Bloomberg Hedge Funds Summit

Bloomberg Hedge Fund Summit 2012: next up, Allan Meltzer, The Allan H. Meltzer University Professor of Political Economy, Tepper School of Business, Carnegie Mellon University and former Fed Governor, Laurence  (Larry) H. Meyer debate macro policy.

Meltzer is scared about inflation, and says that no one should have the power to create as much power as the Fed, which has ballooned its balance sheet. He calls the power dangerous. He says people are buying farmland, TIPs, and other signs that inflation is picking up. However, it has not shown up in numbers, because companies consider to cost save. As long as labor costs remain low, inflation will stay low.

Larry says that he disagrees with everything Meltzer says. Meltzer is worried that the Fed cannot get inflation up to 2% and keep it there, it is currently at 1.6%. His model is inflation is based on expectations and economics slack. It is not proper to call the Fed irresponsible, because we are in extraordinary times. Does it work is the main question. And the answer is that it does work.

Meltzer is in favor of doing things to lower unemployment. The Fed has made the mistake to confuse real and nominal. We have lowest interest rates in history and $3.5 trillion in reserves, creating more reserves will not solve anything.

Larry says that Allan and people like him do not worry about short term or employment, they only focus on long term.

Allan says that in the 99 years of the Fed we only had stability under the Taylor model, and perhaps the Eisenhower era.

Meyer admits that the Fed has become more aggressive than usual.

Allan believes that the Fed cannot reduce unemployment, and there is a reason they are cost cutting. They do not trust this Government, energy costs, healthcare, taxes regulation etc. This is a real unemployment problem and it is not a monetary policy, there is more than enough reserves.

Larry says that excess reserves do not matter at all. He says that Allan worships money supply, which does not appear in macro models. The question is if you purchase MBS will it lower rates.

Allan says he understands why the market loves QE, but it does not have a good impact on the real economy. He says reserves do matter because they can be converted into real money. He thinks Bernanke pays too much attention to short term events, and dont distinguish between temporary and permanent changes, such as the various rounds of QE.

Larry says that QE has nothing to do with seasonal factors, which Larry hinted to. He admits that the exit strategy for the Fed will be difficult, but they have a plan for it. Larry says that Allan wrote ‘the book on the history of The Federal Reserve’, but it had nothing to do with modern monetary policy, which began in 1987.

Meltzer says that the Taylor rule was abandoned for no real reason. The Fed pays too much attention on day to day changes. There is never a statement from the Fed about what will happen one year out.

Larry counters that monetary policy has nothing to do with what happened in the 1920s. Ben Bernanke does not look at what happens on a day to day basis.

Allan says that the Fed forecasts make big errors, as do all economists. Meltzer jokes that he can predict history very well.

Larry interviewed Michelle Bachmann and asked if cutting $100 billion in spending would lower the unemployment rate within a few months, and she answered yes.

Allan does not understand Barack Obama’s policies, he says the President is too interested in redistribution policies than economics.

Will market vigilantes come into the market? Larry says that markets will react responsibly if a deal is not made on the fiscal cliff. Allan says the GOP have difficulties compromising and the President cannot compromise, the market will go crazy. He says good presidents 1. know how they are 2. know how to lead 3. know how to compromise, Obama has zero.

Note: The debate was very comical, laid back, yet informative and entertaining. The debate was extended several minutes, since it was so popular.