Bob spoke with Bloomberg's Tom Keene about the Fed's decision to lower its benchmark interest rate by half a percentage point to 3 percent, the risk of a U.S. recession and the outlook for the credit default swaps market. To listen to the interview, click here.
Today is the 49th anniversary of the day the music died, when a plane crashed in a snow storm killing Buddy Holly, Richie Valens, the Big Bopper, and the pilot. As band member Sonny Curtis later put it, "That'll be the day" came way too soon." Waylon Jennings wasn't on the plane because he "lost" a coin toss, reminding us all that we never really know when news is good or bad. I was a high school junior in 1959, and, of course, I liked Buddy, but those were the days of Elvis, Chuck Berry, Jerry Lee Lewis, and so forth. Elvis was king.
Many years later my appreciation of Buddy grew when I was in London and went to the play, Buddy, which had been running for years. I wouldn't have thought a play in London could capture the austerity of a small radio station in Lubbock, Texas, but it did. But, more than that, when the play ended, the reserved British were dancing in the aisles of the theater. Buddy ballooned in my estimation that night.
Some time later I was going to Lubbock to make a speech, and I asked someone to drive me by the cemetery that contained Buddy's grave. I had my picture made there, leaving guitar picks as was the custom, and later included that picture in my President's Letter in the Dallas Fed's annual report, alongside a picture of me at Adam Smith's grave in Edinburgh, Scotland. I thought those two heroes gave me balance.
Gary Bussey played Buddy wonderfully in a pretty good movie. My favorite scene was when Buddy and the Crickets went to New York to sign a recording contract. The host offered champagne for the occasion when Buddy said, "Make mine a coke," and one of the others said, "Make mine a Dr. Pepper." They were Texans all right. While I liked the movie a lot, it apparently contained some flaws that mattered to some people, like mountains in the background of Lubbock. To set the record straight, Paul McCartney produced and hosted The Real Buddy Holly Story, a documentary that included great footage and much reminiscing by Buddy's former band members, music producers and others.
You probably already know that the Beatles took their name from the Crickets, but there were more connections than that. Buddy had the first solid guitar they had seen with a gear shift on the side. He was one of the first performers to write and perform his songs; up until then you had your song writers and your singers. This inspired the Beatles to write songs as well as perform, according to McCartney. Buddy was also one of the first performers to wear his glasses while performing — black horn rims, no less. His example is reported to have given John Lennon the courage to do the same. There was more, but you get the point.
(Don't worry, I'll get to Greenspan later.)
National Public Radio thought it odd that a Reserve Bank President would put his picture at Buddy Holly's grave in his annual report letter. So, near the end of an interview about the economy, the host brought up the subject and asked if it was true that I had made a pilgrimage to Buddy Holly's grave. I told him it was true. He then asked me what Buddy Holly had contributed to the economy. I told him that Buddy's Rave On would have made a great anthem for the booming New Economy. That was a taping rather than a live interview. It ran two days later when, using the marvelous ability NPR has with sound and sound effects, as the interview drew to a close, Rave On, started up softly then reached full crescendo as the program ended. That was, without doubt, my finest hour. I had brought Buddy Holly back to radio.
As you might imagine, Alan Greenspan showed some curiosity about the Buddy Holly thing and, in particular, the annual report picture at Buddy's and Adam Smith's grave. So, taking the offensive, I proposed that the Chairman and I co-author an essay about Buddy Holly and Adam Smith, the father of Rock and Roll and the father of Economics. The Chairman graciously declined my offer on the grounds that his taste in music was more like Adam Smith's taste than mine, i.e. J.S. Bach. I wrote back and told him I'd heard of old J.S., but I thought Buddy had more hits.
Rave On!
For the second time in just over a week, I have proposed bold action for the FOMC, not really expecting them to take my advice. And for the second time in just over a week, they were even bolder than I recommended. That gave us what I thought we needed, but more than I dared ask for. What's going on here?
My first recommendation for a 50 basis points reduction in the target Fed Funds rate got us 75. Then, I hoped for another 50, predicted only 25, and we got the 50. I have been conditioned to expect excessive caution. I guess I need to be reconditioned, or, like the sexy woman in my GPS says when I don't take her advice, "I'm recalculating."
My probability for a recession keeps going from just under 50 percent to just over 50 percent. I had been encouraged by four consecutive declines in new claims for unemployment insurance, down to 301,000. Then yesterdays new orders for durable goods came in strong. But yesterday's advance estimate for fourth quarter GDP was a disappointing 0.6 percent, although that included significant inventory run down, which will be reversed.
Then jobless claims reported this morning jumped up by 69,000 and last week was revised down slightly. I guess the slowdown has finally softened the labor market. Still, I don't expect unemployment to go much over 5 percent in January, and a slight reduction wouldn't surprise me.
The large reductions in the target Fed Funds rate finally gave some needed upward slope to the yield curve which is very helpful to banks and other financial intermediaries that borrow short and lend long. Rate reductions in 1993 gave the yield curve a steep positive slope and finally ended the credit crunch that threatened to linger forever.
So, what about the fiscal package that just passed the House and is likely to go from bad to worse in the senate? Will it help prevent recession, or hurt?
There may be a very narrow sense in which it will help marginally by adding modestly to total spending. But, when you look at it more broadly and consider longer run consequences, the modest help comes at a high price in terms of increasing the budget deficit, implying higher tax rates down the road.
