FOMC | Questions About Fed Models

Gov. Lael Brainard (top center) addressing the NYABE,
Cornell Club, NYC, May 30, 2017.

On Tuesday, Federal Reserve Board Governor Lael Brainard spoke to the New York Association for Business Economics. 

At the heart of the Federal Reserve System is the Federal Open Market Committee (FOMC), which since the days of Ralph Young in the 1950s and 1960s has, as its primary task, engaged in carrying out open market operations in Treasury bills to influence interest rates.

The idea behind FOMC intervention in the marketplace is that the Fed can fine-tune the economy, by buying Treasury bills to inject cash and lower short-term interest rates, or by selling Treasurys to remove cash and raise interest rates. 

Lower interest rates create "easy money" and that is supposed to encourage investment. However, the Fed has been at the "zero bound" in its interest-rate targeting since its statement of December 16, 2008. I wrote a piece for Huffington Post  on January 17, 2009, that quoted former Fed Vice-Chair Laurence Meyer. Speaking to the New York Association for Business Economics, Meyer said that the FOMC could go on vacation "for the next two years" until it lifted off from its zero-bound policy.

It's been more than eight years now and the Fed's interest-rate target is still below 1 percent. A quarter-point increase is expected at the next FOMC meeting in mid-June.

The worry about raising interest rates is that it will discourage investment, and also that in the absence of inflation it is not necessary. 

A full table of reporters in the back.
Bloomberg, Dow-Jones...

It is a time when basic questions are being asked about the implicit model on which FOMC model is based. Is it possible that the model-builders have lost touch with the data on which the models are based? Is inflation understated, for example?

After the lunch I asked Gov. Brainard what she thought about this. Her answers were helpful:

Marlin: "When I was working at the Federal Reserve Board more than fifty years ago..."
Brainard: "Fifty!?"
Marlin: "Fifty, under Chairman William McChesney Martin. The prevailing faith then was that higher [but moderate] inflation would encourage demand, and lower interest rates would stimulate investment. Is this still the faith?"
Brainard: "I think we are less confident now than we were then."
Marlin: "Is that because of a new theory, or less faith in the data?"
Brainard: "It's not because of change in the theory. It's more a question of alternative views about the econometrics, rather than the data."

The data and econometric issues are related, because models use high-level aggregate averages. For example, "inflation targeting" at 2 percent per annum is based on a few overall-average price levels. The expansion of the money supply during and after 1933 is given full credit by Christina Romer for the stimulus to the economy that ended the Great Depression.

But what if average-price components move in different directions and then one of them changes direction? As the economy changes, the time horizons over which averages are computed may also need to change. Here are some charts from the "Fed Dashboard" of how prices have been diverging.

Similarly, both the slow response of the economy to massive new debt creation since 2008 and the zero-bound interest target from January 2009 raise questions about the Keynesian narrative in changed financial markets. The markets responded as predicted when short-term interest rates were hiked, but lowering rates to the zero bound did not spur investment as expected.

If the theory on which FOMC policies are based hasn't changed, and interest-rate and inflation-targeting policies based on the theory have not achieved their goals, doesn't that imply problems with the models or the data?

Related Posts: FDR Nullifies Gold Contracts . Glass-Steagall . FDR's First Fireside Chat

BANKS | Fed Showed Risk-Blindness

On March 22, 2008, I expressed concern about the cumulative impact of financial deregulation:

http://cityeconomist.blogspot.com/2008/03/us-financial-regulation-2008.html

The post, which was widely read and a version of which also appeared on Huffington Post, refers back to the 1999 Financial Modernization Act, in which the US Congress took another step toward deregulation of the banks, removing more bricks from the wall between government-insured banks and the non-bank institutions.

I said the Economist magazine was correct in 1999 when it said that the implication of weakening the Glass-Steagall wall should be to extend the net covered by U.S. financial regulation.

The implication of a story in today's New York Times by Gretchen Morgenstern is that my thinking in March 2008 was on target. Financial regulators in New York and Washington at that time were dissing the "pessimists" who were concerned that banks were under-capitalized. The pessimists were worrying about the risky behavior of the unregulated sector of the economy and the porous nature of what was left of Sen. Carter Glass's wall in the Banking ("Glass-Steagall") Act of 1933.

(Rep. Steagall's part of Glass-Steagall is of course still with us–i.e., the FDIC. But the original idea was that government insurance of bank deposits was a trade for stronger regulation and a wall between banks and other, unregulated financial actors. Deposit insurance coverage has expanded in many ways but the regulation has evaporated.)

