The Fed can be fallible
Federal Reserve chairman Ben Bernanke faced his first press conference in Washington on Wednesday, following a meeting of the Fed's monetary policy committee. He confidently rejected the idea that inflation posed any threat. Fed confidence is not necessarily a guarantee that the future will unfold as the Fed forecasts. For a lesson in the fallibility of economic forecasters, and the monumental policy blunders that (1) cause crises and (2) prolong crises, below are comments made by Mr. Bernanke in a speech on May 17, 2007, titled "The Subprime Mortgage Market."
Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.
We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.
The vast majority of mortgages, including even subprime mortgages, continue to perform well.
Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.
Credit market innovations have expanded opportunities for many households. Markets can overshoot, but, ultimately, market forces also work to rein in excesses.
Inflation? What inflation?
He's the Man with the Golden Touch. As Federal Reserve chairman Ben Bernanke went public with a Fed policy statement and press conference Wednesday, traders watched as every word seemed to add a few cents to the price of gold. After hitting US$1,530 late in trading, gold backed back down a bit, but the story was clear.
The euro gained and U.S. treasury bond yields went up. Also moving in directions that were inconsistent with the Fed chairman's world view was the American dollar, which went down.
Somebody clearly wasn't getting, or didn't quite believe, Mr. Bernanke's message. Inflation is not a problem, said Mr. Bernanke, and the Fed will take no action against inflation until it begins to see it in the whites of the eyes of consumers and businesses in the form of "inflation expectations."
As for oil prices, a key inflation driver, Mr. Bernanke said it was all a matter of supply and demand in the oil industry. Gasoline prices will "not continue to rise" and will eventually "stabilize" and even "come down" just as soon as the turmoil in the Middle East "stabilizes." There's nothing the Fed can do about it.
Following arguments that have become familiar in the Federal Reserve's recent policy pronouncements, Mr. Bernanke delivered what has emerged as the bedrock of Fed theorizing on the future of inflation. "For the most part," he said, "I think it's fair to say that medium-term inflation expectations have not really moved very much and they still indicate confidence that the Fed will ensure that inflation in the medium term will be close to what I've called the mandate-consistent level."
Part of Mr. Bernanke's problem is that the Fed has a bit of a credibility problem in the forecasting department. In the buildup to his Wednesday news conference, many media circulated excerpts from Mr. Bernanke's 2007 speech on the U.S. housing market. "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," he said then. (See below).
The Fed's reliance on "inflation expectations" in the market to telegraph when the risks are dangerous seems somehow all too similar to its reliance on readings of the mortgage market in 2007. It looks like a rerun of rational expectations -the theory that a problem is only a problem if it shows up in market data somewhere, the markets always being right.
There are also reasons to doubt that reliance on signs of rising "inflation expectations" on the part of wage earners and corporate managers is the right place to monitor the risk of inflation. By this theory, inflation is only a problem when wages and other price pressures begin to drive up prices throughout the economy. But what happens in a stagnant economy, where prices of many goods and services rise while wages are falling?
It wouldn't be the first time in economic history that growth and employment dragged while prices -due to monetary inflation -rose. This year, U.S. consumer prices in March rose at an annual rate of 6% and were 2.7% higher than a year ago. In a recent speech, Fed vicechairman Janet Yellin called the CPI gains "transitory" inflation. Meantime, producer prices are up almost 6% year over year and import prices -thanks to a falling dollar -are up almost 10%.
Despite this evidence, the Fed sees no real inflation and is waiting to see if price increases begin showing up in "inflation expectations." That will happen when workers begin insisting on higher wage demands and corporate managers begin passing rising costs on through higher prices. The logical impasse, however, is that wages are in decline in the United States, with real wages (nominal wage gains of 1% minus inflation of 2.7%) in decline.
By the Fed's standards, inflation is steady. For consumers, inflation is eating away at diminishing wages and incomes. Mr. Bernanke claims that the gap between inflation and wages will disappear just as soon as growth and jobs pick up and the Middle East turmoil subsides.