The rebates will be borrowed from one group of citizens and given to another group, with no incentive value at all. The net impact of that, we learned in Money and Banking class, depends primarily on what's happening with monetary policy at the same time. If monetary policy doesn't ease sufficiently, the borrowing will be from existing money and more spending by the recipients will be offset, or partially offset by reduced spending by others. You get a bit more expansion, but very little, if you finance with newly created money, but no newly created bank reserves. To get the maximum bang for the buck, the extra spending should be accompanied by an expansion of both money and bank reserves-a very easy monetary policy.
But, as I said in the previous posting (The San Diego Op Ed), if monetary policy is ideal, the fiscal policy will be redundant. Why not just go with monetary policy and keep the deficit lower?
Timing is another issue. We just had a dramatic example of how fast monetary policymakers can act once the make up their mind to. Fiscal policy takes much longer to put in place and may just add to inflation when it kicks in after recovery has started.
Some of the business portion of the fiscal package contain some incentive to invest and may do some good. However the good is not so good as to offset the bad of rebates. Those business incentives should be considered separately and should become a permanent feature of the tax code than a temporary feature. If we aren't careful we may hurt investment by promising incentives sometime in the near future.
We may or may not avoid a recession, but either way the economy is likely to be sluggish for a while. Not as sluggish, however, as it would have been without the aggressive monetary action. We need to monitor monetary policy carefully however, because of the exclusive focus on interest rates. The fundamental impact of monetary policy, especially on inflation, and on the monetary assistance given to fiscal ease, depend on the growth of the money supply. Narrow measures of money have been pretty flat lately. Broader measures of money have been growing, but not very fast.
Mr. Bernanke, don't take your eye off money. Here, as elsewhere, it pays to follow the money.
Bob discusses the Fed's decision to cut rates and the impact it has on the stock market in a radio interview with Small Business Advocate Jim Blasingame. To listen to the interview click here.
Originally appeared January 20th in:
(ri sesh' en): n. Econ. a period of general economic decline; specifically, a decline in GDP for two or more consecutive quarters
New incentives, not fiscal stimulus, are the best way to bolster a slowing economy
The recession watch has begun. With the second and third quarter real GDP - our most comprehensive measure of economic activity - coming in at at a robust 3.8 and 4.9 percent, respectively, we wouldn't normally be expecting a recession, but these aren't normal times. The steep housing slump is unlikely to reverse any time soon, and the head-spinning financial market turmoil triggered by subprime slime is bound to take its toll. Paper wealth is melting away. The unemployment rate, which had remained remarkably low and was the chief source of hope, surged in December. That light at the end of the tunnel now seems like a fast train to Georgia. Those good mid-year GDP numbers now remind me of the guy who jumped off a tall building and about half-way down said "so far, so good."
Monetary policy was late to the rescue, but it has been catching up with both traditional and new, creative measures to inject liquidity into the financial system. The Fed has cut its target federal funds rate, the rate at which banks borrow from each other. It has also cut its discount rate, the rate at which it lends to banks. It has liberalized loan terms and collateral requirements for those loans. And, finally, the Fed has literally been auctioning money to banks. It has eased policy substantially, but more ease is needed, sooner rather than later. Once the Federal Open Market Committee, the policy-making arm of the Fed, decides that a substantial move is warranted, I see little reason to wait for the next scheduled meeting at the end of January. Ben, use your speed dial.
One problem is that the Fed's policy tools aren't very well suited to the current crisis in financial markets. If the problem was a shortage of liquidity, it would be solved by now. The bigger problem is that lenders are afraid they won't be repaid, and the interest rate they won't be repaid at makes little difference to them. They worry about what land mines - read that subprime mortgages in mortgage-backed securities - are hidden in counterparties' balance sheets. This crisis is unique, but Fed actions, past and future, should help limit the collateral damage to the overall economy and ease the severity of the impending slowdown, whether it reaches recession proportions or not. Monetary policy is powerful medicine, and a little like sipping vodka: you don't feel it, then you are on the floor. But with monetary policy, as with vodka, memories are short.
With monetary policy not getting the job done, many are calling for fiscal stimulus - more government spending or lower taxes. But while fiscal measures to stimulate the economy are tempting, it's a temptation that should be resisted for several reasons.
First, is timing. By the time it is formulated, passed by Congress, and implemented, the fiscal measure may be the opposite of what is then needed. Second, fiscal policy doesn't work without the appropriate accompanying monetary policy, but if monetary policy is appropriate - meaning more aggressive - then it is probably sufficient without a fiscal component. Fiscal ease, or an increased budget deficit, without appropriate monetary expansion puts upward pressure on interest rates and crowds out private-sector borrowing and spending. We'd just end up substituting government spending for private-sector spending, not a good recipe for growth and prosperity.
Politicians say we should put money in the hands of middle-and low-income people because they are more likely to spend it that those with higher incomes. More redistribution may or may not be desirable for social reasons, but the idea rich folks don't spend their money is ridiculous. Their saving goes into a financial intermediary or financial instruments that provide funds for investment. Taking it to the bank rather than the store is just the first step. The rich generally don't put their money in mattresses.
Old-fashioned stimulus through more net government spending is a poor substitute for supply-side fiscal measures that increase incentives to work and produce. The most important and most effective fiscal measures for now and for the future would be to remove the threat of higher marginal tax rates on both labor and capital that would result from the expiration of the Bush tax-rate cuts. Those reductions should be made permanent as soon as possible, and even augmented, especially the taxes on capital gains and dividends.
