Thanksgiving, Ben Bernanke, WSJ Story (11/23/2011)
David R. Kotok
November 25, 2011
Wall Street Journal readers saw the front-page story entitled “Investors Bullish on Fed Tips,” by Susan Pulliam. The opening discussion was alarming.
The story discusses private conversations that took place between Fed Chairman Ben Bernanke and Nancy Lazar, an economist with International Strategy & Investment Group, Inc. The story reports that they met in Bernanke’s office on August 15th. The story goes on to suggest that Lazar then hastily alerted her clients that a modern version of “Operation Twist” was coming.
WSJ says Lazar declined to comment. The Fed’s calendar entry confirms the meeting. So why is this meeting and report so alarming? Other meetings with Bernanke and NY Fed President Dudley were also reported. What’s the big deal?
It is standard procedure for Fed officials to meet with market participants to gain “color” from the market. Such inquiries by the Fed are a way in which they are supposed to gain insight. Some of those meetings are conducted with a small group of participants.
I have been involved in such meetings over the years. From my experience, those meetings are focused on the guests. The gatherings are small and without press, so all in attendance can speak freely. The Fed official leading the meeting asks numerous questions. The Fed official usually has staff present, and they occasionally take notes. Guests offer diverse views. Sometimes the debates become fierce. The Fed official listens. Sometimes she/he even stirs the debate with questions. Often, the official summarizes and may add perspective.
In all of my experience over the last 30 years never was I or another member of the group “tipped off” by a Fed official with a prediction of what the Fed was going to do. Federal law and the Fed code of ethics prohibit such behavior.
I did not read the Lazar comment, so I have no firsthand knowledge of what she said to her clients with her hastily drafted advice. I have read the reports of others who participated in such meetings. In some cases my colleagues and I have publically noted conversations with Fed officials. To my best recollection, we have never published our views on future Fed policy with a representation that it was sourced to a Fed official and originated in a private conversation.
These private conversations and this story have created a dilemma for the Fed.
On one hand, Fed officials want as much information as they can obtain from market participants. The best information comes from those who are in the markets on a daily basis. These are the folks who follow the markets most closely. They are executing transactions. They are part of the process that is determining market-based pricing of financial instruments of all types. The Fed needs to learn all it can from them.
On the other hand, a Fed official should never place him- or herself in a position to purposefully give away possible Fed policy. To give the policy initiative away to anyone is to put money in someone’s pocket at the expense of everyone who was not in the meeting. Such behavior weakens Fed credibility and eventually harms the entire financial system. Without integrity and honesty, a central bank has nothing.
How should Fed officials walk this fine line between obtaining information and conveying policy?
The story that is reported in the Wall Street Journal is distressing on the face of it. Of course, only Nancy Lazar and Ben Bernanke know what information was exchanged between them. The rest of us have to surmise. Perhaps Bernanke inquired as to how markets would take certain transactions, without disclosing what the policy might be. He may have asked questions. Nancy Lazar may have determined, on her own and solely from the nature of the questions that the Fed was seriously considering such a policy.
It is hard to imagine that Ben Bernanke actually leaned over to Nancy Lazar and said “Shh, don’t tell anybody but we are going to do an Operation Twist.” We doubt it. But only those in the room know the truth.
What about Lazar? How did she reach her conclusions? From what we can see, she didn’t break any law. There are no insider trading rules on interpretation of Fed policy or forecasts of same.
I look at the WSJ article and think, “How would those meetings have been reported? How would the story have read if every detail of meetings of this type were made public? In those meetings, anyone could walk out, call their clients, and honestly say, “Here is what I think is going on.” That would be an honest conveyance of information. Furthermore, the public could see if anyone in the Fed was playing favorites. Bernanke would have to explain any reports in his public press conferences. In addition, the Fed official could determine that certain guests had “stepped over the line” and misadvised clients or improperly conveyed discussions.
The Fed needs to decide how it is going to walk this fine line between a private inquiry into obtaining market information and an inappropriate information transfer.
One thing is clear: one-on-one calendar-listed meetings with the Chairman of the Federal Reserve or with a member of the Federal Open Market Committee are much riskier than meetings in which at least several participants are in the same place. The exclusivity of the single private interview is then eliminated. So is the risk of misinterpretation.
Some Federal Reserve officials are presently working on the Fed’s communication system. I am certain that they are examining new forms of transparency. They must now consider this WSJ story and its implications. We will learn from the minutes of the FOMC whether there is any discussion of this Wall Street Journal front-page story.
For us, this was not a good story to read at the beginning of the Thanksgiving holiday. It came on the heels of a dire bond auction in Germany, widening credit spreads in Europe, and a very heated discussion of policy options for the European Central Bank. It came along with the ongoing debate over QE3 and Federal Reserve policy for the US economy. It came in the wake of the announcement that the Federal Reserve is advancing a new form of intense stress tests of large US banks. And it came on the heels of the failure of the super-committee.
This was an inauspicious start to the Thanksgiving holiday. Add to it five extra airport travel hours and the need grew for a fine red wine to accompany our turkey. I hope, dear reader, that your Thursday meal and gathering were pleasant. Two healthy grandchildren and family warmth by a fireplace were the best enhancements of mine.
David R. Kotok, Chairman and Chief Investment Officer