Quote of the day: Paul Volcker on the new two year delay in implementing his eponymous rule.

December 19th, 2014 at 3:05 pm

As Bloomberg puts it, what with the diminished oversight on derivatives in the budget bill and this new announcement by the Federal Reserve re a two-year delay in the Volcker rule, this holiday season is shaping up to be the best one yet for the financial sector. Recall that the Volcker rule is the part of Dodd-Frank that prevents federally insured banks from trading their own books in securities that put taxpayers and the broader financial system at risk.


Banks added to their wins in Washington this month by getting a reprieve from the Volcker Rule that will let them hold onto billions of dollars in private-equity and hedge-fund investments for at least two more years.

The Federal Reserve granted the delay yesterday after banks said selling the stakes quickly might force them to accept discount prices. Goldman Sachs Group Inc. has $11.4 billion in private-equity funds, hedge funds and similar investments, while Morgan Stanley has $5 billion, securities filings show.

Um…Dodd-Frank passed in 2010. Yes, ironing out the details of rule took too long, but the intention of the law–to block proprietary trades of the types noted above–was clear from the start. Which brings us to the quote of the day, if not the month, by none other than Volcker himself:

It is striking, that the world’s leading investment bankers, noted for their cleverness and agility in advising clients on how to restructure companies and even industries however complicated, apparently can’t manage the orderly reorganization of their own activities in more than five years. Or, do I understand that lobbying is eternal, and by 2017 or beyond, the expectation can be fostered that the law itself can be changed?

I’ll grant you at least two things here. First, we won’t know how well most aspects of Dodd-Frank will work until we try them. “Pushing out” derivatives–the now defunct rule to move such trades out from under the government backstop–or the Volcker rule are complicated changes to a complex system. But we’ll never learn anything if we don’t try them and it’s my increasing sense that we’re predictably forgetting lessons we should have learned in the last crash.

Second, of course the banks will say these measures are burdensome and costly. They are! That’s the point. It’s surely a lot easier and more desirable to keep reaping profits by maintaining your old business model. But these costs must be weighed against the benefits of not having another bubble and bust. So I’m with Mr. Volcker here: stop coddling the financial sector and implement the damn bill.

(H/t: Anthony M.)

A quick note on the Fed meeting and the need for “patience” for a “considerable time.”

December 17th, 2014 at 9:10 am

As the Federal Reserve Open Market Committee meets today to decide their path for monetary policy, there’s great focus on whether they’ll change a few key words of their guidance language. Specifically, will they drop “considerable time” from the sentence wherein the telegraph their thinking about how long they’ll hold interest rates at around zero? EG, from their last FOMC statement (my bold):

The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time

I’ll share a few substantive thoughts in a moment, but I’m sure Chair Yellen and co. are looking for helpful alternatives, so here are some suggestions:

Go Zen: When the petals of the plum blossom cascade in the warm winds of future days, so too shall we be moved to action. [investors: note the usage of “warm breeze,” suggesting a spring liftoff…]

Go Brooklyn: Hey, fuggetaboutit…we’ll let yas know when we’re good and ready!

Go Greenspan-ian opacity: There is a frequency distribution wherein the optimal spectrum of rate movements exists alongside stochastic properties that guide a set of choice functions.

Go Logic problem: The FOMC is sitting around a large table. Janet, who wants a later liftoff, is sitting next to Bill, who wants a sooner lifter. Stan is next to Narayana, who wants an even later liftoff…etc…

Go Seasonal: “You better watch out, you’d better not pry, we’ll raise when we see, inflation’s white eye…”

Slightly more seriously, while it’s hard for normal humans to parse the difference between “considerable time” and “patience” (the lead candidate for the word change), such a change should be taken as guidance that they’re on track to raise rates sometime later next year which from my perspective seems like a big mistake.