Lower tax rates on capital is about as close to a free lunch as it gets. The lower rates, by stimulating more activity, almost always generate more tax revenue. Close behind making the Bush tax cuts permanent in importance would be to reduce significantly the corporate income tax, which is currently internationally noncompetitive, and eliminate the death tax, which dilutes and distorts incentives of small businesses to maximize output and employment. Tax credits for new investment, or the expensing of investment rather than depreciating it, should also be considered. For the longer run, of course, fundamental tax reform is needed - either a low flat income tax or a tax on consumption rather than income.
Professors at universities that don't have good football teams dismiss supply-side tax-rate cuts as ineffective voodoo. That myth stems partly from the fact that the Reagan tax cuts were overhyped and overpromised. Tax revenue didn't rise enough to overcome higher defense spending, but not working as hyped is different from not working. There are levels of tax rates on the Laffer Curve, which depicts tax rates and corresponding tax revenue, where lower tax rates would completely pay for themselves with more revenue, levels where they would lower revenue and levels where they would substantially but not completely pay for themselves.
We are probably in that third category where lower marginal tax rates would substantially, but not completely, pay for themselves. That's good enough for me. It may not be the proverbial free lunch, but it would be an awfully cheap lunch. If supply side marginal tax-rate cuts were good enough for John Kennedy and Ronald Reagan, I don't see why Congress can't get it together.
A new element has complicated the quest for policies to stave off recession - the weakening of an already weak dollar in terms of other major currencies.
The dollar is an important factor in the results of any policy action, and a strong dollar over time is a major positive for the U.S. economy. But, while I favor a strong dollar generally, this is not the time to give up the stimulative effects of the weak dollar. To paraphrase a famous prayer, "Lord give us a strong dollar - but not just yet!" The stimulus to exports and restraint on imports caused by the currently weak dollar is needed to offset housing and other weak sectors of the economy. The current level of the dollar should help our international trade balance for some time to come. For international capital flows, the expected direction of the dollar is more important than its current level; so, soon, if not already, expectations will turn and the dollar will climb back to its rightful place in the sun. We want that. But not just yet!
The bottom line on fiscal stimulus to stave off or ameliorate a recession is this: None is needed for that purpose that wouldn't be good policy under more normal circumstances. Low marginal tax rates on income, capital gains and dividends are always good policy and largely pay for themselves by stimulating economic activity. They need to be lower, but the first urgent priority is to avoid making them higher by letting the Bush tax cuts expire and to make that clear as soon as possible to end the uncertainty.
Corporate tax rates should be lowered at least to the level of those of our trading partners and lower still if we can get our minds around the fact that corporations don't pay taxes, people do. Death taxes are the final insult, coming at an awkward time and on top of all the taxes already paid over the years as income was earned and assets were accumulated. How many more family businesses must be sold or broken up to pay the tax?
Eastern European countries are way ahead of us in fundamental tax reform as they implement flat, low income taxes. Do we have to sink to their previous levels before we have the courage to implement fundamental reform? When will we learn that what is taxed is destroyed; so taxes on consumption that exempt saving is key to continued dynamic income expansion. We don't need election-inspired makeshift rebate goodies from Washington under the guise of economic stimulus. We need to get real with fundamental reform worthy of this great nation.
In honor of Martin Luther King and in observance Martin Luther King Day, I'm reprinting below a speech I gave on MLK two years ago when I was Chancellor of the Texas A&M University System. It and other old speeches and articles may found on my personal web site http://www.bobmcteer.com/.
Bob McTeer
January 16, 2006
Sulphur Springs, Texas
It's an honor to be invited to talk about Martin Luther King on Martin Luther King Day. But, frankly, I don't know why you invited me, of all people. But I accepted your invitation because it is an honor. And it just seemed like the right thing to do.
I greatly admired Martin Luther King, especially in the early years of the civil rights movement, but I've never mentioned that publicly. My invitation must be based on the fact that Dr. McFarland was a previous speaker and did a good job. So, if the president of A&M-Commerce did a good job, then maybe the chancellor would too.
Maybe, but that logic is suspect since university presidents are probably more scholarly than chancellors. That's certainly true in this case. You may not know what a chancellor's job is. I didn't until Mark Yudof, the chancellor of the University of Texas System, explained it to me. He said being chancellor is like managing a cemetery: There are lots of people under you, but most of them aren't listening.
I admired Dr. King, both the man and his work. But I never marched with him, or against him. I was on his side: for desegregation, for an end to discrimination based on race, and for equal rights. I was against separate public bathrooms, separate water fountains, and separate and unequal schools-the most visible signs of discrimination at the time.
I was a supporter, but I watched the civil rights movement on television, as a spectator.
There were no marches or sit-ins in my little town in the foothills of north Georgia. This part of the state had never been plantation country, so we didn't have rich whites and poor blacks. In my little town of Ranger, we only had poor whites. And no blacks at all.
I attended grade school-it was called grammar school back then-in a three-room schoolhouse in Ranger, Georgia, population about 100, maybe a few more. As I said, there were no black families in Ranger. I went to high school five miles south in Fairmount, which, I believe, had three black families. I remember that because my school bus passed their houses on the way to school. I don't know if they had school-aged kids, but, if they did, they went to the black school in the county seat of Calhoun, 18 miles to the west. Both my grade school and my high school got consolidated away, so now everyone travels 20 miles to Calhoun's consolidated and integrated Calhoun schools.
