Leeds on Finance

The Fed released their projections this week, including their much-anticipated Fed funds rate projections.  Here are three slides with some quick thoughts:

Slide 1: GDP, Unemployment and Growth Projections

1. Growth projections have dropped for this year and increased for next year.  The highest projection included in the central tendency is that growth will reach 4% in 2014.

2.  Unemployment projections have also decreased.  The expectation is that our unemployment rate will be between 6.7% and 7.6% at the end of 2014.

3. Inflation expectations are below the 2% target.  In one Fed announcement (released this week), they clearly stated that there was an inflation target of 2%.  This had always been assumed, but it was made perfectly clear this week.

Slide 2: FOMC Participants – When Will Rates Rise?

1. Five out of 17 participants think that rates will increase in 2014.

2. Six think it will happen earlier (three this year and three next year).

3. Six think it will happen later (four in 2015 and two in 2016).

Slide 3: Future Fed Funds Rates

1. In this chart, each dot represents where the FOMC participants believe the Fed funds rate will be at the end of each year.  Notice that the participants think of the “normal” Fed funds rate to be near 4% (in the future).  With 2% inflation, that implies a 2% real rate.

2. Notice that several expect the Fed funds rate to be approaching 3% by the end of 2014.  Several others expect the rate (in 2014) to be where it is today.

Is This All Consistent?

When putting together the “central tendency”, the Fed excludes the three highest and three lowest estimates.  But, they include these “outliers” in the “range” – so we know what they are.  If you look at the most optimistic estimates for growth, they are 3%, 3.8% and 4.3% for the next three years.

It strikes me as surprising to think that participants expect such low growth to bring our unemployment rate down to 6.7%.  If we have some growth, I would expect people to re-enter the labor market and this would keep the unemployment rate at higher levels.  If we don’t have significant growth, there’s little reason to expect the unemployment rate to decrease.

It’s also surprising for me to think that these low growth estimates will allow the FOMC to raise rates (as some expect it to approach 3%).  In addition, we’d be raising rates at a time when inflation expectations are low (no estimates are above 2% for the next three years).  Obviously, the FOMC would like to see rates at a higher level so that they would be able to use the Fed funds rate to implement monetary policy again.  (The Fed funds rate has lost its effect when it’s at zero.)  But, it’s hard to see how we’re going to get there based on these estimates.

One final thought…if we do have inflation of 1.5% – 2% for the next five years, that means that investors are locking in a negative real yield when they buy five-year Treasury bonds (which are yielding .77%). That gives you an indication of the fear in the market (and / or the effect of the Fed).

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Monday’s email didn’t contain the entire blog for about half of my readers.  Some people received an email that contained the entire blog.  Others received an email that only contained half of my post.  Very strange.  If you want to see the entire blog, it’s posted here (scroll down to Monday’s blog).

Today’s quick thought…

Recently, I’ve been reviewing the Senate testimony of Laurie S. Goodman (Amherst Securities).  She testified in September and her testimony seemed very similar to the Fed’s white paper on housing (released in January).  Here are a few key numbers from her testimony:

There are approximately 80 million houses, but only 55 million have mortgages.

Of those 55 million, approximately 8% of the loans are classified as nonperforming (60+ days delinquent).

Another 7% are performing now, but have been delinquent in the past (and this is a bad sign – these people have a high “re-default rate”).

Another (separate) 5% are more than 20% underwater.

Another 10% are between zero and 20% underwater.

She estimates that another ten million foreclosures could occur over the next six to eight years.  Of course, the risk is that foreclosures could push prices lower, pushing more people underwater (where they owe more than their house is worth).  People who are slightly underwater don’t strategically default.  But, strategic default becomes a more significant option when a borrower is underwater by a larger amount.

These potential problems explain why we have to take action in order to stabilize home prices.  The current idea being promoted is that we need to bring large investors into the market to turn houses into rental properties.

See exhibit below.

