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Came across this section while reading Third Ave value shareholder letter (like to read what Martin Whitman has to say). Probably nothing itulipers don't know. Interesting read nonetheless.
THE PRACTICAL LIMITATIONS OF THE FEDERAL RESERVE
There is a great game for your iPhone called “Akinator, the Web Genius.”Akinator is a computerized genie armed with the pop cultural knowledge of millions of users. Akinator leads a 20 questions style game where the user thinks of a celebrity and the Akinator attempts to guess who it is. This game can make a 10-hour car trip between New York and Boston with kids feel more like a four-hour trip. I became a hero in my12-year-old daughter’s eyes last month when I beat the computer. It was as if I were Kasparov beating Deep Blue, except that my daughter cares about neither one of those things.
As with chess and Jeopardy, the computer usually wins. Then, the computer gloats by telling you how many people picked the same celebrity you did.You picked Justin Bieber? So did half a million other people. Thought you were a clever child of the 1970s by picking Miss Piggy? 100,000 others did as well. Oh, and 10,000 people picked Alan Greenspan and 3,000 people picked Henry Paulson; so, even the investment world has its pop icons before you go wasting your time trying to stump the computer with George Soros. I did stump the computer, though.I beat its crowdsourcing. Paul Volcker. The computer, so well versed in Maroon 5 band member names, thanked me for introducing it to the
former Chairman of the Board of Governors of the United States Federal Reserve System, themanwho tamed inflation
and created thefoundations ofthemodern economy.
To those of us interested in investments and the policies that affect them, Volcker is well known.His keynote appearance at the 2013 Third Avenue Value Conference helped to draw approximately 350 attendees who listened quite attentively to his 90-minute talk with me over lunch. But to the general public, Volcker seems little known by those who did not live under his policies and he remains little liked among
many who did. Here is a man presented with a near impossible task (taming double digit inflation) who had at his disposal only an arsenal of weapons that would, in the short term, hurt the patient he was trying to cure.Volcker raised interest rates to the point that, late in his second term at the Fed, the U.S. Treasury sold a 30-year bond with a 16% interest rate. The last of the double-digit Volcker bonds are still trading.
Volcker is a proud man with a strong sense of decorum.He would not wade into the muck of where interest rates will be a year from now or three, nor does he even pretend to know. He had little to say about Alan Greenspan, Ben Bernanke or Janet Yellen except to wish them all well.
However, he has plenty to say about the Federal Reserve, what it exists to do and what we Americans expect from it. He believes that the Fed’s dual mandate (to maintain price stability and maximum employment) is dangerous. Employment, and every other economic goal, he says, should follow from price stability. Get that right, says Volcker, and everything else will fall into place as best it can in an imperfect system.Volcker is no wide-eyed Utopian.
In the old days, the Fed Chairman could act without having to explain much to Congress, much less to the people. Fed Independence meant independence from politics.We now live in an era of high transparency where no institution of influence can claim independence from the public’s eye or the public’s government. If we look at Japan, we see that Prime Minister Shinzo Abe is working in concert with the
Bank of Japan to coordinate and execute an economic stimulus program meant to end deflation once and for all. The bank and the government are no longer independent, they are an unabashed team, working towards the same goal.They are following a playbook that has its roots in the academic work of Bernanke, who said that Japan should have done something like this ages ago. Meanwhile,
Bernanke has complained often since the Financial Crisis that the Federal Government has pursued austerity that has been contrary to the Fed’s Quantitative Easing programs and extraordinary stimulus measures.
Meanwhile, Fed critics want more transparency.They want interest rate targeting and maybe even GDP targeting and unemployment targeting. Give the markets a signal, they say, and uncertainty will be reduced, bringing volatility down with it. Volcker never worried about such things. He concentrated on long-term policy, not short-term signaling.
Economic historians will likely remember Bernanke as the Fed Chairman who used an economic crisis to expand the powers of the Fed. Under Bernanke, the Fed has infused insurance companies with money. It has invested in mortgage-backed securities. It has become not only a
regulator of the economy, but a regulator of the financial sector. Bernanke has been an activist Fed Chairman, struggling mightily, as Volcker did, against seemingly insurmountably problems.
The results, though, have been middling. We escaped the Great Recession of 2009, but growth has failed to reach desired levels. Five years after the collapse of Lehman Brothers, unemployment remains higher than average. There seems to be little more that the Fed can do. Anemic growth might be the upper bound of the results the Fed can achieve through its policymaking.More worrisome, the Fed seems to have few options if some exogenous shock were to knock the economy back into a recession.
Volcker’s answer is that we stop expecting so much from the Fed.The Central Bank cannot solve all problems and probably should not even be trying. Yellen, Bernanke’s chosen successor, has signaled that she will follow his path. Some day, though, Volcker’s ideas will probably regain currency.Bernanke expanded the powers of the Fed but, as we have seen, there is only so much that even the most powerful Fed can practically accomplish. At some point, those powers will haveto bereined back in.
If the Fed has the power to do virtually anything, then everything will be expected of it. If the Fed’s powers are limited, then the public will accept those limitations and look for other solutions. Perhaps that is preferable to what we have today – a very powerful Fed that can only
accomplish so much.
Ultimately, the Focused Credit Fund chooses its investments based on the team’s bottom-up analysis of businesses and the conditions under which they are operating. We do not forecast Fed decisions and, like Chairman Volcker, we are mindful that there are limits to the Fed’s ability to affect the economy at the level of individual businesses, including large businesses with national or global operations.
It was a tremendous pleasure to interview Chairman Volcker and to be reminded that although much happens at the levels of policy and politics, we are prudent to maintain our focus on business fundamentals and not make investment decisions based solely on market noise.
