‘leaning against the wind’ when an asset or credit bubble is inflating by operating a tighter monetary policy

From Alphaville:

"The need for greater realism in monetary policy Posted by Tracy Alloway on Jun 10 15:50.

Is it ironic that the following conclusion is coming out of the Bank of England?

(Emphasis FT Alphaville’s):
. . . What lessons might be drawn for the operation of monetary policy? As we have argued, monetary policy can play a role in bringing credit booms to an end. But deploying monetary policy is much easier when credit growth is also accompanied by strong output growth and inflationary pressures. For a combination of reasons, this was not the case in many countries in the late 1990s and early 2000s. Some have argued that this means that the objectives of monetary policy should be changed — with a greater focus on ‘leaning against the wind’ when an asset or credit bubble is inflating by operating a tighter monetary policy than a conventional focus on price stability — such as an inflation target — would imply.

However, we see three problems with this approach. First, it is very difficult to operate because it is not always clear at what point in the growth of a credit cycle the monetary policy-maker should intervene. Second, it potentially creates confusion about the objectives of monetary policy by shifting the focus away from price stability as experienced by the general public towards a more complex set of objectives. This may undermine the credibility of monetary policy and its ability to anchor inflation expectations at a low and stable level. Third, and most crucially, however, this ‘leaning against the wind’ approach takes no account of the globalised nature of the financial system.

In the recent episode, the global financial crisis has been driven primarily by developments in the US mortgage market and within global financial markets and institutions. It is hard to see that a different course for monetary policy in other countries – such as the UK, the euro area or Japan — could have made much difference on either front. Within such a globalised fnancial system, a policy which sought to ‘lean against the wind’ risks having a deflationary bias at the national level - growth is held back in the upswing to head off a national credit bubble and yet the economy concerned is still at risk from a recession generated by a global financial crisis. The fact External MPC Unit Discussion Paper No. 27 June 2009 38 that Germany and Japan did not participate in the credit boom has not shielded them from the effects of the current global recession. Indeed, the export and manufacturing orientation of their economies means they have been among the hardest hit, in the short term at least.

Could better global coordination of monetary policies have helped in these circumstances? It could certainly be argued that while monetary policy seemed appropriate for many countries individually, at the global level it was too loose. The global credit boom was a symptom of this, as was the inflationary pressure which emerged in energy and other commodity markets in the mid-2000s. But effective coordination is likely to be very difficult to achieve when it is most needed. It is true that the current recession, along with an increased recognition of global interdependencies, has led to a renewed interest in policy coordination. But this has been against a background of strong mutual interest in the common goal of lifting the world economy out of recession. It would be much harder to achieve an appropriately coordinated monetary response when the world economy was growing healthily and the sense of common purpose was absent.

Maybe a more appropriate conclusion for monetary policy is the need for greater realism about what it can and cannot achieve. Monetary policy can deliver price stability over the medium term. But it cannot also single-handedly maintain the broader stability of the financial system or avoid all recessions. Economies experienced cycles and recessions going back to biblical times — long before inflation became a problem in the 1970s. Financial instability was an important driver of cycles before the Second World War. And the recent crisis provides a reminder that the instabilities of the earlier historical experience can re-emerge.

Another important conclusion for policy is that long expansions eventually come to an end. And they can be brought to an end by behaviours which are themselves encouraged by the experience of a long period of growth. The long expansion we saw in the 1950s and 1960s resulted in a sustained build-up in inflationary pressures which was responsible for at least two of the previous three UK post-war recessions. And we now recognise the financial excesses which built up in the recent period of sustained global economic growth ultimately sowed the seeds of the current recession. In a long period of economic expansion, policy-makers need to be alert to the imbalances and vulnerabilities which might bring a period of stability to an end. Even in a world in which inflation is generally low and stable recent experience suggests that financial instability is another powerful mechanism which can bring a long expansion to an end.

You can read the full BoE discussion paper — which focuses on the credit boom and the challenges it poses for macroeconomics and policy — here.

Related links:
Thinking anew on UK monetary policy - Martin Wolf, FT
Success and failure of monetary policy since the 1950s - Speech by Donald Kohn, BIS

This entry was posted by Tracy Alloway on Wednesday, June 10th, 2009 at 15:50 and is filed under Capital markets. Tagged with bank of england, boe, Monetary policy."