Here is Morgenstern's story, based on reviewing 2,000 pages of transcripts just released by the Fed.

http://www.nytimes.com/2014/02/23/business/a-new-light-on-regulators-in-the-dark.html?ref=fairgame

Comment on CityEconomist Readership: The CityEconomist blog just passed 70,000 pageviews. The previous marker was 60,000 in October 2013, so that's 10,000 pageviews in four months, or 2,500 per month, roughly 100 per day. The blog was started in the first half of 2007. I did not post during a two-year break while I was working in Washington for the Joint Economic Committee, but the blog was open and the pageviews kept coming, so it is fair to pin the average pageviews per year at about 10,000. So the recent rate of viewership is three times the average over the life of the blog. Thank you for reading.

WOODIN | His Contribution to the Platinum Coin, HuffPost

My story on the history of the trillion-dollar Palladium (Platinum) coin was published today by Huffington Post. I wrote it before the Fed and Treasury decided to rule out issuance of the platinum coin.  (HuffPost sometimes takes a couple of days to post things, often because of rights issues relating to images.) 

I obtained permission to use the image of the "Woodin Nickel" for my blogs (see January 11 post below), but HuffPost must have decided the terms of the permission did not apply to them, and only to my personal posts on Google Blogger. So only the $25 platinum coin approved in 2010 is shown in their post, courtesy of the U.S. Mint.

In this post I am including two photos of Will Woodin that were generously loaned to me for copying, to accompany what I might write about Woodin, by his granddaughter Anne Harvey Gerli. 

This is Will Woodin with his beloved guitar, outside
the U.S. Embassy to Cuba. Photo by permission
of Anne Harvey Gerli, Woodin's granddaughter.

Here Will Woodin is proudly displaying his
catch of the day. East Hampton? Pennsylvania?
Photo by permission of Anne Harvey Gerli.

HUFFPOST | Editors Talk

Feb. 7, 2009–Behind HuffPost are lots of people, not just (surprise) Arianna Huffington. Four of them were on offer at the 92nd Street Y in Manhattan February 5.

The panel discussion is billed as giving the lowdown on "How they choose the stories that make the news" and "their insights into blogging, including what blogs they link to and why, what content gets blogs noticed, the best practices for community building and quick tips for making blogging more empowering, profitable and fun."

Roy Sekoff. My photo.

The MC is Editor Roy Sekoff, shown at left. With him are Senior News Editor Katharine Zaleski, Senior Blog Editor Colin Sterling and Columnist-Reporter Jason Linkins. If you’ve never clicked on the "About Us" button on HuffPost, here’s the editorial staff lineup (the business side is another world). The four speakers are shown in bold:

Co-Founder & Editor-in-Chief: Arianna Huffington
Chief Executive Officer: Betsy Morgan
Editor: Roy Sekoff
Political Editor: Thomas B. Edsall
Senior Editor: Willow Bay
Senior News Editor: Katharine Zaleski
Senior Blog Editor: Colin Sterling
National Editor: Nico Pitney; Senior Features Editor: Katherine Thomson
Senior Style Editor: Anya Strzemien; Media Editor: Danny Shea
Business/Green Editor: Dave Burdick; Living Editor: Verena von Pfetten;
World Editor: Hanna Ingber Win; Chicago Editor: Ben Goldberger;
Washington Editor at Large: Hilary Rosen; Night Editor: Marcus Baram
Associate News Editors: Nicholas Graham, Nicholas Sabloff
Associate Video Editor: Patrick Waldo
Associate Editor, Citizen Journalism: Matt Palevsky
Associate Blog Editors: David Flumenbaum, Katherine Goldstein, David Weiner, Whitney Snyder
Reporters: Ryan Grim, Jason Linkins, Sam Stein
Community Manager: Katie Saddlemire
Editor at Large: Nora Ephron

Roy has a challenge as MC. The crowd has struggled in from a dark, icy-cold, windy night. Roy is well tanned, obviously just flown in from the LA sun and zephyrs. He’s breezy himself and used to taking control of the house. However, his first couple of warmup jokes fall flat on a sullen audience of 100 or so earnest New Yorkers, God’s frozen people. My take is they resent he hasn’t been suffering with them the bitter NYC weather. Think: Jovial American journalist covering the 900th day of the Siege of Leningrad.

In fairness to audience members, they not only braved the cold but paid $27 plus round trip fares, in a deepening recession. Not even relatives got in free. Roy starts in about the blogger tone being “more personal than the typical news story, something you would write to a friend.” If they could have text-messaged him in real time it would have been: "Pls LA guy speed up."

