Washington, DC -- (ReleaseWire) -- 07/16/2015 --DAWN BENNETT: Danielle DiMartino Booth is here. Booth is the chief market strategist at Liscio Report, which is a very popular research newsletter among professional traders. From 2006 to 2015, Booth served as an advisor to the president of the Federal Reserve Bank at Dallas. Now that she has moved in from the Fed, she's able to speak freely, and recently penned a very strong article attacking the Federal Reserve's abdication of responsibility. Danielle, welcome to Financial Myth Busting.
BOOTH: I'm happy to be here with you this morning.
BENNETT: Your recent article, "The Great Abdication," exposes the reality of the Fed as simply being clueless of the real day-to-day financial markets. Have you heard from your former Fed colleagues since it went to print?
BOOTH: I might have burned every bridge. No, I say that tongue in cheek. I have heard from Fisher, who I worked for and advised for many, many years. And he and I are on the same page, when it comes to a lack of appreciation of the financial markets within the central bank. I guess what I'm trying to say is that there's a fear of financial markets, as opposed to an appreciation.
BENNETT: You served for many years as an advisor to Richard Fisher, when he was the President of the Federal Reserve Bank of Dallas. He retired this year from the post, and he was known as the most hawkish within the Federal Reserve's open market committee. What was it like for an inflation hawk during a period of some of the most unprecedented campaigns of money printing and artificially low interest rates in American History?
BOOTH: Well, I think it was frustrating, and it wasn't just a matter of inflation, but it was also concern about Einstein's theory of insanity. (Insanity: doing the same thing over and over again and expecting different results.) If you think about when the initial floor was placed underneath the markets, that was Greenspan in 1987. I like to say that Draghi doesn't have anything on Greenspan, because he just stole his playbook, by saying, 'We'll do whatever it takes,' after the crash of 1987. And since then, the rules have really changed, but the problem is that there is a very large consequence of this, and I don't even think at this point you should call it unintended. But the consequence of all of this, and you've been speaking about Austrian economics all morning long, is that you end up with several generations of malinvestment, as Ludwig von Mises would say. That's where I think a lot of Fisher's and my concerns come in, with all of the easy monetary policies we've seen for almost 30 years now.
BENNETT: You accuse the Fed, in your article, of letting the tail to wag the dog, by which you mean the markets are basically setting Federal Reserve policy, not the other way around. How should Yellen treat Wall Street? Certainly it's one of the data points that should factor into her policy behavior, but in an ideal world, what would that relationship actually look like?
BOOTH: You know, I think the relationship should be one of greater understanding, as opposed to fear, as I said earlier. And by that same token, I think there should be a greater distance, if you will, between policy making and the financial markets. There's a risk-reward dynamic that has always existed in financial markets that has been stunted by easy monetary policy, whether you're talking about the United States or in other countries. And that kind of perverts the entire investment dynamic. If you're going to take on risk, then your hands should be slapped from time to time.
BENNETT: That's right.
BOOTH: There shouldn't always be a floor placed underneath you. And it's certainly not policy makers' place to do that. They need to be more agnostic of the investors in the financial markets, because they should know what they're doing, and a loss should not be a crime.
BENNETT: Is that why on CNBC this week you called quantitative easing 'quantitative pleasing'?
BOOTH: Yeah, I'll go down with that ship. I coined that many years ago. And again, you said it; the tail wagging the dog. That's how I perceived going too far down the path with quantitative easing, is kowtowing the markets, which is not the place of what are supposed to be independent policy makers.
BENNETT: Yellen is constantly moving the goal posts, in my mind.
BOOTH: You can say that again.
BENNETT: Do you think that this reflects a lack of confidence or a lack of knowledge?
BOOTH: That, what you just mentioned, moving the goal posts, has to have been the most frustrating aspect of being on the inside. At some point, I wanted to-- my hair was on fire, saying, 'These people are not coming back into the workforce. They're economically dis-incentivized from doing so. It's not going to happen. The longer we keep interest rates at the zero bound, the greater the risk is that we're not encouraging one asset bubble, but many at the same time.' And again, you mentioned earlier in your show, what happens if we hit recession? What is in policy makers' tool kit at this juncture? Because from my lens, it looks like the policy makers' tool kit is fairly empty right now, given the size of the balance sheet and where interest rates are.
BENNETT: Without this monetary stimulus, according to Yellen and Bernanke, everything would have collapsed. Do you agree with that?
BOOTH: I hate to say this, but I was in the camp of quantitative easing that very first slug, the one that Congress voted down. I was certainly in that camp, because you could see the dominoes lining up. It was very, very visible in the derivatives market that one bank after another looked to be ready to collapse. Had that happened, we would've had a global financial system downfall, and systemic risk is something that's very, very difficult to contain once it's unleashed, especially given the interconnectivity of markets. That said, the further iterations—that, again, I believe were made due to fear of financial markets and a lack of understanding of them—those further iterations, I believe, did more harm than good.
