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Why Do Fed Officials Talk So Much In Advance Of Action?


The presidential season has started in earnest. First to hit the hustings was the president of the Federal Reserve Bank of Boston, Eric Rosengren, who, true to his blue-state roots, pressed the case for an open-ended asset purchase program. Dallas Fed President Richard Fisher made the red-state argument for easing off the monetary gas pedal. Increased chatter from Fed officials is a marker Morgan Stanley’s Vince Reinhart has long-identified as signifying increased chance of Fed action. And we are hearing it. But why do Fed officials talk so much in advance of action?

 

Morgan Stanley: Macro Matters: The Campaign Season, Fed Style

There are two parts to the answer related to two different design flaws of the Federal Reserve. First, an FOMC meeting is a terrible venue for policy makers to exchange views. Second, even if they could talk it through, Fed officials cannot agree as a group on what they individually want.

A Failure to Communicate

The Fed’s failure to communicate internally owes to an irony of increased openness. In 1994, under considerable Congressional pressure, the Fed became more transparent. One initiative was for historians. The FOMC decided to release lightly edited, but otherwise complete, transcripts of every meeting, five years after the fact.

What followed was a predictable social dynamic that is never factored in by economists in their theoretical reasoning that more transparency is better. Starting that year, speakers at an FOMC meeting were given a rough draft of their remarks a few weeks after each meeting. Most learned, to their surprise, that they were a lot less lucid speakers than they had imagined. Off-the-cuff responses to prior speakers looked unthoughtful in black and white. Almost immediately, some began bringing prepared remarks. This set off a readiness race that ended with virtually everyone reading from prepared texts.

Meetings got longer and less spontaneous. More problematic still, meetings became a less useful way of exchanging information and changing minds. This led to a new dynamic: When policy views are scripted, the window to influence views opens before the meeting, when scripts are being written, not during the meeting, when scripts are being read. Thus, Fed officials give more speeches and interviews before meetings to signal each other what they will read at the meeting. If a policy issue is contentious—if it is a close call—then the volume cranks up. It just so happens that the free investing world is listening to that conversation.

A Failure to Agree

But why can’t they agree? Most applied work on monetary policy reaches the conclusion that conditional policy rules work best. That is, the policy instrument should be linked to economic performance relative to the central bank’s goal. Rather than announce a program set in amount and duration, the Fed should link changes in its balance sheet to ongoing shortfalls in achieving its dual objectives. The desire for a conditional commitment is shown in both President Rosengren’s call for an “open-ended” program and Chicago Fed President Evan’s proposal to tie action to the deviation of unemployment from its natural rate as long as inflation is contained.

Conditional commitments provide the reassurance that the central bank will keep trying until the economy performs better. If the rule is crafted correctly, it can build in an exit strategy that will be activated when data show the Fed is starting to meet its goals. At that juncture, the Fed would begin to reduce the balance sheet in a symmetric fashion to the expansion triggered by earlier shortfalls. Moreover, rule-like behavior by the Fed leads to more automatic stabilizing behavior by investors. If the economic outlook deteriorates, for example, market prices will build in the expectation of additional accommodation in advance of the official announcement to act.

Why doesn’t the Fed pin policy to some rule?

We have argued previously that most of the Fed’s problems in communications stem from three obvious, but not always well understood, principles. Those roadblocks are structural to the design of the institution.

  1. Ambiguity. The mission at the heart of Fed policymaking is ambiguous. In the Federal Reserve Act, the Congress tells the Fed to foster maximum employment and stable prices but is silent on how to weigh deviations from the two objectives or how quickly those deviations should be eliminated.
  2. Diversity. Fed officials fundamentally do not agree among themselves on how to weigh relative deviations from the two goals.
  3. Democracy. Chairman Bernanke entered office wanting to create a more democratic policymaking committee. This attitude was shaped by his own experience as a Fed governor and academic work indicating that a group makes better decisions than an individual does.

Together, these features explain why the Fed has difficulty in being specific about its policy rule. Specifying a policy rule butts against the core problem of the dual mandate. The Fed is assigned an ambiguous task (Principle 1), and its leaders do not agree on its interpretation (Principle 2). Absent the imposition of order by the chairman (in violation of Principle 3) or a change in the legislated mandate (which is not in the cards in the near future), the FOMC will not be able to pre-commit on future contingencies. As a consequence, they prefer to lay out programs in fixed amounts with set start and end dates. A fractious committee is unwilling to make conditional decisions that might depend on the interpretation of the staff or FOMC leaders later on.