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A few quick stats from some Fed pieces that I read last week (and a quick football comment).  Most everything contained in today’s blog is a direct quote from the different Fed pieces.  I’ve listed the sources at the bottom of the article.

1. The total number of employees on nonfarm payrolls remains about 6.1 million workers fewer than at the start of the recession, a dramatic shortfall.

2. Auto sales fell dramatically below scrappage in 2009, the most recent year for which data are available.  That was historically unprecedented, showing the severity of the auto sector downturn.  Auto sales remain roughly in line with the scrappage trend, suggesting that December’s sales rate is easily sustainable and has room to run somewhat higher.  See chart below.  (This speaks to pent up demand.)

3. Consumer sentiment seems to have improved, though remaining far below pre-recession levels.  Higher consumer confidence bodes well for purchases of big-ticket items, such as autos, furniture, appliances and homes.

4. The National Association of Realtors reported that housing affordability rose to an all-time high.  (Home prices are low and mortgage rates are at all-time lows.)  See chart below.  In addition, the ratio of the cost of buying a house compared with the cost of renting one has fallen dramatically over the past five years and now is close to historical averages.

5. While 620 is generally considered a prime borrower, the median FICO score for prime borrowers has risen about 40 points to around 770.  Thus, a prospective homeowner must have a much higher credit rating than in the past to qualify for a loan.  See chart below.

6. Equity in household real estate peaked at $13.3 trillion in Q1 of 2006 before plummeting to $5.5 trillion in Q3 of 2011 (in 2005 dollars).  See chart below.

7. During this time period, household debt fell to 113% of disposable personal income, a level not seen since 2004.  Net borrowing fell as consumers defaulted on loans, paid down debt and took out fewer loans.

Comparing Wartime Deficits With Our Current Deficit:

1. Wartime deficits are explained by large temporary increases in defense expenditure.  However, revenue also increases – which results in a post-war fiscal surplus.  Today, we have higher expenditures and lower revenue.  Two-thirds of the increase was due to transfers.  Revenue fell by 2.8% of GDP as a result of tax cuts, credits, rebates and depressed economic activity.

2. Output during the three wars increased significantly, whereas it is currently below trend.

3. Inflation increased substantially during all three wars.  After WWII, high inflation was used to reduce the real value of accumulated debt.

4. Deficits are expected to continue until the end of FY 2014.  By 2016, outlays (net of interest payments) are estimated to fall to about 19.8% of GDP, which is still 1.4 percentage points higher than the average from 2004 to 2008.  Assuming revenues climb to 19.3% of GDP, debt held by the public will reach 68% of GDP, which would more than double interest payments in terms of output.  These developments will create strong incentives to use inflation to reduce the financial burden of fiscal liabilities.  An even greater incentive is the fact that over half of the debt is held by foreign and international investors.  This “is a troubling scenario that should not be lightly dismissed.”

Quick Football Comment

How ‘bout those Giants?  Pretty exciting finish.  But, the game was ruined by Williams fumbling twice.  I never enjoy seeing a game decided by a big mistake (let alone two mistakes by the same player).  With that said, I’m excited for the Super Bowl.

Jim Harbaugh is clearly a great coach.  But, did you watch when he shook hands with Coughlin after the game?  Harbaugh hardly said anything.  He pretty much ran by Coughlin, shook his hand (while still moving) and ran off.  Then, he wouldn’t do an interview (with the network) after the game.  Good role model.  I was watching the game with my nine-year-old and I replayed the handshake to show him how not to behave.

All comments (above) are from the following Fed pieces:

Fiscal Policy in the Great Recession and Lessons From the Past, by Fernando M. Martin

Twelfth Federal Reserve District Fed Views, by Eric Swanson (Jan. 12, 2012)

Where Are Households in the Deleveraging Cycle, by R. Andrew Bauer and Betty Joyce Nash

______

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I want to present three quick ideas, mostly from a recent speech by SF Fed President John Williams.  Here’s the link to the speech.  It certainly seems like he’s making the case for more Fed action.