BENNETT: Monetary stimulus, printing of money, was meant to just get us through the rough patches, not to be a day-to-day, hour-to-hour, minute-to-minute need by an economy.
BOOTH: Dodd-Frank has removed these words, but prior to the financial crisis, the words 'unusual' and 'exigent' and 'emergency' were in the verbage that dictated putting a floor under financial stability. And these were definitely emergency times, so it was appropriate then. But I'll digress for a minute. We wouldn't have been in the same situation, had in 1996, when Alan Greenspan uttered the words 'irrational exuberance,' somebody had the wherewithal to raise margin requirements. Just look at what's happening in China. So there are different ways that you can go about trying to staunch speculation, if and when you see it, as a policy maker. And had some prudent actions been taken in the 1990s, I'm not sure that the calamity that we've all come to know as the financial crisis would even have come to pass.
BENNETT: What's your take on this, Danielle; do you think American markets—the stock market and bond market—are actually experiencing a bubble?
BOOTH: I think without a doubt that the bond market is. There's absolutely no doubt. This is something that I'm doing more and more work on every day. What people don't appreciate—they're saying, 'Well, we're not seeing the mania that you see in the late stages of a credit cycle.' I keep trying to point out to people that the bond market has basically doubled in size. I'm talking about the corporate bond market here and the structured product market. There's more paper out there than is even really imaginable. In 2014, the global bond market passed 100 trillion dollars in size, and the liquidity situation, due to not well-made regulations, has actually made the bond market even more susceptible. But that being said, the stock market is also fast approaching bubble levels as well. But I think that there's a possibility that the stock market rally continues regardless, again, because some prudent measures are not going to be taken.
BENNETT: You've written that pensions are seeking out safe harbor assets to balance out the risk posed by the equities, in the form, of course, of fixed income, but many of these assets are still locked into the stock market. So all these retirees' securities are at risk when the massive overvaluation of fixed income and equity markets eventually turn themselves right side up. Do you think there's any smart way pension managers can possibly escape the risk, and also our listeners, whose retirement is contingent on receiving their full pension?
BOOTH: I think this is the most difficult, pressing issue for the country today, and I don't say that lightly. The fact that pension managers have been advised identically on what I call the fallacy of the efficient frontier is placing the entire pension system at grave risk, because, well, as a veteran of the market, you know exactly what happens to correlations at times of great market distress. My biggest concern, which I'm in the process of writing about this upcoming week, is that pensioners aren't aware of what's being put into their pensions at this point, and I'm talking about alternative investments, private equities, especially on the commercial real estate side. Not only are pensions going out the risk spectrum, which is inappropriate for pensioners, but they're actually going out the liquidity spectrum as well, in the search for yield. And I think it's very difficult to say where to put your money, from the perspective of pensioners and the people safeguarding those assets.
BENNETT: You've criticized congress for essentially making use of the Fed's low interest rate policy, by even going deeper in debt. We're on the same page on that. If congress were to get serious about trying to rein in the risk that comes from a Fed with too much power over the economy, what would you say would be some smart steps to take?
BOOTH: Well, I'll say this first: I got a ton of criticism when I said that the US should be issuing 100 year debt. Mexico is, why aren't we? The British have fortified their balance sheet. I don't like the idea of being beholden to strangers in Shanghai, to step up to our treasury options. Every corporation in America has refinanced their balance sheet, and corporate America's balance sheets are in some ways stronger than they've been in a generation. But why on earth haven't we taken the same opportunity? And it helps to create the veneer of a low deficit, if you have extremely low interest costs. So that's an initial criticism. My greatest fear right now is that the powers that be are trying to increase the concentration of power at the Federal Reserve to New York and the Federal Reserve board in Washington. That's not what this country looks like. The largest economy in this country happens to be the state of California, Texas is number two. The Federal Reserve system should reflect the United States economy, not power bases that are ingrained, in my view. So if and when the central bank manages to whistle by the graveyard, and another crisis erupts, my hope is not that we end the Fed. That's ridiculous. We're not a third world country. We have to have a central bank. But my hope would be that the Fed would be re-engineered in a general make-up.
BENNETT: To that point, I'm going to ask you this last question: The Fed now has to maintain an illusion of stability in ever greater extremes. How are they going to do that?
BOOTH: As long as Wall Street is willing to go along with the Fed, and as long as some economist out there is willing to say that you can grow the Fed's balance sheet to infinity, I think you can perpetuate this illusion for more time to come. But again, every step we take further down this unprecedented path—we're pushing 12 trillion dollars in money printing—every step further down this path we take, we're careening further and further towards an abyss that I don't think monetary policy making can address, ultimately.
BENNETT: I agree. Danielle DiMartino Booth, thank you so much.
BOOTH: Thank you for having me this morning.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org