The Fed's claim, in summary, is that all that is happening in the world economy -rising commodity prices, a falling dollar, rising bond yields, price increases in developing nations and Europe -have nothing whatever to do with the Fed's unprecedented trillion-dollar quantitative easings and monetary expansion.
The gold, bond and currency markets aren't buying this line of argument. At some point, American consumers and businesses may stop buying it too.
Memo to HR: No leader makes the cut
Is Stephen Harper a good CEO? Could Michael Ignatieff be a better chief executive? What about Jack Layton?
As executive headhunters, we size up candidates for top corporate roles and make recommendations to clients every day. At election time, we assess the party leaders the same way we evaluate top corporate candidates. We find this gives clarity as we head to the polling station. After all, a number of the skills required of a prime minister are akin to what is needed to lead a corporation.
As recruiters, we've sifted through the candidates' qualifications and we're ready to present our findings to our client (you, the electorate).
First, we've immediately eliminated one candidate -or, rather he has declined the CEO's office at Canada Co. That would be Gilles Duceppe, a capable manager but one whose agenda is predicated on the organization's demise.
Second, upon consideration we've eliminated another candidate, Elizabeth May, because without a seat in the House of Commons (i.e. position of influence in the company) we believe it would be difficult to seriously consider her. We do, however, fully support diversity and recommend that one, two or three major parties offer voters a female leader in the next election.
For 2011, we are left with three candidates for Canada Co. CEO: Mr. Harper, Mr. Ignatieff and Mr. Layton.
MANAGEMENT STYLE
This is an area of at least perceived contrast between the two top contenders. Mr. Harper is seen as a micromanager who has consolidated power in his office and away from his team.
Then again, corporate leaders are often forced to take a more centralized leadership approach when their organization lacks a unified mandate/ mission (i.e. minority government). But we wonder if he were given a majority whether he wouldn't loosen up on his direct reports.
Mr. Ignatieff is presenting an image that he is an inclusive and collaborative manager. His direct reports (the Liberal caucus) have suffered from a crisis of leadership and he is carrying that weight into the election. He loves to march his team out behind him for photo ops and chide his opponent for being a one-man-band. It may be genuine, but it can at times come across as posturing.
ABILITY TO INSPIRE
This generation of political leader is not as strong on the "inspire-meter" as Churchill, Trudeau or Reagan.
Employees prefer an inspirational leader over a transactional manager. Neither Harper nor Ignatieff have yet elevated themselves in this regard. Often actions speak louder than words and seeing Mr. Layton out on the hustings after prostate cancer and hip surgery is inspirational. Companies have historically galvanized around leaders who show courage and humanity and this directly correlates to the political sphere as well.
CRISIS MANAGEMENT SKILLS
Mr. Harper can hang his hat on the fact that he was at the tiller during the worst economic downturn since the Great Depression and Canada fared better than most. Truth be told, just as corporate leaders often take credit for their predecessors' achievements, Mr. Harper got some help from earlier Liberal moves. But perception is reality in politics and business.
Mr. Ignatieff has faced his own type of emergencies -from losing a Liberal leadership race, to supporting a coalition in 2008 to topple the Conservatives and then reversing his stance, to being painted as an interloper from the United States. Certainly recent candidate crises haven't helped his cause.
And while Mr. Harper is dealing with his own controversies (Bev Oda, Bruce Carson and Dimitri Soudas come to mind) he continues to demonstrate an ability to ride through the storm.
Mr. Layton has made astute moves in this area of crisis management, particularly when it comes to supporting or voting against Mr. Harper's government, depending on what he could negotiate for his constituents.
So while each of the candidates demonstrate their unique skills and experience, it will likely come down to overall fit, that elusive third factor that clients struggle with.
As executive recruiters we have the luxury of finding CEO candidates and developing a short list. None of the three would make our short list for CEO of the country. But we've got to work with what we've got. We recommend that it would be prudent to stay the course and urge the other parties to diversify and bring in fresh leadership with new ideas for the next election.
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