I just used the term "blacks" and "black families." I trust that's not offensive to anyone. Back then the proper term-and the term Dr. King used-was "negroes." Today it's "African American." Since this is an historical account, I'm using the term that emerged during the civil rights movement.
Martin Luther King Jr. was born in Atlanta, about 75 miles south of Ranger, on this day in 1929-77 years ago. He attended Morehouse College in Atlanta and studied theology at Boston University. Like his father and grandfather before him, he became a Baptist preacher.
On December 1, 1955, Rosa Parks-who died last October at age 92-refused to give up her seat on a Montgomery, Alabama, bus to whites. (For perspective, this was just over a year after Brown vs. the Board of Education.) 26-year-old Martin Luther King, a local pastor and member of the Montgomery Improvement Association, was drawn into the ensuing bus boycott and, as they say, the rest is history. I was barely 13 at the time, and had been baptized as a Baptist four months earlier in a muddy creek behind Liberty Church outside Ranger. A deep-water Baptist!
I mention my Baptist credentials so I can tell a Baptist joke, hopefully, without getting into trouble:
They say being Baptist doesn't keep you from sinning; it just keeps you from enjoying it. That's why you can probably classify me now as a backsliding Baptist.
On occasion, one might have classified MLK the same way, but that doesn't take away from the greatness of the man, in my opinion. If we set the bar for our role models and heroes too high, I'm afraid we won't have any. You don't have to be perfect to be great.
In an interview years later, they asked Rosa Parks if she kept her seat on the bus because she was tired. She said no, she was just tired of giving in.
MLK emerged from the successful Montgomery bus boycott, which lasted over a year, as a civil rights leader.
He became the founding president of the Southern Christian Leadership Conference (SCLC) in 1957.
His belief in nonviolent tactics was based in part on Gandhi's teaching, and a trip to India in 1959 strengthened that commitment.
He didn't initiate or lead the sit-in movement (at lunch counters and the like), but he got drawn into it by activists in SNCC, the Student Nonviolent Coordinating Committee.
He was arrested in October 1960, during an Atlanta sit-in, just before the presidential election. John Kennedy called King's wife, Coretta, to express his concern. This attention reportedly helped get King released, and probably helped Kennedy get elected president.
By then, I was a freshman at the University of Georgia and voted for Kennedy in that, my first election-partly because he seemed stronger on civil rights and partly because my Dad had always voted for the Democrat, whoever he was, because, in his words, "Democrats are for the little man." My Dad dropped out of school in the seventh grade to work in the sawmill. He always considered himself a little man. He was a very smart man who was borderline illiterate, and I'm here today because of him.
(But I still don't think it was smart for him to allow his vote to become automatic-to be taken for granted. Especially if it's based on the slogan of a past era.)
That January-on January 9, 1961-the University of Georgia was integrated by two black students: Hamilton Holmes and Charlayne Hunter. He later became a doctor in Atlanta, and she made it big in journalism as Charlayne Hunter-Gault on The NewsHour with Jim Lehrer.
Hamilton Holmes registered for the psychology class I was taking. As I recall, he sat apart from the other students, and they (that is, we) pretty much ignored him. I wish I could report to you that I went out of my way to make him welcome, but honestly, I felt like I was just barely hanging on myself as a freshman from a tiny rural town in a big university. I didn't do anything ugly. I just didn't do anything, and I was typical. If I was feeling overwhelmed, think how he must have felt.
Looking ahead two years, I sat next to Harold Black in an international trade class. Harold told me he had been the third black student at UGA, and we became classroom friends of sorts.
I stayed at Georgia and got a Ph.D. in economics. He left and got his Ph.D. in economics from Ohio State. He'd told me he'd been subjected to some minor harassment early in his freshman year-people banging on his dorm room door and so on-but it was not too bad. What I admire most about Harold is that he says he has fond memories of his Georgia days and he doesn't hold a grudge. I believe he sent his daughter to Georgia.
[As a footnote, so did Hamilton Holmes, who graduated Phi Beta Kappa, went on to Medical School at Emory in Atlanta, and latter became an ardent UGA supporter. He died in 1995 at age 54. Georgia named a professorship after him in 1999 and named the academic building after him and Charlayne Hunter in 2001, on the 40th anniversary of their arrival.]
Back to Harold Black. At one point, I thought I'd probably lost his friendship when he asked me to sign a petition to bar the ROTC from campus. I declined to do so, but he didn't take it personally. Following several important positions in government, Harold has been in recent years a professor of finance at the University of Tennessee, another one of those schools that wear those awful orange-colored football jerseys. In preparing these remarks, I googled Harold and his picture indicated that he has lost more of his hair than I have.
Harold's asking me to sign the ROTC petition created quite a moral dilemma for me. I wanted to support him as a friend, and, frankly, as a black student in a white school. But I didn't see the connection with ROTC, one way or another. Later on, of course, Martin Luther King presented the country with the same dilemma by bringing Vietnam into the Civil Rights Movement. More about that later.
Charlayne Hunter had a rougher start at the University of Georgia. One night during her first or second week, Georgia lost a basketball game, and as the upset fans piled out of the arena, someone yelled out, "Let's go to Center Myers"-which was her dormitory. A crowd of students and locals gathered there, threw some rocks, broke some windows and made news acting like the redneck idiots they were. My roommate and I were in our room, listening to it on my portable radio. He wanted to go over there and watch-just watch, he promised. I wouldn't go. So he called me a bad name that you can imagine.