1. Inflation expectations are low.  Several Fed Presidents and Fed Governors have predicted that inflation will be below 2% for the next year.  This is significant for many reasons:

A. we could start to have fears of deflation

B. low inflation means that for a given nominal interest rate, the “real interest rate” (the rate of interest excluding inflation) is higher.  In other words, if you can get a 4% loan and the inflation rate is 3%, your real rate of interest is 1%.  If there is no inflation, the real rate is 4%.  Since the Fed is doing all it can to reduce nominal rates, they would like to see some (limited) inflation to keep the real rates lower.

C. low inflation means that the Fed believes it can do more to stimulate the economy without worrying about inflation.  Whether you agree with this or not, this is how the Fed is thinking right now.

See below for a chart on inflation from Boston Fed President Rosengren.  It shows the drop in inflation during the past six months compared to the prior six month period.

2. SF Fed President John Williams recently spoke and forecast 2.5% GDP growth for the year.  But, he said that there is one risk that would cause the economy to perform much worse – Europe.  Specifically, he said, “European leaders have been working to solve this problem and they may be able to muddle through.  But, if they fail, all bets are off.”  There’s a happy thought.

3. It sure seems like the Fed is starting to jawbone for more action.  Some comments from SF Fed President Williams about the unemployment situation include, “the unemployment rate is still shockingly high” and “the level of unemployment is a national calamity that demands our attention.”

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I want to share some slides about the employment situation.  Other than the first slide (which I pulled from Bloomberg), the remaining four slides are from Boston Fed President Eric S. Rosengren’s recent speech (“Small Business Funding and the Economic Recovery”).  Here are some quick thoughts:

1. The weekly claims for unemployment insurance moved back up to 399K.  It seems consistent with the employment report (where 42K of the 200K jobs created were in the “messenger and courier” business).  See slide below.

2. Many people are working part-time even though they want full-time work.  These are people who have had their hours cut or just can’t find full-time work.  It’s a sign of the weakness in the labor market.  See slide below.

3. The next slide shows just how much deeper this labor market recession has been.  It will take significant growth to get this line back to even.

4. Unlike the prior recession (2001 – 2002), this recession has seen small firms lose employees to a greater extent than large firms.  This is consistent with the idea that financing is very difficult for small firms.  See slide below.

5. You can see that some of the states with the most significant decreases in home value have also experienced the highest unemployment rates.  We could attribute this to lots of reasons such as the reverse wealth effect (driving consumption down).  But, it’s also possible that the drop in home values is hurting the ability to start a new business – since home equity loans often provide the financing for new ventures.  See slide below.

All of this helps to reinforce why the labor market will continue to be slow to recover.

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Really Odd Statistic

I thought that this was the oddest stat in Friday’s employment report:

There were 200K jobs created.  One-fourth of them (50K) were in “transportation and warehousing.”  “Almost all of that gain (42K jobs) occurred in the couriers and messengers industry.”

Analysts are saying that this is a seasonal issue (maybe the seasonal adjustment is wrong) or that it reflects the fact that people are shopping online.  But, it sure is odd.

Quoted in Houston Chronicle

I was quoted in The Houston Chronicle last week.  It also appears online and you can read it here.  I was interviewed about the recent Fed announcement that they would start publishing their interest rate forecasts.

Here were all of my thoughts (that I described to the author, Loren Steffy):

I think that it’s difficult to know the effect of this.  We already know
what the market believes that the Fed will do with the Fed funds rate –
we can tell this through the Fed funds futures contract.  It will be
interesting to see what happens when there is a release that shows that
the FOMC has different expectations than the market.  Will the market
change or will the market think that the FOMC members are wrong?

We have always had limited transparency and this is just making it
slightly more visible.  In the past, Fed Presidents and Fed Governors
have given speeches to let the market know what they are thinking and
where policy is headed.  Now, it will be more explicit and it will
involve the more distant future.  The fact that they’re predicting
further into the future means that there will be more mistakes.

