1、Paul McCulley Global Central Bank Focus Comments Before the Money Marketeers Club Reflections and Ruminations New York City March 25, 2010 April 2010 Thank you for that most kind introduction, Nancy. It is indeed an honor to be address- ing this august group for the fifth time, especially sharing ti
2、me with friends going back over 25 years. Its great to see you! While Ive given hundreds, if not thou- sands, of speeches over the years, the only ones I ever write are to the Money Marketeers Club. Not that I deliver them as I write them, which is probably congen- itally impossible for me to do. Bu
3、t I write them both out of respect for this audience, as well as to force me to think intensely as to what Im saying in the context of what Ive said before. Yes, here at the Money Marketeers, I explicitly own my priors, even if that can be extremely painful at times. I always have an axe to grind an
4、d in the fullness of time, my axe may be revealed to be dull or perhaps, not even an axe at all, but rather a hammer against my head. What is “Neutral?” In my first address 1to you, on April 26, 2004, the Federal Reserve was on the cusp of ending its “considerable period” of a 1% Fed funds rate, set
5、 to embark on a journey back toward “neutral” monetary policy. I had no quarrel with the direction of where the Fed was about to go. The “considerable period” pre-commit- ment to 1% Fed funds had worked its magic, inducing animal-spirited risk- taking on both Wall Street and Main Street, and it was
6、time, as I put it, for the Fed to end “happy hour prices” for liquid- ity: Wall Street patrons had more than a comfortable buzz.Global Central Bank Focus Page 2 April 2010 My axe to grind wasnt with the Feds looming tightening trajectory, but rather what would be the destination, commonly known as “
7、neutral.” Consensus market opinion was centered on 4%, while I was centered on 2%. How so? The workhorse model for contemplat- ing the destination was (and is to this day!) the Taylor Rule, primarily because Professor Taylor made one huge, simplify- ing assumption, that the neutral real Fed funds ra
8、te is a constant 2%. With that assumption, plus assumptions for the Feds implicit inflation target and the Feds estimate of the full-employ- ment GDP potential (alternatively, the NAIRU), it is easy to calculate where the Fed putatively should, according to Taylor, peg the nominal Fed funds rate. In
9、deed, Bloomberg now has a plug-and-play version of the Taylor Rule, where anybody can pretend to be a FOMC member. And most conveniently, if you assume that inflation is at target and unemployment is at the NAIRU, all the “active” terms in the Taylor Rule drop out, and the neutral nominal Fed funds
10、rate is simply the 2% neutral real Fed funds rate assumption plus the at-target inflation rate, which Taylor assumed and the Fed preached both then and now to also be 2%. Thus, in an equilibrium Taylor world, the neutral nominal Fed funds rate is 4%, which is why, in my view, the consensus view in A
11、pril 2004 held that the looming tightening cycle would take the Fed funds rate at least that high (and presumably, higher if and when inflation rose above target and/ or the unemployment rate overshot the NAIRU to the downside, implying the need for “restrictive” monetary policy). John Taylors insig
12、hts were and are very powerful. And, indeed, his Rule is elegant. But it is also hostage to his assumption that the neutral real Fed funds rate is a constant 2%. I didnt buy it in 2004 and dont buy it today. In fact, I had voiced this view prior to that April 2004 first evening with you, notably in
13、my August 2003 monthly 2(ironically just as the Fed evoked the “con- siderable period” regime). My thesis was Page 3 purchasing power, but no more: No risk, no real return! In contrast, private capital, specifically long-dated bonds, carries both default risk and price risk. Thus, I argued that priv
14、ate real long-term rates should be much more positive, approximating the economys long-term potential real growth rate, which I estimated back then to be about 3%3%. Subtracting a long-term swap rate of about 50 basis points, as it was in spring 2004, I conjectured that the “equilibrium” real 10-yea
15、r Treasury yield should be 2%3%. Adding back the Feds 2% inflation target, that implied a fair-value nominal 10-year Treasury yield of 4%5%. There was, of course, one problem with my market-segmentation view of the difference between money and private capital, which I fully recognized: it structural
16、ly implied a very steep yield curve 2%2% from Fed funds to 4%5% for 10-year Treasury yields. Such a steep curve would, I recog- nized, offer a structural real reward for levering into the duration-mismatch carry trade. simple: The neutral real, after-tax Fed funds rate should be zero! Money and Priv
17、ate Capital are Different My rationale? Overnight money is fun- damentally different than private capital. Money carries zero default risk and zero price risk: A buck is a buck is a buck. To be sure, holding money does involve paying two taxes: (1) the tax on nominal interest income and (2) the purc