The narrative around the rate liftoff has morphed into: if you’re hawkish, you’d like to see increases beginning in say Q2 of next year. If you’re a dove, then it’s Q3. But as far as the real economy goes, there’s no difference, especially considering that the magnitude of increases in the federal funds rate is likely to be quite small at first.

But why this obsession with raising at all in the near term? Even as US GDP and employment growth have accelerated, inflation remains extremely quiescent. I worry more about deflation than inflation. Look at the yield of the 10-year treasury, last seen at 2.05%, i.e., flitting around historical lows, implying low inflation expectations a midst strong demand for a safe harbor. Look at oil (from BLS this AM: overall CPI up 1.3%, yr/yr, on falling energy costs; core up 1.7%).

Look at “Strips“: my CBPP pal Chuck Marr sends me this from Bloomberg, telling of strong demand for these zero-coupon securities whose return is eroded by future inflation, meaning market actors are willing to bet real money that inflation will be low for years to come.

Couldn’t they be wrong? Of course, but that’s not what matters re Fed guidance and policy. What matters are market expectations for future inflation which are very clearly “well-anchored.” (BTW, this high Strips demand also implies investors are not worried about future deficits pushing up private interest rates—aka “crowding out.” Deficit hawks, if they’re still out there, really have little-to-nothing by way of evidence for this phenomenon.)

There’s still no wage pressure and no evidence that what wage growth we’ve seen is bleeding into prices. There’s still considerable room for non-inflationary wage growth: it’s been stuck at 2 percent annually but could grow 3.5 percent (productivity of around 1.5 percent + the Fed’s 2 percent inflation target) or even faster if there were some redistribution from the historically inflated profit share of national income into the depressed compensation share.

There’s still considerable slack in the job market, millions of un- and underemployed persons, and millions more who’ve left the labor market but might well come back in if demand would strengthen. Even under current conditions, there variables will take years to get to their full employment levels.

So, the petals of the plum blossom should stay on the damn tree. And as far as all this rate talk goes…fuggetaboutit!

An idea whose time has come: raise the federal gas tax. Also, an important, new-ish trend.

December 16th, 2014 at 9:20 am

Here’s an argument–raising the federal gas tax that’s been stuck at $0.18/gallon since 1993–that IMHO should be highly resonant right now with progressives, environmentalists, fiscally responsible types, those with common sense, and anyone else I’ve left out. Anyway, it’s over at PostEverything. There’s even some bipartisan support for the idea.

Let me add two pictures I left out of the piece. First, FWIW (and who knows, really?), here’s EIA’s forecast for gas prices over the next year. If they’re right, that’s another reason why a slow phase in of a small increase shouldn’t hardly bite consumers at all.


Second, and much more importantly, here’s a really remarkable trend that I’ve mentioned before but has been extremely persistent: the flattening of vehicle miles traveled since the last recession.


Source: US Federal Highway Administration. I’ve seasonally adjusted the data and run a filter to identify the trend.

I’ve run a smooth trend through the data but the flattening is evident either way. Obviously, income loss has played a role but even while you can see some cyclicality in the series, there’s nothing in there that comes close to the recent flattening (the trend reveals a slight uptick toward the end but you’ve got to squint to see it).

So what’s going on here? I don’t know and it certainly warrants some research, as this is an important change with economic and even cultural implications. I will offer an hypothesis: it’s what Ben Spielberg and I call “the inequality wedge” at work. This recovery has been unique, even relative to past deep recessions like the early 1980s double dip, in how little income has reached the middle class, as the wedge of inequality has diverted growth to the top of the scale.

This is known, but all the elasticities it triggers are not. For example, car travel at the margin may be more of thing for middle and lower-income than higher-income households. Since the FHA (the source of the data in figure 2 above) collect data by state (I believe) perhaps some enterprising researcher or student out there could create a panel data set of vehicle miles traveled in states over time to generate the variance necessary to see how that correlates with various relevant economic measures, like state-level wage, median income, or inequality measures.

[Brad Plumer also makes this argument, and very effectively.]