The sugar high and the morphine drip
Or, what two U.S. Senators asked Fed Chair Nominee Janet Yellen on Thursday.
(Note, this is a very casual post which may turn into a more refined post later on. I welcome your questions. Find me on Twitter @AnneMarieAuthor)
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The sugar high and the morphine drip. How are they different?
Dr. Janet Yellen’s nomination to be the next Chairman of the U.S. Federal Reserve has been wrapped around two constant, nagging and necessary questions:
1. When does the easy money, in the form of Quantitative Easing (QE), end? Or does it?
2. How long will the Zero Interest Rate Policy (ZIRP) last, and will economics or politics ultimately drive that decision?
In Thusday’s hearing (November 14, 2013) in Senate Banking Committee, the answers to both questions remained vague. This would be expected in a hearing of this type, held to fulfill tradition and obligation and not held to move markets or minds in any way.
In an age when guidance, the high and low art of the market nudge, is becoming a key and central role of the Fed in practice, this hearing wasn’t intended to do that.
A highly qualified nominee of impeccable credentials sat before the Senate Banking Committee. Agreed with her or not, the goal of this hearing was to enable her to proceed toward confirmation.
The goal was not to cause a stir.
This reality placed limits on the sorts of questions that could be asked. It drew lines between what was asked in private meetings, and what could be said on live television.
Still, there were several brave moments, most of which were cloaked in metaphor.
Two metaphors which invite comparison were the “sugar high” and the “morphine drip,” brought to us by Sen. Mike Johanns, R-NE and Sen. Pat Toomey, R-PA , respectively. Each looked at the sense of “artificiality” that is apparent as the stock market/asset prices enjoy record highs even as the surrounding economy languishes, at least for those unfortunately destined to live within the larger demographic of “everyone else”
Senator Johanns talked of QE, associating it with the temporary sense of joy induced by sweets. Senator Toomey focused on the skew, strangeness and ends of normalcy introduced by continued extension of ZIRP.
The two, in tandem, reinforce each other’s effects. Each creates a sense of calm, but does not actually prevent what might be a storm.
As of the date of this hearing, it was generally (though not universally) believed that QE was due for some type of “taper.” Depending upon whom you talk with, this is either because it has fulfilled its function of stabilizing unemployment, or because it has done nothing at all.
Johanns’ point about “sugar” was simple and blunt, and offered a third sort of view. QE has fulfilled a function, but not the one it was supposed to have fulfilled.
It is abundantly clear where QE has ended up**.
Not “out in the community” via increased lending,resulting in job creation, but in elite venues such as the stock market, where it has directly and rapidly benefited both major banks and the investor class.
In theory, such verve should eventually show up in the greater economy via productive investment, allocated per market opportunity and demand.
But the market, within a situation of heightened interference and interest rate suppression, is in no position to signal accurately.
In optimal control, or high certainty, lies uncertainty. And artificial pricing of risk assets, and misallocation of what might otherwise be productive capital.
Investment is delayed. Companies hold untold levels of cash. Or investors return it temporarily to lands with which they are familiar, seeking higher returns over shorter timeframes, as available via equities and other.
The sweat of real life, and the societal as well as economic profits it generates, take longer and now appear less necessary to wealth creation.
What if it’s all that easy? Why would I eat well over the long term if I can just eat candy all of the time and never have to sweat, get fat or get sick?
The sugar high is a decent metaphor if applied to asset and stock prices. Those who have the resources play in a market which seems ready made for fantasy and reward.
Those who cannot? Do not participate. Except insofar as the price effect trickles down to make staples more expensive in certain instances.
What if you let the “sugar” wear off?
The market will react. Perhaps even just to the mention of a taper, as we already saw last May. Do this, and it will upset some of those whose recent wealth build has come via the markets.
But that misses the greater, and dimmer picture. What about the wider economy, the one that includes “everyone else?” Those who have not had access to the “candy?”
On that note, perhaps Toomey’s morphine drip is the better metaphor. It’s by far the scarier one.
It implies that the patient, i.e. the economy, is long past a decision of candy or no candy.