After the first couple of weeks, I don't recall much fuss about race or desegregation on the Georgia campus. I graduated in 1963-the year James Meredith entered the University of Mississippi with the help of 5000 federal troops-and won a fellowship to stay at Georgia for graduate school.
When my fellowship ran out in 1966, I became a full-time instructor for two years and didn't leave Georgia until August 1968, about four months after King's assassination at age 39. So his remarkable civil rights career began when I was roughly 13 and ended just before I was 26. Where I was and what I was doing are, of course, not important, but it helps me keep track.
As a civil rights leader, Dr. King had his failures as well as his successes. Through it all, he adhered to a nonviolent approach, despite the urgings of more militant leaders like Malcolm X and Stokely Carmichael. He achieved a great victory in Birmingham in 1963 when his organization, the SCLC, orchestrated a series of clashes with the police. Remember Bull Connor? The use of police dogs and fire hoses on peaceful protestors attracted much media attention and national sympathy and prompted President Kennedy to introduce major civil rights legislation in June 1963. Kennedy was assassinated that November, and it was left to Lyndon Johnson to get the legislation through Congress the following year.
King's most famous and most-quoted writing was his letter from the Birmingham jail in 1963, in which he defended the use of civil disobedience to unjust laws.
His most famous speech also came in 1963-his "I Have a Dream" speech, following the march on Washington.
Time magazine, fittingly, named him "Man of the Year" for 1963.
1964 wasn't a bad year either: He became the youngest person to win the Nobel Peace Prize, at age 35.
Voting rights protests and the march from Selma to Montgomery, Alabama, came in 1965. That August, President Johnson signed the Voting Rights Act.
King took a major turn in 1966, moving into a Chicago ghetto and launching a campaign against poverty.
He also became increasingly vocal against U.S. involvement in Vietnam and delivered a strong antiwar speech at Riverside Church in New York on April 4, 1967.
His antiwar stance attracted more attention from J. Edgar Hoover's FBI, which used bugs and wiretaps to find something damaging.
Dr. King became involved in a Memphis sanitation workers' strike in April 1968. On the evening of April 3, he made the following familiar comments regarding his optimism for the future despite the obstacles that lay ahead.
He said . . .
". . . it really doesn't matter with me now, because I've been to the mountaintop . . . and I've seen the Promised Land. . . .
I may not get there with you. But I want you to know tonight, that we, as a people, will get to the Promised Land."
He was murdered the next day, on April 4, 1968, as he stood on the second-floor balcony of his room at the Lorraine Motel in Memphis, Tennessee.
He was only 39 years old.
Martin Luther King Day was first celebrated in 1986.
So far I've been summarizing facts that many of you remember, at least vaguely.
It goes without saying that I was, and still am, a great admirer of Martin Luther King.
He was a great man, a great leader, a great orator-right up there with Winston Churchill.
When I taught a weekend mini-course on public speaking at Johns Hopkins University in the 1980s, I assigned his speeches because I considered them some of the most eloquent ever written.
Earlier I said I admired Martin Luther King, especially in the early years of the civil rights movement.
What I meant by that qualification was that in the early years, he was trying to right clear wrongs, to end racial discrimination and demeaning treatment, and promote equal opportunity and respect for all.
His philosophy was to turn the other cheek, despite attacks by thugs with badges and their dogs.
He avoided returning violence that would likely have caused many more casualties and polarized the nation rather than won its support, as he did.
His message was accepted not only because it was right, but also because it was pure and unencumbered by extraneous issues. He fought clear and plain evil in those early years.
I personally thought it was a mistake for him to mix his messages in his later years and put our Vietnam efforts and fighting poverty on the same plane with ending racial discrimination.
Many others and I believed at the time that our cause was noble in Vietnam-that what we were trying to do was right, even if we weren't doing it very well. I think King's position on Vietnam muddied his message on civil rights.
Public opinion on Vietnam after all these years has moved in King's direction. History will probably declare him right on the war, but I still think our cause was noble and that millions of people would have been better off had we won. But in the context of tonight, I just want to offer the opinion that Vietnam diluted King's main message, which was a purer and more righteous message.
Similarly, I also thought it was a mistake for him to take on some of the economic issues that he made part of his movement.
Make no mistake about it: We are all against poverty and unemployment, which were especially severe among his people, and still are to a lesser extent. His goals were and are shared by all people of goodwill.
The problem comes not with the goals of ending poverty and unemployment but with the means of doing so-with the economics.
Good people disagree on that-especially economists, even good economists.
You've all heard the economist jokes.
One is that if you laid all the economists end to end they would never reach a conclusion
My point here is that those who care the most don't necessarily have the best answers. Some well-intentioned remedies end up doing more harm than good.
I would even define economics as the study of unintended consequences.
President Kennedy's assassination left it to President Johnson to get most of the civil rights program through Congress.
Having been Senate majority leader, Johnson was good at that, perhaps too good.
The Civil Rights Act was needed. The Voting Rights Act was needed.
My Dad, in his Truck Stop, needed the Civil Rights Act as an excuse to do the right thing.
But laws have their limits.
You can't eliminate poverty by making it illegal, and you can't achieve prosperity by voting for it.
Attempts to do so generally run afoul of the law of unintended consequences.