Fed officials must be disappointed by an economic outlook that falls short of both of their objectives. They individually think that policy can do better, but they cannot collectively agree on how.

 

Source: Morgan Stanley

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Guest Post: Moral Relativism And Patriotism As Weapons Of The State


Submitted by James E. Miller of the Ludwig von Mises Institute of Canada,

Over the weekend, a suicide bomber suspected of being a member of Al Qaeda struck a funeral in Yemen, killing forty five individuals.  The funeral was attended predominantly by members of a militia which aided the Yemeni Army in recapturing a town held by Al Qaeda.  The attack was rightfully condemned by major media outlets.  Viciously killing mourners at a funeral is the very definition of terrorism as it sends a message that no time or place is off limits from a surprise attack.  It shows a complete lack of respect for the sanctity of life.  Al Qaeda has become known for these attacks in recent years.  American national security officials and politicians have reacted by denouncing such attacks as a sign of the utter savagery of the terrorist group.

Yet Al Qaeda is not alone in this tactic.  The CIA’s not-so-secret drone campaign is also guilty of targeting funerals attended by civilians.  According to the Bureau of Investigative Journalism, drone attacks have been responsible for the deaths of “dozens of civilians who had gone to help rescue victims or were attending funerals.”  As of February of this year, at least 535 civilians have been killed by drone strikes since President Obama took office; 20 of which were killed while attending funerals.  Last June, a gathering of mourners was targeted for a strike in Pakistan.  The 10 people killed in that attack had come together to grieve over the death of a “brother of a militant commander” killed just a day before in another drone strike.

There is little denouncement of the civilian casualties that are a product of the U.S.’s foreign policy.  The narrative presented by Washington lawmakers and the press is that of a struggle between the forces of good and evil.  The terrorists of the Middle East are ruthless barbarians while the troops and Pentagon officials are goodhearted protagonists trying to liberate an oppressed people.  The blood of innocent women and children on the hands of Al Qaeda is damming evidence of their depravity.  That same blood on the hands of the U.S. defense establishment is a sign of triumph.  It is moral relativism on a national scale; slaying of the innocent is terrible on one hand while honorable on the other.  As LRC columnist Laurence Vance notes in regard to how atrocities committed by private individuals are perceived differently than those committed by the military:

 

I don’t know if there are theaters in Afghanistan, but if U.S. soldiers enter a building in Afghanistan and kill twelve and wound fifty-eight – like James Holmes allegedly did in Colorado – they are lauded as heroes.

Military officials frequently go on television and tell not just Americans but the rest of the world that they are making a sacrifice for maintaining safety and freedom around the globe.  They invoke patriotism to justify their actions.  Taxpayers forced into picking up the tab for the endless warfare repay the favor by unquestioningly handing their respect over to crusaders of state-sanctioned mass murder.  From the perspective of enhancing and enlarging the central state, it’s the prefect scheme.  Force feeding the concept of “patriotic duty” is a great way to get people to accept the otherwise deplorable actions of government officials.  It is why Randolph Bourne aptly recognized war as the “health of the state.”

Today, the conduct committed by state enforcement officials, whether they be imperialistic endeavors or the negation of human liberty at home, are rationalized by the way of apologetic relativism.  This relativism stands in opposition to absolute moral principles.  Theft, murder, eavesdropping, lying, issuing threats, and beating upon others are all actions looked down upon by sensible individuals.  They lead society astray from an amicable coexistence.

The state, by the doings of its executors and administrators, embodies everything you were told was wrong as a child.  Children are usually taught straightforward rules of acceptable behavior at a young age.  As they grow older, they are bombarded with propaganda from school, television, and even their own parents that attempt to remove the government away from basic considerations of right and wrong.  These efforts are part of an ongoing agenda to convince the public what they see as morally repugnant behavior is justified when done under the refuge of government authorization.  The institutional predation of the state is supported by a kind of war on reason fought by those seek most fervently to maintain the exploitive status quo.  The objective is enough consent on the part of the people to overwhelm any high-spirited protest.  While independent and intellectual criticism is the state’s worst enemy, unthinking acceptance is its greatest ally.

The ruling establishment sees little danger in violent uprising.  What they fear most is the turning of public opinion against their legitimacy.  They fear losing consent above all things because soon after, their lordship must come to an end.   Support among the people is what keeps tyranny alive; not a violent clenching down upon personal freedom.

