ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Jeremy Stein Brings More Salt To the Fed's Table

Updated on October 25, 2012
Jeremy C. Stein
Jeremy C. Stein

An Important Maiden Speech and Venue

On October 11th 2012 Jeremy C. Stein, one of the latest additions to the Federal Reserve Board of Governors, made his maiden public speech. The venue chosen for this speech, provided a signal of the intentions and capabilities of Governor Stein.The Brookings Institution is synonymous with FDR and the creation of the New Deal. It is also synonymous with the Marshall Plan for Europe. Clearly, Governor Stein wished to allude to these two historic events to announce his arrival on the global stage.

The speech generally conformed to the principles that Chairman Bernanke opined; as his rationale for embarking on the latest Quantitative Easing programme. Stein however provided a slightly more granular analysis of the Fed's purchases of mortgage backed securities. His conclusion was that purchases of these securities would create greater bang for the QE Buck than the purchase of US Treasuries. He was also careful to opine that the risk of portfolio concentration in these securities, in both the Fed's balance sheet and the balance sheets of investors who followed rather than fought the Fed, would be something that needed careful scrutiny going forward. Having begun to elaborate on these risks, he quickly discounted them; by saying that greater regulation and oversight of holders of these securities, by the Fed, would be needed. The Fed therefore is the buyer of first (and last) resort and also the regulator; which sounds like an egregious conflict of interest that Governor Stein has overlooked.

It is not difficult to see the consequences of such a conflict, unintended or otherwise. A scenario can be generated in which the Fed owns all the mortgage backed securities outstanding; therefore forcing fixed income investors to buy US Treasuries, either because there is nothing else to buy, or because they become totally risk averse due to the Fed's strategy. Commercial banks, who currently own a great deal of mortgage debt, can therefore exchange it for less risky US Treasuries. The US banking sector is therefore de-risked.As a consequence, unintended or otherwise, the commercial banks end up monetizing the debt of the United States in the form of US Treasuries. This hypothetical scenario, generated by the conflicted Fed, has the positive externality effects of monetizing the US Federal Deficit and bailing out the US Banking System simultaneously. It is hard to believe that this is not part of a grand strategy to kill two birds with one stone; or that Governor Stein is not involved in the tactical execution of this plan.

"Under God's Power (Governor Stein) Flourishes"
"Under God's Power (Governor Stein) Flourishes"
Governor Stein has the same "Mind and Hand" as Chairman Bernanke
Governor Stein has the same "Mind and Hand" as Chairman Bernanke
Governor Stein shares the same "Truth" as Chairman Bernanke
Governor Stein shares the same "Truth" as Chairman Bernanke

What Governor Stein Brings to the Table

Governor Stein brings a unique skill set to the Fed. He also brings what is known as "Salt" to the table.

Beginning with the last quality first; the word "Salt" needs explaining. To do this, one must follow Governor Stein's career from academia to the Fed. He was an undergraduate at Princeton University; which is where Chairman Bernanke was a professor. Following in the footsteps of Chairman Bernanke, he then did his doctorate at MIT. Following MIT, he then became an assistant professor at Harvard Business School; and then moved on to MIT's Sloan School. In 2000, he joined Harvard University; Chairman Bernanke's old alma mater. One can conclude that Governor Stein has walked in the intellectual footsteps of Chairman Bernanke. These footsteps are indentified with what is known as the "Saltwater School of Economics", specifically located on the eastern seabord of the United States. The "Salt" that Governor Stein brings to the table, comes from the economic school of thought that is identified with Keynes.

Chairman Bernanke is the greatest student of the Great Depression; and its impacts on the New Deal and the Second World War that led to the Marshall Plan. It is hard not to hear history rhyming again in the current global economic environment. History also seems to be rhyming again; with the appointment of Governor Stein, as a kind of Bernanke "Mini Me".

Governor Stein has a unique skill set in capital markets and asset pricing; for which he received the Fama - DFA Prize. His winning paper was entitled "Breadth of ownership and stock returns";submitted in 2002. Eugene Fama, for whom the prize is named, is known as the founding father of the Efficient Market Hypothesis; and latterly for his criticism of the Capital Asset Pricing Model.

One begins to discern a pattern in the appointment of Governor Stein. Chairman Bernanke has made no secret of the fact that Quantitative Easing is targeted at asset prices. The performance of the equity market, since Quantitative Easing began, demonstrates this point. Chairman Bernanke needs someone who understands asset prices, especially equities, very well in order to execute Quantitative Easing with maximum effect and minimum risk. Governor Stein is clearly the man that Chairman Bernanke believes understands the job in hand. It doesn't hurt that Governor Stein also has the same "Salty" pedigree as Chairman Bernanke either.

Governor Stein therefore has the macroeconomic strategic background; and the micro-economic tactical skills. Bernanke was a student of the Depression; and this knowledge is what got him selected to become the Chairman of the Fed. Stein is a student of asset price behaviour; and this knowledge has qualified him to become the Fed's go to guy on the market impacts of Quantitative Easing.

Join the dots together, along with the little issue of the conflicted Fed and its consequences (unintended or otherwise) for US Treasuries and the Budget Deficit; and one can see a clear strategy evolving and being executed. Governor Stein will need the best of luck practically executing his academic theories in a capital markets environment, at the "Zero Bound", that the US Economy has never seen before.We wish him well.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)