The Fed Turns a Page: Warsh and Greenspan

Kevin Warsh’s first meeting as Fed Chair last week and the death of longtime Fed Chair Alan Greenspan yesterday signaled that the Federal Reserve is embarking on a new chapter in its history. The Fed is now turning a page as it leaves its policies for the first quarter of the 21^st Century behind. Under Warsh the Fed is abandoning its policy of forward guidance and with that the so-called “dot plots” that were introduced in 2012 which presented the forecasts of individual members of the Open Market Committee will soon go by the wayside. As a result, the Fed Put that worked as a floor underneath the stock market since 1987 has been removed. Look for more volatility in stock prices. As if on cue, the stock market is responding today. Over the longer term the four task forces authorized by Warsh, which will include outside members, may end up having a far more lasting effect on the Fed.

 

Ten years ago, I reviewed Sebastian Mallaby’s biography of Alan Greenspan so there is no need to recount his remarkable career here. (See: https://shulmaven.blogspot.com/2016/10/my-amazon-review-of-sebastian-mallabys.html ) In a nutshell a kid from the Washington Heights neighborhood of Manhattan rose to become the conductor of the global economic orchestra as I wrote then. Both Henry Kissinger and Henry Kaufman, my old boss at Salomon Brothers came from the same neighborhood. Something must have been in the water.

 

I met Alan Greenspan twice as an outside consultant to the Federal Reserve Board. The first time was in December 1991, when the Fed invited a group of real estate experts to discuss the then ongoing meltdown in commercial real estate. Greenspan listened and maintained a sphinxlike expression. Two days later he announced an inter-meeting 100 basis point cut in the discount rate and a 50-basis point cut in the federal funds rate. He obviously took seriously my comments and those of others on the gravity of the situation.

 

The second time was in December 1996 when the Fed called in several Wall Street equity strategists and few academics including Robert Shiller. The topic was whether or not the roaring bull market in stocks was getting out of control. A few days later Greenspan gave his famous “Irrational Exuberance” speech. When the formal meeting was over, I sat with him and a few others at a small table over lunch. There he gave me a marked-up copy with his autograph on “Comments on Credit,” Salomon Brothers weekly publication on the credit markets and the economy. He noted a small error. When I got back to the office I gave the copy to Robert DiClemente, the author of the report. Bob was flabbergasted that Greenspan read his work in such detail and he immediately had it framed. One of the secrets to Greenspan’s success was that he was very meticulous. He knew every data point in most economic series, both current and historical.

 

Under Greenspan’s leadership the Fed helped lead the U.S. economy into an extended period of moderate growth, with low unemployment and low inflation. Along the way he rescued the stock market after the 1987 crash giving rise to the Fed Put, organized the rescue of Long-Term Capital Management 1997, the Asian crisis of 1998. The whole period form 1982 -2007 was known as “the great moderation.” Unfortunately, it came crashing down with the financial crisis of 2008. Just as in the days of ancient Rome, a slave in the chariot of a conquering general would warn that all glory is fleeting, the ghost of Hyman Minsky should whisper in the ear of every Fed chair that “stability leads to instability.” I think Warsh understands that and let us hope he won’t be a slave to President Trump.

 

All that said, Alan Greenspan was a giant in the world of central banking. May his memory be a blessing.

The Israel-Hamas War: Is Peace at Hand?

 On October 27, 1972, Henry Kissinger told the nation that “peace is at hand” in Vietnam. He was premature to say the least. We now have announcements from Israel, Hamas, and various Arab states that they are on board with President Trump’s 20-point plan to settle the Israel-Hamas War. Discussions will begin tomorrow in Egypt with Hamas already agreeing to release all of the hostages, both dead and alive, that they hold. A reason to be optimistic is that unlike in 1972 when the North Vietnamese Army was standing strong, Hamas is sitting on the brink of military defeat.

 

However, the hostage release is not the be all and end all to the conflict. The critical sticking points that remain is whether or not Hamas will disarm as required and that Hamas will have no role in the future governing body of Gaza. Both of those conditions Hamas has yet to agree to. Further complicating the situation is that Israel attempted to assassinate Khalil Al-Hayya, Hamas’ lead negotiator in Doha, an attack in which his son was killed.

 

My belief, or hope, is that these obstacles will be overcome. Why? Simply put, the correlation of forces is such that Hamas’ choice is to accept the terms or be “obliterated” using President Trump’s term. An early sign of progress will be the speed at which the Israeli hostages are being released. Of course, all of Israel will be looking at the physical condition of the alive hostages being released which will obviously affect Israel’s negotiating posture. Meantime, the ball is in Hamas’ court.

