The Real Deflategate

The Fed has intensely debated
When interest-rate hikes should be slated.
Like a team I won't name,
They're playing the game
With balls that are underinflated.

With a mandate to find the right measure
Of balancing jobs versus treasure,
They're Patriots all,
But the Hawks want the ball
To be at the usual pressure.

The rate of the jobholding share
Is less than appears to be there,
As if it were tested
And then one suggested
To secretly let out some air.

In spite of the fear of inflation,
Wages display moderation,
Since it's hard to inflate
With a tumbling rate
Of labor force participation.

Says Yellen: "It starts to annoy,
In discussing the rate of employ,
The analogy calls
For playing with balls;
Is it something the fellows enjoy?"

"It seems to me, based on my role,
The economy's just like the Bowl:
The material might
Be flaccid or tight,
But the point is to get to the goal."

Fed's Letter to Deutsche Bank

"In reviewing your earnings per annum,
We're less than impressed, and we pan 'em.
The bank may have gains,
But this letter pertains
To the haphazard way that you ran 'em."

The Wall Street Journal reports that the Federal Reserve Bank of New York has vented its frustration with the sloppy reporting of Deutsche Bank's US branches and subsidiaries.  In a December 2013 letter to the bank, senior Fed supervisor Daniel Muccia complained  that the bank's reports "are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm's entire U.S. regulatory reporting structure requires wide-ranging remedial action."  It's a problem long in the making, wrote Mr. Muccia: "Since 2002, the FRBNY has highlighted significant weaknesses in the firm's regulatory reporting framework that have remained outstanding for a decade."

Of course, it's not only the Fed that should be concerned.  Investors too rely on firms' financial reports to value their securities and decide when to buy, sell or hold.  Lest we forget, the feeling that "you can't trust the numbers" was a factor in the global financial meltdown of not so long ago.

Nothing Is Better Than Something

The Fed stirred up market festivity,
In spite of low business activity,
From the joy that relates
To their keeping the rates
At zero, as is their proclivity.

With rates so depressingly low,
Fixed income has nowhere to go
So the stock market beckons
To each one who reckons
The chance that their nest egg may grow. 

It highlights how hard to discern it is
To know when the bond market's turn it is,
But with rates to be found
At the null lower bound,
The Dow lacks investment alternatives.

Recovery?

Fed Chairmen (paternal or motherly)
Have made a depressing discovery:
If demand isn't great,
You can lower the rate
But you can't cut your way to recovery.

En (La)Garde Against Deflation

Said Lagarde, of a threat that dismayed 'er:
"There's a danger that prices may crater. 
We're conditioned to fear
That things become dear
But deflation's the risk that is greater."

"With deflation, the instinct is human
To save and cut back on consumin',
But though disciplined ways
Are worthy of praise,
They prevent the economy's boomin'."

"To all of those countries who plan
To avoid the malaise of Japan:
Forget all the rules
Of conventional tools,
And stimulate now, while you can!"

Advance Draft of Next FOMC Statement

"If employment & prices are strong,

We can give up QE before long,

So we're tapering it,

But just by a bit,
In case we turn out to be wrong."

The drumbeat of tapering talk continues, with various members of the Fed Open Market Committee making public comments that suggest the question isn't "if", or even "when", but "how".  Expectations have begun to coalesce around the next FOMC meeting on September 17-18, in part because it is seen as advisable to remove the uncertainty surrounding the unwinding of QE before the White House announces the President's nominee to succeed Chairman Ben Bernanke. The current Chairman's term ends on January 31. 

Comments yesterday by James Bullard, president of the Federal Reserve Bank of St. Louis, put the spotlight on the tactics the Fed might employ when starting down the long, unwinding road: "A larger move would be interpreted as a faster pace of reduction," he said, while "a smaller move would be considered a more hedged bet, a slower rate of reduction in purchases." In other words, the FOMC could test the waters before making a big commitment to unwinding its extraordinary monetary stimulus. 

Summers vs Yellen

Wall Street is looking for men

For the mantle of leadership when,

As the President knows,

He'll have to propose

A successor to Fed Chairman Ben. 

