Central Banking and Forest Fires: The Connection

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We can create a force that eliminates forest fires, but there will be a cost.  A certain amount of forest fires are normal, and if we don’t have small forest fires, we will have big ones that happen infrequently, and cause a lot of damage. Central banking is similar. Good central banking allows for the extinguishing of a lot of bad debts.  Bad debts should fail, and the Fed should not rescue them.  Better that the Fed should imitate William McChesney Martin, Jr., and allow recessions to do their good work, eliminating bad debts that would otherwise encumber the economy.

Central Banking and Forest Fires: The Connection

“I’m the fellow who takes away the punch bowl just when the party is getting good.” – Fed Chairman William McChesney Martin, Jr.  He was a great central banker, as was Volcker.  Both of them embraced pain.  Wimps, like Greenspan, Burns, and Bernanke, embraced no pain, and assumed that their lame efforts to support the economy would actually aid things.

The Fed should have a single mandate, but it is not the mandate commonly proposed.  The Fed should restrain the total growth of credit in the economy, and ignore inflation and unemployment.  Let the Fed defend us against depressions.  It can succeed at that.

As for inflation and unemployment, the Fed can state that they can’t do anything about unemployment, which is largely true.  Inflation — that they can do, if it is desired, but they will need to stop doing QE, and do unsterilized purchases of debt.

That’s all for now.  Just remember that the government has a hard time interfering in the economy.  It doesn’t work, but they try to make it look like it works.

Democrats, Republicans — just remember that they can’t deliver what they promise you.

By David Merkel, CFA of Aleph Blog

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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