18、hasing power loss of at-target inflation. Accordingly, I proposed that the neutral real Fed funds rate should be the econ- omy-wide marginal tax rate, which I assumed to be 20%25%, times the Feds 2% inflation target about 50 basis points, in contrast to Taylors assumption of two percentage points. T
19、hus, my estimate of the neutral nominal Fed funds rate was 2%, in contrast to the 4% estimate falling out of the Taylor Rule. Bottom line: The Fed funds rate, the return on money, should be suffi- ciently high to maintain moneys real Global Central Bank Focus Page 4 April 2010 Thus, on that April 20
20、04 evening with you, I said: “If the Fed were to enforce my view of the neutral real short rate, the Fed and other financial regulators would need to enforce quantitative rules on growth in levered players balance sheets, so as to prevent unbridled growth in credit creation via the carry trade.” And
21、, to my shame, I actually thought that would happen, with proposed regulatory limits on growth in the GSEs at the time as my putative harbinger. How wrong could I be! The Fed did not stop tightening near 2% but just over twice that number, at 5%. And a key reason is that the Fed, and even more impor
22、tant, other financial regulators and here I include the Rating Agencies, who are literally hardwired into the regulatory architecture did absolutely nothing to quantitatively restrain growth in lever- age. In fact, they did exactly the opposite, acquiescing to, if not cheerleading, explo- sive growt
23、h in the shadow banking system, founded on the carry trade of funding long-dated assets with short- dated liabilities, fat-tailed liquidity risk be damned. Thus, financial conditions, defined not just as the price of credit but its availabil- ity and terms, were getting progressively easier as the F
24、ed was “normalizing” the Fed funds rate up. Financial intermediar- ies, both conventional banks and shadow banks, were doing exactly what I feared they would do, in the absence of regula- tory constraint on growth in leverage. The carry trade of maturity transforma- tion funding long-dated assets wi
25、th short-dated money is the mothers milk of banking from time immemorial. And the unfettered invisible hand of the finan- cial capitalism market could not resist reaching for the sky, on the proposition that the sky was no limit for asset price appreciation, notably for property, both residential an
26、d commercial. Systemic degradation of underwriting standards was the gin in the bath tub.Page 5 All of this had, of course, become abun- dantly clear before I spoke before this group the second time, on February 27 , 2006. And chastened, I had already pub- licly confessed my forecasting sins, starti
27、ng with my January 2005 essay 3 , “Shades of Irrational Exuberance,” ironically the month before Chairman Greenspan famously declared that it was a conundrum that long rates were falling as the Fed was hiking the Fed funds rate. The motivation for the essay was, in fact, minutes 4of the December 14,
28、 2004 FOMC meeting, when the Fed funds rate was hiked to 2 %. Those minutes explicitly declared Fed concerns about: “.signs of potentially excessive risk- taking in financial markets evidenced by quite narrow credit spreads, a pickup in initial public offerings, an upturn in mergers and acquisition
29、activity, and anecdotal reports that speculative demands were becoming apparent in the market for single- family homes and condominiums.” To wit, the FOMC was concerned that financial conditions were becoming more accommodative, even as the Fed funds rate was becoming less accommodative. And since t
30、he FOMC was manifestly unwill- ing to use regulatory tools (now known as macro-prudential tools) to deal with the putative excessive risk-taking, it was bla- tantly obvious that the Fed funds rate was going to go up very meaningfully further. And then in my September 2005 essay, 5“Pyrrhic Victory,”
31、I confessed my forecasting sins yet again, after Chairman Greenspans August 2005 speech in Jackson Hole, when he spoke elegantly about the dangers inher- ent in excessively-thin risk premiums (excessively-high risk asset prices). Mr. Greenspan left little doubt that unless asset prices corrected of
32、their own accord, he was, as I put it, going to “take off his belt of nasty tightening, which is likely to invert the yield curve.” And so he did. In Comes Chairman Bernanke When I spoke before this Club on February 27 , 2006, my April 2004 forecasting sins fully Global Central Bank Focus Page 6 Apr
33、il 2010 confessed and just after Chairman Bernanke had taken his seat, I had a new axe to grind: the merits of inflation-targeting, long a favorite chestnut of Mr. Bernanke. I applauded the new chairman, having become an inflation target advocate myself in April 2003, when I (along with Bill Dudley,
