Well if the study works as advertised, we should get "some sort" of a bounce within two weeks but I seriously doubt it will be anything much bigger than a short term thing and not the big trend change he is talking about.
Thanks to "Bear" on our site for finding the link to the FOMC minutes from 24 Spet 1996. A lot of interesting stuff in that meeting.......
24 September 1996 FOMC meetings where Greenspan says "WE ARE IN A BUBBLE" ......
I recognize that there is a stock market bubble problem at this point, and I agree with Governor Lindsey that this is a problem that we should keep an eye on. We have very great difficulty in monetary policy when we confront stock market bubbles. That is because, to the extent that we are successful in keeping product price inflation down, history tells us that price-earnings ratios under those conditions go through the roof. What is really needed to keep stock market bubbles from occurring is a lot of product price inflation, which historically has tended to undercut stock markets almost everywhere. There is a clear tradeoff. If monetary policy succeeds in one, it fails in the other. Now, unless we have the capability of playing in between and managing to know exactly when to push a little here and to pull a little there, it is not obvious to me that there is a simple set of monetary policy solutions that deflate the bubble. We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it. My concern is that I am not sure what else it will do. But there are other ways that one can contemplate.
Just reading through and this sounds like today minus the employment numbers which were only 5.1 back then.......
But given the employment data, given the level of consumer confidence, given the rise in the stock market, given the lack of real visible restraint on interest-sensitive sectors and particularly the housing markets, I think there is some risk about how far GDP is going to slow. The next question, to the extent that it does slow, is whether that slowing will be sufficient to restrain inflation.
Today, we have a market that declined, a 6% unemployment rate yet everyone is still rushing to "buy the dip" bidding the mature industry DOW 30 up to PE ratios in the 40s, the SPX is at PE 44 and the NDX has a PE in the hundreds. The housing market is still in a boom as consumer credit is maxed out.
For those that don't realize it, the Fed is VERY involved in foreign exchange issues. This is something that many often forget and we get a reminder from these minutes.....
MR. BOEHNE. I understand the issue of trying to get some of these holdings off the Bundesbank's balance sheet. What are our alternatives in terms of doing that? Is this proposal the only option? I can think of some theoretical alternatives, but I do not know whether they are worth much. For example, we could diversify into some short-term nongovernment securities instead of extending the maturities of our German government securities holdings. Or we could reduce our position in D-marks. I am just wondering if you have thought about other alternatives and what the pros and cons might be. ...........
.....It is my hope that the German repo market will grow and that we will be able to push the envelope a little more there than we have. But if we invest too much there, we will become a rather large piece of that market.
To be fair, when the Fed talks about private securities, they clarify that they are not allowed to buy stock here on page 42.......
MR. TRUMAN. If I could just interrupt, we could not buy any private assets other than bank deposits. We should have mentioned that in the memo. It may be useful to note as background that, before the Monetary Control Act, we could only hold our foreign currency balances in the form of bank deposits. The Monetary Control Act added government paper. So, the only private assets we may hold, as Peter has said, would be bank liabilities.
Always remember that these guys are bankers and always thinking like a banker.......
MR. FISHER. I have begun to think about that. It has been my assumption that we would leave our deutsche mark holdings unchanged as they are transfigured into euros. And when that happens, we would then be a participant in the novel question of what the euro yield curve will be--whether, for example, German paper will determine long euro rates but French paper will determine the short rates. There is enough noise in how that will work out that I cannot see very clearly in my crystal ball. That is about as far as I have gotten.
Not sure what this is but it sounds important. Marking it here for future reference....
VICE CHAIRMAN MCDONOUGH. The reason we are in deutsche marks is not because we love deutsche marks. It is because it is the right intervention currency and therefore we sold our relatively small holdings of French francs, Swiss francs, pound sterling, and so on and put it all in deutsche marks. If we came to the conclusion over time that we would do all our intervention in euros, we should be completely in euros. Peter brought to the Committee the view that we will need euros but that we may also need some other currencies because parts of Europe may decide not to join the common currency. That would be a different matter, and we do not know how that will work out.
They intervened in foreign currency and bond markets in the past? From page 44-45.......
MR. HOENIG. Just a follow-up, Peter. I want to make sure I understand the reason for your average duration proposal. Did you choose the 18-month duration because that leaves you within the bounds of intervention amounts that we have done in the past? What is the reason for the 18 months if it does not relate to that?
