Search results for: Financial Times Top 300 Advisors

## FT 300: Top Registered Investment Advisers

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We are honored to announce that our firm, Ritholtz Wealth Management, has been named to the FT 300 list for 2017. This is a ranking of the top 300 registered investment advisers in the United States according to a comprehensive set of metrics developed by the Financial Times. The list is merit-based, and selects only the best in firms in each state according to that methodology.

For a young firm like ours (we are not quite 4 years old) it is an honor to be included. I am blessed to work with some great partners in Josh, Michael, and Kris; we have a wonderful staff, and a great group of professional advisors, CFAs and CFPs. What we do is the result of a team effort — RWM is a true ensemble practice.

Our goal is to continue delivering the finest services we can to our clients around the nation. We are fortunate to have an engaged, thoughtful and fascinating group of people as clients. We try to live up to the high standards and expectations you hold for us every day.

We are grateful to be included. See you there tonight for a drink . . .

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## Video-O-Rama: Figuring out the lie of the financial land

Video-o-rama: Figuring out the lie of the financial land

In addition to more “Outlook for 2009” videos (dealt with in last week’s Video-o-rama), the past week saw material covering a hodgepodge of topics. Although the topics were varied, good viewing material was produced, with the likes of Marc Faber, Peter Schiff, Martin Feldstein, Barton Biggs, Jeff Saut and Bill Gross in attendance.

A few of the more interesting clips that attracted my attention are shared below, including a few items warning about a bubble in government bonds.

But before we get to the economy and the financial markets, please spend a few minutes viewing a worthwhile three-part production by the Wall Street Journal entitled the “End of Wall Street” – What happened? Why did it happen? And what happens next?

The Wall Street Journal: End of Wall Street
Chapter one: What happened?. In the first of this three-part series, Journal reporters explain how the housing bubble inflated and burst, and why easy money led to the collapse of Wall Street’s biggest financial institutions.

Chapter two: Why did it happened? What was going through the minds of CEOs, corporate boards, fund managers and mortgage lenders as they created hard-to-understand derivatives Warren Buffett once called ‘weapons of financial mass destruction’.

Chapter three: What happens next? This final chapter of the crisis on Wall Street tells the story of the $700-billion bailout, as seen through a reporter’s eyes, and looks at what’s ahead for the global economy. Click here for Chapter three. Source: The Wall Street Journal, January 5, 2009. ## About Barry Ritholtz Barry L. Ritholtz is the co-founder and chief investment officer of Ritholtz Wealth Management LLC. Launched in 2013, RWM is a financial planning and asset management firm, with over$605 million in assets under management. The firm offers a variety of services to the investing public, including Financial Planning and Wealth Management, as well as LiftOff — a low cost online investment site.

In 2017, Ritholtz Wealth Management was named ETF Advisor of the Year. The firm was also named to the Financial Times Top 300 Advisors in the US, and is the 4th fastest-growing RIA in America, according to Financial Advisor magazine.

“To say that Barry Ritholtz ‘pulls no punches’ is like saying that Joe Louis had a nice right cross.”-Jesse’s Café Américain

In addition to running a wealth management and financial planning firm, Ritholtz is a frequent commentator on many financial topics. He was named one of the “15 Most Important Economic Journalists” in the United States, and has been called one of the 25 Most Dangerous People in Financial Media. He writes a daily column for Bloomberg View and previously wrote a monthly column on Personal Finance and Investing for The Washington Post.

Ritholtz is the creator and host of Masters in Business, a popular podcast on Bloomberg Radio. A 90-120 minute deep dive with sone of the most important people in business and finance, the radio/podcast on iTunesSoundcloud, and Bloomberg. It has quickly became one of Bloomberg’s most popular podcasts.

Beyond his commentary and published articles, Mr. Ritholtz also authors The Big Picture — a leading financial weblog, generating several million page views per month. The Big Picture covers Investing & Trading to Macro Economics, and everything else in between. The blog has quickly amassed ~130 million visitors. Media accolades for The Big Picture have poured in: TED named TBP one of top 100 Websites You Should Know and Use; TBP was featured in the 10th annual New York Times magazine “Year in Ideas,”(DIY Economics); Numerous traffic sites rank The Big Picture as one of the most trafficked Markets/Economic’s blogs on the web.

