insightful in his book other than a life-changing interaction with Ayn Rand, which led him inexorably down the path of libertarianism. (And yes, that's a contradiction for a government economist, if you're keeping score.) His comments on over-dependence on foreign oil, "creative destruction" causing U.S. citizens to become concerned about their quality of life, corn-based ethanol being a boondoggle, warnings against protectionism and economic populism, etc.--this has all been said before, by someone else, somewhere else. Greenspan does advocate a higher tax on gasoline to reduce consumption, which is surprising for a libertarian, but again, not a new idea.

Greenspan also compares the U.S.'s main competitors, especially the U.K., Russia, Japan, France, Italy, and India. He concludes that India needs to overthrow its labyrinth bureaucracy to be competitive, France needs to reform its union-based employment system, Italy made a wise decision to join the EU, and Japan's emphasis on saving face may harm its future growth. He also contends, without saying so directly, that Russia may be the next rising power due to its natural resources and military strength.

Greenspan mentions that the currency markets are more difficult to manipulate than one might think, and points out that Japan bought 20 billion U.S. dollars in one day in 2004, and the dollar-yen exchange rate barely moved. On the other side of the currency divide is Argentina, and Greenspan briefly discusses Argentina's pegging of its currency to the dollar, which led to a financial restructuring. Again, nothing new is said, but Greenspan did have access to many high level politicians and economists, so he is able to discuss, for example, Gerald Ford's "ordinary Joe" persona with more credibility. (For the record, Greenspan did not like Nixon, but found him to be very intelligent, and mentions later in the book that until Clinton, he did not meet anyone as intelligent as Nixon in the White House.)

Although he offers nothing profoundly new (except for perhaps the role liquified natural gas might play in our future energy plans), Greenspan's book is pleasant to read and gives the reader an insight into his sense of humor and tastes. Greenspan's overall message seems to be that the U.S. owes the Constitution much credit as its backbone of stability; citizens should be careful not to revert to the old ideas of centralized government; and the Federal Reserve should maintain an environment of controlled optimism.