Me:

Don the libertarian Democrat Jun 10 20:46

I never get irony. Sorry. However, the policy of a Central Bank leaning against the wind should be called "P---ing Against The Wind. In the same way that a Central Bank is a Lender Of Last Resort, it's a Leaner Of Last Resort. The Central Bank will always lag a bubble because it has to slow the entire economy to act against the bubble. It will not do that until the bubble is about the size of one's face and about to burst. **** this idea out before someone begins to take it seriously.

coming from Japan’s opposition party — which isn’t exactly steaming ahead towards victory

TO BE NOTED: From Alphaville:

"Samurai-ed: Japan ‘would avoid dollar bonds’ Posted by Tracy Alloway on May 13 10:12.

Japan voiced some anti-dollar/US Treasuries remarks and a future preference for samurai bonds late Tuesday.

From the BBC:
Japan’s opposition party says it would refuse to buy American government bonds denominated in US dollars, if elected.

The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar. Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.

But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.

Yen-denominated bonds would effectively mean that the US is exposed to the risk of future falls in the value of the USD rather than Japan. That’s a pretty big policy shift for Nippon, which has been a strong buyer of US Treasuries - and, taken with comments coming out of China, hints at a growing unease in Asia over the USD’s supremacy.

But, as the BBC story notes, this is coming from Japan’s opposition party — which isn’t exactly steaming ahead towards victory. Nakagawa’s comments have also been toned down since his interview with the BBC, and there is, as often happens with Japanese politics, undoubtedly a dose of anti-gaijin political rhetoric in the above. BarCap has a good summary:
Masaharu Nakagawa, the “shadow” finance minister of Japan’s largest opposition party, the Democratic Party of Japan, was quoted by BBC on 12 May saying that his party would shun buying US bonds denominated in dollars if his party took the reins of government as a result of Japan’s upcoming lower house election. In an interview with Bloomberg News on 13 May, however, Mr. Nakagawa clarified that it would merely be one option for Japan to propose that the US government issue samurai bonds (US bonds denominated in yen), and that this was strictly his personal proposal and would not necessarily be implemented immediately by the party if it took the helm. The comments, while perhaps reflecting a genuine concern shared by other world leaders, would also serve to boost Mr. Nakagawa’s nationalist credentials ahead of the election and, we believe, should be viewed primarily in that context. Japan’s lower house election must be held by this September, but could be called earlier if the prime minister decides to dissolve the lower house prior to that time.

The samurai will be waiting for a while, it seems.

Related links:
Samurai bond market revives - FT
China to US: We hate you - FT Alphaville
We ‘hate you guys’ even more now… - FT Alphaville

This entry was posted by Tracy Alloway on Wednesday, May 13th, 2009 at 10:12 and is filed under Capital markets, People. Tagged with china, Dollar, japan, Treasuries, yen."

deflation is no longer the key concern it was only a few months ago

TO BE NOTED: From Alphaville:

"‘V’ victorious Posted by Tracy Alloway on May 11 10:55.

This, apparently, is the chart that “shows” the economic recovery will be V-shaped.

That’s from JP Morgan and here’s the accompanying commentary (H/T TJB):

Will the global recovery by V-shaped or L-shaped? That is easy and has been settled. As the chart shows, given the depth of the recession, any return to positive growth will depict a V. The issue is whether the leg up will be as long as the leg down. Here we figure that the V is set to become quite symmetric, with the first few quarters of rebound below trend, and the following ones above trend.

That’s somewhat similar to Barclays’ recommendation to “look for a ‘U’ or a little ‘v’ “, and also Merrill Lynch, which published this tidbit Monday morning:

Some observers seem to be worrying about a “W”, that is, about a relapse into recession after a temporary recovery over the summer. We continue to think that the double-dip scenario has a low probability in, say, the next six quarters. The fiscal stance will remain highly stimulatory at least through to the end of next year. In addition, monetary policy is gaining traction via asset prices. Rather than a short-lived improvement followed by an immediate relapse, we believe it is more likely that economic conditions will improve gradually but the recovery will then gain some strength going into the final months of the year and early 2010.

