--- Lecture 1, Lecture 2, Lecture 3, Lecture 4
Foreword: The first of four lectures was on 3/20 (video - also available at federalreserve.gov). The second was on 3/22 (video). There will be two more. These are being hosted by the George Washington University School of Business. The following are notes and comments that were taken while watching the video today. The intent is to watch all four of these and to summarize at the end.
Today, I watched real-time. I'll delay and watch the video after the fact, henceforth. It was a little different; as one could watch Ben work his thoughts into words. However, after the fact, there can be a pause to see the slides (in real-time, they're only flashed momentarily).
Too, the first four posts will be re-capping only and will provide a means to link into work already done on this and the related blogs. Summarizing, and analysis, will occur after the last video. While listening, it was too easy to turn Ben's comments around and put them into a context for a question. That is, he is being driven by his abstract'd background which is great (don't get me wrong). And, he's lifting out to that realm where it's more fuzzy, by nature. The trouble is that when one then goes back to the technical space, things don't match up (it's partly topography, in a sense).
---
Notes (italics, my aside, sometimes with links - times are clock - CDT):
Ben restated the need to take a historical view to set the context.
~11:46 Today, he will go over early challenges (post WWII), then cover the great moderation, and finally get into the current crisis. Reminder: macroeconomic and financial stability are goals.
~11:49 During WWII, the Government kept interest low, post the war, keeping them low was seen to risk heating up the economy, and leading to inflation
1951 – FED got okay to be independent in setting interest rate
William McChesneyMartin, 51-70 (the longest term), the idea was to lean against
the wind, whichever way it blew, even so, there were 2 recessions,
plus the expense ofKorean effort.
the wind, whichever way it blew, even so, there were 2 recessions,
plus the expense of
By the 60s, the policy was too easy, hence a surge in inflation, until 79, peaked at 13%
~11:54 Why? Ben used 'optimistic' on his slides
(but the idea was to think about parameters),
implying an ability to control, however response was mostly too slow
(but the idea was to think about parameters),
implying an ability to control, however response was mostly too slow
Too, theory started to say: permanent tradeoff between inflation and employment
70s: oil (
Nixon’s wage-price controls tried to dampen inflation, didn't (as we know)
~12:01 1979, Paul Volcker, came in, facing double-digit inflation, during Carter's time,
PV raised interest rates, established a disciplined approach, also allowed
big change, that is, other than small deltas
big change, that is, other than small deltas
80s, there was a drop, to 3 to 4 % from the 13% (so, FED was successful)
collateral damage (isn't there always, as we're seeing with Greece)
collateral damage (isn't there always, as we're seeing with Greece)
unemployment went up, peaked at 11%, 1982
Reagan and congress continued to support Volcker
~12:06 1987, King Alan's time, he held it for almost 19 years (see WMcM, above)
his time was of the 'great moderation' and growth
(not the stagflation of the 70s)
(not the stagflation of the 70s)
GDP growth rate (chart) shows a dampening into a smaller span, less variability
Recessions, 73, 81; the band was stdev
Why? …, monetary policy was a focus, therefore economic stability,
…, but, structural changes, too (inventory management, for example)
and luck?
and luck?
Downturns during the period, 1987, 2001 (dot com)
87's influence short-lived, the dot com? see below
87's influence short-lived, the dot com? see below
~12:15 Housing bubble (late 90s to 2006 - remember, a retrospective,
he did not see this in 2007, see note yesterday)
turned out to be a 130% rise in prices
he did not see this in 2007, see note yesterday)
turned out to be a 130% rise in prices
too, lending standards deteriorated
the thought: couldn't lose?, house prices would keep rising,
as well, underwriting became bad
as well, underwriting became bad
in short, poor mortgage quality
before 2000, down payments, documentation of finances,
before 2000, down payments, documentation of finances,
then nonprime came to fore (more than subprime)
peak of nonprime, middle 2000s, 1/3 were non-prime
also rise in those with no documentation, 60% little or no docs
(sell at any cost, was the slogan)
but, with prices up, payments up, so, how to pay?
eventual dampening, 2007, hit the limit
eventual dampening, 2007, hit the limit
then, declining demand, 2006, prices dropped, 30% drop across the country
~12:22 Aftermath, …, some felt rich, then were underwater
negative equity (to say the least)
12 million, out of 55 million, were underwater
too, delinquencies and foreclosures up signicantly
~12:24 (Ah) securities based upon these mortgages, had losses
(understatement, I want to hear about the toxic)
says that we need to consider triggers vs vulnerabilities
housing losses were like dot.com
but, dot.com had a smaller effect
decline in prices and loss of mortgages were triggers
vulnerabilities enhanced the effect of the triggers of the housing bust
what were these??
= too much leverage (debt)
= too much leverage (debt)
= lack of sufficient monitoring of risks (complexity of the securities)
= confidence from the great moderation?
= in 2006, they wouldn’t have been able to say what the impact of
a house price drop would be (lessons learned?)
