Fed Policy and Some More Stats

2012 October 8
by SJ Leeds

Hi All,

Recently, I’ve been writing once per week.  It’s been a crazy busy time – and I’m hoping things will calm down after this week.  I want to get back to learning, teaching, (public) speaking and writing – the things I love.  Hopefully I’ll be able to write more in the future.

This week’s blog has two parts: (1) a review of Fed Chairman Bernanke’s recent speech; and (2) a few interesting stats that I came across.

Also, I received emails from a few people that said that they didn’t receive last week’s blog.  I don’t know what happened.  If you’re interested, you can read it at leedsonfinance.com.


Part 1: Chairman Bernanke’s Top Ten

Fed Chairman Bernanke spoke last week.  Here are the ten things he said that I found most interesting.  I’ve included some of my thoughts with respect to some of the comments.  Please note…while I disagree with some of what Chairman Bernanke said, I think that he’s done a good job given the situation that he’s in.  I will agree that the Fed’s oversight was weak and that he was late to realize the risk to the banking system from the housing bubble.  But, we could be in a lot worse position today (in my opinion) if he hadn’t taken some of his actions.  (Reasonable people can disagree.)


1. “When the Fed first announced purchases of mortgage-backed securities in late 2008, 30-year mortgage interest rates averaged a little above 6 percent; today, they average about 3.5 percent.”


2. Explaining the importance of the Fed’s new communication approach (stating that rates will stay low for a long time), he said, “Because the yield on, say, a five-year security embeds market expectations for the course of short-term rates over the next five years, convincing investors that we will keep the short-term rate low for a longer time can help to pull down market-determined longer-term yields.”


3. “We are buying $85 billion of longer-term securities per month through the end of the year.  We expect these purchases to put further downward pressure on longer-term interest rates, including mortgage rates.”


4. “Monetary policy is no panacea.  It can be used to support stronger economic growth in situation in which, as today, the economy is not making full use of its resources, and it can foster a healthier economy in the longer term by maintaining low and stable inflation.”  (I think many people fundamentally disagree with this.  The question is whether, in a time of deleveraging, lower rates can strengthen the economy.  It seems more likely to only inflate asset prices, with some resulting wealth effect.  But, it also creates risks.)


5. “However, may other steps could be taken to strengthen our economy over time, such as putting the federal budget on a sustainable path, reforming the tax code, improving our educational system, supporting technological innovation, and expanding international trade.”


6. “I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow.  I find this argument unpersuasive.”  (You may be right.  Congress would overspend, regardless of the situation.)


7. In arguing that the Fed is NOT monetizing the debt, he said, “No, that’s not what is happening and that will not happen.  Monetizing the debt means using money creation as a permanent source of financing for government spending.  In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economy recovery through lower interest rates.”  (For me, these are some subtle distinctions.  The idea that the Fed’s intent is “temporary” rather than “permanent” doesn’t change what they are doing.  In addition, it doesn’t matter to me if the Fed buys the debt directly from the Treasury or if the Treasury sells the debt to someone else and the Fed buys it from them.)


8. “The Fed can tighten policy, even if our balance sheet remains large, by increasing the interest rate we pay banks on reserve balances they deposit at the Fed.  Because banks will not lend at rates lower than what they can earn at the Fed, such an action should serve to raise rates and tighten credit conditions more generally, preventing any tendency toward overheating in the economy.”  (Chairman Bernanke argued [in this same speech] that we’re saving the government money due to the Fed owning all of this debt.  But, if we end up paying higher rates on reserves, these profits will be gone.)


9.  Chairman Bernanke addressed the issue that low rates are hurting savers.  He said that the low rates are the result of the crisis and we’re seeing them globally.  He said that many savers are also homeowners, investors and small business owners.  Low rates are helping all of those people.  (That may well be true.  But, many savers are retired people who have done the right thing for their whole life and now they’re the ones paying for the crisis.)


10. With respect to auditing the Fed, Chairman Bernanke said that the GAO can review the Fed…they just can’t audit monetary policy.  He said, “A perceived politicization of monetary policy would reduce public confidence in the ability of the Federal Reserve to make its policy decisions based strictly on what is good for the economy in the longer term.  Balancing the need for accountability against the goal of insulating monetary policy from short-term political pressure is very important, and I believe that the Congress had it right in the 1970s when it explicitly chose to protect monetary policy decision making from the possibility of politically motivated reviews.”  (I agree.)


PART 2: A Few Interesting Stats

Here are some stats and ideas that I found interesting…

1. An estimated 13,000 patients may have been exposed to the tainted spinal steroid injections which have given more than 100 people meningitis.


2. Texas Governor Rick Perry continues to push the idea of a $10,000 college degree.  Currently, on average, students at Texas public universities pay $30,000.  According to the College Board, undergraduate costs at public four-year universities climbed 139% between 1990 and 2010.  For the 2011-12 academic year, average tuition and fees at four-year public universities averaged $8,244.  At private schools, tuition and fees averaged $28,500.


3. Between 2006 and 2011, state governments appropriated 12.5% less per student.


4. According to The Wall Street Journal, the University of Texas at Arlington has a $10,000 degree track that will credit classes students take in high school and at a local community college.  (I teach at UT – AUSTIN, not Arlington.)  So basically, for $10,000, we’ll say that your high school and local community college are actually a four-year college.  That makes a lot of sense.


5. Californians have been paying approximately $4.70 for a gallon of gas.  This sure has received a lot of attention.


6. Margin debt rose 5.4% YOY.  This is a potential sign of speculation.


7. The World Bank cut its forecast for economic expansion in developing East Asia from 7.6% to 7.2% (in 2012).  Growth in 2013 is expected to be 7.6% (down from 8%).  These estimates include China.


8. Gallup says that President Obama and Governor Romney are tied at 47% (among registered voters).  Before the debate, President Obama led 50 – 45%.  Most of the polls that I’ve seen have shown a virtual tie.  Of course, I’m not sure that any of this really matters – since our system is based on the Electoral College.  Respondents thought that Governor Romney won the debate by a margin of 72% to 20%.  Even Democrats thought this (49% to 39%).


9. I saw an estimate that said 17% of voters were undecided prior to the debate.  That sounds like a large number to me.


10. Vanguard founder John Bogle said that there’s a 90% chance that stocks will beat bonds over the next ten years.  He says that bonds are yielding 2.5% to 3%.  Stocks have a 2.2% dividend yield and earnings growth will average 5%.


11. Some analysts are questioning the recent drop in bank loss reserves.  While the credit markets are improving, some loan delinquency rates (such as home equity loans) are increasing.


Have a great week.


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