A Discussion with Ambassador Martin Indyk on his Book "Master of the Game"

Ambassador Martin Indyk appeared in a discussion with Jim Falk of the Santa Fe Council on International Relations on March 10th. He discussed his book on how Henry Kissinger engaged in Middle-East diplomacy in the 1970's and the lessons to be learned for today. He also dicussed the current situation in Ukraine. The links for a video recording of the event and my review of his book are below.

Martin Indyk: Master of the Game - YouTube

Shulmaven: My Amazon Review of Martin Indyk's "Master of the Game: Henry Kissinger and the Art of Middle East Diplomacy"

My Amazon Review of Jeffrey Garten's "Three Days at Camp David..........."

 

The Nixon Shock

 

Former Yale School of Management Dean and long-time economic policy official in the Nixon, Ford, Carter, and Clinton administrations as well as being husband of Ina Garten, the Food Network’s Barefoot Contessa; Jeffrey Garten placed you in the room where global monetary policy was upended over an August weekend in 1971. Garten offers keen insights into the personalities in the room at Camp David. Of course there is Nixon whole loved to do bold and daring things, there is his Secretary of the Treasury John Connally who was the super hawk on trade and who was completely transactional, there was Arthur Burns the pipe smoking and vacillating Fed Chief, there was Peter Peterson forward thinking Nixon policy advisor, there was William Safire, the man who would write Nixon’s speech and there was Paul Volcker, the Under-Secretary of the Treasury for Monetary Policy who knew more about what they were about to do than anybody else.  And although Henry Kissinger wasn’t present he had to deal with the after effects of of upsetting America’s allies.

 

What they did that weekend was to take the United States off the gold exchange standard which was the foundation of international economic policy since the 1944 Bretton Woods agreement. What they also did was enact a 90-day price and wage freeze which would ultimately turn into an unmanageable regime of wage and price controls that would last for a few years. They also put a 15% tariff on European and Japanese imports upending the United States’ postwar free trade policy. It truly was the Nixon shock. U.S stocks initially rallied and Japanese stocks crashed.

 

Garten explains in a nontechnical manner how the U.S. was running out of gold to back its currency and the economy was suffering from a bout of stagflation with rising inflation and unemployment. Although he doesn’t specifically mention it, Garten was writing about the Triffin Dilemma where the supplier of a global reserve currency has to continually supply increasing reserves to the world and in order to do that it has to run a balance of payments deficit. Thus, in the summer of 1971 U.S. gold reserves stood at $10 billion while foreign central banks had accumulated $40 billion in claims. Simply put we were broke.

 

Garten starts his story in the late 1960’s when in fact he should have started it in November 1960 when after Kennedy’s election the price of gold soared from its fixed $35 an ounce to $40 an ounce. The market feared a U.S. devaluation which last occurred in 1933.  The Kennedy Administration talked the market down but from then on, the balance of payments issue outlined by Triffin was top of mind among economic policy officials.

 

Although it didn’t happen right away the Camp David meeting set into motion the transition away from fixed exchange rates to floating exchange rates, a regime we live under to this day. It also signaled that balance of payments considerations would no longer affect domestic monetary and fiscal policy opening the way to very expansive policies. After all Nixon wanted a booming economy to get re-elected. He got it and along with OPEC the way was open to the 1970’s inflation. Garten, I think rightly argues that the Nixon team didn’t have much of a choice with respect to leaving the gold exchange standard but was horribly wrong with respect to wage and price controls.

 

One of the things that impressed me was Garten’s insights into John Connally. Connally was a brilliant synthesizer of complex information and he greatly respected Paul Volcker. He backed him to the hilt even when Nixon had his doubts. He also writes very favorably about Peter Peterson who ultimately hired him at Lehman Brothers and later at Blackstone. How influenced he was by his friendship with him, the reader does not know. Lastly as with Nixon’s sense of the dramatic, only one month before Nixon upended 30 years of U.S. policy by announcing his visit to China.  All I can say the heads of my left-liberal friends were spinning as Nixon adopted many of their policies.

 

Jeffrey Garten has given us great insights as to how a major policy decision was made and the importance of the personalities involved. I highly recommend the book.

For the full Amazon URL see: The Nixon Shock (amazon.com)