Economists generally agree, for example, that legislating higher minimum wages can raise wages for a few while contributing to the unemployment of many.
Getting the incentives right can create a needed safety net for the poor. But getting the incentives wrong can lead to welfare dependency for generations of the poor.
I don't mean to turn this into a polemic on economics.
My point is simply that the drive for freedom and the end to discrimination is probably more successful if it doesn't become part of a larger ideology with unrelated features that weaken the total message.
I don't know what Martin Luther King would say about some of the major issues of today.
But because he was a very intelligent man, I believe his thinking would have evolved with the times, with changing facts and circumstances, and with our better understanding of economic issues.
If he were here today, I think he would say the job is not finished, that more needs to be done.
But I think he would also recognize the enormous progress that has been made.
I think he would caution his people against thinking of themselves as victims-even though they have been victims-and urge them to take responsibility for their progress and prosperity.
It takes time. Usually generations.
I'm relatively prosperous. I have a good job.
But I can't take much of credit for that. Most of the credit goes to my Dad, the seventh grade dropout who quit school to work at the sawmill.
From the time I can remember, he told me I had to go to college so I wouldn't have to work as hard as he did.
I assumed I had no choice in the matter.
He saved enough money to start a gas station and saved enough there to build a truck stop, which is where I grew up-raised by my folks and long-haired waitresses.
The truck stop was successful enough to send me to college before Interstate 95 bypassed it and drained off its business.
We are all poor until someone steps up and, with sheer will, decides to break the cycle of poverty.
Government safety nets are needed to catch us if we fall, but we can't depend on them to help us soar.
That depends on us, with the help of our family and friends.
Martin Luther King was a great man. A great leader.
He gave his people freedom and dignity and a more level playing field.
He gave his people a beginning toward the good life.
I'm not sure what a 77-year-old Martin Luther King would say if he were here tonight.
But with more eloquence than I could ever muster, I think he would say something like the following to his people:
Don't forget the past, but don't dwell on it.
Continue to seek justice, but look inward and to God for the strength to move onward and upward.
Don't use the past as an excuse for failure in the future.
Use the past as an incentive to break the cycle of poverty through education, dedication and hard work.
Take responsibility for your own progress and success.
What I will leave you with tonight is that I hope we in the Texas A&M University System can help in the noble quest.
We have nine universities-not as many flavors as Baskin- Robbins, but enough to meet diverse needs.
The closest is Texas A&M Commerce, but they are all in Texas.
We have Texas covered.
We are proud that a high percentage of our students are first-generation college students, just as I was.
We want to help.
I can't think of a better way to celebrate Martin Luther King's birthday than to be here with you tonight.
When regular loans
Don't earn enough to suit us
Maybe bad loans will.
I'd never heard of Haiku until a Wall Street Journal article in the early 1990's described a large group of financially strapped Japanese businessmen gathered in an auditorium taking turns singing the blues, as it were, in classic Japanese Haiku. It was sad–sad and lonely–and eloquent.
I looked it up, but decided Haiku was too sophisticated for a country boy, with its rigid syllable count, its absence of rhyme, but the presence of an undefinable zen quality. Not rhyming, I'm told, is sophisticated in the same sense as art that doesn't look like anything. I can imagine enjoying it, but how would you judge it? I can at least imagine learning the rules of rhyming, but what are the rules of not rhyming? Not everyone agrees, you might be surprised to learn, that rhyming is low-brow. I think it was Robert Frost–no Bubba–who said that writing prose was like playing tennis without a net. But my first Haiku, like Buck Owens acting sad and lonely, came naturally:
Japanese Haiku
Is too sophisticated
For a country boy.
What stirred all these memories up was another WSJ article about the financial blues expressed in verse, but these blues were made in the USA. What is it about financial distress and poetry? As the current subprime crisis developed, my mind did turn to a poem from my early years that dealt with risk management and moral hazard. Its author, Joseph Malins, describes a town's dilemma over what to do about a dangerous cliff that had already claimed a number of lives. The question before the community was whether to build a fence at the top of the cliff or place an ambulance at the bottom. Here is the first verse of A Fence Or An Ambulance:
'Twas a dangerous cliff, as they freely confessed,
Though to walk near its crest was so pleasant;
But over its terrible edge there had slipped
A duke and full many a peasant.
So the people said something would have to be done,
But their projects did not at all tally;
Some said, "Put a fence around the edge of the cliff,"
Some, "An ambulance down in the valley."
It was a close vote, but they finally chose the fence with the following rationale:
"To rescue the fallen is good, but 'tis best
To prevent others from falling."
Sometimes a rhyme can capture the essence of mundane business matters like, say, Sarbanes-Oxley, or, in this case, the endless "attesting" requirements of COSO. Those attesting requirements were anticipated by Ogden Nash in The Python. See if you don't agree:
The python has, and I fib no fibs,
318 pairs of ribs.
In stating this I place reliance
On a seance with one who died for science.
This figure is sworn to and attested;
He counted them while being digested.
Ogden Nash understood banking and finance. Banks current reluctance to lend, except under ideal circumstances, was captured by his poem, Bankers Are Just Like Anybody Else, Except Richer. Bank customers probably appreciate it more than bankers, however. Here is an excerpt:
Most bankers dwell in marble halls,
Which they get to dwell in because they encourage deposits and
discourage withdralls,
And particularly because they all observe one rule which woe
betides the banker who fails to heed it,
Which is you must never lend any money to anybody unless they
don't need it.
