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View Full Version : Four Fed Bankers Discuss the U.S. Economy - What is your take on their statements?



FRED
11-19-06, 12:55 PM
The Women’s Economic Round Table (http://www.provisionaltruth.org/Archives/bulletinarchives.htm) sponsored a panel discussion in New York that featured New York Federal Reserve Bank President Timothy Geithner, former NY Fed President and FOMC Chairman Paul Volcker, former NY Fed chief and FOMC vice-chairman Gerald Corrigan, and former NY Fed President William McDonough. The discussion of monetary policy making amongst some of our most seasoned central bankers ran the gamut from inflation, to asset bubbles, to communications, to LTCM and hedge fund supervision.

Q: What worries you the most about the current economic landscape?

William McDonough: “The thing that worries me most–in fact, the only thing that worries me a great deal–are what are popularly called the global imbalances. The United States of America last year needed to import $800 billion of other people’s savings; six and a half percent of gross domestic product. Unlike the days of yore when it was rich countries that were exporting savings to poor countries, it is now emerging market countries–China, Brazil –which are not investing enough in their own societies and sending money to the United States. It seems to be a good deal. We are the importer of last resort. They want to export things. We have very well developed financial markets–very creative financial services companies. And, so we are the place to invest of last resort.

In my view, this is not in the interest of the United States. We are a country that has a very serious problem with our aging population, of which I’m part. The Social Security system and the Medicare system on an actuarial basis are both in deep bankruptcy. Therefore, it is not appropriate for us as a society to be living higher than we should on other people’s savings from poor countries. China has 400 million people living below the poverty line; 800 million people living in poor rural areas. It makes no sense that they have a trillion dollars in reserves and that we, the people of the United States, are living better as a result of it. We have to do a better job. They have to do a better job in managing their economies. This is a situation which, left to its own devices, is one that will hit a brick wall. The only question is when.”

Gerald Corrigan: “The first point I would make is related somewhat to the one Bill just made–its kind of the other side of it. That is that the United States savings rate is virtually zero. The household saving rate is negative. And for the reasons that Bill mentioned and a whole bunch of other reasons as well, this is a potentially very dangerous situation, not only in terms of economic and financial terms, but it brings with it, I think, some potentially very serious problems down the road in terms of the well being of our own citizens. You know, as I said, that’s very closely related to Bill’s point about imbalances.

Spartacus
11-19-06, 07:49 PM
but it's NOT savings that are being imported, is it?

It's not the bank deposit of a Chinese or Indian worker that's being lent to the US,

It's printing press output all around, going round and round and round.

Uncle Jack
11-19-06, 08:09 PM
This poll question looks very similar to the one I asked for the then-unknown interview, which I am still anxiously awaiting, with Martin Mayer.

jk
11-19-06, 08:16 PM
but it's NOT savings that are being imported, is it?

It's not the bank deposit of a Chinese or Indian worker that's being lent to the US,

It's printing press output all around, going round and round and round.

i believe that it IS savings. that's what a surplus means, isn't it? money earned which isn't spent. e.g., to focus on china, yes, the government prints yuan to buy the dollars earned by exporters. but household savings is quite high in china, notably because of the absence of governmental social insurance for medical care or retirement. [that's 21st century communism for you.]

Spartacus
11-20-06, 04:33 AM
you've clarified my thinking a bit

It's not individuals, each putting their own savings in the US after an economic calculation.

It's central banks and governments putting the money in, after their own self-interested calculation. So it may be savings, but it's not the savers sending the money over, it's people who've hijacked the savings.


i believe that it IS savings.

jk
11-20-06, 12:26 PM
you've clarified my thinking a bit

It's not individuals, each putting their own savings in the US after an economic calculation.

It's central banks and governments putting the money in, after their own self-interested calculation. So it may be savings, but it's not the savers sending the money over, it's people who've hijacked the savings.

sometimes it's asian central banks- that's what happens when the dollar is weakening. when the dollar is strengthening the cb's stop their buying, but then there has been private buying channeled through london and the caribbean offshore banking centers- likely some petromoney in there.

DemonD
11-22-06, 05:30 AM
I voted for hit a brick wall after 08

My reasoning is more or less the quote on the front page of itulip from Keynes.

"Markets can remain
irrational longer than you can remain solvent."
- John Maynard Keynes

This I take to mean going up or down. I don't think the chinese will make their big margin call on the dollar until AT LEAST 2008 because of the olympics, although of course the chance of an exogenous event is always there.

kelton56
11-27-06, 06:33 PM
In this roundtable discussion, former Fed chief Paul Volcker worries about two things: one, that he's not in Washington again running the Fed (!), and two, inflation.
His concern about inflation seems to be based on his observation that market participants are not concerned:

Mr. Volcker: "And I am impressed by the degree of pressure - if that’s the right word - psychological pressure, political pressure there is not to do anything about it (inflation). A lot of people out there on Wall Street and on Main Street are operating on the assumption that nothing very startling will happen in terms of restraint. And that’s reflected in attitudes pretty broadly. But once people are convinced that that’s the case, it can creep up on you. And the more it creeps up on you, the more difficult it becomes to do something about it.”

Current Fed chief Bernanke would appear loathe to intervene to burst an economic bubble, on the contrary standing ready to supply liquidity at such time any bubbles burst on his watch, as was evident in the latter Greenspan years.

At some point, however, the inflationary pressures of excessive liquidity build, notably wage and benefit costs, and, as Mr. Volcker noted, it becomes more difficult to restrain. This Fed does not have the flexibility enjoyed by Mr. Volcker, as our net (public) national debt, $900 billion in November 1980, now stands at more than $4.9 trillion, of which foreign holdings now approach 50 percent (17 percent in 1980).

I am inclined to agree China will not make any significant policy changes before the 2008 Olympics. I am more concerned China will be able to use its massive dollar/treasury holdings for political purposes in the future should the Chinese take issue with U.S. policies with which they disagree, such as pre-emptive regime change.

Finster
11-27-06, 07:11 PM
Are you sure it doesn’t go something like this … ?

phone confab, June 28, 2004, day before Fed meeting…



Poole: Whaddya think, Janet?

Yellen: Dunno, Bill.

Poole: We gotta make it sound like we care about inflation…

Pianalto (interrupting): What do you guys care? Big Al’s gonna make the call.

Poole: Aww, he’s into that "legacy" thing now. Ya know, barely eighteen months left. Keep the pedal to the metal and let the next poor chump deal with the mess…

Poole (continuing): … By the way, Ed, did you get your script yet?

Gramlich: Yeah, Dick sent it over yesterday. Don said Karl hadn’t sent his yet, though …

Pianalto: Talk about livin’ on the edge! You’d think it’d occur to these guys that somebody’s gonna be readin’ this stuff on the Internet one of these days … probably well before they’re six feet under, too…

Poole: ... Say ... anybody heard from Ben???