Link to letter (starting page 33): http://www.thirdave.com/wp-content/u...r-Letters1.pdf
THE PRACTICAL LIMITATIONS OF THE FEDERAL RESERVE
There is a great game for your iPhone called “Akinator, the Web Genius.”Akinator is a computerized genie armed with the pop cultural knowledge of millions of users. Akinator leads a 20 questions style game where the user thinks of a celebrity and the Akinator attempts to guess who it is. This game can make a 10-hour car trip between New York and Boston with kids feel more like a four-hour trip. I became a hero in my12-year-old daughter’s eyes last month when I beat the computer. It was as if I were Kasparov beating Deep Blue, except that my daughter cares about neither one of those things.
As with chess and Jeopardy, the computer usually wins. Then, the computer gloats by telling you how many people picked the same celebrity you did.You picked Justin Bieber? So did half a million other people. Thought you were a clever child of the 1970s by picking Miss Piggy? 100,000 others did as well. Oh, and 10,000 people picked Alan Greenspan and 3,000 people picked Henry Paulson; so, even the investment world has its pop icons before you go wasting your time trying to stump the computer with George Soros. I did stump the computer, though.I beat its crowdsourcing. Paul Volcker. The computer, so well versed in Maroon 5 band member names, thanked me for introducing it to the
former Chairman of the Board of Governors of the United States Federal Reserve System, themanwho tamed inflation
and created thefoundations ofthemodern economy.
To those of us interested in investments and the policies that affect them, Volcker is well known.His keynote appearance at the 2013 Third Avenue Value Conference helped to draw approximately 350 attendees who listened quite attentively to his 90-minute talk with me over lunch. But to the general public, Volcker seems little known by those who did not live under his policies and he remains little liked among
many who did. Here is a man presented with a near impossible task (taming double digit inflation) who had at his disposal only an arsenal of weapons that would, in the short term, hurt the patient he was trying to cure.Volcker raised interest rates to the point that, late in his second term at the Fed, the U.S. Treasury sold a 30-year bond with a 16% interest rate. The last of the double-digit Volcker bonds are still trading.
Volcker is a proud man with a strong sense of decorum.He would not wade into the muck of where interest rates will be a year from now or three, nor does he even pretend to know. He had little to say about Alan Greenspan, Ben Bernanke or Janet Yellen except to wish them all well.
However, he has plenty to say about the Federal Reserve, what it exists to do and what we Americans expect from it. He believes that the Fed’s dual mandate (to maintain price stability and maximum employment) is dangerous. Employment, and every other economic goal, he says, should follow from price stability. Get that right, says Volcker, and everything else will fall into place as best it can in an imperfect system.Volcker is no wide-eyed Utopian.
In the old days, the Fed Chairman could act without having to explain much to Congress, much less to the people. Fed Independence meant independence from politics.We now live in an era of high transparency where no institution of influence can claim independence from the public’s eye or the public’s government. If we look at Japan, we see that Prime Minister Shinzo Abe is working in concert with the
Bank of Japan to coordinate and execute an economic stimulus program meant to end deflation once and for all. The bank and the government are no longer independent, they are an unabashed team, working towards the same goal.They are following a playbook that has its roots in the academic work of Bernanke, who said that Japan should have done something like this ages ago. Meanwhile,
Bernanke has complained often since the Financial Crisis that the Federal Government has pursued austerity that has been contrary to the Fed’s Quantitative Easing programs and extraordinary stimulus measures.
Meanwhile, Fed critics want more transparency.They want interest rate targeting and maybe even GDP targeting and unemployment targeting. Give the markets a signal, they say, and uncertainty will be reduced, bringing volatility down with it. Volcker never worried about such things. He concentrated on long-term policy, not short-term signaling.
Economic historians will likely remember Bernanke as the Fed Chairman who used an economic crisis to expand the powers of the Fed. Under Bernanke, the Fed has infused insurance companies with money. It has invested in mortgage-backed securities. It has become not only a
regulator of the economy, but a regulator of the financial sector. Bernanke has been an activist Fed Chairman, struggling mightily, as Volcker did, against seemingly insurmountably problems.
The results, though, have been middling. We escaped the Great Recession of 2009, but growth has failed to reach desired levels. Five years after the collapse of Lehman Brothers, unemployment remains higher than average. There seems to be little more that the Fed can do. Anemic growth might be the upper bound of the results the Fed can achieve through its policymaking.More worrisome, the Fed seems to have few options if some exogenous shock were to knock the economy back into a recession.
Volcker’s answer is that we stop expecting so much from the Fed.The Central Bank cannot solve all problems and probably should not even be trying. Yellen, Bernanke’s chosen successor, has signaled that she will follow his path. Some day, though, Volcker’s ideas will probably regain currency.Bernanke expanded the powers of the Fed but, as we have seen, there is only so much that even the most powerful Fed can practically accomplish. At some point, those powers will haveto bereined back in.
If the Fed has the power to do virtually anything, then everything will be expected of it. If the Fed’s powers are limited, then the public will accept those limitations and look for other solutions. Perhaps that is preferable to what we have today – a very powerful Fed that can only
accomplish so much.
Ultimately, the Focused Credit Fund chooses its investments based on the team’s bottom-up analysis of businesses and the conditions under which they are operating. We do not forecast Fed decisions and, like Chairman Volcker, we are mindful that there are limits to the Fed’s ability to affect the economy at the level of individual businesses, including large businesses with national or global operations.
It was a tremendous pleasure to interview Chairman Volcker and to be reminded that although much happens at the levels of policy and politics, we are prudent to maintain our focus on business fundamentals and not make investment decisions based solely on market noise.
Link to letter (starting page 33): http://www.thirdave.com/wp-content/u...r-Letters1.pdf