Perhaps more importantly, the ‘V’ view has been adopted by the Bank of England, according to The Telegraph:

The Bank of England will this week declare that it expects Britain to enjoy a powerful V-shaped recovery as it raises its inflation forecast for the first time since the onset of the economic crisis.

In what many will judge as a landmark moment, the Bank’s Monetary Policy Committee (MPC) will indicate that deflation is no longer the key concern it was only a few months ago, as near-zero interest rates and the £125bn cash infusion from central bank money start to take root.

Ls, Ws, hooks and diminishing sine waves are out of the economic spotlight, then. For now at least.

Related links:
Stop the rot! V for victory - The Long Room
Presenting the ‘hook-shaped’ global economic recovery scenario - FT Alphaville
What shape the US economic recession and recover - FT Alphaville

This entry was posted by Tracy Alloway on Monday, May 11th, 2009 at 10:55 and is filed under Capital markets."

banks’ capital shortfall would’ve been $68bn greater had the government used TCE instead of Tier 1 Common Equity

TO BE NOTED: From Alphaville:

:Stress test capital shortfall could have been $68bn bigger Posted by Tracy Alloway on May 11 11:19.

The scenarios contained in the US banking stress tests have been much criticised. Now, the type of capital used in the SCAP is coming under scrutiny.

This from RBC Capital Markets’ Gerard Cassidy:
Overall we were pleased with the transparency the level of detail given by SCAP but we have a couple of criticisms of the program. First, we were disappointed the regulators did not use a more stringent form of common equity in their analysis. We would of preferred the regulators used GAAP Tangible Common Equity (TCE) rather than Tier 1 Common Equity. Tier 1 Common Equity deducts Other Comprehensive Income (OCCI) from the calculation of Tier 1 Common which means in this environment of large negative OCCI charges, the unrealized losses are included in Tier 1 Common Equity.

In fact, according to RBC the banks’ capital shortfall would’ve been $68bn greater had the government used TCE instead of Tier 1 Common Equity.

Related links:
Stress tests and the question of converting capital - FT Alphaville
US U-turn on tangible common equity - FT Alphaville
Tangible common equity for beginners - The Baseline Scenario

This entry was posted by Tracy Alloway on Monday, May 11th, 2009 at 11:19 and is filed under Capital markets. Tagged with Banks, Capital, RBC, stress tests."

The program effectively rolls the dice more than 100,000 times by running the information randomly

TO BE NOTED: From Alphaville:

"Gambling on Monte Carlo simulations Posted by Tracy Alloway on Apr 27 09:48.

A mathematical model developed by physicists working on the atomic bomb in the 1940s and named after a gambling hub, is probably a fitting one for the US government to adopt in its banking stress tests.

While Friday’s release of the methodology for the tests contained little new on the loan loss assumptions of the exercise (the assumptions about GDP, unemployment and house prices had already been published) there was this bit from the paper:

Analysis of [commercial and industrial] loan loss projections was based on the distribution of exposures by industry and by internal rating provided by the firms. In many cases, these ratings were mapped to default probabilities by the firm; in other cases, this association was established by supervisory analysts. This information was confirmed and supplemented by external measures of risk, such as expected default frequencies from third party vendors. Supervisors evaluated firm loss estimates using a Monte Carlo simulation that projected a distribution of losses by examining otential dispersion around central probabilities of default. The approach produced a consistently‐prepared set of loss estimations across all the BHCs by combining firm‐specific exposure and rating information with standardized assumptions of the performance of similar exposures. The results of this analysis were compared to the firms’ submissions and adjustments made to ensure consistency across BHCs.

Monte Carlo simulations are pretty standard things in finance. They’re used to value not just potential loan losses but also portfolio risk and derivatives.

While there’s no single Monte Carlo method they tend to work like this: Define a domain of possible inputs, generate inputs randomly from the domain, apply some algorithms, then aggregate the results. In playground terms, you can imagine it as a game of battleship. First a player makes some random shots on their opponent’s board. Then they apply the maths (in this case, a battleship is a vertical or horizontal line of four or five dots) and then determine the likely locations of their opponent’s ships.

