Today’s comment I have just included my email with Stephen Roach (Morgan Stanley Asia CEO) about his attack on Bernanke in the FT.
It’s a long one so I’m not going to comment on anything else today – I’ve rearranged the order so just read it from the top down as normal.
Dear Mr Roach: Bernanke – you wanted a debate to begin, Sir?
From: Jonathan Moore
To: Roach, Stephen (FM)
Subject: Bernanke – you wanted a debate to begin, Sir?
Dear Stephen,
I agree with you in nearly every respect regarding the economy and I believe you are one of the few economists the truly understands the connectivity of the Globalized World we live in. But I have long been disturbed by the disdain which has been spat upon our current Federal Chairman.
Firstly, I’d like to say that I’m not an economist, I’m a trader, but perhaps that gives me some clarity. It seems economists, like all professionals, suffer from being so far in the game they forget what the rules are. A bit like a British politician who thinks that squabbles in the House of Commons are a perfect representation of political feeling. You only need to see the entertaining but childishly petty spat between Krugman vs Ferguson to figure this out. I do not mean to be condescending in anyway, Stephen, my point is only this: I believed that many well-schooled and deep-thinking economists had already subliminally written Bernanke off because of his history/writings/past actions. I am not from that school (and I’m not suggesting your FT article states this), I think we should judge him purely on his actions thus far.
We have to put this in context: if there is a single person who we should be asking questions of accountability to it is this man: Alan Greenspan. Let’s not deviate from that, it takes years of malnutrition to create a multiple organ failure of this proportion. You pay lip service to Bernanke’s creativity and courageousness during what was an incredibly difficult time but I don’t think this was enough given not only the circumstances but this timing as well.
I have included an excerpt (below) from a piece I wrote back in January. Put simply there is a mandate which the Fed must obey in black and white, but, as we know, there is much more to it than that. Primarily, there is an issue of credibility. Without credibility the Federal has no power to police its mandate, none, zero, zippo… Secondly, Greenspan was at the time (whether me and you like it or not) considered “The Great Maestro” he was an institution in itself. Greenspan was at the helm for 2 decades: whether we should allow Central Bank Chairpersons to accumulate this much power, longevity – now THAT’s a debate worth having! In any case, asking any man to step into those shoes was in itself an incredibly delicate exercise, for that man to immediately begin addressing the issue of asset bubbles is unrealistic. He had to manage credibility first (as you would have had to if you were in his shoes) with an asset market which was incredibly precarious (and blown up to epic proportions by any measure) before addressing conventional monetary concerns, which came before addressing asset prices – they were bottom of the pile of priorities circumstantially, not out of choice. This takes time. True the reason for his procrastination may be that he had no intention of tackling the root problems of asset bubble, but they may not have been – I believe he deserves the benefit of the doubt, for reasons which I expressed at the beginning of this email
On the issue of “Savings Glut”: it’s related to all the above. But here I’m in agreement with you. Starting at the basics, if you recognize that credibility is a foremost concern for any Central Bank, then, de facto, you mean that it is impossible for a Central Bank Chairman to be apolitical. It’s as simple as that – you of all people should recognize this. But I agree with you, that is where the politics should end. I’m deeply concerned by the use of the phrase “savings glut” – it is politically contrived subtlety best kept to the media spin doctors. Indeed, I commented on it to my readers after reading your last piece on Global Imbalances:
After reading Roach’s latest piece (see attached) it is clear that there are some who are still very concerned with the global imbalances in the system – in particular what some call the “savings glut”. As I’ve mentioned, I have issue with the term “savings glut” because it suggests that somehow the crisis is the fault of Chinese savers – it’s politically contrived rhetoric which conveniently disassociates Western political culprits from the blame. Over on this side of the World we know that this is rubbish; Asians have not changed habitually they have always saved – if anything they consume more now than they have ever done. Let’s be frank about this, the real root cause of the imbalances is the massive debt levels of the over extended Anglo Saxon consumer – the biggest consumer and most powerful economic engine in the World. Yes Chinese surpluses compounded the problem but they were not the cause of the imbalances. I think “Debt Glut” is a more appropriate phrase.
