San Francisco Federal Reserve Symposium
I'm reposting this article back towards the top of my Blog--for those of you who haven't yet read. If you have the time, take a look at the comment section also.
Last Thursday afternoon (April 10th) I had the opportunity to attend a three-hour Fed symposium at UNLV and meet three representatives of the Federal Reserve Bank of San Francisco. This symposium is held biannually and is geared towards providing Undergrad and Grad students with a better understanding of the operations of the Federal Reserve Banking system.
I’m a friend of someone who is enrolled in an executive MBA program and we often discuss current economic conditions and the Fed Reserve System, so when he became aware of this symposium, I was the first person he thought of and invited.
The symposium started with welcome introductions and was quickly followed by a 24-slide presentation/briefing from Karen “S” (Manager of Administrative Services, Banking Supervision and Regulation, FRBSF) on current banking conditions and trends.
Karen has worked for the Federal Reserve Bank of San Francisco for over 20 years and prior to that, worked for Barclays bank for 10yrs, so one would surmise she is well seasoned in her field.
Karen discussed the regulatory role of the Fed and several other regulatory agencies (FDIC, Office of Thrift Supervision, Comptroller of the Currency—Administrator of National Banks, etc) and then moved on to cover the Top-3 current Banking Risks:
Each of these areas was covered with slides/charts/graphs etc, but there were really only a few takeaways worth sharing:
1) Subprime & Residential Lending
a. Mortgage underwriting weak
b. Consumer Disclosures questionable
c. Property values continue to decline
2) Commercial Real Estate
a. Loan concentrations high
b. Properties unoccupied
3) Liquidity Risk
a. Non-core funding dependence increasing
1) National home prices have already dropped 9% (Peak-to-trough) thus far, but the briefing suggested we should expect to see a total drop of 20% by Spring 2009—Sub-prime resets, falling home values and tight credit conditions being the main factors (1 of every 4 subprime residential loans is in past due status)
2) National Foreclosure rates are at a 27 year high and expected to worsen
3) 12th District Bank Construction and Land Development Loan Concentrations at all-time highs (% of equity vs. Allowance for Loan and Lease Losses); much higher than even before or during the 90’s California RE collapse
4) Many bankers are “in denial” and not acknowledging problems; loans are being downgraded to “substandard” or worse; bank loss rates rising sharply
5) Bank Construction and Land Development loss rates likely to go much higher
6) Many issues on the radar screen for Banking Risks—Credit Risks, Compliance, Market/liquidity Risks, etc.
During her briefing, Karen heaped most of the blame for our current housing crisis on relaxation of underwriting standards, mortgage fraud, predatory practices, etc, but she spoke not one word about partial responsibility being tied to fed policies. After listening and twisting in my chair for some time, I finally asked: “You’ve placed much of the blame for our current housing predicament on all these factors, but you’ve not once addressed Fed policy and the fact that Greenspan held interest rates at a 40 year low for far too long… Don’t you think the Fed deserves part of the blame for this crisis?”
After a somewhat long pause came the words: “Well yes, Fed policy was partly to blame.”
Karen then searched for thoughts/words to make her answer seem less “Fed-negative” than it was, so she tried to refocus and babbled on for quite some time about how these ultra low rates and Fed policy provided the opportunity for millions to live the “American Dream of home ownership -- even if it was just for a short time. "
I was incredulous and couldn’t believe my own two ears. The whole time she spoke of this, I was thinking: Sure, inept Fed policy/easy money allowed MILLIONS to “taste the American Dream” -- but now MILLIONS will lose their homes, ruin their credit, ruin family relationships, lose jobs, etc, but she felt it was all worth while… "They tasted the Dream.”
Bottom Line: Her reply was absolutely ludicrous. But what else should a person expect to hear from a Fed employee who drinks the Kool-aid?
Next up was Renee “C”, a rather young, attractive Fed Research Analyst who presented a briefing on the Federal Open Market Committee (FOMC). Renee spoke with a bubbly/positive outlook on things, but seemed a bit naïve – she struck me as a regurgitator of data that has been heard/learned over time, but really incapable of independent thought or an understanding of the “Big-Picture”.
She did however appear to be very enamored/proud to be employed by the SF Fed -- a true Fed Soldier.
1) Her Group’s Role at the Fed
a. Public Information
b. Economic Research
2) US Monetary Policy Goals
a. Maximum sustainable output and employment
b. Stable prices
3) Tools of Monetary Policy
a. Open Market Operations
b. Discount Window
c. Term Auction Facility
d. Primary Dealer Credit Facility
e. Term Securities Lending Facility
f. Reserve Requirements
4) Monetary Policy Meetings
a. Eight times a year in Washington DC
5) Monetary Policy Decisions
a. National in scope
b. Forward looking
c. Tradeoffs of between short-term and long-term goals
6) Fed Policy Statements
a. A secondary policy instrument (first is the Federal Funds Rate)
7) Economists at the Fed—who they are/what they do
a. Fed is the largest employer of economists
b. Economists conduct and publish research
c. Produce economic briefings for FOMC members
Early on in the briefing, Renee put up a cartoon depicting Bernanke holding a balloon inscribed with the word "inflation" in one hand and a rope tied to a dollar sign tilting off a ledge in the other, and then asked if anyone can interpret what the cartoon is trying to say.
