French Caldwell

Since I’m trying to get a handle on how new regulations and risk management requirements will emerge, I spent much of today at a conference on monetary policy and the global financial crisis.  The keynoter was Fed vice-chair Don Kohn.  He was still defending Alan Greenspan who in turn refuses to acknowledge that asset prices should be a consideration when setting rates (read the epilogue of his book).

Although the conference was held at CATO, it was not a libertarian rally.  Economists and former central bankers of many stripes were there — pick your party and economic school – -all mixes.  There were lots of fingers pointing, but I concluded general consensus on these things:

1 — More regulation is coming early in the next Congress. No doubt.  Rationale for that — government protection of financial institutions is now is now pervasive and goes beyond just banks.  To balance the fact that financial institutions are now a protected species, there will be more regulation and supervision — especially the latter.

2 — Central bankers’ monetary policies must account for asset prices, not just prices of goods.  While Kohn denied this, he left open the door to it, and all the other economists there including former ECB board member Ottmar Issing said it has to happen.  The problem is agreement on the model — so while transparency is possible technically, no one agrees on the model —

My conclusion after listening to all these arguments over whose asset-bubble model works best is that any of them would have worked better than none.

3 — The recession will be protracted – the best case I heard was through 2h09 — the worst case was that a real for goodness one to two year depression is setting in, and there were many there who agreed with that.  All agreed that deflation is the enemy.  Cash is king and by hoarding cash, you profit.  Are banks doing that right now? — the Fed is paying them interest on their reserves to prop up the real fed funds rate as close as they can to 1% – why lend if you can make money on the Fed?

My conclusion on deflation is that it’s certainly occurring in housing. A sustained and substantial drop in the Dow below 8000, say for two to three months, would be a deflation milestone for a broader set of assets pointing to a much longer recovery period. But I’m not a financial analyst — so please don’t take this personal conclusion as investment advice.

Hold on to your hats!