In 2008-09, Ritholtz wrote the book Bailout Nation, published by Wiley in 2009; the updated paperback was released in 2010. Bailout Nation became the best reviewed book on the bailouts, with NYT calling it “Irreverent,” and “an important book about a complicated subject, and yet you could still read it at the beach.WSJ noted “If you want to know how we got into this mess and what might still be coming, this is the book for you.” Bloomberg praised it as “A valuable new contribution to our understanding of how we arrived at this sorry juncture.” Bailout Nation was named “Investment Book of the Year” by Stock Trader’s Almanac, and won aFirst Amendment Award for Outstanding Journalism: Best Book. Numerous media — USA Today, Miami Herald, Marketplace Radio — named it as one of the best finance/business books of 2009.

One of the few strategists who saw the the coming housing implosion and derivative mess far in advance, Ritholtz issued warnings about the market collapse and recession in time for his clients and readers to seek safe harbor. Dow Jones Market Talk noted that “many market observers predict tops and bottoms, but few successfully get their timing right. Jeremy Grantham and Barry Ritholtz sit in the latter category…”  (A summary of major market calls can be found here). His observations are unique in that they are the result of both quantitative data AND behavioral economics, most likely a function of his unusual career path in finance.

Mr. Ritholtz is a frequent commentator on economics and financial markets, and has appeared as a regular guest in most major media outlets.* He has been profiled in the Wall Street Journal’s Quite Contrary column (August 3, 2004; Page C3), and was the subject of several Barron’s interviews (December 8, 2008 and October 26, 2010). Ritholtz was honored to be the dedicatee of Stock Trader’s Almanac‘s 40th Anniversary edition in 2007 and the Yahoo Tech Ticker’s Guest of the Year in 2009.

Mr. Ritholtz performed his graduate studies at Yeshiva University’s Benjamin N. Cardozo School of Law in New York, where he focused on Economics, Anti-Trust and Corporate Law. He was a member of the Law Review, and graduated Cum Laude with a 3.56 GPA. His undergraduate work was at Stony Brook University, where on a Regents Scholarship, he focused on Mathematics and Physics, graduating with an Bachelor Arts & Sciences degree in Political Science. He was a member of the Stony Brook Equestrian Team, and competed successfully in the National Championships (1981) of the Intercollegiate Horse Show Association. In addition to writing the National Affairs column for the campus weekly (The Stony Brook Press), he was elected Vice-President of the student body. (Ritholtz best describes it as his Bizarre Academic Career)

After passing the Bar exams in New York and New Jersey, Ritholtz practiced law for a few years, but became disenchanted with his career choice. He shifted his focus to technology and markets, has been an angel investor in early stage technology companies. He is on the Board of Advisors of Riskalyze (creating quantitative measurements of client risk tolerances) and Peer Street (a marketplace that provides unprecedented access to high quality real estate loan investments). He is also an investor in StockTwits, a Twitter based stock community.

When not bemoaning the New York Knicks‘ all-too-frequent offensive lapses, Mr. Ritholtz is a vintage sports car enthusiast. He and his wife Wendy, an artist and teacher, live on the North Shore of Long Island, New York with monsters Max and Jackson.

• CNBC, Bloomberg, Fox, CNN, ABC, CBS, NBC, PBS, MSNBC, and C/SPAN, including shows, such as Nightline,ABC World News Tonight, NBC Nightly News with Brian Williams, Fast Money, Kudlow & Co, and Power Lunch, and has guest-hosted Squawk Box on numerous occasions. He appears regularly on radio for Bloomberg, NPR, CBS, and other broadcasters. His market perspectives are quoted regularly in the New York Times, Wall Street Journal, Barron’s, GQ, Forbes, Fortune, Smart Money, Kiplingers, and other print media.

## Transcript: Jerome Schneider, PIMCO

The transcript from this week’s MiB: PIMCO’s Jerome Schneider  is below.

You can stream/download the full conversation, including the podcast extras on BloombergiTunesOvercast, and Soundcloud. Our earlier podcasts can all be found on iTunesSoundcloudOvercast and Bloomberg.

ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST: This weekend on the podcast, I have an extra special guest. His name is Jerome Schneider. He is the head of had a short-term portfolio management of PIMCO. If you are remotely interested in fixed income bonds, trading, the plumbing of how finance works, this is a master class and tremendous details of how the fixed income market works. It is absolutely fascinating.

If you are remotely considering any sort of fixed income investing, working on a bond desk, being a portfolio manager of any sort, then this is a conversation you have to listen to. It’s absolutely fascinating.

With no further ado, my conversation with PIMCO’s Jerome Schneider.

