Jan 222018
Bill Longbrake

Bill Longbrake

This month’s letter is in two parts. In Part I, Bill Longbrake provides his final assessment of “hits” and “misses” on his 2017 forecasts. There were a lot of misses, which is a reminder that domestic and international economic and political dynamics can and usually do change dramatically over the course of a single year. Nonetheless, Bill takes a crack in the second section of Part I to summarize expectations for economic activity in 2018, which promises to be a very good year.

However, given that forecasts grow stale quickly and that the course of events can change economic outcomes, sometimes substantially, in Part II Bill provides a 10-year outlook for several key economic variable for four different scenarios. The “BASE” scenario reflects steady growth, but incorporates the demographic impact of slowing employment. Outcomes in other scenarios are not forecasts but rather show what could happen should the economy overheat, should recession occur, or should productivity remain extremely weak.

In next month’s letter, Bill intends to discuss accumulating economic imbalances and to examine significant risks that could alter the U.S. and international outlooks for the worse, if not in 2018, in the not too distant future.

Read the full letters.

Jan 022018
Bill Longbrake

Bill Longbrake

As we enter 2018, consumer and business optimism is at levels not experienced since the dot com days of the late 1990s. Passage of “The Tax Cuts and Jobs Act” by Congress and signed by President Trump just before Christmas has reinforced animal spirits. 2018 should be a good year, perhaps a very good year. But, with the economy operating at full capacity and the labor market extremely tight, Bill Longbrake warns that the extra stimulus risks overheating the economy and exacerbating imbalances that have already been building. In this month’s letter, Longbrake examines the natural rate of unemployment and demonstrates that small differences in its level have significant implications for inflation and monetary policy. He also provides updates on economic activity, employment, inflation and interest rates.  Read the full letter.

Nov 212017
Bill Longbrake

Bill Longbrake

As prospects rise for significant tax reform legislation to be enacted and take effect at the beginning of 2018, this stimulus boost is likely to extend the current expansion and push off the timing of the next recession. But, because the stimulus is coming during the mature phase of the cycle when the economy is already at full employment, it raises the risks of overheating and a potentially tighter monetary policy down the road. Amplifying the business cycle at this point in time is not optimal economic policy. But it is politically necessary for Republicans to deliver at least part of what they have promised to the American public. Bill Longbrake discusses prospects and risks in this month’s letter. He also describes significant policy developments coming out of the 19th Communist Party Congress that will shape China’s social and economic systems for years to come.

Read the letter

Nov 142017

The Center for Financial Policy was honored to host FDIC Chairman Martin Gruenberg on November 3, 2017 in College Park for a talk to faculty and students on the financial crisis and its aftermath.  

“I thought the ‘Thrift Crisis’ (1980-90 Savings and Loan Crisis) would be the most severe crisis I would encounter. It resulted in the failure of nearly a third of its industry and cost taxpayers nearly $140 billion to make good on the failed institutions,” he said. “But as it turned out it was a relatively a small hors d’oeuvre compared to what we went through in 2008 and 2009.” — Chairman Martin Gruenberg

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Nov 012017

This CFP blog post is the first in a series on Wall Street legend Henry Kaufman’s new book, Tectonic Shifts in Financial Markets (Palgrave Macmillan). Tectonic Shifts is the fourth book by Dr. Kaufman, who spent most of his career in senior management at Salomon Brothers overseeing the firm’s premier fixed income research organization.

Kaufman was an early Fed watcher, and has much to say about the central bank’s successes and foibles since the Second World War. “Ironically,” he observes, “the Federal Reserve has vaulted itself into a position of high prominence not because of its achievements but because of its shortcomings.” The Fed’s key blind spot was its failure to take proper account of dramatic structural changes in financial markets when formulating monetary policy – from the rise of spread banking, to burgeoning securitization, to financial concentration, to the rapid growth of off-balance-sheet transactions and debt, the latter growing at a much greater rate than GDP. Piecemeal financial deregulation (such as the seemingly innocuous phase-out of Regulation Q) left financial markets more vulnerable to crisis and in some ways less competitive.

The 2008 debacle only accelerated financial concentration, Kaufman laments. “As a consequence, monetary policy is increasingly guided by the actions of our financial markets. Large financial conglomerates that are now too-big-to-fail have become financial public utilities, but other institutions will be allowed to fail. That will further increase financial concentration and intensify political scrutiny of monetary policy.” And we should all be concerned about a politicized Federal Reserve.

David B. Sicilia is Henry Kaufman Associate Professor of Financial History and a CFP Academic Thought Leader.