Overall, I think that the increased transparency is consistent with what
the Fed has been doing through Chairman Bernanke’s press conferences,
the announcement that they would likely maintain a near-zero Fed funds
policy for a specific amount of time and more detailed minutes of the
FOMC meeting.

Based on these changes, the Fed seems to be increasingly focused on
their ability to impact expectations.  It’s hard to say whether that is
because they think they can have a positive impact on the economy, avoid
a panic or just think that transparency is the right thing to do.  But,
as Richmond Fed President Lacker pointed out two weeks ago, “Monetary
policy is often credited with entirely too much influence on real
growth.”

In my opinion, the change will not be huge.  Ultimately, we’d be a lot
better off if Congress would let us know when we could expect to end the
gridlock and reduce the deficit.

 
The Game

It’s hard to say much after a game like Alabama played.  It’s actually a lot more fun to talk trash before the game.  For the record, I actually thought that there was a very good chance that LSU would win this game.  During the season, LSU reminded me a lot of Alabama two years ago and Auburn last year.  There were times that Alabama (two years ago) and Auburn (last year) looked bad.  Yet, they always found a way to win.  LSU looked bad a few times this year, but they always found a way to win.  Everyone talked about how Alabama would have won on November 5^th if they had hit their field goals.  But, you really couldn’t be sure – because LSU seemed like they would score in games when they had to score.  Tonight though, it was Alabama’s night.  It was a great night for Alabama fans.  Of course, I’m just happy that I won’t receive the barrage of LSU emails that I thought were likely.

Roll Tide!

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Time for my typical New Year’s resolution.  I’m hoping to write more and keep the posts short.  You can feel comfortable that this will last as long as most of my resolutions (three to five days)…

Today, three quick topics on today’s blog:

1. McCombs alumni — join me in Dallas on Wednesday

2. improvement in banks

3. party like it’s January 7, 2010

McCombs Alumni — Join Me in Dallas

I’m speaking this Wednesday night (January 11^th) in Dallas at a McCombs alumni event.  Join us.  Here is the link.  (In the coming months, I’ll also publicize events in Austin, Washington DC and New York.)

Improvement in Banks

Fed Governor Elizabeth Duke gave a great speech on Friday with her thoughts on the economy and housing.  (I’ll discuss housing later this week.)  She made a great point that banks are in much better condition than they have been in a long time.  Banks are crucial to economic growth.  In the past, we’ve discussed research that shows that recessions accompanied by a financial crisis are more severe and recoveries are slower.  Below, I describe her thoughts and display her slides.

Some reasons for optimism:

1. Financial institutions in the US have stronger capital positions and can withstand stress.  See chart 14.

2. Bank deposits have grown substantially.  This reduces banks’ dependence on more volatile wholesale funding.  See chart 15.

3. Loan balances have increased but are well below their peak.  There is substantial liquidity available.

4. Credit quality (nonperforming assets, delinquencies and charge-off rates) is improving.

5. Banks are actively seeking loan growth to improve profitability.  A survey of loan officers shows that there are fewer banks tightening standards on commercial and industrial loans.  (It’s not an impressive chart, but it’s an improvement.)  See chart 16.

6. Spreads on business loans have stopped increasing.  See chart 17.

These are all small steps, but they are consistent with the cyclical recovery that we’ve been experiencing.  Of course, this could all come undone due to problems in Europe.  In addition, we have huge long-term structural issues that are not improving.  But, we’re not going to improve if the banks aren’t healthy and lending.

Party Like It’s January 7, 2010

As you read this blog, I’m partying like it’s January 7, 2010.  If that date doesn’t mean anything to you, that’s the last time that Alabama won the national championship.

Big game tonight.  I’m nervous.  I went to the game the last two times that the Tide won the national championship (Jan. 1993 and Jan. 2010).  I’m not going to be at the game tonight.  (If we lose, maybe you Tide fans will pay for my trip next time?)

