Credits in the U.S. balance of payments give rise to a demand for dollars. Debits reflect the supply of dollars. Together, they determined the exchange rate for the dollar. So far, so good. Everybody knows that.

Then why is it that virtually all the commentary on the dollar on financial TV and in blogs fails to mention the balance of payments when discussing the dollar? The dollar is considered super-important these days while the balance of payments isn’t considered important enough to mention. That’s like saying the price is important, but supply and demand don’t matter.

Read the rest of this entry »

My title is taken from the following quote from Monday’s (10-12-09) Dallas Morning News:

“The financial services sector has enjoyed a fine summer rally, but I just can’t get too excited about a bunch of financial stocks leading the market higher.

I mean, we are talking about banks, for heaven’s sake. These are the same charlatans and ne’er-do-wells who got us into this mess in the first place.” (Emphasis added)

Where to start?

First, let me simply say that, in my 36-year career with the Fed, I met many, many bankers. I don’t recall any that would fall into the category of charlatans and ne’er-do-wells. Not any.

Read the rest of this entry »

Financial TV is full of talk about Governor Warsh’s opinion piece in Friday’s Wall Street Journal. One theory is that it was a shot across Chairman Bernanke’s bow. I doubt it, but even if it was in some limited sense, my experience on the FOMC for almost 14 years suggests to me that the following probably happened. Governor Warsh wrote the piece, then showed it to Chairman Bernanke and asked if he was okay with submitting it to the WSJ. Whatever the Chairman really thought down deep, he probably said “That’s okay with me. Go ahead.” This, of course, is only a guess, but an educated guess.

The timing was odd, however, and awkward, for the Governor since it was so soon after an FOMC meeting in which he didn’t dissent. It looks like he’s trying to have it both ways. Of course, it’s always possible that he and the Chairman together are trying to have it both ways.

Read the rest of this entry »

I try to keep up, but occasionally it dawns on me that I’ve been missing something. The latest example is the importance being placed on G-20 meetings. I wake up to find that there is to be a debate in Pittsburg on such matters as how much the respective governments should restrict banker pay packages. Apparently, we plan to crack down, but not as much as most others. There will be a debate.

What’s going on here? It’s not just that the debate will be over different degrees of government intervention into areas of business not normally under government jurisdiction. More scary is the idea that we might be morally bound, or even influenced, in such matters by the other 19. I didn’t get to vote for those guys. How did they get a vote on my banker’s pay?

Read the rest of this entry »

(And They Called Supply-Side Voodoo)

The only really sensible investment advice I know of came from Will Rogers, who is alleged to have said:

"You buy your stock.
When it goes up, sell it.
If it don't go up, don't buy it."

Advice I just don't get includes the following:

People are very optimistic; so stocks will decline.

People are pessimistic; it's a good buying opportunity.

Stocks go down in September and October.

You can't beat the market; it's all priced in.

You've got to do your homework.

Go with the momentum.

The Dow is 5½ points below Fair Value.

Sell in May and go away.

Cash is king; stay liquid.

If you're out of the market a few days, you can miss the run-up.

The trend is your friend.

It's a random walk.

I was about to "go to press" with the title and article that follows when I heard of the reappointment. Topics are too precious to waste; so I'm going with it anyway. Congratulations to President Obama for his good judgment. Congratulations to Ben, who must be thinking that no good deed goes unpunished.

Should Bernanke be Reappointed?

I'm asked that a lot these days. My answer is "Yes, of course, and he should be given a medal for saving our financial system." Then comes, "But he, or the Fed, didn't see the crisis coming," or, "The Fed caused the crisis by creating the real estate bubble." There are more "ors," but let's start with these two.

Read the rest of this entry »

On matters such as corporate uses of private airplanes and first class air fares, meetings at luxury hotels, eye-popping salaries and bonuses, and other extravagant perks, my position is one that many would call inconsistent. Believing that corporate executives really do want to maximize profits or shareholder value, I have given them the benefit of the doubt in assuming that their decisions are based on legitimate cost-benefit analysis. Another reason I have avoided criticizing their exorbitant salaries and bonuses are equally ridiculous salaries paid to professional athletes. If good eye hand coordination and the ability to hit a little ball or throw a large ball through a hoop can command such salaries, the contributions of CEOS are surely as valuable to society. The third reason I've avoided criticism of either is that it really isn't any of my business.

We've seen recently that many people have no such qualms about criticizing what they regard as corporate excesses, especially in corporations that have received public assistance. What amazes me is the crowd's certainty that such practices are bad for business. Corporate attempts to rationalize them as profit maximizing fall on deaf ears and get hostile reactions. Detroit executives criticized for flying corporate jets to Washington knew better than to argue; they hopped into their ridiculous little green cars for the next trip.

Read the rest of this entry »

Yesterday, I defended Gentle Ben Bernanke. I said I believed him when he said he didn’t say something and said it would have been appropriate if he had. Or, something like that. A committee of Congress had his partner in non-crime on the hot seat today accusing him of saying something he had already acknowledge saying. Got that?

In the process, Mr. Paulson clarified that he had reminded Ken Lewis, the CEO of Bank of America, that the Fed, as the primary regulator of his holding company, had the authority to remove management and the board if he did something they regarded as stupid as well as harmful to the bank, the financial system, and the economy. Of course, Mr. Lewis knew that already, as do all bankers.

