(Old Bones for the Week-end)

When I was president of the Dallas Fed (1991-2004), I frequently spoke to the graduates of our rank-and-file training programs. I just ran across the following summary outline someone made of my remarks on such an occasion in February 2002. Maybe you can use my suggestions on your kiddos. Commenters may want to add their own favorites to the list.

1. Plan your life on paper. Where would you like to be in your career in 5 years?  10 years?

2. Do a time line.

3. Write out your goals, objectives and ambitions. Be very specific and detailed.

4. Translate your goals into activities and schedule those activities on your calendar. Write your to-do lists with your goals in mind.

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Why can’t we learn even the most obvious lessons from the Great Depression? Many policy mistakes were made then, but perhaps the biggest and most destructive was the Smoot-Hawley tariff that contributed to a world-wide trade war and the reinforcement of the depression’s downward spiral. We’ve already dissed our Mexican neighbors by abrogating the trucking provisions of NAFTA. Do we really want to have a tire war with China to pander to domestic unions? The Chrysler bond holders would probably have an opinion on that.

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Written on the bathroom wall at a Libertarian convention in France in July 2001:  “Defy Authority!”

 Next day below that:  “Who are you to tell me what to do?” 

The Tobin Tax came up on financial TV the other day. It brought back memories.

I gave the keynote address at a conference in Dax, France  in 2001, celebrating the 200th anniversary of the birth of Frederic Bastiat, most easily described as the French Adam Smith. The conference was by Le Cercle Frederic Bastiat and was sponsored by the International Society for Individual Liberty and Libertarian International. I titled my remarks, Why Bastiat is My Hero.

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(A More Realistic Look)

This is the year that the whole world apparently discovered the importance of the Fed's Balance Sheet. Unfortunately, their discovery was made when it suddenly doubled in the context of a severe financial panic. This is awful! Right? We've got to get it back down to size! Right?

The suddenness of these revelations prevented useful perspective on why the balance sheet is important and why the composition of the balance sheet is just as important as the size. Money and banking text books for decades have discussed the Fed's balance sheet in the context of bank reserves and the Fed has for decades provided a statistical release on "Factors Affecting Reserves."

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(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.

(The Glass is Half Full; not Half Empty)

The good news that employment declined less in August than in previous months is more important than the bad news of the rise in the unemployment rate. As I've noted here previously, the unemployment rate (from the household survey) had not kept up with employment losses and a convergence was over due. It should not be considered new bad news. The unemployment rate will rise further, even if employment losses continue to decline. One reason is that discouraged workers will come into the labor force as their perceived prospects improve. Keep your eye on employment rather than unemployment as a measure of how the economy is doing.

When I was in graduate school in the olden days (1960s), Professor Waller hired me as his grader in his money and banking and monetary policy classes. At first, he limited my chores to multiple-choice and true-false questions, but he gradually trusted me with essay questions-following his strict guidelines of course.

"Are budget deficits inflationary?" was one of his favorite questions on final exams, and he had a precise idea of the components of an "A" answer. Using T-Accounts (Remember the Chicago Fed's Modern Money Mechanics booklet?), the students were supposed to show the alternate ways of financing government spending, including deficits. The answer to the question, you see, depended almost entirely on the method of financing. Another way of saying that is that the impact of fiscal policy depended almost entirely on the accompanying monetary policy.

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Last year I said that I felt about a strong dollar like St. Augustine felt about chastity. "Lord, make me chaste, but not just yet." My version was, "Lord, give us a strong dollar, but not just yet."

My point was that while a strong dollar had benefits in normal times it would make a recession worse and more difficult to recover from. If someone from on high decrees a stronger dollar in a recession, our exports would be more expensive to potential foreign importers and imports would be more affordable to us at home. The decline implied for net exports pulls down GDP.

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A: No, Not directly, but Yes Indirectly.

Channeling the FOMC

I remember once when the head of the trading desk at the New York Fed was giving his report on international operations, the FOMC broke into applause when he announced that there had been no dollar intervention during the past year. While fixed exchange rates was once the orthodoxy, central bankers came to appreciate their ability to concentrate on domestic economic needs under flexible exchange rates. Do what's right for the domestic economy and let the exchange rate adjust to that. The alternative is to target the exchange rate and let the domestic economy do the adjusting. Fortunately, sound domestic policy promoting low inflation is more likely than not to produce a strong dollar.

So, when talking heads say the Fed's job is to support the dollar, Fed policy-makers agree, but they view supporting the dollar as protecting its domestic purchasing power. That's not usually what the critic had in mind; but they rarely acknowledge the downside of targeting the dollar.

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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.

