A quite impressive interview with Richard Fisher, President of the Dallas Fed, in the Wall Street Journal. After reading through this, I see there is no chance on Earth he will ever replace Ben Bernanke as he is not a political puppet; he reminds me of a Paul Volcker (who appears to be a mentor of sorts) rather than a Greenspan/Bernanke. In fact if you don't want to read the whole piece let me leave you with 2 scary items.
- In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion." (think about that number for a moment - it is hard to comprehend. Our entire economy is $13-14T and we owe $11T per official national debt. Then think of $99 Trillion of obligations... however long it is spread out over)
- Voices like Mr. Fisher's can be a problem for the politicians, which may be why recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. (and that pretty much sums up the context of our problems - if truthful information is "troublesome" eliminate the source of that information and speak happy talk)
If you prefer the-non Cliff Notes version of the type of person who should be head of the (cough) "independent Federal Reserve" go onward past this point...
- From his perch high atop the palatial Dallas Federal Reserve Bank... Richard Fisher says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now. His bigger concern these days would seem to be what he calls "the perception of risk" that has been created by the Fed's purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper. (moral hazard, the Fed put, whatever you want to call it - backstop nation)
- Mr. Fisher acknowledges that events in the financial markets last year required some unusual Fed action in the commercial lending market. But he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be "the handmaiden" to fiscal profligacy. "I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program."
- The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he's not the only one worrying about it.
- He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China." [May 21, 2009: China Becoming More Picky About Debt]
- Mr. Fisher was educated at Harvard, Oxford and Stanford. He spent his earliest days in government at Jimmy Carter's Treasury. He says that taught him a life-long lesson about inflation. It was "inflation that destroyed that presidency," he says. He adds that he learned a lot from then Fed Chairman Paul Volcker, who had to "break [inflation's] back."
- Mr. Fisher has led the Dallas Fed since 2005 and has developed a reputation as the Federal Open Market Committee's (FOMC) lead inflation worrywart.
- In September he told a New York audience that "rates held too low, for too long during the previous Fed regime were an accomplice to [the] reckless behavior" that brought about the economic troubles we are now living through. (speaks the truth)
- He also warned that the Treasury's $700 billion plan to buy toxic assets from financial institutions would be "one more straw on the back of the frightfully encumbered camel that is the federal government ledger." (more truth, someone stop this man)
- In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion."
- In March, he is believed to have vociferously objected in closed-door FOMC meetings to the proposal to buy U.S. Treasury bonds. (wait, I thought this was a new open and transparent Fed? Would have loved to be a fly on that wall)
- So with long-term Treasury yields moving up sharply despite Fed intentions to bring down mortgage rates, I've flown to Dallas to see what he's thinking now.
- Regarding what caused the credit bubble, he repeats his assertion about the Fed's role: "It is human instinct when rates are low and the yield curve is flat to reach for greater risk and enhanced yield and returns." (Later, he adds that this is not to cast aspersions on former Fed Chairman Alan Greenspan and reminds me that these decisions are made by the FOMC.)
- "The second thing is that the regulators didn't do their job, including the Federal Reserve. (solutions we are offering? Give Federal Reserve more power)
- And finally, he says, there was the 'mathematization' of risk." Institutions were "building risk models" and relying heavily on "quant jocks" when "in the end there can be no substitute for good judgment."
- What about another group of alleged culprits: the government-anointed rating agencies? Mr. Fisher doesn't mince words. "I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside." He says he also saw this "inherent conflict of interest" as a fund manager. "I never paid attention to the rating agencies. If you relied on them you got . . . you know," he says, sparing me the gory details
- That's a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio.
Remember to that last point, the Fed is only buying "highest quality AAA paper!" to spare taxpayers risk! hah
- I wonder whether the same bubble-producing Fed errors aren't being repeated now as Washington scrambles to avoid a sustained economic downturn. He surprises me by siding with the deflation hawks. "I don't think that's the risk right now." Why? One factor influencing his view is the Dallas Fed's "trim mean calculation," which looks at price changes of more than 180 items and excludes the extremes. Dallas researchers have found that "the price increases are less and less. Ex-energy, ex-food, ex-tobacco you've got some mild deflation here and no inflation in the [broader] headline index."
- Mr. Fisher says he also has a group of about 50 CEOs around the U.S. and the world that he calls on, all off the record, before almost every FOMC meeting. "I don't impart any information, I just listen carefully to what they are seeing through their own eyes. And that gives me a sense of what's happening on the ground, you might say on Main Street as opposed to Wall Street." (so talking to a group of bankers in NYC - and Charlotte - does not give you a clear world view? Hmm, might want to tell Ben)
- "Throughout history," he says, "what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can't run away from it."
- Voices like Mr. Fisher's can be a problem for the politicians, which may be why recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. Does Mr. Fisher have any thoughts about that?
- This is nothing new, he points out, briefly reviewing the history of the political struggle over monetary policy in the U.S. "The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street. "Now we have this great populist fervor and the banks are arguing for Main Street, largely. I have heard these arguments before and studied the history. I am not losing a lot of sleep over it," he says with a defiant Texas twang that I had not previously detected. "I don't think that it'd be the best signal to send to the market right now that you want to totally politicize the process."
- Speaking of which, Texas bankers don't have much good to say about the Troubled Asset Relief Program (TARP), according to Mr. Fisher. "Its been complicated by the politics because you have a special investigator, special prosecutor, and all I can tell you is that in my district here most of the people who wanted in on the TARP no longer want in on the TARP."
- At heart, Mr. Fisher says he is an advocate for letting markets clear on their own. "You know that I am a big believer in Schumpeter's creative destruction," he says referring to the term coined by the late Austrian economist. "The destructive part is always painful, politically messy, it hurts like hell but you hopefully will allow the adjustments to be made so that the creative part can take place."