The good thing about Monte Carlo simulations is that they do well modelling things with lots of uncertainty and complexity in inputs. However, as the above should have suggested, they’re very much limited by their range of actual inputs. This snippet, from a May 2007 Bloomberg article on CDOs and subprime is a perfect illustration.

Because there are so many moving parts to a CDO, rating companies have to assess not only the chance that something may go wrong with one piece but also the possibility that multiple combinations of things could falter. To do that, S&P, Moody’s and Fitch use a mathematical technique called Monte Carlo simulation, named after the Mediterranean gambling city.

The rating companies take all the data they have on a CDO, such as information about specific bonds and securitizations and the remaining types of loans to be purchased for the package.

The firm enters data into a software program, which calculates the probability that a CDO’s assets will default in hypothetical situations of financial and commercial stress. The program effectively rolls the dice more than 100,000 times by running the information randomly.

If the inputs and assumptions are wrong then the Monte Carlo simulations will be of very little use. In that sense they’re very similar to the magic worked by David Li’s Gaussian Copula. They give a false sense of security.

And that’s precisely, some might argue, what the US government is going for with its bank stress tests anyway.

Related links:
Of couples and copulas - Sam Jones, FT
Dual stance on valuing bank securities - FT

This entry was posted by Tracy Alloway on Monday, April 27th, 2009 at 9:48 and is filed under Capital markets. Tagged with Banks, defaults, Gaussian copula, Monte Carlo, stress tests."

Some states, like New York, appear to be making profits while others, like California and Connecticut, look to be in much tighter spots

TO BE NOTED: From Alphaville:

"State by state stimulus Posted by Tracy Alloway on Apr 27 13:50.

From an FRBSF article, showing funds received vs projected 2010 state budget gaps.

Some states, like New York, appear to be making profits while others, like California and Connecticut, look to be in much tighter spots (H/T Econbrowser).

This entry was posted by Tracy Alloway on Monday, April 27th, 2009 at 13:50 and is filed under Capital markets. Tagged with california, new york, Stimulus, usa."

Yields on US Treasuries are continuing to rise — despite the best efforts of the US to keep them down

From Alphaville:

"Rescuing banks, then Treasuries Posted by Tracy Alloway on Feb 09 15:47.

Yields on US Treasuries are continuing to rise — despite the best efforts of the US to keep them down.

Monument Securities’ Stephen Lewis has this to say about it today:
US policymakers need to take the Treasuries market’s behaviour seriously. Each basis point by which the market yields rise nullifies actions that the US Treasury and Federal Reserve are taking in other policy areas to stimulate the economy. If those actions, through their implications for the budget deficit, are the cause of the rise in yields, the US authorities need to be careful how they proceed.

Cue tomorrow’s announcement on the US’s bank rescue/stimulus plan. Any action will likely have an impact on treasury yields as well - and here the US needs to be careful. It could very well end up pushing yields higher — via its implications for the US budget deficit, etc. Back to Lewis:

It is entirely possible that a point might be reached where the loss would exceed the gains. That would set an effective limit to what the US authorities could do to support the economy. Any attempt to reflate the economy beyond that point would be as futile as an attempt to travel faster than the speed of light.

Mr Bernanke and some of his colleagues may believe they can circumvent this constraint by having the Federal Reserve hold down yields in the marketplace. If they initiate a strategy of Fed purchases of Treasuries in such circumstances, they will very likely find plenty of willing sellers. After all, investors will know for sure that, without the Fed’s intervention, yields on Treasuries would be higher, though they will not know how much higher. The Fed’s bid will, therefore, afford investors an opportunity to offload paper at above-market prices.

To keep yields steady, the Fed might well have to increase the scale of its purchases progressively, and eventually wind up holding most of the Treasury debt in issuance. This looks like a route-map to the destruction of financial markets and the establishment of a command economy.

Of course, if we’ve learned anything from the current crisis it’s that the Fed is already targeting asset prices. It’s not a command economy, but supply and demand is being manipulated. In any case, speculation that the Fed may have to start buying longer-term treasuries, as it’s been considering for some time now, is gaining pace.