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(I'm Hopeful, but not Convinced)

A Technical Answer

The Business Cycle Dating Committee (BCDC) of the National Bureau of Economic Analysis determined that the current recession began when payroll employment started declining in January 2008. I doubt that they well declare the recession over while payrolls continue to decline, even if we get positive GDP growth in the current quarter, especially if the growth results primarily from an inventory rebound and one-time clunker rebates.

My assessment differs from many talking heads who have gotten used to the idea of a "jobless recovery" based on experience of the last two recessions. Many of them have declared the recession over already, expecting a positive third quarter GDP number, even though they expect employment to decline for several more months. However, I think they've misread recent history.

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I just learned of the death of our beloved Rose Friedman.

This picture of me with Rose and Milton Friedman was taken at a Dallas Fed conference celebrating the twenty-fifth anniversary of their Free To Choose. Both of them graciously flew to Dallas and participated fully.

A few years earlier I had the honor of visiting the Friedman's in their San Francisco home. I had taken my two Dallas Fed board members who were the founders of the Fair Tax movement-then just called a national consumption tax-to discuss their proposal with the Friedman's, who were generally supportive.

Except for the spectacular view of the San Francisco Bay, their high rise home was predictably modest. Even the Nobel Prize hanging on the wall seemed unpretentious. Rose participated fully in the conversation, but also found time to serve milk and cookies.

Years later, at the Dallas Fed conference, I reminded Rose of that visit and asked her if the cookies were homemade. She said, "If I served them, I made them."

We will miss you too Rose.

A Mixed Blessing

Productivity  surged in the second quarter–up 6.3 percent in the business sector and 6.4 percent in the nonfarm business sector. These were the largest increases since the third quarter of 2003. Rising productivity is a blessing. It's a mixed blessing during periods of high unemployment, however, since the alternative is higher employment.

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"Don't tell it like it is; tell it like it ought to be."

"Where did that crazy idea come from?"

"There's nothing in the bill like that?"

"The crazies are making this stuff up."

"It's just not true."

"It doesn't exist."

"We are going to take it out of the bill, since it confuses people."

Along with my sister, I participated in that decision for both our parents. They were both in comas and the decision was hard, but not really close. And, of course, consultation with the doctors was an ongoing natural process over time.  

No special, formal consultation was necessary and the idea of having one, charged for and reimbursed by public or private insurance, is distasteful to me. Some things just go with the territory.  “I’ll talk to you about pulling grandma’s plug if you make an appointment with my receptionist. You do have insurance for that, don’t you?”

My wife and I have living wills, and she is my designated plug puller. She accepted that responsibility readily, which I found a bit disconcerting. It doesn’t help that she’s always cleaning out the closets and giving perfectly good clothes to Goodwill. I, on the other hand, never throw anything out.

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This morning on financial TV before the Federal Open Market Committee's (FOMC's) scheduled announcement today at 2:15 eastern, someone (Larry Kudlow) asked "Should the Fed begin its exit strategy?"

Let me offer the view that it already has. The Fed's balance sheet ballooned last fall and peaked in December. Since then there has been no net new growth in total assets, but the composition of those assets have changed with circumstances. First, borrowing through special loan facilities grew rapidly, but the FOMC pretty much offset that by reduction in Treasury bills. The liquidity went where it was needed most without bloating liquidity throughout the system.

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(The FOMC Should Start Making that Distinction)

Monetary policy is not interest-rate policy. Neither is it Fed balance-sheet policy. Monetary policy is money-supply policy.

Sometimes these distinctions aren't important, but they are important now, and the Federal Open Market Committee (FOMC) should begin educating the public on them because soon it may need to allow interest rates to rise a bit to reduce market distortions without easing money (the money supply) in an inflationary way.

Similar distinctions between monetary policy and the Fed's balance sheet, the monetary base, and excess reserves should be understood. A large balance sheet, monetary base, and excess reserves are not inflationary unless they lead to too rapid an expansion of the money supply given the state of money velocity.

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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.

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The decline in payroll jobs of 247, 000 was a pleasant surprise to most observers, including me. It continues the "less bad is the new good" paradigm, but I'll take it. The negative must get smaller before it becomes positive.

More surprising to me was the decline in the unemployment rate from 9.5 percent to 9.4 percent. Since the unemployment rate-measured by the household survey-had risen only a tenth in June with a fairly large decline in payroll employment, I thought it had some catching up to do.

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My local newspaper this morning showed a picture of a guy standing in a line of job seekers at a Career Expo. He had his cap on backwards.

If, in the unlikely event, he were contacted for the household survey of employment, they would ask him if he had a job. He would say no. Then, they would ask if he had looked for a job in the last six weeks. He could truthfully say yes. He would be classified as in the labor force but unemployed.

Perhaps they should add another question to the survey: "Did you wear your cap backwards when you applied for a job?" If so, he would be classified as not in the labor force, and the number of unemployed would go down by one.