You’re preaching to the choir here mate – time and time again the Fed strays beyond its political mandate (which is or should be INCREDIBLY tight). This is a deeply disturbing fact and this is ANOTHER debate worth having.
Take my comment today, for example:
Incidentally, as I mentioned previously, I don’t think it’s a surprise that (the normally conservative) Bernanke’s sudden optimism on the outlook of the economy coincided with The White House’s silence over his reappointment – a sign that the so-called “independent” Fed Chairman can flex his political muscles too when he feels the need. But this in itself is a rather disturbing phenomenon as it brings the credibility of the entire institution on the line for the fate of one man… which is another debate.
Lastly, I’d like to ask you a question, Stephen… do you really think that Larry Summers, the proverbial deckchair on the proverbial Titanic, was a better alternative?
Written in Jan 2008 – excerpt from “Bernanke and the Butterfly”
Credit Only Where it is Due
Greenspan deserves only a fraction of the credit he gets for keeping inflation under control and stimulating growth for the past twenty years. It is quite likely that low inflation, globalization and higher growth would have presided irrespective of who was at the helm of the Central Bank for the last quarter of a century. In fact, by over-use of the Greenspan Put, our “Maestro” encouraged confidence to give way to complacency.
Well, that is all water under the bridge, as they say, it is history. We find ourselves in a brave new World. The economies commonly referred to as the BRICs are no longer emerging they have emerged into titans, consuming, reforming and growing on a scale and pace never seen since the emergence of the great American economy, nearly a century ago. Never-more is this exemplified than in our observation of the Middle Kingdom of Asia. While China contributes greatly to global economic GDP growth, the sheer volume of production, pace of change and the stage of its development cycle, means that China is no longer a deflationary influence on Global prices. The tailwind for the policy makers and central bankers in The West has gone, in fact the tailwind may now have given way to a headwind – the BRICs are, if anything, exerting inflationary influence on the Global Village (see Morgan Stanley’s piece on this from a few weeks back). The job of a central banker is now more difficult now than it has been since Volcker, in my opinion. This was always going to be a difficult transitional stage of the cycle to manage, but it was not made any easier by the ill-disciplined policies of our central bankers during the “Wonder Years”, which started just after the fall of The Iron Curtain. Due to a bubble-happy predecessor, our current Fed Chairman, Ben Bernanke, faces, not only external inflationary forces, but the consequences of the last bubble(s), a Sub Prime Crisis and, apparently, a precipitous decay in economic growth rate and consumer confidence. A butterfly flapped its wings in 1987 but now, two decades later, it caused a hurricane all over the World.
Blame Only Where it is Due
People talk about the current Fed being behind the curve. I agree, the Fed is behind the curve, because the Fed simply has no choice. Pause for a moment to imagine the consequences of a dramatic pre-emptive (or “ahead of the curve” , as some call it) cut in the Fed Funds Rate, only then to be confronted with economic data showing a “head-fake” for imminent recession and, instead, sparking an inflationary super-spike at the expense of the US? They would likely have the humiliating task of needing to raise rates dramatically directly after they had just over-zealously slashed them. The credibility of the Federal Reserve would evaporate. While the probabilities of this may be lower, the risks to the economy and the Fed (confidence/credibility) are far higher. No, Bernanke’s hands are tied, he must wait either for significantly slower growth to be baked into the cake or for problems in the banking system to reach an obvious risk-equilibrium before he can take action, or risk destroying the last threads of credibility that the Central Bank still has. Gentle Ben has been handed the unenviable task of weaning a complacent market off the Greenspan Put in a, now “high-inflation-risk” part of the globalization cycle, and there is zero margin for error. He’s not perfect, but, so far, he has done little wrong, given the information available at hand at the time. It’s worth reminding ourselves that it is not the Fed’s job to prevent recession, it is to manage long term inflation (and therefore present inflation expectations) and nurture long term employment and with it economic growth. I hear talk of recession now as if it were something we should never have to experience, ever. Perhaps this was Greenspan’s vision, a safety net for failing, weak and inefficient businesses. Nobody should be allowed to suffer the consequences of the natural business cycle. But yet this form of Financial Socialism has a tendency to expunge the natural existence of, what I call, the “darwinistic alpha” normally prevalent in a purer capitalist system, thus the notion of “creative creation with creative destruction”, becomes compromised.