Let me say something that will really annoy the LSU fans.  This is something that annoys them even more than “the keg is empty – you’re going to have to have something else with your cereal.”  Here it is…you’d be nothing without Saban.  In the two seasons before he resurrected LSU football, you were 7-15.  Monday night is a great night for you to pay homage to him.  Roll Tide!

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Richmond Fed President Jeffrey Lacker gave a speech two weeks ago concerning lessons from the past year of US macroeconomic performance.  He made several interesting points that I’ve tried to summarize below.  President Lacker had overestimated how much the economy would grow in 2011.

Persistent Factors Impede Growth

“The most significant lessons learned over the course of this past year, in my view, concern the importance of relatively persistent impediments to economic expansion in the US.”  He described the following persistent impediments:

1. “The still-overbuilt housing market tops the list of persistent factors that continue to impede growth.”  Residential construction normally expands during recovery, but it’s been flat.  The fact that there is low demand for new homes despite low mortgage rates indicates that home building is likely to remain depressed for some time to come.  All gains in residential construction have been in multi-unit rental properties – indicating a shift away from home ownership.

2. Consumer spending is expanding at a more moderate pace than in past recoveries.  There are diminished income prospects and tighter credit terms.   These factors have resulted in consumers paying down debt and building up savings.

3. Labor market conditions improved at a disappointingly slow pace.  “Evidence suggests that one impediment to more rapid employment gains is the magnitude of the skills mismatch between the unemployed and the needs of the growing segments of the economy.”  It is possible that this accounts for one percent of our unemployment rate.

4. “Another impediment to growth cited by a wide range of observers is the array of changes in tax and regulatory policy, both actual and anticipated.  There are persistent anecdotal reports that these policy changes are discouraging firms from making new hiring or investment commitments.”

5. “The murky federal budget outlook also imposes significant uncertainties on consumers and businesses.  Realistic projections under current law show federal debt outpacing our national income for decades to come, with no bound on the ratio of debt to GDP.  This simply is not feasible.”  “Any sustainable configuration of fiscal policy” will affect a broad range of citizens either through higher marginal tax rates, cuts in programs’ benefits or reductions in government payrolls and supplier contracts.

Other Lessons

1. Inflation can accelerate despite elevated levels of unemployment.  As of last December (2010), the twelve month inflation rate was 1.4%.  To date (2011), inflation has averaged 2.8%.  This was more than just food and energy; it was broad based.  Core inflation was .9% last December and has averaged 1.9% this year.

2. “Monetary policy is often credited with entirely too much influence on real growth.  Monetary policy is about inflation – that is, the value of money.  Growth is governed almost entirely by the evolution of a society’s technology, skills, resources and trading opportunities.  This might be consistent with everything else already discussed – maybe monetary policy was able to increase inflation, but not improve employment.”

Future Risks

President Lacker anticipates growth of 2% – 2.5% for 2012.  He sees three risks to his forecast:

1. “The accretion of consumer confidence in their economic prospects could proceed either more or less rapidly than projected.”

2. “The pace that which businesses have invested in equipment and software has surprised on the upside throughout the recovery.  While some moderation in the rate at which that investment is expanding seems likely, we could easily miss on that forecast.”

3. “The trajectory of economic activity in Europe is likely to hold significant implications for US growth in the coming year.  Euro areas governments are grappling with the financial market volatility that inevitably follows from ambiguous commitments to protect creditors using taxpayer funds.  In this case, the ambiguity surrounds protection that might be forthcoming, both for sovereign debt holders and the creditors of large European banks.  The rapid fiscal and balance sheet adjustments, and the accompanying uncertainty regarding prospective tax policy, appear to be dampening euro zone growth, and that is likely to cut into US export demand in the year ahead.”

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I hope everyone is having a nice holiday season.  This past week, I read some testimony concerning the European financial crisis.  Two Fed officials testified before the House of Representatives’ TARP Subcommittee.  I thought that a quick summary might help to frame what is at stake (and there is also a postscript at the end of the story).