Though the American Revolution is frequently evoked as a display of this truth, a better example exists in colonial Pennsylvania nearly a century before the Declaration of Independence was penned.  Upon being granted the lands of Pennsylvania by King Charles II in March of 1681, William Penn proceeded to establish a colony governed over by a constitution of sorts.  The positions of governor and proprietor were created along with an elected Council that saw to executive and judicial functions.  An appointed Assembly was also formed which had the authority to levy taxes and veto laws passed by the Council.  Because of the liberties guaranteed in the new colony, the low tax burden, and Penn’s selling of land at cheap prices, immigrants flooded into Pennsylvania in its formative years.  Penn would eventually return to England in 1684 but upon doing so found that the colonists were refusing to pay taxes including the land taxes he counted on to maintain a hefty profit.  The Council, which was elected by the people and had the sole authority in executing laws, refrained from collecting taxes and left the colony autonomous.  Penn would eventually appoint a commission to restore his lost opportunity of compensation through force.  The colonists simply ignored the commission which led to its collapse.  Penn then instituted a deputy governor to ensure for the collection of taxes but that effort was also came to be in vain.  As Murray Rothbard summarizes

William Penn had the strong and distinct impression that his “holy experiment” had slipped away from him, had taken a new and bewildering turn. Penn had launched a colony that he thought would be quietly subject to his dictates and yield him a handsome profit. By providing a prosperous haven of refuge for Quakers, he had expected in turn the rewards of wealth and power. Instead, he found himself without either. Unable to collect revenue from the free and independent-minded Pennsylvanians, he saw the colony slipping gracefully into outright anarchism—into a growing and flourishing land of no taxes and virtually no state.

The peace-loving Quakers and colonists were able to dissolve an intrusive government by their sheer unwillingness to recognize its legitimacy.  They properly regarded the various attempts at governance and taxation imposed upon them as thuggish means of exploitation.  In short, they saw through the facade of the state being above moral considerations.  Rejecting state rule did not make them bad citizens but admirable in the sense that they ended up living harmoniously with each other in its absence. As Penn would lament in the midst of Pennsylvania’s brush with halcyon anarchism, he and his appointed rulers had lost “their authority one way or another in the spirits of the people.”  The idea that men are born to be free instead of in shackles was enough to overcome government compulsion.

The first step toward liberty is to see through the masking fog the state engulfs itself in to carry out its deeds of conquest.  It is the realization that murder is murder no matter if it is committed by a street thug or an army captain piloting a remote controlled aircraft armed with hellfire missiles.  It is the realization that debasing of the currency by a select few central bankers is no different from the shysters of old who would shave off small portions from gold bullion so that it would appear to retain the same weight.  Finally, it is the realization that glorifying war in the name of “loving thy country” is a grand swindle used to deceive the simple-minded into falling in line like a herd of sheep soon be slaughtered.

Using reason to discover absolute truths is an essential part of determining how one should live their life in accordance with sound ethics.  Relativism denies this.  It can deny that evil is committed by the state and that reprehensible acts are perfectly okay when done by individuals with guns and badges.  All it takes to reverse such destructive thinking is the realization that state authority deserves no pass in moral scrutiny.  Withdrawing consent comes next on the path to a free society.

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Former Defense Secretary Says US Will Probably Enforce "No Fly Zone", "Take Aggressive Action" Over Syria


Three months to the election? Check. Which means war-mongering rhetoric, once considered a staple of the GOP, may very soon become action, first in Syria, and soon, everywhere else. From Bloomberg: “The U.S. and allied forces probably will impose a “no-fly zone” over Syria and take other “more aggressive action” against the Syrian regime, former Defense Secretary William Cohen said. While the U.S. has been leery of another military intervention after a decade of wars, “We’re coming to the point, however, where the violence is getting so severe, I think, that you’ll see a movement towards setting up those no- fly zones,” Cohen said on Bloomberg Television’s “Political Capital with Al Hunt” airing this weekend.” Is war and immediate geopolitical escalation guaranteed? Not yet: “The former Pentagon chief and Maine senator, now chairman and chief executive officer of the Cohen Group consulting firm in Washington, said any U.S. military action would depend on participation and support from allies.” Although desperate times, and by that we mean unfavorably trending popularity ranking, will certainly require desperate measures. Such as the continued massive build up of US naval assets in the middle east.

More from Bloomberg:

“I think that the United States is not going to go into this alone,” said Cohen, who served as defense secretary during the NATO air strikes in the Kosovo conflict during the Clinton administration. “That’s why we’ve been working with the Gulf states.”
 
