Years of Poems and Spirits

Somehow, my ECON 301A (macro) professor got a Federal Reserve Bank president, William Poole, to sub-in for her after he’s given a lecture in downtown earlier.

I was pretty excited at this opportunity. More or less a dabbler in macro-economy issues for a few years, I was sure I’d hear about a lot interesting topics.

Mr. Poole started with self-intro, how he got this job and so on. He was a grad in U. Chicago, a disciple of Milton Friedman and was talked into taking a econ PhD by George Schultz. (See also, Chicago School of Economics, Friedrich Hayek). I know he is a member of Cato Institute. So in 2 hours of lecture, he didn’t mention a word of Keynesian thought.

One thing he touched upon, housing boom:
1. Just like bond, asset valuation always go reverse direction to interest rates. For example, if one can afford $500 monthly m. payment, when the rates goes down, the valuation will go up. Local supply-demand further attenuates valuations.
2. REAL interest rate being so low worldwide. In US. historical figure is 6% but most recently is 3%. Europe is now 2.8% (?)
3. Real estate values gains are not part of production process that contributes to GDP.

Also asked him about Current/Capital account:
1. They are mirror image of each other.
2. He strongly disagrees with the notion that US econ is “financed by foreign government, i.e. vulnerable to vicious manipulation”.
3. Instead, he stressed, one has to link Curr.A. deficit with Cap.A. surplus: essentially, foreigners trust US economy and market, so they deposit their surplus back to US to keep the two balanced (otherwise, US currency depreciates)
4. What US does with the Cap. A. surplus is striking. Although US has a net $3 TRILLION dollar surplus Cap. A. compared to the world (i.e. the world buys $3t more of US assets than US does others), the total return, in absolute terms, are the SAME!
5. This means US is a more capable investor then the rest of the world (higher return on capital). Imagine who now has $3 trillion more to spend … (the have and the have mores, now their offsprings too)
6. He furthered this argument by describing how banks work. I always suspected this—US makes money by managing others money.
7. The current account deficit has been bugging me for a long time. Since it is always linked to trade deficit, government debt, and possible foreign blackmail, etc. It is always a very politicized issue. Everyone’s telling me what it really MEANS but not what it really IS. Now hearing a straight answer from a Fed president, isn’t school great?

See also, his speech in 2001 “Does the United States Have a Current Account Deficit Disorder?”

Another very important thing I take away from this class is Mr. Poole’s personal view on Fed’s role in economy. He’s emphasized “rational expectation” and “macroeconomic equilibrium” several times during his lecture. I can see his view in a general sense knowing where he’s coming from. Chicago school believes in market efficiency and efficacy.

My question to him was, if it is so true, how can’t the market run by itself? Why we still need the Feds? He used the analogy of a orchestra, saying the Feds or FOMC as the conductor. I understood his points better when he used Greenspan’s recent comments as examples: the market has to have confidence in the judgement of the leadership of the Feds (judgement calls vs. the obvious). The key to building this confidence, according to another earlier speech of his, is clear communication between the Feds and the market (same information, same model and philosophy, e.g. inflation check).

In the last 10 minutes, he touched upon his new thoughts on fertility rates and current accounts. He predicted Japan would soon become a current account debtor because of aging population. I am sure it would be a fitting reversal for many Detroit street vendors.

Trackback URI | Comments RSS