The first testimony comes from Steven B. Kamin (Director, Division of International Finance, Board of Governors of the Fed’l Reserve System).  Realize that Mr. Kamin was justifying / defending recent Fed policy (reducing the pricing of dollar swap lines) – so this means that it’s always possible that his testimony is making the risks sound greater than they are.  Here were some of his key thoughts:

1. The combination of high debt levels and low growth prospects in several European countries using the euro has raised concerns about their fiscal sustainability.

2. This has led to substantial increases in their sovereign borrowing costs.

3. Pessimism about their fiscal situation, in turn, has helped to undermine confidence in the strength of European financial institutions, increasing their cost of raising funds and threatening to curtail their supply of credit.

4. These developments have placed significant strains on global financial markets and have weighed on global economic activity.

5. The financial stresses in Europe are undoubtedly spilling over to the United States by restraining our exports, helping to push down business and consumer confidence and adding to pressures on US financial markets and institutions.

6. Of note, foreign financial institutions, especially those in Europe, are finding it more difficult to fund themselves in dollars.

7. A great deal of trade and investment the world over is financed in dollars, so many foreign institutions have heavy borrowing needs in our currency.  These institutions also borrow heavily in dollars because they are active in U.S. markets, purchasing government and corporate securities as well as making loans to households and firms.  (This makes it harder for US households and businesses to get loans.  He also argued that this could raise the cost of funding for US financial institutions.)

8. Although the breadth and size of all of these effects on the US economy are difficult to gauge, the situation in Europe poses a significant risk to US economic activity and bears close watching.

New York Fed President Dudley also testified before the same subcommittee.  Here were his comments:

1. Although the US economy is currently expanding at a moderate pace, we face significant downside risks, mostly relating to the sovereign debt crisis in Europe.

2. If the European situation deteriorates, the euro area would face even more serious fiscal and economic challenges.  As a result, European growth would weaken and this would hurt US exports (and hurt our jobs).  The European market is the world’s second largest economy (after the US).  Europe is also a significant investor in the US economy.

3. If the European situation deteriorates, this could put pressure on the US banking system.  While US banks have bolstered their capital, the exposures of the US banks climb quite sharply when you consider the exposure to the core European countries and to the overall European banking system.

4. If the European situation deteriorates further, financial markets would become more stressed.  This could hurt the availability of credit.  This would also hurt our retirement savings and result in lower output and job creation.

The Postscript

Of course, since all of this testimony, the ECB has loaned 489 billion euros ($641 billion) to European banks.  The assumption is that the banks will take the cheap funding and buy sovereign debt, temporarily easing the crisis.  This is the European version of kicking the can down the road (they probably do this in speedos) and it delays the day of reckoning.

Happy New Year!

Have a great week.

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Albert Einstein has been credited with saying that insanity is doing the same thing over and over again and expecting different results.  So my question is why we keep electing career politicians and expecting that they will solve our fiscal crisis.  I also wonder why we have this insane political process where the cast of candidates each swears that they will maintain the party line that is established by the party extremists (and this is true for both Democrats and Republicans).  Just as long as they commit to these ideas rather than doing what they think is right, we should be fine…

If I could select our next leader, I’d want someone who understands the economy, is clearly willing to say what he believes is true and has a record of insulting both Democrats and Republicans.  (No, I’m not throwing my hat in the ring – while I’ll admit that my ability to insult both parties is pretty strong, I’m not an economist.)  I’ll take Richard Fisher (the Dallas Fed President).   Take the time to read his most recent speech.  Here’s the link.  Don’t just read my excerpts.  See what you think.

Here’s another important idea.  I don’t agree with everything he says.  But, I’m not looking for someone who will pander to me.  I’m not an extremist and I’m not someone who is 100% sure that I’m right on all issues (other than college football).  I believe that he’s smart, understands the economy and speaks the truth.  That’s what I’m looking for in a leader.  We don’t have to be on the same page about everything.