Texas style cowboy poetry has fewer references to evil bankers and other money lenders than one might expect since running money is a lot like running cattle. In both cases it pays to look back occasionally to see if the herd is still with you. Investors can learn an important lesson in herd behavior that cowboys already know: If you are following a cow, chances are it's following a cow too.
I've seen one cowboy poem devoted to the contemporary issue of collateral, but I can't find it. Anyway, it starts of with the banker requiring collateral from a cowboy–his cows–for a small bank loan. The cowboy was insulted by the implied lack of trust and the banker's unwillingness to make him a character loan. So, when the cowboy paid the loan off, on time, and the banker urged him to keep his deposit account in his bank, the cowboy asked the banker what he would be using as collateral. Life does have its small satisfactions.
I'll leave you with one more subprime verse:
My house is under water, for sure,
And my car is upside down, you bet,
But I'm going to get me a consolidation loan
And finally get out of debt.
It's not Haiku, but it'll do. After all, as Ogden Nash put it so eloquently,
Purity
Is Obscurity
Happy New Year Everyone!
Bob McTeer
Sorry about the delay. I haven't been on the Canadian border arbitraging books in U.S. and Canadian dollars as I had threatened to do. Instead, I participated in a Forbes/NCPA Investor Cruise through the Panama Canal. Very nice. Good folks; interesting program.
But the program left me in a bit of a funk. I had friends on opposite ends of the optimism/pessimism spectrum speaking with passion and absolute certainty about current and future economic prospects. At one end, my friend Gary Shilling said we are going to hell in a hand basket, things can only get worse, the Fed is behind the curve and has much more easing to do. He didn't honey coat his doom and gloom.
All the other speakers were less pessimistic than Gary, most particularly, Brian Westbury, another friend, who focused on inflation rather than the subprime crisis. He said, very emphatically, that the Fed shouldn't have eased at all to deal with the subprime fallout and certainly shouldn't ease more. He had some rather colorful unkind things to say about our beloved central bankers; I don't think he expects them to go to central banker heaven. Having sat around the FOMC table with Alan Greenspan for 14 years, including 3 with Ben Bernanke, my knee twitched a bit, but didn't go into full jerk mode. Since I'm long gone from the Fed — well, just over 3 years now — I'm not sure why I still feel unfair criticism — or partially unfair criticism — in my gut. On the other hand, maybe I was just suffering from the motion of the ocean. (See my posting: "The Blame Game.")
My funk resulted partly from the fact that either Gary or Brian could be right, but I didn't know which one. Like an old-line Texas politician, "I can argue it round; or I can argue it square." That's about where I am these days, hearing all black and white and coming out grey. I've always avoided the two-handed economist approach, which drives listeners mad and harms my self esteem. Splitting the difference and taking a middle-of-the-road approach isn't satisfying either, especially in Texas where they say the only things found in the middle of the road are yellow streaks and dead armadillos. Remember the old cowboy movies where the bad guy in the black hat always called the good guy in the white hat "yellow"? A yellow streak is not good.
Actually and unfortunately, I'm forced to go with grey, bland shades of grey. Nobody wants to hear it, but I expect the economy to do better than the pessimists expect, but not as good as the optimists expect. Not in the middle of the road, but the middle of the optimistic half of the road. I'll admit that's based more on a hunch and hope than on rigorous analysis. But my hunches are educated hunches, if I have to say so myself.
I'm not alone in my uncertainty. The dirty little secret is that economists just aren't good at forecasting. They know it and most will admit it, but the public, employers of economists, and talking-head interviewers all expect forecasting; so, in good Keynesian fashion, demand creates its own supply. Smart economists have figured out, however, that, if you must forecast, it's best to do it late and often. The FOMC recently caught on and promised release of quarterly rather than semi-annual forecasts, cutting their average embarrassment time in half. They also foolishly expanded their forecast horizon to 3 years out, revealing in their 2010 forecast a very pessimistic view of productivity expectations and the growth potential of the economy. (See my previous blog posting: "The FOMC's Enhanced Transparency Reveals Old Paradigm Pessimism.")
I recall the last time the Fed and Fed watchers were on recession watch. It was late 2000 and all of 2001. Each quarter would produce a barely positive real GDP number — not good enough for anything else, but good enough to avoid the dreaded two consecutive negative quarters that would constitute a recession. We kept dodging the bullet until 9/11 tipped the third quarter into negative territory, the first one. Everyone expected, a more-negative 4th quarter, but surprise, surprise, thanks largely to zero interest auto loans, the quarter was positive. The 4th quarter of 2001 was the beginning of the current expansion, which is now six years old and counting. The 3rd quarter of 2001 was the only negative quarter! No recession! No recession that is until the National Bureau of Economic Research later decided retroactively that a recession began as early as March 2001 and bottomed out in November. The recession was ending about the time we thought it was beginning. Makes you think, doesn't it?
I don't think that will happen this time, since 3.8 percent and 4.9 percent real GDP growth in the 2nd and 3rd quarters of 2007 would be hard to revise to zero or below. But many talking heads started talking about a 1 percent 4th quarter number as early as October, months before the Bureau of Economic Analysis releases their first forecast of the 4th quarter.
This morning's newspapers (December 26) "confirmed" the expectations for a weak Christmas season. Not so if my mall is any indication. Besides, we will join millions of smart people in the coming days buying on sale what was full price through yesterday and using all those new gift cards, which apparently don't count in official retail sales numbers until they are spent on merchandise.
