Richmond Fedhead Lacker on the Economic Outlook. And, Knock on Wood, the Fed Getting Out Alive

I'm taking back some of my squishy pink hearts for this
consider yourself on watch, JL
hell hath no fury like a fringe financial blogger scorned

Richmond Fed President Jeffrey Lacker spoke to the Maryland Bankers Association in Baltimore last week but since I was on self-induced hiatus for a couple days, I had to sit on the speech. Now that I've worked out my quarter-life crisis over the weekend, however, I'm ready to jump back in and what better way to step back into the fun-filled world of financial doom than with my all-time favorite Fedhead?

I need not point out that this is Lacker's first speech of 2010 since, you know, it's only the second week of January. I'm looking forward to seeing if his tone changes any now that he's no longer a voting FOMC member but also counting on him being the same shit-disturbing, dissenting thorn in the FOMC's side he's been all along. Unfortunately, if this speech is any indication of what he's planning for the year, we'll get more recycled bullshit about how things are looking much better and on the uptick with little acknowledgment of the real problem, which is the shift from a private sector driven economy to a fully-socialized government-fueled farce of a recovery. Of course, this wouldn't normally be a problem if it were temporary or if we weren't already some $12 trillion in the hole to foreign creditors who are no longer interested in funding our reckless deficits and printing problems.

So he starts by referring to last year's speech to the same fun bunch of Maryland bankers, which was full of blame for the crisis and his trademark conservative take on the "pending recovery" that would begin to infect his colleagues with delusions of better times ahead around the same time. That's my boy.

I found it striking that Lacker would point out in early 2009 - only moments after expressing his obvious distaste for exceptional central bank intervention in distressed markets without the regulatory fortitude to fend off unrealistic expectations of continued intervention moving forward - that the Fed's actions in light of the circumstances would be likely to serve as the largest catalyst to overall economic improvement. This sort of defies the Lacker logic I've grown to know and love but whatever, he's still a central banker so I can't expect too much from the guy:

[I]t strikes me as reasonable to expect the U.S. economy to regain positive momentum sometime in 2009, for several reasons. First, monetary policy is now quite stimulative and real interest rates are quite low. Second, the energy and commodity price shocks that dampened economic activity last year have subsided already or are in the process of doing so. And third, as I said, the drag from declining residential investment seems likely to diminish significantly in the next year. In fact, I would be surprised if we don’t see a bottom in housing construction sometime in 2009.

Psst, JL, that energy thing might be a real problem moving forward. And were I the contrary sort, I might feel compelled to point out that we still have not exactly reached "positive momentum" as his own Richmond Fed should know by a quick peek at the past few months' manufacturing data.

Lucky for all of us (at least those of us who get paid in, use, and hold investments in dollars), Lacker gets pissed when you combine high inflation and high energy prices. Not so lucky for us, he doesn't have much of a say this year.

Anyway, let's get back to the present.

First of all, what's this about "The recession that appears to have just ended"? Of all people Lacker should know we aren't out of the woods yet and the "all clear" is resting heavily upon how the Fed backs out of its inflated balance sheet and sets the tone for the pending regulatory overhaul ahead, if they are even concerned with that at this point.

Secondly, I don't know where he gets his numbers from, citing 7.2 million jobs lost throughout the recession but positive gains in demand across the board. Mmmkay, sure, next time have someone audit those figures.

Where's the man on the street to intervene and inject a dose of reality into Lacker's uncharacteristically optimistic view? I know of one person in particular who could really enlighten our dear JL on the true situation out there but as this person already knows, it can be tremendously difficult to break the glossy veneer of a decidedly macro-minded economist, regardless of how close to the person one is. Oh well. We'll get there eventually.

And what the hell is this?

One key element supporting the recovery is the significant improvement in financial conditions that has occurred this year. Corporate borrowing costs have declined considerably, as interest rates on commercial paper and corporate bonds are now much lower than they were last year. Many major banks have sold stock successfully and now have the capital to support new lending, even if conditions turn out worse than expected. Granted, we frequently hear anecdotal reports of business borrowers being turned down for credit, or having long-standing credit lines cut off. It is important to recognize, however, that many borrowers will naturally face tougher credit terms in a soft economy, because their revenue prospects are likely to be more uncertain. Moreover, the proper benchmark is the ability of the banking system as a whole to supply an appropriate quantity of credit, since any one given bank may be shrinking their balance sheet while others are expanding. I am not aware of any evidence that the banking industry as a whole is inappropriately impeding the availability of credit.

Should Lacker care to see evidence of this, I highly advise him to OPEN HIS FUCKING EYES and LOOK. Again, I have specific evidence that he may find "of interest" on this point, perhaps I need to yell louder to penetrate his little bunker over there in Richmond?

And there's always the little problem the Fed has moving forward about that swollen balance sheet. While we know Lacker was the "one guy" who expressed concerns about increased asset purchases before the Fed even figures out what to do with the assets they've got (if you want to call shitty GSE paper "assets" - were I auditing the Fed's statements, I would take issue with them listing such large amounts of worthless paper on the asset side of the balance sheet and argue they are, in fact, massive liabilities), it doesn't matter if the rest of them are all for expanding the housing bailout. And certainly doesn't bode well for inflation expectations in the months ahead.

During the recovery period ahead we may face an increasing risk of inflation edging upward, which has sometimes occurred during past recoveries. While that risk appears to be minimal at this point, we will have to be careful as the recovery unfolds to keep inflation and inflation expectations from drifting around.

Overall, he's optimistic. A little too optimistic. I recently asked this question and I will ask it again, who is this guy and what has he done with my favorite Fedhead?

Putting the whole picture together, I think the most likely outcome is that the economy will grow at a reasonable pace this year – housing should continue to recover from a very depressed state, consumers should gradually expand spending, business investment should make something of a comeback, and these components of demand should overcome a continuing drag from commercial construction.

"Knock on wood, it's a manageable problem," he said regarding smaller banks exposure to bad commerical real estate loans. Would he also like to throw some salt over his shoulder in the hopes that we'll recover those 7.2 million jobs at some point?

All in all, I'm disappointed. Did he switch speech writers or anti-depressant medication or something?


Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Lacker is sounding a bit less hawkish than the last time I heard him. Now that he's no longer the FOMC's designated hawk (been replaced by Hoenig), I guess he can soften his game up!


Hoenig is no Lacker but I guess he'll do in a pinch.

So what are you saying? He said fuck it weeks ago because he knew he was vacating his seat as the FOMC's thorn?

I'm beyond disappointed. But still won't take Hoenig as my new favorite Fedhead :P


Pinky Swear said...

Put not your trust in princes, nor in the son of man, in whom there is no help.