Bill Gross, the man with the uncanny ability to direct the US asset purchases, has this (self-serving) tidbit to say about it this afternoon, via Reuters:

If the benchmark 10-year U.S. Treasury note is sold at a yield above 3 percent at an auction this week, that would increase the chance the Federal Reserve will buy longer-maturity Treasuries, the manager of the world’s biggest bond fund said on Monday.

Recommended reading for later this week: The prolific Willem Buiter on whether the US can sustain such a course of action.

Related links:
Fed lacks consensus on treasuries as yields rise - Bloomberg
Bond investors call Fed’s bluff - Naked Capitalism
To twist a treasury - FT Alphaville
Après moi, le déluge - John Kemp / LR"

Me:

Don the Libertarian Democrat Feb 9 16:35

Little did I know that when William Gross offered to work for free in Sept. for TARP, he had been taken up on his offer. The government isn't paying him anything and he's telling them what to do. I like and respect Gross, although I find that he is currently, as being noted, essentially trying to make shareholders and owners of bonds and toxic assets whole, at the expense of the taxpayers, which is the opposite of what I believe. That's because he believes that forcing investors to lose money is bad for investing, and, hence, bad for the economy. Much worse than taxpayers getting stiffed. After all, it isn't as if he's hiding this view. He's bellowing it out as loud as he can.

As for the Fed, something is amiss. Just when they were supposed to be making everything clear, they've got everybody wondering what the hell they're going to do about these bond yields, if anything.

"he reckons it may be the best way of preventing a “bad recession” from descending into a “deflationary bust.”

From Alphaville:

"Nationalisation Magnus Opus Posted by Tracy Alloway on Jan 21 09:25.

UBS’s senior economic adviser, George Magnus, has thrown his hat into the bank nationalisation ring.

Magnus, like many others, is starting to see an increasing likelihood of full-scale bank nationalisation. What’s more, he reckons it may be the best way of preventing a “bad recession” from descending into a “deflationary bust.”( A CALLING RUN. WE'RE IN IT )

Selected excerpts from his latest “Economic Insights - By George” below.
Yet again, events are moving quickly as governments and banks, including some ring-fenced institutions, battle to contain the destructive and spiralling effects of asset price decay and de-leveraging( A CALLING RUN. DEBT-DEFLATION. ). We are now moving fast towards a second round of capital injections, a further expansion of loan guarantee( YES ) arrangements, and, importantly, towards a formal establishment of bad bank or bad asset schemes, with a rising likelihood of more widespread nationalisation.( YES )

Here then lies another chance for governments to be bold and assertive in trying to implement some of the five key policy imperatives, in this case to strengthen banks, unblock credit arteries and breathe life into failed or illiquid markets. But they need to ensure that their best plans are neither half-hearted, nor hostage to the opinions of those with vested interests( THE BANKS ), or with an enduring but dangerously naïve belief that government intervention is intrinsically bad. For, if truth be told, there will have to be more full-scale nationalisation of weak or basically insolvent banks anyway - in addition to those that work with government support - and the sooner we get there, the better, and the less costly it will be.( I COMPLETELY AGREE )

To top it all, of course, the underlying weaknesses in the financial system have again become more exposed since the start of the year. A number of wellpublicised problems at particular banks represent the tip of a generic financial system iceberg, the nature of which we have explored at length in past issues of Economic Insights. Essentially, banks deemed integral to the financial system, have to be more than adequately capitalised to cope with enormous losses on securitised assets, and of course, more conventional credit losses that are coming with the recession. They also have to be allowed to de-leverage in an orderly fashion( WITHOUT A CALLING RUN ), but as we know now, this can only occur with the help of the State( TRUE ). Full-scale nationalisation of some banks, as recently occurred in Ireland for example, remains a quite likely outcome, and may indeed be the only way in which the good and bad assets of weak or insolvent banks can be sold off and disposed of, respectively.( YES )

One way or another, the goals must be: to shut down bad banks, most likely involving full nationalisation for some, restructure and sell the salvageable parts of the bank, and put bad assets into a national fund, where they can rot (at taxpayers’ expense) or return a profit over time; to get weaker but viable banks to merge; and to allow good banks to complete their write-downs quickly, and benefit from new capital.( I AGREE )

UBS estimates, by the way, are that US and European banks will require something like a whopping $1,000bn of additional capital to see out the financial crisis — with $400bn of it needed a.s.a.p. (i.e. this year)."