34、 then Chief U.S. Economist of Goldman Sachs and current NY Fed President) wrote an essay 6for the Financial Times arguing that the FOMC should state that the very accommodative policy of the time, designed to cut off the fat tail of deflation risk, would remain in place until the Fed achieved a 2% o
35、r higher inflation target. The FOMC didnt follow that advice directly, but as a practical matter, it essentially did when initiating the exit in June 2004. So I was actually in a pretty warm and fuzzy mood when I spoke to you in February 2006. I reviewed Mr. Bernankes October 17 , 2003 speech, 7when
36、 he advocated that the FOMC calculate and announce what he dubbed the OLIR the Optimal Long-term Inflation Rate. I thought that was a colos- sally smart idea. But I did have one quarrel, as is my nature: I thought the prevailing implicit definition of the OLIR, known as the “comfort zone” of 1%2% fo
37、r the core PCE deflator, was both too low and too narrow, declaring that “gun to head, Id suggest 1%3%.” My reason: I thought market participants hubristic belief that the Fed should, could and would always achieve the 1%2% comfort zone was actually one of the “cul- prits” in excessively-low risk pr
38、emiums. A wider comfort zone for inflation, with the Fed allowing more cyclical varia- tion within it would, I believed, increase market participants uncertainty and thus, foster somewhat wider risk premiums. To wit, a higher and wider comfort zone for inflation would make the financial markets less
39、 bubble prone. And that, I thought, would be a good thing, because it would reduce the odds of an eventual debt-deflationary Minsky Moment. Page 7 But I was clearly running my analytical digger both belatedly and where there was no FOMC dirt. Seventeen months later, in August 2007 , the Minsky Momen
40、t arrived. All About Minsky This was the backdrop for my November 15, 2007 visit 8with you, when I preached, literally preached, the importance of under- standing Minskys Financial Instability Hypothesis in contemplating where we were and where we would likely go. The Forward Minsky Journey of the p
41、receding twenty years had come to an ignominious end, I argued, and a Reverse Minsky Journey was underway, in which “Ponzi Debt Units are destroyed, Speculative Debt Units are severely disciplined, and Hedge Debt Units make a serious comeback.” And indeed, that Reverse Minsky Journey unfolded in 200
42、8, in ways more nasty than I ever envisioned, culminating in a global financial and economic cardiac arrest following Lehmans fall in September. The Fed funds rate stood at 4% on that November 15, 2007 evening, with the FOMC having cut it 75 basis points in September and October. Might Fed funds fal
43、l, I mused, all the way to 2%, the level that I had mistakenly forecast in May 2004 would be the peak of the looming tightening cycle? My response: “I honestly dont know. What I do know, or at least think I know, is that the slower the Fed is in lowering the Fed funds rate, the greater will be the c
44、umulative decline in the Fed funds rate. Debt deflation is a nasty beast and will not be tamed with a gentle monetary policy response.” Which brings me to my last visit with you on March 19, 2009. 9The Fed funds rate resided in a 025 basis point range, where it stands to this day. I simply hadnt bee
45、n bold enough in forecasting how nasty the debt deflation beast would be! And with the zero lower bound hit for the Fed funds rate, credit easing and quantitative easing (QE) were underway. Global Central Bank Focus Page 8 April 2010 I applauded the Fed, loudly, for what it was doing. The economy wa
46、s suffering from both the Paradox of Deleveraging 10and the Paradox of Thrift, and the only way to break those paradoxes was, I argued, to substitute the sovereigns balance sheet for the deflating private sector balance sheet. America was doing it, with three balance sheets in operation: the Feds, t
47、he Treasurys with TARP and the FDICs with increased deposit guarantees and the introduction of unsecured debt guar- antees. It was an “all in” strategy and that was precisely what was required, I intoned. I advocated that most major countries should join the Fed in aggressive QE, effectively generat
48、ing a Competitive QE game, in which all fiat currencies were devalued against things, with gold being a proxy for things. I was generally upbeat, going so far as to suggest that I was contemplating buying a second home, on the notion that Depression 2.0 would be avoided. Now and Looking Forward A ye
49、ar later, the evidence is in: Depression 2.0 has indeed been avoided. No, I havent yet bought that second home. In fact, I actually sold my only one, at a good level, as I was no longer using it, preferring to live in a little rental house on the water where I have my 32-foot fishing boat, named the Moral Hazard, and my 18-foot electric Duffy boat, named the Minsky Moment. Yes, I am sorta non-normal. And so is the current configuration of Fed policy, with the policy rate pinned against zero in the context of a very b
