Echos from Jackson Hole

Apart from the Bernanke speech, there was a lot of debate over the weekend amongst central bankers on how to proceed with monetary policy towards the future. And from all the interesting comments, it seems that one main conclusion comes out : The post Greenspan- & Bernanke - era has to taccle issues from out of a different monetary perspective.

But let's first have a look upon the main message from Jean Claude Trichet : "Governments risk a “lost decade” of weak economic growth if they delay reversing the surge in public debt triggered by the financial crisis. The lesson from past history is that dealing with the legacy of accumulated imbalances is not simply a duty to be fulfilled after the economic recovery, but rather an important precondition for sustaining a durable recovery .The primary macroeconomic challenge for the next 10 years is to ensure that they do not turn into another ‘lost decade."

On bubbles and how to deal/avoid them, Bank of England Deputy Governor Charles Bean (BoE) told the meeting that regulatory tools would be most efficient at deflating a boom without inflicting broad economic damage. Stanford University Professor John Taylor, creator of an interest-rate-setting formula used by central banks, said the tools are “unproven” and using them may cause central bankers to lose focus on adjusting rates properly. In a sense, the Fed caused the bubble in home prices ; a priority would therefore be not to create bubbles in the first place.

In our latest contributions, we have mentioned the possible dangers of Z(ero) I(nterest) R(ate) P(olicies). Thomas Hoenig - who was hosting the meeting - did not speak about ZIRP but his views were echoed by Martin Feldstein (Reagan administration) : “It could well be that anybody’s who’s buying 20-year, 30- year Treasuries is taking a big risk, ; those prices could come down. I think the Fed is keeping those rates below any kind of long-term equilibrium.”

Charles Bean sums it up very clearly : “Monetary policy is too weak and ill directed to moderate a credit and asset-price boom without inflicting unacceptable collateral damage. Instead if central banks want to manage credit growth and asset prices in order to avoid future financial instability, another instrument is necessary, and that’s obviously macroprudential policy.” And he finally concludes : "The current discussion represents a shift from the debate before the crisis, when we advocated something closer to benign neglect during the boom phase, coupled with aggressive relaxation if an asset-price bust occurred".

And what was the message of Ben Bernanke ?

1) "a scenario for continued expansion as households rebuild their savings, banks increase lending and companies become more willing to hire. We see some challlenges in the short run but a stronger recovery in 2011."

2) “The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do.”

3) “Should further action prove necessary, policy options are available : further purchases of securities, a change in the Fed’s policy statement (ie higher inflation target) and a reduction of the interest rate it pays on banks’ excess reserves. The Federal Open Market Committee has not agreed on specific criteria or triggers for further action, but I can make two general observations : First, the FOMC will strongly resist deviations from price stability in the downward direction. Second, regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery.

Some personal comments on this "market re-assuring" speech

1) So far not much evidence of increased lending and hiring. Furthermore, when households rebuild their savings - and if the math still holds - there is not gonna be a lot of room for personal consumption expansion (70% of the US debt driven growth engine) ; "Challenges in the short run" reminds us of tech companies 10 years ago reporting quarterly losses but "next quarter will be better". Is it like the Black Knight of Monty Python who - after having lost both his arms and legs - merely states "come on, fight me, it's only a scratch, a minor fleshwound " ? In view of horrible recent macro releases, "challenges" probably imply recession (double dip)

2-3) But if that is the case, we needn't worry because Ben has the engines of the helicopters already warmed up, it's only a matter of time before we have final lift off.