It's increasingly frequently said

By economists very well read

That Obama may stiff

The recovery if

He picks the wrong head of the Fed. 

Dr. Yellen's CV is the nicest

To manage employment and prices

From the days when she ran

The Fed bank in San

Francisco and warned of the Crisis. 

Dr. Summers has those who would vote 'im

'Cause his "gravitas" serves to promote 'im,

While other folks showed 

That's really a code

For the candidate having a scrotum. 

Whatever your partisan views

On the better of qualified Jews,

It's the President's pick

And we'll know pretty quick

The mensch that Obama may choose. 

Please, Sir: Ease, Sir!

The market's resounding with pleas
From New York to the Brits and Chinese
For a positive trend,

By which they depend

On the Fed to continue to ease. 

For the Index to keep hitting highs,

It's important to all of those guys

In the trading salons,

As they're dealing in bonds, 

That the Fed Open Market Desk buys. 

Investors have reason to sob less

And fear for their balance at Schwab less

If the Fed will agree

To stick with QE

'Til there's 6 1/2% jobless. 

Around the world, stocks have surged to new highs following Federal Reserve Chairman Ben Bernanke's assurances of further monetary stimulus. On Wednesday, speaking at a conference organized by the National Bureau of Economic Research, Bernanke observed that "you can only conclude that highly accommodative monetary policy for the foreseeable future is what's needed in the US economy." These words gave a shot of comfort to global markets that, for the last two months, had been obsessed with the timing of eventual "tapering". 

The resulting Wednesday afternoon rally in US equities carried through to Thursday morning in Frankfurt, Paris and London, before caroming back to New York for a second day. The S&P 500 has now reached a new record, and the Dow Jones Industrial Average may soon follow suit. 

* * *

On a side note, I am happy to resume this little hobby of economic verses, following a two-month hiatus in which I found and adjusted to a demanding new job. Thanks to all those who enquired after my welfare during that time, and who expressed their desire for the return of Limericks Économiques. I hope they don't disappoint. 

Doves & Hawks Together

Thoughts diverge in the FOMC
On how long to hold on to QE,
But in case of deflation,
Without hesitation,
They'll ease up unanimously.

Market Correlation

Some analysts set about crunchin'
A proven statistical function
For why stocks and debt,
Which used to offset,
More recently move in conjunction.

At the end of it all they succeeded,
Having crunched all the data they needed,
Finding no other fact
So truthfully tracked
As expected expanse of QE did.

Season of Easin'

S&P GSCI GLOBAL COMMODITY INDEX 
VS. U.S. 5-YEAR INFLATION EXPECTATION

The Fed has a great flexibility
To promote economic stability;
They may finish QE
If it's growth they foresee,
Or extend if they sense more fragility.

In the weakening outlook of Spring,
It appears to QE they must cling,
While back in the Winter,
We thought they'd begin ter
Discreetly unwind the whole thing.

Quantitative Ending?

Said Bernanke: "I think we will phase out
QE as recovery plays out,
And joblessness wanes
(Though the latter remains,
Admittedly, still quite a ways out)."

Stress Test

Said the Fed to the banks in its purview:
"Sorry chaps, we don't mean to unnerve you,
But if panic should surge,
Our views would diverge
On the capital that would best serve you."

Help the Long-Term Unemployed

The news has been better concerning
A rise in the ranks of the earning,
But many confirm
They've been out longer-term
Without showing signs of returning.

In order to bring employees in,
We need programs to put more trainees in,
To conquer more ills
By developing skills
Than the Fed's quantitatively easin'.

Safe Investments?

Said a strategist, airing his views
On central bank rumors and news:
"You've booked every gain
And best not retain
Your bonds, which are certain to lose."

Bernanke's Records

Said Bernanke, in argumentation
To the makers of Fed legislation:
"You may think me a dove,
But take notice of
My record-low rate of inflation."

Those Congressmen failed to point out
That, for all of his monet'ry clout,
He couldn't deflate
The very high rate
Of laborers laying about.

Along came an eminence grise
Saying: "High or low rates such as these
Are attributed less
To your skill or success,
And more to the global unease."