Before I summarize some of President Fisher’s comments (and you’ve got to admit…President Fisher has a nice ring to it, doesn’t it?), I’ll mention one of the places that I struggle with what he says.  He complains about all of the regulation we have today.  There is no question in my mind that regulation has huge costs and can put us at a competitive disadvantage – there are obvious financial costs to complying, there are legal costs to understanding regulation, there are business costs that we incur and our foreign competitors don’t, there’s the reality that we don’t pursue business opportunities because of regulation, etc.  We could describe many more problems.

But, if we want to reduce regulation, I need to know that people are going to do the right thing on their own (without regulation).  I need to know that they want to do the right thing.  I need to know that they are not going to enrich themselves and inflict the cost on me.  In my house, there are regulations that we impose on the kids because we’re not sure that they will always do the right thing yet.  (Jenny also has imposed some regulations on me, but I’ll have to save that for another blog.  I don’t complain about the regulation – I’m proud that I need to be regulated.)   Regulation is costly and hurts our economy.  But what really hurts us is the fact that we have too many people who don’t do what’s right and force us to create rules.   As an aside, you should read this story about Rudy (of Notre Dame fame)…if you can’t even trust Rudy, who can you trust?

Here are a few key points from President Fisher’s comments on Friday.  He was speaking in Austin at the 2012 Economic Forecast Luncheon.  For all of the McCombs (Texas Business School) alumni, note that President Fisher started his speech by recognizing Tom Gilligan (our Dean) for his “spot-on forecast for the prime rate” that was made at last year’s forecasting meeting.  Now, on to some of the other ideas:

1. Fisher spoke about the cost-push pressures in 2008 that led to companies trying to cut costs by lowering head count.  I thought that this was REALLY interesting.  I tend to only remember back to subprime and the financial crisis.  But, with $147 oil, there were other things going on that had a huge impact on our employment situation.

2. Today, businesses still have this same focus on cost control (limiting employment).  Liquidity won’t change this.

3. Further Fed accommodation “might even prove counterproductive should it give rise to fears the Fed is so hidebound by academic theory as to be blind to the practical consequences of harboring an ever-expanding balance sheet.”  He discussed the possibility that we’re distorting our fixed income markets and we could be seen as monetizing our debt.  (Does anyone not believe that?)

4. Our domestic economy is recovering.  But, there’s little we can do about (a) Europe; (b) the possibility that China will not be able “to contain the pricking of their real estate bubble or the shadow banking industry that enabled it”; or (C) a possible slowdown in Brazil.

5. Corporate liquidity and low interest rates will not encourage a company to expand or invest if they don’t know how much it will cost to run their business.  In addition to his comments against regulation, he said that we must be “reassured that the sinkhole of unfunded liabilities like Medicare and Social Security that Republican – and Democrat-led congresses and presidents alike have dug will be repaired so that our successor generations of Americans will prosper rather than drown in dark, deep waters of debt.”

6. He used a great analogy (crediting Fed Governor Sarah Bloom Raskin) concerning our fiscal and economic problems.  He described a situation in which you have food, coffee grinds and a bit of hair clogging your sink.  You could do the unpleasant task of reaching down and scooping up the gunk.  Or, you could turn the water on full blast, providing immediate relief, but knowing that you might be destroying the entire plumbing.  (We’re just blasting liquidity into our plumbing system.)

7. “All I know is that the “honorable” members of Congress and presidents past, Republicans and Democrats alike, have conspired over time, however unwittingly, to drive fiscal policy into the ditch.  They purchased their elections and reelections with popular programs so poorly funded that they now threaten the economic well-being of our children and our children’s children.”

8. “Like all of you here, I am sickened by our politicians’ tendency to kick the can down the road, even when it is starkly clear that doing so jeopardizes America’s well-being.”

I realize that we’re not going to draft someone like this.  I also realize that having a great leader would still leave us with a black hole known as Congress.  But, I also know that if we keep electing career politicians and expecting different results, it’s simply evidence that we’re insane.

Have a great Holiday season.

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