Then that's what it takes. If we keep tinkering, the price will double.

“For the first time in our 10-year history we are buying distressed debt,"

I've talked about the news that John Paulson was purchasing Toxic Assets. Here's Tracy Alloway on Alphaville hearing of a similar case:

"Would you buy “the most toxic mortgages ever written”? Posted by Tracy Alloway on Dec 10 15:57.

Because T2 Partners, the New York hedge fund run by value investor Whitney Tilson, is. From Reuters:

NEW YORK (Reuters) - Hedge fund T2 Partners LLC on Monday for the first time was buying distressed U.S. mortgage securities on bets that losses on underlying loans will fall far short of expectations, founder Whitney Tilson said.

“For the first time in our 10-year history we are buying distressed debt, and we are selling equities to do it, Tilson said at the Reuters Investment Outlook Summit in New York.

The $100 million fund put between 10 percent and 25 percent of its capital in the mortgage securities, which include pools of subprime home loans that triggered the global financial crisis, he said.

For T2, traditionally a stock investor, mortgage debt has surfaced as one of the best investment areas in years since forced selling has pushed prices below levels that signal even catastrophic losses, he said. Many of the bonds that were once rated “AAA” are trading at 30 cents to 40 cents on the dollar, and offer “enormous” returns on capital, he said…

They are “pools of the most toxic mortgages ever written,” he said. “The characteristics of these would really make your jaw hit the floor.”

You can make your own judgement of the move, but we’d note that Tilson did have some prescient views on the housing bubble back in March…"

Of course, you have to wonder about the validity of these claims, but, if true, it seems that someone is able to price, value, assess, and buy these Toxic Assets. Why do we need the government to do it exactly?

"It is the response which is specific to the political culture concerned."

From Tracy Alloway on Alphaville, a very interesting post:

"In this case, their own financial bubble. From a strikingly philosophical Dresdner note:

According to Tolstoy, happy families are all alike, but every unhappy family is unhappy in its own way. The same could be said of financial bubbles, which are all much of a muchness in their pathology. It is the response which is specific to the political culture concerned.It goes without saying that bubble collapses are always deflationary since wealth is destroyed and savings, personal and corporate, need to be rebuilt. The bigger and longer-lasting the bubble, the greater the risk of embedded deflation. The potential policy responses range from the extreme of acceptance (”take the pain”) to panic (”avoid any pain at all costs”), depending, we believe, on deeply ingrained political and social values, reinforced by demographics.

To wit, this singularly arresting chart of gold’s post-bubble performance in the UK, US and Japan.

One way to combat the mess of a bubble popping is, as Dresdner puts it, “reducing confidence in the value of money” — i.e. creating inflation.

What the rise in the US and UK gold price tells us is that those two countries (assuming gold is in fact acting as an inflationary hedge here) are not shying away from their inflationary task. They are, unlike Japan, really going for it."

I hope that this is correct.

"Back to Dresdner:

Japan had no Japanese precedent to study. The last experience of deflation was buried so far in the past that anyone predicting a recurrence could be safely dismissed as a crank. The BoJ was dominated by inflation vigilantes who bitterly rued inflating the bubble and were determined at all costs to avoid a repeat. They remained far behind the curve and allowed growth in the monetary base to collapse. The contrast with the United States could not be clearer. Ben Bernanke is an authority on the historical experiences of deflation, and in his famous speech of 2002 laid out his playbook for all to see.

And to conclude:

No policy response to a post-bubble bust can ever be free of unintended consequences. The speed and scale of the current economic fiasco as good as ensures that the mistakes will be serious. The key question for investors is whether over the long haul their bias will be deflationary (too little, too late) or inflationary (too much, too fast). Given the different pressures that policymakers are working under, we find it hard to
believe that the world as a whole will choose the Japanese path."

I hope you are correct. I love Yukio Mishima, but if I go out by my own hand, I'll follow Levi and Amery, not Mishima.

