Dallas Fed President Richard Fisher is one of the funniest – and most disturbing – voices out there in the sea of equivocating central bankers. In an earlier speech, he’d lamented “the injustice of operating our economy under the thumb” of TBTF banks. But this time, he even outdid himself in the dreadfulness of his warning and the humor of his presentation.
Perhaps he thought he could speak more freely, up north of the border, at the C.D. Howe Institute Directors’ Dinner in Toronto. So he slammed the Fed’s money-printing and bond-buying binge, and its consequences, among them the “speculative impulses” that were going wild in an all-out chase for yield, goosed prices of even the riskiest, lowest-grade junk bonds, and pushed their yields below 7%, from “double digits just a year ago.”
Companies have taken advantage of this craziness by selling $187 billion in junk so far this year, an all-time record. Covenant-light bonds, the riskiest of them all where protections for investors have been discarded one by one, were “on a tear,” he said. And then there’s the “roaring bull market for equities.” Financial risks were piling up, in an economy where growth since 2009 has averaged “just 2.1%.”
Before he was willing to offer his vision about the economy in the coming months, he cautioned that his forecast – or any forecast – should be treated with what he called the “Arrow’s Caveat”:
During World War II, future Nobel laureate Ken Arrow served as a weather officer in the Army Air Corps. He and his team were charged with producing month-ahead weather forecasts. Being a disciplined analyst, Arrow reviewed the record of his predictions and, sure enough, confirmed statistically that the corps’ forecasts were no more accurate than random rolls of dice. He asked to be relieved of this futile duty. Arrow’s recollection of the response from on high was priceless: “The commanding general is well aware that the forecasts are no good. However, he needs them for planning purposes.”
And so with this caveat, he ventured to forecast that “the chances of inflation rearing its ugly head” over the next six months were “extremely low.” He called inflation “the broadest tax of all,” a refreshing admission for a central banker. And he saw economic growth that would be slightly faster that recent trends. That was the good news.
The bad news was Washington. “The propensity of members of Congress has been to spend in excess of revenues to give pleasure to their constituents and garner their affection.” Priceless! To hammer home the point, he offered a video clip, his “favorite spoof on the historical behavior of fiscal policy makers in Washington, D.C.” (A must-see; I’m still laughing):
Nevertheless, he was somewhat encouraged by the recent efforts “to rein in Congress’ spendthrift ways,” and by the near-term improvements in the deficit, though it has been mostly due to “passive action” – rising tax revenues and the sequester? – rather than fiscal policy changes.
But the chaos in Washington impacted businesses in nefarious ways, as “decision-making in a thick fog of uncertainty is well-nigh impossible,” he said. So they were holding off on job-creating capital investments, and in the process, they were negating the power of a “hyperaccommodative monetary policy” to move the economy forward. The impact of this “rudderless fiscal policy” manifested itself in the growing pile of excess reserves that banks carried on their balance sheets. “Until the Congress and the president provide a clear road map to restoring fiscal rectitude, economic growth will continue to be impeded by undue uncertainty,” he said.
Washington’s “divisive nature and petty posturing” undermined the confidence of businesses and got in the way of “the upward momentum needed for a full recovery.” For businesses to put the Fed’s “cheap and abundant money” to work in job-creating projects, they needed to be confident that the Administration and Congress would “reorganize the tax code, spending habits, and the regulatory regime.”
Washington’s inability to get its fiscal and regulatory house in order might keep the economy mired down forever, he said. And if the Fed tried to compensate for it by throwing even more fuel into the economy, it would “risk an explosion of speculative excess, or worse: an eventual inflationary conflagration, the debasement of money, and the ruination of our economy and lifestyle.”
Speculative excesses are already happening. Just like in the good old days. Those days when money grew on trees: home prices jumped 10.9% year over year. In Phoenix, they soared 22.5%, in San Francisco 22.2%, in Las Vegas 20.6%. I’m already hearing it again: You can’t lose money in real estate. Read…. US Housing Bubble II: Euphoria And Other Shenanigans