dennis and all: don't you know what AG really said?
OK, i'll risk going to jail for copy wright infringment in the prime of my life to fill you in. (you could go to thestreet.com and get two week free)
The Invisible Mouth: Greenspan Hammers Home Rationality Lesson
By James Padinha
Economics Correspondent
11/5/98 6:38 PM ET
Premie
JACKSON HOLE, Wyo. -- "Hello? Mister Senior Bureau of
Labor Statistics Press Officer? This is Delta Minus
5512E106 calling from the nonfarm payroll sector of the --"
"Who? Do you know what time it is? And that I am on
vacation?"
"Community, identity, stability. And yessir. It's just after 9
and I know you're on vacation. But we've got this ... situation
... that's going to require your presence."
"On my way. But 5512E106? Wave bye-bye to feelies for a
good long time. Forget about soma too. And I want you to
drag your dumb Delta-Minus ass down to Reconditioning five
minutes ago."
That Press Officer really did get dragged in today. And
thanks to that dumbass Delta, now we don't have to wait
until tomorrow to know what Greenspan learned last night.
(a) The unemployment rate held steady at 4.6% last month.
So it still sits just three-tenths higher than the cyclical low of
4.3% it registered in both April and May. Do note that when
someone like Fed Governor Meyer mentions utilization
rates, he means both the unemployment rate and the "real"
utilization rate (discussed yesterday).
(b) Total nonfarm payrolls grew 116,000 last month. That
represents a marked deceleration from this series'
three-month average (198,000), its six-month average
(205,000) and its 12-month average (241,000).
The manufacturing sector began rendering this series
useless back in February, remember, so it pays to look at
service-producing payrolls. They rose 154,000 last month,
which marks a deceleration on their three-month average
(182,000), their six-month average (231,000) and their
12-month average (229,000). Slowdown here, too.
(c) Average hourly earnings rose 0.1% last month. This
brought year-on-year wage growth, which hit 4.3% in
August, down to 3.7% last month from 3.9% in September.
Wage growth in goods-producing industries slowed to 2.7%
from 2.8% and wage growth in service-producing industries
decelerated to 4.3% from 4.6%.
As far as a stubborn economic report getting in the way of
an ease on the 17th, then, the Fed cannot reasonably ask
for a greener light than this. (Greenspan would have had to
ease this month anyway. What, the grave concern that
prompted an intermeeting move has disappeared in three
short weeks? But do recall that back on April 1, 1994, the
BLS released a March employment report that revealed a
456,000 increase in nonfarm payrolls. Greenspan pushed
through an intermeeting tightening just over two weeks later.)
Not that the immediate future is overly grim. The index of
aggregate hours rose 0.6% last month and is on track to
rise as much during the fourth quarter as it did during the
third (1.4%). Provided that productivity does not collapse,
then, gross domestic product is on track to rise another
3% this quarter (aggregate hours plus productivity equals
GDP).
Which brings us to a walk through the Greenspan speech.
The financial instruments of a bygone era,
common stocks and debt obligations, have
been augmented by a vast array of complex
hybrid financial products, which allow risks to
be isolated, but which, in many cases,
seemingly challenge human understanding.
Many of us are beyond stupid when it comes to anything
having to do with finance.
As I have pointed out before, the huge flows of
capital into debt and equity markets, premised
on overly optimistic assessments of risk or
returns, drove asset prices to unsustainable
levels that only worsened the subsequent
correction.
Many of us are so stupid that we thought share prices would
rise 30% every year for the rest of our lives. Even after
Greenspan promised they wouldn't.
[Recent financial] crises seem to reflect,
arguably, an inability of people to come to
grips with the vastly accelerated pace of
financial activity -- its complexity and its
volume.
Many of us are beyond stupid when it comes to anything
having to do with finance.
The inevitable reversal [of higher asset prices
and lower risk premiums] engendered fear and
retrenchment. ... It became particularly
pronounced in the remarkable increase in risk
aversion and an increased propensity for
liquidity protection in both the United States
and Europe in recent months without
significant signs of underlying erosion in our
real economies, tightened monetary policy, or
higher inflation. This is virtually unprecedented
in our post-World War II experience.
Those who showed no fear on the way up are showing undue
fear on the way down.
Even more startling is the surge for liquidity
protection that has manifested itself through
significant differentiation in yields among
riskless assets according to their degree of
liquidity. We are all familiar with the dramatic
rise in late September in the illiquidity
premium for off-the-run Treasury securities, or
the spreads on government sponsored agency
issues.
The spread between on-the-run and off-the-run bonds -- a
difference Greenspan has called "pure liquidity premium" --
got as high as 30 to 40 basis points. (Normally it hovers in
the single digits.)
The surge toward liquidity protection ... is a
step beyond, since it implies that any
commitment is perceived as so tentative that
the ability to easily reverse the decision is
accorded a high premium. ... The enhanced
demand for liquidity protection ... reflected a
markedly decreased willingness to deal with
uncertainty -- that is, a tendency to disengage
from risk-taking to a highly unusual degree.
Investors morph into teary-eyed sissies when push comes to
shove.
It has become evident time and again that
when events become too complex and move
too rapidly as appears to be the case today,
human beings become demonstrably less able
to cope.
Make that pouty teary-eyed sissies.
Last month's unprecedented three-day
weakening in the dollar, relative to the yen,
reportedly as a consequence of a large scale
unwinding of the so-called yen carry trade, has
not induced spasms in the U.S. financial
markets, nor for that matter in Japan, despite
its severe banking problems.
See that? Investors can behave rationally.
First, while over the longer run, it will be
essential to have significantly improved
systems to oversee lending and borrowing by
financial intermediaries, and incentives to
dissuade excess leverage in general, in the
short run, there will be little need. If anything,
lenders are likely to be overcautious.
Now the pendulum is stuck way over there.
See what Greenspan is saying here? I tried to warn you
about rationality two years ago, and I am still trying to drive
it into your heads now.
But talking wasn't enough then, and it is unlikely to be
enough now. Think of the dog waiting for a treat. Or the
high-school student waiting for the car keys. The owner
wants the dog to do a trick; the father wants to repeat the
rules. Both subjects respond similarly. They humor their
providers because they know what's coming.
Yeahyeahyeah. Woof. Now gimme. |