I stated the Fed is worried about inflation, which is rising, but can’t do much about it by cutting rates and therefore risks allowing the dollar, the world’s reserve currency, to fall off a cliff—and added: “He is in quite the pickle right now…” Renee politely giggled and said, that’s good, but I’m actually using the dollar to depict the US economy, and as for the balloon, inflation always needs to be positive, but not too high… It must be a delicate balance and the fed walks a fine line…
Later, when discussing Monetary Policy she stated that: “Monetary Policy Lags and needs time to take effect” which I agree with, but I stated “Inflationary Policy also lags.”
I don’t know if she really understood my point: Using the numerous new Fed Tools to inject while cutting rates is highly inflationary and we consumers are already feeling the first wave. With the many recent/deep cuts yet to take full effect, it’s only going to get much worse (while the dollar gets creamed)…
I also asked if Fed decisions are politically influenced. (e.g. reporting to the public that the glass is half full vs. half-empty). Renee was firm in stating that analyst research and the sharing/publishing of data is NOT politically motivated and she highly doubts that the FOMC public release is either.
My thoughts were: Move along now, nothing to see here… Continue drinking the kool-aid and all will be fine…
Yelena “T”, Ph.d. Economist of Russian decent, gave the last economic briefing. Yelena was pleasant, seemed to be very intelligent (far more so than the other two), but you could sense that she was only providing surface-level, somewhat optimistic forward looking data, and seemed to be holding back on what could be said to the audience.
1) Current Economic Outlook
a. GDP is dropping faster than earlier Fed Predictions
b. Personal income is flat/dropping slightly
c. Consumption expenditures—a noticeable drop
d. Unemployment is increasing; employment fell for 3rd month
e. Weaker Dollar (Note: she stated a weaker dollar is good for US exports. I chimed in: “That’s good, but we’ve exported most of our manufacturing capacity and until we get it back we’re still going to continue running MASSIVE trade deficits.” Oil yesterday hit $112 and the Yuan broke 7 to the dollar and is gaining speed. Inflation can mainly be attributed to a weak dollar — she nodded/seemed to agree with all)
f. Real GDP Growth has been reduced by a decline in Real Residential Investment
g. Inflation is a source of concern (depicted charts of Core PCE, Total PCE and CPI rising above trend line: I wanted to state that her "understaed" numbers were all completely bogus, but it would have been inappropriate in this collegiate setting)
h. Mixed Signals for long-term inflation expectations
2) Federal Reserve Board of SF National Forecast
a. Little GDP growth in first half 2008, but likely improvement in 2nd half
b. Monthly GDP forecasts have fallen every month since Aug 07
c. Inflation should decline going forward due to slower economy
d. Housing inventories climbing; >2x higher than normal; downward price pressures
3) Potential Risks to their Forecast
a. Continued home price declines may impact construction and consumer spending more than anticipated
b. Continued tightening of lending standards may make housing situation worse
c. Jumbo mortgage rates remain high; increased spreads between 10yr Treasury rate and Mortgages rates -- even conforming mortgages
d. Increased Credit Market Stress
When the briefings were finished, the forum was open to questions. A few relatively easy questions were asked by audience members and were promptly answered.
I later, after much internal consternation, asked how we can sit here and discuss rate cuts, stimulus packages and Monetary Policy, yet fail to address our ailing US Dollar and it’s faltering status as the World’s Reserve Currency. I highlighted that back in 1971, US total monetary aggregate was merely $700 Billion, but now it’s > $14 Trillion and is growing by 18% annually.
I then stated numerous countries have already pulled or are discussing pulling their currency-dollar pegs (due to high domestic inflation rates—as they have to print money as fast as we do). I also opined that Treasury Secretary Paulson and Bernanke’s “Strong-Dollar policy” is preposterous/laughable. How can they continue to cut rates/inflate while the dollar falls to all time lows around the globe, yet “claim to support a strong dollar?” (Note: I was getting a little worked up by now)
I was told this “Dollar Exchange Rate” issue isn’t really taken into account when discussing Monetary Policy, but there are departments internal to the Fed that do study monetary exchange rates/etc. Additionally, I was told that monetary aggregates aren’t important or studied. (Internally, I laughed at the ignorance).
I had many, many more questions/concerns boiling inside of me, but at this point, I had already been the most vocal audience member of the day and had taken far too much of the forum’s time… It wasn't like I was getting intelligent answers anyway… So I bit my lip and said no more.
In closing, what more can I say -- except that I expected more from this symposium. Here were three Fed Bank employees with many years of economic experience, yet their answers seemed uninformed and absolutely baffled the informed mind. I guess that’s what Fed programming/propaganda does to a person. Drink the misinformation Kool-aid for too long and become part of the problem -- passing on ignorance as fact and supplying high school level, nonsensical answers to those with valid questions/concerns.
If these three folks actually represent a typical cross-section of Fed employment/knowledge base, then God help us all, because the misinformation/ignorance problem we have is much bigger than even I thought.
Best regards and until next time