John Brennan, President Barack Obama’s top homeland security and counterterrorism adviser, said on Aug. 8 the administration is studying the option of a no-fly zone with air protection “very carefully, trying to understand the implications, trying to understand the advantages and disadvantages of this.”
 
Cohen, a Republican, also criticized the presumptive Republican presidential nominee, Mitt Romney, for promising to issue an executive order on his first day in office labeling China a currency manipulator.

Then there is Iran. And Israel:

On Iran, Cohen said the odds are increasing that Israel will strike the Islamic regime’s nuclear facilities to prevent the Persian Gulf state from being able to produce a nuclear bomb.
 
“I would say it’s a little bit better than 50-50 that the Israelis would take action,” Cohen said. “The rhetoric is starting to get ratcheted up,” he said, though the sharp language may be a “tactical” move to pressure Russia and China to sanction Iran.

Which they won’t as both see Iran, as well as Syria, precisely as the fulcrum points in an anti-US/Israel axis. And from there, where the escalation takes us, is anybody’s guess.

The good news is that if and when Syria is finally “liberated”, following what is sure to be a barrage of daily media propaganda including the gratuitous includsion of “weapons of mass destruction” for old time’s sake, when brent and crude soar to new record highs, at least the market can be finally assured that no QE will be coming any time soon. Or not so soon.

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Presenting The Ultimate 'Muppet' Indicator


Today’s MANU fiasco tipped the scale for us on the dichotomy between the seeming exuberance that occurs on the stock exchange floors (and the incipient media attached to it) and the reality of what an IPO is and what exchanges do.

Since the middle of last year – when the impossible was suddenly made possible by the US debt downgrade and markets realized that Keynesian arithmetic was an academic version of three-card-Monti – Bloomberg’s IPO index has dramatically diverged in performance from the ever-exuberant S&P 500. This index of post-IPO performance sends an ominous signal. It must be clear by now that IPOs now occur when when MANAGEMENT want to cash out – simply put they are trying to maximize their gain; unlike the textbook role of markets to provide capital to new entrants to enable growth in a win-win relationship (that every underwriting broker will sell you), the IPO index clearly signals management’s knowledge that ‘it ain’t getting any better than this’ by the dismal reality of its performance.

 

 

The stock market itself is levitated (a la JPM whale-trade in IG and bottom-less pockets of vol-selling exuberance currently) to maintain the appearance of order as Muppets are stripped bare of their remaining cash in IPO after IPO while management exits, piles cash, and hunkers down. With underlying fundamentals leaking everywhere, the IPOs are crushed since there are no comps to manipulate to and hide fair-value with.

 

The divergence between new-money weakness and stuck-money strength highlights more than ever the Muppet-fleecing purpose of ‘our markets’.

 

(h/t Brad Wishak of Newedge)

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Guest Post: The Other Side Of Sanctions


Submitted by Felix Imonti of OilPrice.com,

Iran has been pushed into a corner and is fighting for its life.  The safest weapon in its arsenal is an economic strategy; and it is the one point where the United States is vulnerable. 

There is no doubt about it.  Section 1245 of the National Defense Authorization Act that was signed into law by President Obama on December 31, 2011 is having the intended effect upon Iran.

Unlike previous sanctions, Section 1245 attacks the foundation of the Iranian economy.  The provisions of the law seek to stop the sale of crude oil and to block transactions between the Iranian central bank and the rest of the world.  About fifty percent of the national budget is funded from the sale of exported crude oil that provides eighty percent of the foreign exchange.  “Crude (oil) sales are a trap which we inherited from the years before the (1979 Islamic) Revolution,” Khamenei told a gathering of researchers and scientists at the end of July.  

An immediate consequence of the legislation has been the plunge in the exchange rate of the Iranian Rial that has lost half its value against the U.S. dollar.  A combination of devalued currency and a break down in international bank transfers has created shortages of imported products, including basic food grains.  The result is seen in an official inflation rate of 25 percent and an unemployment rate of 12.3 percent.

Before the implementation of the sanctions, Iranian oil exports were the second largest in OPEC at 2.2 million barrels per day.  Today, the current level is around 1.1 million barrels, but that does not take into account the oil leakage through the sanction barriers.  A friendly government in Baghdad makes Iraq one of the easier routes to the world market.  Shipments of gold bullion through Turkey to Iran indicate that the Iranians are selling to someone.