Roy does step up the pace and we find out why he has a rep for very hard work on the nuts and bolts of the HuffPost operation. He's the Founding Editor, been with HuffPost since it opened in May 2005. Katharine Zaleski also, we find out, came on the same month. Roy came to HuffPost via Film School and a job with Michael Moore, where he honed his skills as a champion of the progressive POV. He was hired by Arianna before HuffPost opened. He speaks a lot about Arianna, how she gets the word out during her travels, how she serves as a sounding board, how she listens because she is interested in everything. Roy has a huge job serving as the cable-bridge between Arianna and her e-empire.

The panel is mightily impressed by the rapid growth of Twitter. Users can send only Tweets of fewer than 140 characters. Great time-saver for the reader. Except that maybe the number of Tweets will just rise. I do a Google search and find Twitter users exceed 200,000 per day, firing out 3 million Tweets – a mind-blowing average of 15 Tweets per Twit. It's like the invention of the machine gun. No one is safe any more.

Google search tells us global blogposts were 1.6 million in 2006 but have grown so fast that in 2008 Japan alone has that many. MySpace page views are 1.5 billion per day. Facebook is growing by 600,000 users per day. Stunning.

Katharine Zakeski. My photo.

Katharine Zaleski is News Editor and the most decorative of the four panelists. She is in the eye of the storm in HuffPost's NYC operations where the news is edited. She notes that almost all readers used to get to the site via the "front door" – the home page (www.huffingtonpost.com) - but now 60 percent of readers get to HuffPost via links direct to a story from a search or Digg or a blogpost.

She says the nature of news coverage has been transformed by the Internet. Old model: News reporter looks for a scoop or a new angle, files story, goes to bed. People would get the news in the morning. Television shortened the lag. All-news radio shortened it some more. New model: Delays in reporting important news are down to minutes. The amount of related content that can be offered soon becomes gigantic. Katharine says her job is "to latch onto a breaking story and then stay with it" through the day or night. She works through the night when important stories are breaking. When news about Eliot Spitzer having meetings with a female in Washington, HuffPost for a while "owned" the story of the collateral damage to Ashley Alexander Dupree, by having more new information on Ashley’s music and career than anyone else.

Katharine waves off reports of antagonism between the main stream media and the blogsites. The two are complementary. A good major story on HuffPost, she says, is inclusive, with lots of links to the msm. Sure, HuffPost

depends on the newspapers. The papers also benefit by their content being promoted on the blogs. The great newspapers are using the Internet, adding online news sites with comment boxes, frequent updates and blogs. Same with television,

though she opines that CNN is just 10 percent dependent on the story, with 90 percent of the value in the production.

At question time, Katharine’s mother Caroline, sitting near HuffPost blogger Blake Fleetwood, asks a question anonymously. Katharine mercilessly outs her Mom. But Mom is unflappable. You can see where Katharine gets her poise.

Jason Linkins, Colin Sterling. My photo.

Jason Linkins is the third panelist. He writes "Eat the Press", and was rated one of the five funniest bloggers by Comedy Central. He says HuffPost has 3,000 bloggers. When the final numbers were in on election night, the TV commentators were saying goodbye to one another and their audiences. That's one concept, says Jason, that would never occur to a blogsite. The stories keep rolling in – Rod Blagojevich, Bernie Madoff, who knows what next? He says that the job of bloggers is to "kneecap people who screw up."

So far as "tone" goes, Jason says he got there by trial and error. He started out to be a marine biologist and swam his way into the new medium.

Colin Sterling, Senior Blog Editor, is the final speaker. He is introduced as Harry Potter and you can judge the likeness for yourself. He says he tries to make HuffPost authoritative by including links, and more Google-able by adding enough tags. Colin's most embarrassing moment, he says in answer to a question from the by-now engaged audience, was when he posted a skeptical view of global warming. He's a graduate of UCLA and was like Roy working for Arianna before HuffPost was created.

By the end of the evening, the crowd is happy. Frankly, they didn't get everything promised in the promotion, but who cares? They got $27 worth of information and some entertainment as a bonus. If they need more, they can buy the $15 book on sale in the lobby, The Huffington Post Complete Guide to Blogging. Now I'd dearly like to go to a panel featuring the business side of HuffPost, i.e., the rest of the masthead that keeps the brand afloat and valued last year in the $40-$200 million range.