= short-term funding, and exotic instruments (toxic, to boot)
CDS, as an example used to sell insurance,
if you lose money, we’ll cover you,
if you lose money, we’ll cover you,
(hah) or so they said
~12:31 Where was the government --- AIG was without supervision
= regulations lagged and supervision, such as consumer protection
= no one looking at systemic issues working against stability
no real oversight,
= then, there were fannie and Freddie
= then, there were fannie and Freddie
= even if laws were there, not implemented (FED, too)
FED didn’t measure risk as it ought to have and banks couldn’t
banks could monitor themselves?
= no cooperation, FED, FDIC, SEC (turf issues)
= nobody was looking at things in the whole (but, then, who can?)
~1236 Monetary policy, too low interest rates in early 2000s?, in 2003, 1%,
it increased the demand for housing,
but, UK
…, too, housing bubble was beyond scope of mortgage rate changes
…, size of bubble was huge (so, other factors)
and, timing, started 1998, even rose after 2004 tightening
Asian crisis, reserves built, needed investments
capital inflow heats up markets
capital inflow heats up markets
so what was the monetary influence?
(these were quick asides as he has two more hours)
(these were quick asides as he has two more hours)
~12:41 References on the topic
stress went up, stocks declined,
stress went up, stocks declined,
home construction went way down, unemployment
~12:46 Questions (several of these were of the same vein, plus Ben punted some
to the later lectures):
tighten: too early, too late --- how to know?,
challenging, forecasting is difficult,
plus expectations change, prices up,
so wage demands increase, etc.
(I hope that he touches on the issues of
unwinding from his hugely inflated
balance sheet -- anyone even talk
moral hazard any more?
ought we look at why?)
to the later lectures):
challenging, forecasting is difficult,
plus expectations change, prices up,
so wage demands increase, etc.
(I hope that he touches on the issues of
unwinding from his hugely inflated
balance sheet -- anyone even talk
moral hazard any more?
ought we look at why?)
2000, low rate, didn’t spark the mortgage bubble?--- in 2002, paper
bubbles and monetary policy, …,
need to use tools correctly, …, plus, regulations and monitoring
…, ought to have been done better, …,
Global imbalances, borrowing increase plus greater consumption? --- says low
rates increase capital (yes, one thing he can re-look at)
capital increases (ah, yes – the markets),
too, trade imbalance is down
too, trade imbalance is down
2000, interest not cause of the mortgage, but what about forcing riskier
investment (or as we can say, sacking the savers)? ---
says balance needed,
2000, did he see recession coming? --- he was Economic advisor for Bush,
they looked at house price declining, possible effects thereof,
didn’t see that the decline would have such a big effect,
he’ll be going over the chain of events and causes
government lending for more mortgages? --- the American dream,
home ownership goal, but, Ben says, the worse loans were private
sector, not Fannie/Freddie,
(who seemed to have gotten greedy later)
transparency, can it be too much? --- it’s important for accountability,
can make it work, …, 'tis better,
as market then know how to respond
(remember when Ben blinked?)
price stability, liquidity? --- his actions are trying to bolster confidence
with easy money (see Lecture 1)
Remarks:
12/13/2012 -- Don't know how long this page will be there, Daily Ticker. But, when I looked, 69% had said 'no' (hurt rather than helped) as to whether Ben has helped.
04/03/2012 -- Response 1.
03/28/2012 -- New page covering the series and its material.
03/26/2012 -- From the Fed's media center (Lecture 2 PDFs - Transcript, Slides). As an aside, see Slide 35. It references unpublished material that would suggest that low interest rates do not cause housing bubbles (no smoking gun, yet). Looking forward to the next two. As well, see that I'll have to go back to his Jan 3 talk dealing with this subject. Ben realizes, no doubt, that housing is not the only issue. We can easily find companies (probably even banks) who went bankrupt from over-leveraging (related to cheap money and more). Do we know what shenanigans have come from too-easy rolling out of securitization schemes (are they not, too, related to (actually implicated in) this mess?)? And as far as a smoking gun (their metaphor, not mine) goes, is not the current policy standing savers up against the wall and knocking them down one by one (well, at least, picking their pockets to the point of depletion)?
03/23/2012 -- Minor updates. Links added.
Modified: 12/13/2012
12/13/2012 -- Don't know how long this page will be there, Daily Ticker. But, when I looked, 69% had said 'no' (hurt rather than helped) as to whether Ben has helped.
04/03/2012 -- Response 1.
03/28/2012 -- New page covering the series and its material.
03/26/2012 -- From the Fed's media center (Lecture 2 PDFs - Transcript, Slides). As an aside, see Slide 35. It references unpublished material that would suggest that low interest rates do not cause housing bubbles (no smoking gun, yet). Looking forward to the next two. As well, see that I'll have to go back to his Jan 3 talk dealing with this subject. Ben realizes, no doubt, that housing is not the only issue. We can easily find companies (probably even banks) who went bankrupt from over-leveraging (related to cheap money and more). Do we know what shenanigans have come from too-easy rolling out of securitization schemes (are they not, too, related to (actually implicated in) this mess?)? And as far as a smoking gun (their metaphor, not mine) goes, is not the current policy standing savers up against the wall and knocking them down one by one (well, at least, picking their pockets to the point of depletion)?
03/23/2012 -- Minor updates. Links added.
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