Mint the Coin

With the Debt Ceiling coming up soon, it
Is time (although some may impugn it)
For coining a halt
To a US default
With a really big monet'ry unit.

A one-trillion coin, it is said,
Could be minted and shipped to the Fed,
In order to pay
What the US of A
Might be forced to renege on instead.

This sizeable denomination
Would be kept out of mass circulation,
The better to sidestep
That such an untried step
Precipitates hyperinflation.

When Republicans finally come round
From running bond issuance aground,
It's back to the Mint
For the Coin, where its stint
Will be wound up with melting it down.

So let's mint The Coin out of platinum!
Though objections there be, we may flatten 'em.
There are ways besides cash
'Round the Debt Ceiling clash,
But there's nothing as clever as that in 'em.

It's an idea so crazy, it just might work: the US Treasury could circumvent the looming debt ceiling showdown by minting a very large denomination platinum coin of, say, $1 trillion. The coin could be deposited in Treasury's account at the New York Fed, where the new funds could be used to pay any of the Federal government's many obligations. First proposed in a comment on an economic blog in 2010, the Coin is within the legal powers of Treasury, which "may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time." Never mind the fact that this law was intended to facilitate minting bullion coins for numismatists - it's on the books. Of course it's absurd to speak of minting a $1 trillion coin to keep the government out of default, but the debt ceiling itself is absurd, as is the threat to throw the nation into default for political purposes. So, it's a case of fighting crazy with crazier.

The "Mint The Coin" movement has been gaining steam thanks to the (only slightly tongue-in-cheek) advocacy of such leading economic writers as Bloomberg's Josh Barro and Business Insider's Joe Weisenthal. For those who fret that the issuance of a $1 trillion coin would ignite inflation of Zimbabwean proportions, a former head of the US Mint (who wrote the 1996 platinum coin law) has weighed in with a cogent explanation of why that would not happen. It all comes down to a choice: would we rather the US Treasury default, or do something absurd?

The Bonds That Divide Us

At the Fed, there are three schools of thought
On the bonds that Bernanke has bought:
A) keep on going,
B) begin slowing,
Or C) we would rather have not.

Minutes of the Federal Open Market Committee's December meeting were released on Thursday, and they reveal the divisions among the members on the Fed's policy of buying mortgage and Treasury bonds to stimulate the economy. Following that meeting, on December 12, the Fed announced that it would continue with the bond purchases until the pace of job creation improved. Yet, the minutes show that the "hawks" on the committee fundamentally disagreed with the entire program and, even among those who supported it, there was disagreement over its timeline. Those who wanted an open-ended monthly commitment to add $85 billion to the Fed's balance sheet were most concerned with allowing the stimulus to have its intended effect, while those who worried about the risk of adding so much to the Fed's own investment portfolio wanted to bring the program to a mid-2013 close.

However, Diane Swonk of Mesirow Financial tells the New York Times that "there’s still a huge bias toward buying." Any appearance of dissension, according to Ms. Swonk, reflects merely "modest misgivings in the middle of the most aggressive effort the Fed has ever undertaken to stimulate the economy."

Noël Greetings

Merry Christmas to friends far and near,
And retailing holiday cheer,
With a dovish Fed rule
To stimulate Yule,
And a fiscally balanced New Year!

 - Dr. Goose

The Futility of Liquidity

Though the Fed may be funding us cheaply,
Recovery's not rising steeply,
Until and unless
We consumers express
More demand again, broadly and deeply.

This was the message conveyed by Federal Reserve Bank of Dallas President Richard Fisher in a speech in Gainsville, Texas on Tuesday. While "quantitative easing is a necessary but insufficient tool to spark job creation," said Mr. Fisher, "employers will not deploy the cheap and abundant capital on hand toward job creation while there is so much uncertainty surrounding final demand for the goods and services they sell." This is actually a mild statement for the Dallas Fed president, who, while not a member of the Fed Open Market Committee, has consistently opposed its stimulative measures, arguing that quantitative easing and Operation Twist would have little impact against the resistance of regulatory burdens and tax uncertainty. In his latest remarks, he sounds almost Krugmanesque.