Baum on Money: Forward (Mis)Guidance
Good morning, all. And welcome to a week that will be dominated by shenanigans in Washington. There will be plenty of time for that, so today I've got a smorgasbord of daily reading for you.
Fact-checking the president.
Even presidents should never say never, according to the Washington Post's Fact Checker, Glenn Kessler. President Barack Obama has said that "never in the history of the U.S." has the debt ceiling been held hostage to issues unrelated to the budget. Kessler reviews some history, which shows just the opposite. The list of unrelated-to-the-debt-limit measures includes everything from changes to Social Security, to school prayer, to busing to oil import fees. Four Pinocchios, according to Kessler. It wasn't long ago -- in 2006 -- that freshman Senator Obama engaged in a bit of hostage taking himself, casting a "no" vote on increasing the debt ceiling.
If central bankers are going to rely on forward guidance as a policy tool, they have to do better, writes the Financial Times' Gavin Davies. He's right. I'm in the camp that accepts that the Federal Reserve has no idea what it's going to do in 2015 or 2016. Today's guidance is good for today only. But many folks seem to think it's etched in stone. If, as the Fed claims, the bang from asset purchases is really the result of forward guidance on interest rates, then the Fed "needs to get better at deploying it," Davies writes.
Another option: less is more.
That's the advice of Stanley Fisher, former governor of the Bank of Israel. "You can't expect the Fed to spell out what it's going to do," Fisher said at a conference in Hong Kong today. "Why? Because it doesn't know." The more forward guidance a central bank offers, the less flexibility it has. Why is this so hard to understand, both for central banks and their audience? At a time when forward guidance has become a religion for central bankers, it's nice to see one of their own points out the inherent contradictions.
The Shadow knows.
The discussion over who should be the next Fed chairman is focused on the wrong things, according to members of the Shadow Open Market Committee, a group of monetary economists who meet semi-annually to weigh in on the central bank. Forget gender, personality and style. Focus instead on the "appropriate boundaries" for the Fed's operational policies, the SOMC said in a statement released at the conclusion of Friday's meeting. The SOMC differentiates between monetary policy, which involves managing bank reserves to influence interest rates, and credit policy, which is directing credit to specific sectors of the economy (such as buying mortgage backed securities to support housing). "Fed credit policy is really debt-financed fiscal policy carried out by the central bank," according to the statement. How the prospective nominee views the Fed's role is something the Senate Banking Committee might want to focus on at the confirmation hearing.
The kiss of death ?
It is widely thought that older, established companies aren't at the cutting edge of technological innovation. Now comes empirical research to support the idea. A 12-year study of 2,000 publicly listed companies found that the more financial analysts covering a company, the fewer and less significant patents they produce. Fear of failure reduces the tolerance for risk-taking. It makes perfect sense. You can download the full paper here.
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