BAILOUT | Limericks

I reported on Huffington Post that Bailout was the Word of the Year of the American Dialect Society

To which LimerickSavant posted:

So "bail-out" was Word of the Year?
As a verb, we expected to hear
It used one of the times
When, for myriad crimes,
Those crooks went to court to appear!

To which I responded:

The reason I cry in my beer
Is the trillions of bailouts, I fear.
They'll add up too soon
And stretch to the moon,
We may wish that we had them still near.

Brand Expert Scores Obama v. McCain 7 Ways

Pat Cottingham

The Obama and McCain brands have been rated by branding-strategy expert Pat Cottingham of Genuine Imprints, Ltd. Her paper "Brand Obama or Brand McCain?" is featured this week on brandchannel. It's astute. Here's a summary she wrote for me:

On November 4 the American people will buy the Obama or McCain brand. I think the Obama brand is winning on seven criteria:

1. Logos. The Obama Campaign chose an icon that captured the feeling of sunrise over a field of red and white stripes. There is also a subtle "O" for Obama that is in play here though the name Obama is not used in the icon. This makes it a universal logo/icon to which anyone can bring his or her own meaning. It also communicates the Obama brand style. The McCain Campaign chose a logo that comes directly out of his family heritage of three generations in the U.S. Navy, as well as his prisoner-of-war-hero-status political leader. The colors of blue and gold are the U.S. Navy colors, the star icon comes directly from military-rank designations on uniforms. Graphic icons are more new-school in the branding world, indicating change. Names on logos are more old school, indicating traditional values.

2. DNA. The Obama brand has a clearly defined brand code delivered in a simple three-word line. "Yes We Can". McCain has not clarified his brand code. His brand has delivered multiple messages - "Change You Can Believe In", "Country First", "Reform Prosperity Peace", "Don't Hope for a Better Life, Vote for One", "Courageous Service. Experienced Leadership. Bold Solutions".

3. Benefit. Obama has a clear product benefit. "Hope". It is hard to discern from the variety of McCain's brand messages what his product benefit actually is.

4. Positioning. The Obama brand positioning is We/People based. The McCain brand positioning is more Me/McCain based. If you would like to see evidence of this go to the Brooklyn Art Project site and see their Visual Word Maps. These word maps reveal the Obama and McCain campaign strategies by the top words used.

5. Values. If a brand is to be trusted it has to shed light on its values. Obama conveys the values of hope and unity. The McCain campaign has attempted to undermine these values, starting with exploitation of the Rev. Jeremiah Wright's sermon on YouTube. This inspired Obama to give a well-regarded speech on race in America on March 18 at the Constitution Center in Philadelphia. This strengthened the Obama brand, as Obama showed he could stand up to adversity. McCain has clearly communicated that he values country and service but it's not clear how this message relates to current economic, energy, and environmental challenges facing America. Television coverage today showed Palin with "Country First" in the place of McCain's name on the campaign logo. These two words sound like implicature - a new word for the ancient practice of implying or suggesting something more than what it said. Saying that McCain puts his country first implies that Obama does not. It's as if Coca-Cola advertised "No Arsenic Added" - a statement that is surely true, but carries the (false) implication that other brands of soda do add arsenic. Sarah Palin at the same time was suggesting that Obama "pals around" with terrorists, the evidence being a long New York Times story on Bill Ayers that in fact concludes that the connection between Ayers and Obama, who both served on the Chicago Annenberg Project, was not very strong.

6. Mission. A brand must have a clearly defined mission so that its messages flow in one direction. Obama's mission is to bring "Change to America". The fact that he is the first African American running for the president of the United States is the embodiment of this mission. There could be no bigger change than an Obama administration and the Obama family in the White House. McCain's claim that he will bring reform to Washington with bold solutions is harder to buy into, no matter how much he positions himself as a maverick. The McCain brand simply hasn't demonstrated that his administration would be different from the last eight years under George W. Bush.

7. Vision. Finally, every great brand must have great vision. The Obama brand's "One Nation" vision is wrapped up in his quote "There is not a Black America and a White America and Latino America and Asian America; there's the United States of America." This viewpoint is the uniting principle that the Obama brand has promulgated throghout the country. The McCain brand vision is a world that is more threatening and fear based. He says: "We must win in Iraq. If we withdraw, there will be chaos; there will be genocide; and they will follow us home." A vision of fear in how we face our challenges here and around the world will diminish us. It will make us smaller and this is not the America that we want to see at home or how we want to continue to be seen around the world.

For a longer version of this post showing the logos and including links, go to HuffPost.