The patient is waiting for a near and inevitable end. As if in a hospice. Morphine kills the pain that would be all too apparent without it.
The patient held in stasis, or is at least made comfortable and distracted while nature does its work.
Pulling away a morphine drip could reveal the truth of one’s situation. This could have drastic consequences.
The ZIRP tool could be at the top of the Fed’s toolbox for an indefinite time.
Dr. Yellen, who maintained an impressively high level of professionalism and composure throughout the entire hearing, only appeared jostled once.
It was when Toomey questioned her:
Toomey’s statement about middle class savers was (ironically? Actually I don’t think so at all…) one of the most populist moments of this hearing. It combined the facts with a plea to recognize that those who had foregone present consumption for future reward, those who had played by the rules and done the right thing, had been left behind by a policy of perma-zero interest rates.
Investment in the future drives household wealth, new business, new jobs, and by extension the economy. Yet a whole swath of America has no such “future” — nothing to invest in that fits their risk level.
Even those venturing longer out on the Treasury curve, the places where the hopes of education, home, travel and secure retirement for middle class families have historically and prudently lived, got flattened by “the Twist.”
The Twist is no big deal if you are reallocating your excess or plenty — you simply find higher risk assets with rates of return to match.
But if it’s your retirement, your nest egg, a pension plan upon which many of fewer means depend?
You probably can’t do that.
While Senator Toomey did not mention this directly, what if investment, credit, the promise of wealth — supposedly open to everyone via the magic market wand of Gramm-Leach-Bliley a decade and a half ago — are now only for the rich? It’s a wince-inducing thought, one probably a bit too candid for many in that Senate Banking Committee room.
Toomey later mentioned (this went unanswered by Yellen due to the hearing’s official time constraints, though I personally think she would have answered it adeptly) that community bank creation had all but died over recent years. According to the FDIC, Toomey noted, no new community banks have been created since 2010. This datapoint added more attention to unpleasant observations, made by some, that the QE/Twist/ZIRP combination’s ultimate result had been to drop a significant portion of the U.S. population out of the financial system, and its wealth creation possibilities, altogether.
Toomey’s other point, about the Volcker rule’s potential unintended consequences and implied separate treatment of sovereign and corporate issuers, could have been the topic of an entire hearing, one which considers spreads between the cost of sovereign and corporate debt issuance within the Dodd-Frank (and I would add Basel III) frameworks.
To the extent that it addressed the liquidity, accessibility and pricing within fixed income markets affecting investment across all levels of the economy, it was related to the larger questions being asked.
I would have enjoyed a discussion in which Yellen answered this question (and in related, the comments on the Volcker Rule shared by Sen. Jeff Merkley D-OR) but understand that due to its possible market signaling implications and international focus, it was a topic best left for private, off-camera questioning.
I’ll follow in another post with comments upon i) transparency and ii) the potential conflicts between the Fed’s commitments to systemic stability, supervisory efficiency and reducing unemployment in a subsequent post. I will briefly consider the comments of at least three Banking Committee Senators who are Democrats when I do.
These potential conflicts deserve attention, especially as the voting membership of the FOMC is turning over in several instances (as mentioned by ranking member Sen. Jim Crapo, R-ID, in his opening remarks.) Yellen strongly inferred that she would continue the pathway that she had collaborated with Chairman Ben Bernanke in forging for the Fed amidst the rapid change and challenge of recent years.
Yellen has been influential, respected and highly present within her role as Vice Chair. Who will be her own Vice Chair, should she be (once she is) confirmed? What influence will that new Vice Chair bring?
**I’m deciding which recent study to link to this line of the post. Stay tuned.
Image/Video Sources
Images One and Two: http://images.nationalgeographic.com/wpf/media-live/photos/000/195/cache/morphine-created-naturally-mammals_19515_600x450.jpg
Image Three: http://i2.cdn.turner.com/money/dam/assets/130802132643-janet-yellen-cnnmoney-econ-survey-620xa.jpg
Video: http://www.youtube.com sentoomey
Full Hearing: http://www.c-span.org/Events/Senate-Hearing-on-Federal-Reserve-Nomination/10737442622-1/
