Friday, April 8, 2011

Today's Speech by Dallas Fed President Fisher: "'Is America's Decline Exaggerated or Inevitable?' The Role of Monetary and Fiscal Policy"

Dallas Fed President Richard Fisher is the fellow who brought us "Old Doc Nadler's Remedy". Today, he gave a speech called "'Is America's Decline Exaggerated or Inevitable?' The Role of Monetary and Fiscal Policy". He admits that the bailouts created moral hazard:

In saving the system, for example, it can be argued that we protected imprudent lenders and investors from the consequences of their decisions; we rescued sinners and penalized the virtuous.

Postcrisis, the “too big to fail” financial behemoths that had placed our economy in jeopardy have ended up with even greater financial power. (And, adding insult to injury, by the grace of their shareholders, most of their leaders retain their posts and few, if any, have suffered financial setbacks). This concentration of power comes at the expense of community and regional banks, an imbalance that the Federal Reserve and other authorities must now address through tough-minded, clear-eyed regulation.
He also comes down hard on monetization:
Our duty is most distinctly not to monetize―or even be perceived as monetizing―the debt of fiscally imprudent government. Throughout the history of nations, monetizing the budgetary excesses of governments has proven to be a direct path to economic perdition. Having already peeked inside that door, I feel strongly that we must now shut it, lock it and throw away the key.

In my view, no amount of further accommodation by the Fed would be wise—either by prolonging or “tapering off” the volume of purchases of Treasuries past June, or adding another tranche of large-scale asset purchases. Indeed, it may well be that we should consider curtailing what remains of QE2.
Finally, he admits that moronic risk taking has come back in a big way:
We have seen a resurgence of “covenant-lite” loans, with some $24 billion issued in the first quarter versus $100 billion for all of 2007; private-equity firms are back in size and turning to leverage to pay dividends; credit-boom acronyms most thought would never return after the Panic, such as “payment-in-kind,” or PIK, and “toggle” notes, are prominent once again; traditionally unleveraged asset managers, such as insurance companies and pension funds, are turning to leverage and exotic asset classes to juice returns. These are all signs of the intoxicating effects of the ambrosia of inexpensive and plentiful money. Further spiking the punch bowl with accommodative monetary policy would do nothing to rein them in.
This seems very bearish for risky assets (equities and commodities) and very bullish for the dollar and Treasuries. Which is very interesting, considering how cheaply you can buy Treasury volatility right now.

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