Pencil Neck

Oh the things that you say
Is it life or just a play
My worries away
You're all the things I've got to remember
--A Ha

Considering the source (a Fed bank president), this is a pretty frank assessment of where our financial system and fiscal situation stand. Nice charts indicating the degree of banking system leverage, the escalation of debt, and the destruction of the dollar.

His admission that permitting large banks to continue to operate despite poor managerial decisions, and the adverse impact this has on smaller players (and long run innovation) in the industry is correct (although notice that he does not offer that this policy should be scrapped).

A few points of contention, however (again not surprising, given the source). On p. 6 he claims that failure is 'normally' addressed in a capitalistic system thru an orderly takeover with proper oversight that protects the system's 'stability.' But unfettered markets seek stability on their own with no assistance. Intervention may provide the illusion of stability, but in the long run pent up stress and strain injected into in the system by the planners will let go, leading to much more violent correction down the road when the market's quest for stabilization can no longer be restrained.

On p. 9 he suggests that in environments where debt is large and growing, low interest rates are preferred by everyone. No. In systems where leverage is increasing, so is risk. As such, cost of borrowing should go up. Lenders can properly manage risk of their leveraged balanced sheets, and the cost of borrowed capital must rise in order to compensate lenders for any further loans they might want to extend. Can you see that forcing rates artificially low in such an environment does not lend to stability at all, but rather to excessive risk taking and more instability that at some point will have to be rectified?

From p. 12 on, he boasts that the Fed should be able to achieve its bureaucratic mandates, but then goes on to outline challenges central planners face with getting it right. Classically, on p. 13 he admits that he doesn't know what the 'proper' neutral rate is. How could he? No one knows. Only the collective wisdom of millions of independent buyers and sellers can approach the 'proper' price for anything in dynamic environments--while possessing capacity to revise the price when conditions change.

His conclusion that central planning can work 'if we're smart enough' seems quite oxymoronish.

position in USD