Let me say that, from the Dresdner, I fully agree with this point:

"The same could be said of financial bubbles, which are all much of a muchness in their pathology. It is the response which is specific to the political culture concerned.It goes without saying that bubble collapses are always deflationary since wealth is destroyed and savings, personal and corporate, need to be rebuilt. The bigger and longer-lasting the bubble, the greater the risk of embedded deflation. The potential policy responses range from the extreme of acceptance (”take the pain”) to panic (”avoid any pain at all costs”), depending, we believe, on deeply ingrained political and social values, reinforced by demographics."

Our responses will be a kind of trial and error pragmatic method informed by our ingrained habits and presumptions, although not mechanical and capable of being predicted with much precision.

"No policy response to a post-bubble bust can ever be free of unintended consequences. The speed and scale of the current economic fiasco as good as ensures that the mistakes will be serious. The key question for investors is whether over the long haul their bias will be deflationary (too little, too late) or inflationary (too much, too fast)."

All human action is troubled by unintended consequences. We need to accept the inflationary bias as the best we can do in the present circumstances.

" Pity us youngsters if it does. "

I greatly respect Sam Jones, and I'm enamored of Stacy-Marie Ishmael, and usually I'm a big fan of Tracy Alloway, but Alphaville has added another atrocity to their list which began with the Fact/Parody Jinx. No sooner had I called for Perpetuals and 100 year bonds, than these youngsters starting whining about paying my interest in the future:

"Thought a 25-year lock-up was a long-term investment? How about 100 years?

Ok, it’s not quite the same, but BlackRock’s Peter Fisher is recommending the US Treasury start selling 100-year bonds.

His reasoning? From Bloomberg:

“If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up,” Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.

Note that these would be different to the war bonds discussed here yesterday. The war bonds, or perpetuals, issued by the British government, have no maturity date — they continue paying coupons forever. Fisher’s bonds, as outlined above, would start really paying out (interest and principal) after 50 years. The US government will have moved the debt burden from one generation to the next.

Will Fisher, currently in his 50s, be around in another 50 years? Probably not. But much of the FT Alphaville team will (hopefully) — possibly still paying taxes, so we’re none too enthused about this particular idea. Mish at Mish’s Global Economic Trend Analysis is not very impressed either:

Sadly, I am confident that many Keynesian and Monetarist currency cranks will be quick to support Fisher’s perpetual motion idea on the grounds ‘we will owe the money to ourselves’ or some other nonsensical reason. In fact, they will probably want to spend the ’savings’ in interest for other proposals. The whole thing makes as much sense as me sticking an IOU in my piggy bank for $1 billion and attempting to spend it."

Of all the nerve. Let's mash Mish, if you don't mind. Her whole line of argument is a mishmash. It's a deucedly fine idea to get people buying bonds and funding the government to pay for its expenses, in a time of zero, I repeat, zero interest. Well, we're almost there. Turns out we've been keeping our powder dry.

"Fisher of course, besides being MD of fixed income at BlackRock, was also Treasury undersecretary from 2001-2003. During that time, he eliminated auctions of 30-year bonds — currently the US’s longest-dated security, to help reduce government borrowing costs following four years of surpluses. Interestingly, the US hasn’t had a surplus since — even after reviving 30-year sales in 2006.

Also of note, is that 100-year bonds have been here before, notably among corporates like Walt Disney, Coca-Cola, Ford and the Canadian Pacific Corporation (which, amazingly, actually did a 1,000-year bond). They’ve been popular too — Ford’s sold out within 25 minutes, according to the Bloomberg story.

So will the Treasury’s be as successful? Yields on shorter-term bonds are collapsing and there’s still a general flight to “safe investments,” suggesting investors –those with a very long-term view– might well look upon the idea favourably. Pity us youngsters if it does. "

Pity us old codgers who believed that the younger generation would appreciate all the sacrifices we've made for it. Running up bubbles just so you could buy the things that the ads told you that you needed.

Here's my comment:

Posted by Don the libertarian Democrat [report]

Firstly, Does anyone know if I can buy Perpetuals?
Second, I want everyone behind this 100 yr bond idea because I want to buy some.
Third, I'd like the Fed to create US Perpetuals, because I'd like to buy some.

Are you all telling me you're more frightened of the future than the generation that was fighting WW I?

By the way, I'd buy them because I plan on sticking around for a very long time indeed. That's why I want Perpetuals.