The demise of the dollar is another of the many factors creating a real problem for Gentle Ben. Every time he even considers adopting Greenspan-esque policies, like a pre-emptive move to slash rates, this leads to another down-leg in the dollar, not only against other currencies, but against commodities, in particular oil. Many manufacturing and service industries, in which American businesses used to indulge, simply cannot compete with their foreign counterparts who, despite their groundbreaking growth, are still enjoying a healthy labor arbitrage gap. Consumers have entered an age of complacent indebtedness, induced by a fatal courtship of irrational consumption and irresponsible lending – which started at the top, at the Federal Reserve. This is never more apparent than the predicament of the modern mortgage market. As a result, the consumption-based economy in the US is now highly influenced by the price of imports. A weaker dollar has significantly more inflationary influence than it had in a more balanced economy with, say, a saving cushion or less onerous deficit. This is not the same “pleasant” wage-induced inflation one experiences in a country basking in the glory of organic growth. This is painful inflation, real disposable income is falling, we’re getting poorer. Additionally, as commodities like oil are priced in US dollars, this has direct inflationary follow-thru on the cost of living – in the form of higher fuel prices and everything else that goes along with expensive petroleum. In the same way that a bloke with a hangover is more sensitive to loud noises or a chap in a Californian china shop is more aware of earth tremors, a highly leveraged household is more sensitive to inflationary swings and (more importantly) more likely to react with volatile inflationary expectations. The inflationary threat is not a fabrication, it is real. The Fed must tread carefully.
From: Roach, Stephen [mailto:Stephen.Roach@morganstanley.com]
To: Jonathan Moore
Subject: RE: Bernanke – you wanted a debate to begin, Sir?
Dear Jonathan,
Many thanks for taking the time to craft such a careful response to my piece in the FT. I agree with your key point on the Original Sinner. Alan Greenspan was the architect and champion of much that went wrong during the Era of Excess. But, as I point out in the FT, his successor stood shoulder to houlder with him in waging battle over many of the important intellectual underpinnings of a reckless US monetary policy. While Bernanke gets generally good grades post-Lehman, in my view his record is extremely poor pre-Lehman. As I concluded in the piece, “The world needs central bankers who avoid problems, not those who specialise in post-crisis damage control. For that reason, alone, he should not be reappointed.”
Thx again for your thoughtful comments.
Regards,
Stephen S. Roach
Chairman
Morgan Stanley Asia
From: Jonathan Moore
To: ‘Roach, Stephen’
Subject: RE: Bernanke – you wanted a debate to begin, Sir?
Dear Stephen,
Our differences of opinion are only minor; I guess we can agree to differ on how we should measure the Chairman’s accountability, that’s all. I agree with you on the vast majority of your concerns over the economy and the Federal Reserve. I am truly deeply troubled by the growing footprint of the Fed in the political era. Yes they have to manage their credibility and yes their mandate and leaders are effectively chosen by politicians but there is much to be improved here.
Here’s another idea for debate: as we’re all socialists now, perhaps the Fed should have a more democratic philosophy to targeting inflation – i.e. target inflation in a manner which seeks to preserve the wealth of as many people (rather than simply seeking to preserve as much wealth) as possible? With all the great minds in the World perhaps we can find a measure of inflation which truly represents the people rather than this core inflation or “inflation minus all the inflationary bits” – perhaps then the Fed will be encouraged to run tighter policies even at a time when they risk deflating asset bubbles?
All the best – I look forward to your next piece!
Jonathan.
8 Responses to Daily Comment – 25th August 2009: The Case For Bernanke.