After nearly thirty years of dealing with American sanctions, the Iranians have developed methods of evading some of the restrictions, but the current application goes far beyond anything faced earlier.  The National Iranian Oil Company has been forced to relinquish its monopoly of sales and authorized private traders to market the crude.  The Oil Products Exporters Union expects to manage a fifth of exports and claims to have completed arrangements with refiners in Europe.

In spite of the evasive measures that are being employed, The Iranian treasury is still losing about thirty billion dollars per annum, a decline from seventy-two billion in 2011.  Beyond that, reduced exports are causing a problem of what to do with the surplus.  On shore facilities have been filled.  Seven million barrels are being held at Sidi Kerir in Egypt.

That leaves the tankers as the only other storage choice.  Half the Iran tanker fleet of forty-seven ships is already sitting at anchor with tanks full and no place to go.

The less attractive possibility is for the National Iranian Oil Company to continue shutting down wells.  Already, production has declined from 3.5 to 3.3 million barrels per day.

Once they are shut down and the pressurizing of the aging neglected wells stopped, salt water seepage will make it costly and difficult to reactivate them.  When they are reopened, production is likely to be reduced.  This is the long term damage that the sanctions will have upon the economy. 

How long can they endure the losses?  That is the question that the Ayatollah has to be asking.

So far, there are no signs that people are starving from food shortages, and there is no indication that people are taking their grievances into the streets.  Regardless, Tehran cannot ignore the long term damage to the economy and the potential for social disorder.

Right now, the bombs are not falling.  Sooner or later, though, the risk of war must be resolved.  They cannot ignore that Section 1245 is a declaration of war; and must be treated accordingly.  The Ayatollah has said, “Threat for threat.” 

Ayatollah Khamenei compares the present situation of Iran to Mohammed and his early followers who were besieged for three years in the desert of Saudi Arabia.  When there seemed to be no hope, they struck the surrounding superior army and defeated it at Badr and Kheybar. 

He sees Iran is also surrounded by an enemy.  They are being confronted by two carrier battle groups with a formidable destructive capacity that Iran cannot hope to stop or to match; the repeated threats from politicians in the United States and Israel to attack Iranian nuclear facilities; the newest sanctions that are slowly strangling the economy; and Khamenei believes that it is all for the sole purpose of regime change.

That raises the question.  How does a minor military power contend with the forces available to the United States?  The leaders in Tehran talk about closing the Straits of Hormuz and developing new missiles.  It is all bravado that Khamenei hopes will calm anxieties at home and frighten potential aggressors.

Over the three decades of the Islamic Republic, the Iranians have been careful about pushing Washington to the point that it would retaliate militarily.  The Ayatollah is not going to provoke the U.S. to destroy the theocratic regime and his political career.

“….to defend ourselves we will attack on the same level as the enemies attack us,” Khamenei said on television in March.  Section 1245 is economic warfare.  That is most likely to be the battlefield that Khamenei will choose and it fits perfectly into the strategies employed over the centuries by the persecuted Shia minority

Where is the United States vulnerable economically?  It is the draconian character of the sanctions.

At the end of June, Washington did what was expected.  All twenty of Iran’s regular buyers were granted six month wavers that will push the next decision beyond the November election.  To have found any of the twenty governments to be in violation of the sanction restrictions would have compelled Washington to deny access to the U.S. financial system.  That would have Sparked an economic war with countries taking sides in support or in opposition to the United States.

It is no secret that many governments object to the sanctions and are willing to deal outside of normal channels for a reduced price.  If the Iranians should use the new private traders to dump a few million barrels of oil onto the market at a sharply discounted price, they just might encourage one of these governments to openly defy the United States for a bargain.  Should the United States imposes restrictions upon the offender, that could trigger an unwanted trade war,  while ignoring the challenge would render the sanctions meaningless and invite everyone else to go bargain hunting.

As a persecuted minority, the Shia have learned that the weaker in a conflict must employ cunning rather than muscle.  The philosophy is the core principle of the Iranian Revolutionary Guard that focuses upon the use of asymmetric warfare.  Employing economic tactics is just another form of the asymmetric warfare.

It is the inherent weakness of the alliance that is Iran’s strength.  The unwillingness of Washington to pressure supposed allies and the simple fact that there are buyers willing to defy the sanctions secretly reveals the cracks in the system.  If the Iranians can break through the weak point in the American siege, they will be able to repeat without firing a shot the triumph of Badr and Kheybar

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