On the first day of the Levy Institute's two-day annual Hyman P. Minsky Conference, held at the National Press Club in Washington, high-powered speakers held forth on the most prominent issues in the financial world that will affect the economy as Congress begins to try to legislate during the two years that the Republican Congress has to make its mark as the Obama administration winds down.
Minsky was an early theoretician of the financial crisis, and the expression "Minsky Moment" has taken hold in the financial crisis business to apply to the time when excesses built into the normal business cycle result in a collapse of asset values that in turn leads the financial authorities to intervene. This particular group of speakers at the conference is quite friendly to intervention and like many investors and citizens is trying to figure out what is going to happen next.
James Bullard, president of the Federal Reserve Bank of St. Louis, gave a crisp presentation on the five factors that will influence monetary policy: 1) improvement in labor markets, 2) GDP growth faster than the long-term trend; 3) the return of inflation; 4) the Federal Open Market Committee waiting too long to begin to raise rates; and 5) a "witches' brew" of ingredients of insipient bubble risk.
This writer had never heard Bullard speak before and found it remarkable that a Fed president who is not considered a dissenter or a conservative warned of the prospect of financial excess. He also gave refreshing advice for investors to ignore the frequent references on CNBC to a headwind on corporate earnings arising from the strength of the dollar. Bullard pointed out that large companies have the ability to hedge against currency risk and they should do so.
Thomas Hoenig, himself a former president of the Federal Reserve Bank of Kansas City, now vice chairman of the FDIC, was introduced as someone "who keeps Wall Street on edge." On this occasion, Hoenig addressed himself to negotiations on Capitol Hill as to the contents of legislation to provide regulatory relief to small and medium-sized banks. Hoenig has advocated that the largest banks be required to raise significantly more capital, with the conversation beginning at 10 percent GAAP capital and to reduce or offload risky non-banking activities. For institutions that take these steps, Hoenig is prepared to support considerable reductions in the regulatory burden of reporting to regulators and having to meet risk management standards.
The positive aspect of the speech of Sen. Elizabeth Warren, D-Mass., an active member of the Senate Banking Committee sometimes mentioned as a potential insurgent presidential candidate, is that she called for legislation to build on what she regards as the success of the Dodd-Frank Act to bring a true end to the policy of "too big to fail" by breaking up the largest, riskiest banks and limiting the powers of the authorities to provide emergency support to these institutions.
The message fell a bit flat, as the core message was obscured by a tedious litany of the accomplishments of Dodd-Frank and yet another victory lap over the achievements of her brainchild, the Consumer Financial Protection Bureau. Even though she was speaking to a friendly audience and delivered the speech with her customary energy, the audience failed to respond to most of the applause lines, and as the group was informed she would do, Warren left without taking questions, probably to avoid questions about Hillary Clinton's candidacy.
(Presentations for most speakers are available on the conference website
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