MR. FISHER. If we just take the norm of historic
interventions, we would not have to go out to 18 months in order for me to have a 10-month maturity duration target. But the day could come when the decision would be made to intervene using, say, half of our reserves, which would be three times the largest intervention amount used historically. The Committee has procedures for approving the amounts of intervention. I think this investment guidance I am seeking should be a separate issue and not become a constraint on future intervention. A much shorter duration, whether it is 15 months or 14 months rather than 18 months, is not the be-all end-all. But if you start squeezing and impose a shorter total duration and we were forced to intervene in very large amounts, I would run the risk of violating the authorized duration limit if I were to liquidate a great deal of our holdings at the short end.
A glimpse into the past......
A decade ago we were entirely dependent on their balance sheet. Between 1/4 and 1/2 of the reserves of the German banking system were owned by us through the Bundesbank’s balance sheet. We are down to a much smaller proportion in part because we have moved off the balance sheet and in part because the Berlin Wall came down and reserves expanded in the German banking system. That was a major shift........
........We currently maintain tens of billions of dollars of deutsche marks on the Bundesbank’s balance sheet with zero liquidity cost. We can liquidate these at zero notice and contract their balance sheet at our whim.
WOW!!! The seeds of getting rid of the thirty year bond were laid waaay back in this time frame! Note how they are talking about rolling debt down shorter term here on page 51 so tehy can be more liquid when a crisis hits making intervention easier.....
CHAIRMAN GREENSPAN. We do not care about the earnings aspect and we should not because it is merely a bookkeeping transfer between ourselves and the Treasury. I do not know if there is a problem here. There would be a big problem if the net issues of Treasury debt to the public were disproportionately in the form of short-term bills because that would make budget policy very closely affected by interest rate policy. But it has nothing to do with us on the other side.
MR. LINDSEY. But why wouldn't it if we are adding to our short-term portfolio in an era of, say, low deficits? Why wouldn't that allow the Treasury to ease off on its issuance of long-term debt and move the whole maturity structure of the debt toward short term issues?
CHAIRMAN GREENSPAN. If you move the debt to short term, it is the outstanding debt, not the budget deficit, that determines the impact of--
MR. LINDSEY. I would imagine that to accommodate a growing money supply and a move toward liquidity on our part over time the Treasury is going to have to respond in an era of low deficits by lowering the average maturity of the debt structure. I think that is the incentive we are creating.
A couple paragraphs later, Greenspan shows his mean side.....
CHAIRMAN GREENSPAN. why don't you talk to them over there and see whether they slam the phone down before you can get a couple of words in. They are more than disinclined to listen to anything that complicates their task because they think they are over their heads with work. If you impose any more work on them, you are not a friend. Any further comments? Pxesident Melzer.
Does anyone know what this is all about???? Bailing out Salomon Smith Barney?.....
MR. FISHER. That is a good question. I am somewhat uncomfortable with our current securities lending program, to say the least. The program itself goes back to the period before government securities were in book entry form. It was designed to deal with the tardiness in the paper clearing process. With the development of book entry, I believe that the Desk became eager to discontinue the program and was on the verge of doing so at the time of the Salomon Brothers episode. But that just seemed to be the wrong time to make the change. To put it bluntly, I am desperate to find an occasion to discontinue the securities lending program, and if I can find the right cover I will urge the Committee to discontinue it. I do not think, however, that this issue raises itself to the issue of the overall structure of the portfolio.
Then some small talk back and forth and they re-engage here hinting they can cover a bank derivatives crisis by lending securites and then throw in a joke.....
MR. FISHER. We might be able to. I might add that even if our coupon portfolio went down to 20 percent or 30 percent or 40 percent of the total, we would still have plenty of securities to lend, given the kinds of limits that we impose. But that would not be an obstacle to me, and I do not think it would be viewed as a serious matter in the market.
CHAIRMAN GREENSPAN. If we went to bills only, the earnings of the System would be highly correlated with the federal funds rate. Would it be assumed that as earnings go up we are going to use those
funds to go out on the town or something like that?
MS. MINEHAN. Probably.
MR. HOENIG. I am sure someone would assume that.
SPEAKER(?). We could use the profits to support our
"airforce" !
How to work in a crisis.......
IRMAN GREENSPAN. Liquidity through repos, or the ease with which one can arrange them, decreases in a crisis atmosphere. It is precisely then that we may really need a liquid portfolio. There is never a question about, say, 12-day bills, whereas finding counter-parties may be difficult when we want to do repos during a crisis. Everyone is then running for cover.
federalreserve.gov
Good Luck,
Lee |