The early and unexpected bounce back in economic activity in the 4th quarter of 2001 was only one of several convincing pieces of evidence of the remarkable resilience of the U.S. economy in recent years. We seem to have a Timex economy: it takes a licking, but keeps on ticking. The proven resilience of the U.S. economy, my friends, is the main reason I don't expect extreme pessimism to win out. Not very scientific, is it? Sorry Gary.
But neither can I be as optimistic on the economy, and as worried about inflation, as Brian Westbury. Maybe too many seeds of inflation have fallen on fertile ground and will have to be dealt with eventually. But given the balance of risks that most people see, including me, I can't imagine that the FOMC will risk looking back on 2007-2008 and admitting that it let the sub-prime crisis get out of control while it fretted about inflation. They won't be fiddling while the economy implodes, and if the economy turns out to be weaker than they expect, it will dampen inflation on its own. Of course, either way, the Fed will be criticized for the downside of the choice it makes as well as the downside of the choice not made. Time will tell and reveal the final verdict on Ben Bernanke's performance. I'm betting on him.
Happy Holidays.
Transparency is a good thing if you like what it lets you see. In the making of monetary policy, that's a big if. Transparency is Mom and Apple Pie these days, but I think the exuberance is, if not irrational, at least excessive. This little rhyme, repeated from my previous posting, reflects my skepticism:
Transparency is a current central banker cause
But it reminds me too much of sausages and laws
I think translucence, like my shower door, is a good compromise
It lets in the light, but keeps out the flies.
If you must forecast, I've learned, it's best to do it often. Increasing the number of FOMC member forecasts from two to four per year was a clever idea. It is more transparent, but it's also easier. You get to adjust an errant forecast twice as often and in half the time.
The FOMC's mistake, in my opinion, was extending the forecast horizon out to three years. Given each member forecaster's assumption of "appropriate monetary policy," however they define it, three years is long enough for policy to do all that policy can do. It's long enough for initial adverse conditions to be overcome. What's left in that third year forecast is the FOMC's implicit view of the best it can do, or the limits of the economy — it's capacity to produce without causing inflation to accelerate. I call that a mistake in part because their view, revealed by their latest forecast, is so dismal. I can't find a Goldilocks economy anywhere on their horizon.
Their range of forecasts for real GDP growth in 2010 is a puny 2.2 to 2.7 percent, with a central tendency of 2.5 to 2.6. That growth rate is assumed to produce an unemployment rate of 4.7 to 4.9 percent, above the current rate, and a core PCE (personal consumption expenditure) inflation rate of 1.6 to 1.9 percent. The core PCE forecast is about the same as today, although they also have the number for the headline rate the same, which is lower than the current number, but that doesn't mean food and energy prices come back down. It just means they aren't expected to continue rising as fast. If 2010 is Goldilocks, as Lyle Lovett might describe her, she's ugly from the front.
A 2.5-2.6 percent growth rate in 2010, which can be interpreted as the FOMC's estimate of the economy's growth potential, can be expressed as the sum of labor force growth (hours worked) and productivity growth (output per hour worked). The labor force typically grows about 1 percent per year. That means that productivity growth is expected to slow to around 2 percent per year. Why so low? As I used to say prior to the late 1990's productivity revolution, trees grow faster than that.
The natural rate of unemployment implicit in the forecast has risen to almost 5 percent. Since both growth and unemployment are currently more favorable than their 2010 growth and unemployment estimates, it's no wonder the FOMC is concerned about inflation.
These numbers mean we're already over the speed limit for monetary policy. If they try to enforce such a low speed limit, they could create a self-fulfilling prophecy. That possibility, to me, calls into question of public forecasts by policymakers. The path they've outlined is one of managing slack in the economy to hold down inflation. I'd rather see them control inflation through growth — disinflationary growth.
We had this debate in the late 1990's, and the optimists won out (until June 1999). Because of that, an artificially low speed limit wasn't enforced, and the result was faster real growth, faster employment growth, lower unemployment, and lower inflation. I hope we aren't back to underestimating the U.S. economy.
Chairman Bernanke this morning announced further steps in the Fed's long march toward greater transparency in monetary policy and gave the rationale for it. Since each step toward greater transparency is almost always universally applauded by those to follow such things, I suppose they must be on the right track. Everyone can't be wrong, can they?
Yet, a little voice in my head keeps asking, rather pointedly if I may say so, whatever happened to the argument that an element of surprise is sometimes needed for the Fed to have a significant impact on the market. That was once conventional wisdom, but it's rarely articulated any more. In fact, I've only heard the surprise argument made once in the last several years. Fortunately, from my point of view, it came from a cracker-jack economist for whom I have the highest regard: Russell S. Sobel, an economics professor at West Virginia University and co-author of Economics: Private & Public Choice.
When I sat around the FOMC table, I didn't actively resist steps toward greater transparency, but I did keep reminding my colleagues against going too far too fast, and that we may need an element of surprise some time. Since my more serious efforts bore no fruit, I wrote the following little poem and let it go at that. It's already on my web site under the "Rhymes with No Reason" section. I reproduce it here for your convenience and enlightenment.
Translucence: Measured Transparency
Transparency is a current central banker cause But it reminds me too much of sausages and laws I think translucence, like my shower door, is a good compromise
It lets in the light, but keeps out the flies.