Read the rest of this entry »

(Or a big part of it anyway)

I sat next to Ben Bernanke for almost three years at the FOMC table when he served as a Fed Governor. This was before he became Chairman of the President's Council of Economic Advisors and later returned as Chairman of the Board of Governors of the Federal Reserve System, appointed by President Bush. The cliché, "a gentleman and a scholar," was surely coined to describe Ben Bernanke. He seemed to be the quintessential Ivy League, high I.Q. nerd. I saw no bully in him. No attitude. Just a gentleman and a scholar.

He shocked me when he told me he was from South Carolina and had worked at South of the Border. I grew up in neighboring North Georgia and was familiar with South of the Border. As I recall, snakes were one of the tourist attractions. We had more in common than I ever dreamed, except, of course, for the high I.Q. and SAT scores. Not that he ever mentioned either. I inferred his high I.Q. from his career progression- which obviously required high-powered math skills- and learned of his almost-perfect SAT scores from a network TV special.

Read the rest of this entry »

Last Friday I was on The Kudlow Report to discuss the proposal that the Fed be audited in connection with the question of any inappropriate influence applied by Chairman Bernanke on Mr. Lewis of the Bank of America in connection with the Merrill acquisition. I may follow up in a separate post on some of the issues raised in the interview. You may find part one of the interview here and part two here.

If the money supply increases 10 percent in 3 months, we call it a 40 percent annualized increase. If it flattens at three months and is at the same level 3 months after that, it becomes a 20 percent annual rate for the 6 months. Six months later, if money growth remains flat, it becomes a 10 percent annual rate.

This is an oversimplification, but something like that has been happening. The money supply spiked, and then flattened out. Pre-spike until now still gives us pretty big numbers, but they are getting smaller every day. Yet, commentators treat the money growth statistics as if the rapid rise is ongoing.

Read the rest of this entry »

The collapse of confidence resulting from last Friday's bad employment report was overdone, not because the news wasn't that bad, but because expectations had gotten way too rosy. The search for green shoots with green-colored glasses had led to false hopes and denial– a false dawn if you will.

The employment report reminded us that the recession is not over. That does not mean that the recession isn't closer to being over than it was when the monthly employment losses were much larger. Encouraging signs still abound: financial Armageddon has apparently been avoided; financial markets are healing; confidence is off the floor; some leading indicators are rising. And, yes, the monthly employment losses have moderated.

Commentators, tired of the same old gloom and doom, became irrationally exuberant about the end of the recession. If they had been merely "encouraged," the May employment report would not have been such a shocker. Let's not compound our problem now by becoming irrationally discouraged.

With The Illusion of Saving as background let me explore a very counterintuitive proposition: That the growth in the budget deficit might indirectly strengthen the dollar.

It might do so by requiring a larger capital inflow (and thus a larger current account deficit) to make up for the shrinkage in domestic saving relative to investment caused by the growing budget deficit.

Read the rest of this entry »

The market is headed toward recovery, but we're not there quite yet. This was my response to CNBC's Dennis Kneale last Friday when asked, "Is the Recession Over?" The market is healing but it's not healed yet.

A substantial increase in the personal saving rate was announced last Friday to much fanfare. I hate to be a killjoy, but it was all an illusion.

The national saving rate is composed of the personal saving rate, the business saving rate, and the government saving rate. The personal saving rate is disposable income minus consumption; government saving is equal to its budget surplus. A budget deficit represents negative saving by the government.

Read the rest of this entry »

Just to catch you up on what's been going on, I recently had two good discussions on CNBC about the Fed and the markets. On June 23rd I commented on why implementing a Fed exit strategy may be premature, and on the 24th I responded to questions about Chairman Bernanke's likely role in the BOA/Merrill Lynch affair.

Some Preliminary Thoughts

Increased Powers for the Fed

The rhetoric so far is exaggerating the extent of new powers for the Fed. Since the major investment banks converted to bank holding companies (BHC), the Fed already is the primary regulator, at the BHC level, of the largest financial institutions. Nonbanks like AIG  would represent some expansion, but even that was taken on last year on an emergency basis.

Read the rest of this entry »

We get evidence frequently these days of the relative youth of those on financial television, both interviewers and interviewees. Their historical frame of reference doesn't go back very far; so they miss obvious historical precedent for contemporary issues. In my June 10 post, I discussed the Fed's ill-fated attempt to remove excess reserves from the banking system in the 1930s. In this one I feature the Fed's announcement, and the reaction to it, that the Fed would purchase longer term treasuries in an effort to depress longer-term interest rates, including mortgage rates.

Since short-term rates under the Fed's influence are near zero, a policy of targeting longer-term interest rates represents an effort to change the term structure of interest rates or the slope of the yield curve as it is usually put today. This policy is usually treated as unprecedented. Not so. A similar policy, but for different reasons, was undertaken in the 1960s and was called "Operation Twist."

Read the rest of this entry »

Recently, I did three interviews on the banking crisis for the Las Vegas Money Show. I discussed whether federal bank bailouts are working, whether the banking crisis is over, and whether the banks will make windfall profits from lower fed interest rates.

People keep talking and writing about the explosion of the money supply and the coming inflationary tsunami. Let me point out once again that the M1 and M2 measures of the money supply spiked but have since come back down. There is no explosion of the money supply.

I

The monetary base (currency outstanding plus bank reserves) has exploded, and it's graph is indeed startling-startling that is until you realize that excess bank reserves on deposit at the Fed is the reason. We learned to pay attention to the monetary base because it provided the raw material (reserves) from which the banking system can create new money by lending and investing. Because of the money expansion multiplier, the monetary base has been referred to historically as "high powered money."

Read the rest of this entry »