My special guest today is Jerome Schneider. He is the head of short-term portfolio management and funding at PIMCO which manages about $1.75 trillion as of the end of 2017. Prior to joining PIMCO in 2008, he was a senior managing director at Bear Stearns specializing in credit and mortgage related funding transactions. He held a number of various positions on the municipal and fixed-income trading desks at Bear. Morning Star named him the Fixed Income Fund Manager of the Year for 2015. He manages three separate funds, one over$14 billion dollars, the other, over $8 billion, the smallest, a mere$2.2 billion. Jerome Schneider, welcome to Bloomberg.

JEROME SCHNEIDER, HEAD OF SHORT-TERM PORTFOLIO MANAGEMENT AND FUNDING, PIMCO: Thanks very much, Barry. It’s great to be here.

RITHOLTZ: This is the perfect time to be speaking with you given everything that’s going on in — with the Fed, with rising rates, with yield curve, but let me start with a little bit of background. How did you first get interested in finance?

SCHNEIDER: Pretty easily on, I had a great uncle who was always sort of fascinated with the stock market at that point in time and had bought me a handful of shares, you know, like everybody does and from that fascination, you quickly realize that the power of capital and I think at the age of 11, I had asked my dad, you know this stock market thing is pretty interesting.

Let’s read about it. Let’s read about it on the Wall Street Journal, and for my 12th birthday, he actually took me to the Stock Exchange on the floor and for young chap from Oklahoma, Oklahoma City that is — that’s a pretty, pretty empowering thing to see your dream location come true.

So, for me it was a trip to the Stock Exchange and to see the Yankees who I loved at that point in time and really, put together in your mind how you actually get to that point from being 12 to being a young professional and the steps it takes, so that was a magical moment in my formative years.

RITHOLTZ: And that was back in the day when you could both A, get on the floor of the Stock Exchange, you can’t do that really today and B, it’s not just the front (ph) for a television studio, that was where stocks were actually traded back then.

SCHNEIDER: Yes, and amazing and thinking about it, you know, I was probably hardly five-feet tall at that point in time. You know, it was a scrum and this was in the mid-early 80s and I looked back at the photos we took and the funniest thing, obviously is the people and how they are dressed and second of all, it was a functioning entity in a physical sense, not just a literal sense and a spiritual sense as it is now, along with computers, but it’s a physical breathing entity.

And then today, obviously, it’s changed and the NYSE is — and all the stock exchanges have their functioning perspective to code up to technology, but I think more importantly, and this is the thing that I would say is that, as a young person having the ability to have that experience and learning from people what it took — it takes to get there and then putting those steppingstones in place, seeing the right people, understanding what they took to get there even though they might be 10, 20, 30, 40 years your senior — that’s a very powerful thing.

And I think, one of the key things for people whether they are interested in finance or otherwise is to find people that will serve as mentors, rabbis — whatever it is to help empower them to achieve their goals in that kind of way and I was just fortunate to have a ton of people around me.

RITHOLTZ: It sounds like that was a formative experience for you.

SCHNEIDER: Yes, it was. It was great and I think, you know, people recognized that at that point in time, as odd as it might be from young kid in Oklahoma City, it might have been one of those things that it was a way out, so to speak, and so for me Oklahoma is a great place to be from and is a great place to be going back to with family, but at the same time, I haven’t lived there since high school.

RITHOLTZ: No interest in being a roughneck and working in the oil fields or any of that?

SCHNEIDER: Not as —

RITHOLTZ: Physical labor?

SCHNEIDER: Not at this point. Well, I mean, that was the other formative expense in my life actually being exposed to the roughnecks and when you grow up in Oklahoma and Texas and your whole family is exposed to the oil industry, in the late 70s and early 80s —

RITHOLTZ: During the oil crash? Yes, sure.

SCHNEIDER: The oil bust basically was an eye-opening experience and then frankly, that was one of the things that led me to want to understand capital markets because, you know when you’re in the oil business, you’re putting together a ton of capital, a lot of it is not your money and so your incentives are very different.

And at the same time, when you think about the ramifications of a re-pricing event, in that case, it’s oil and everybody — I mean, they’re in there sitting on the oil patch and things, oil prices only go, up but as a young kid, you see everybody going from having literally Learjets and third and fourth lake homes and multiple cars to nothing overnight and you look around, and you know, we had a very modest upbringing.

I would say that, you know, in retrospect, it was – the (ph) down side is fairly limited compared to some people —

RITHOLTZ: Not a lot of leverage —

SCHNEIDER: Well, not a lot of leverage, so to speak, but at the same time, not a lot of the different up side, but I learned at that point in time, the strength of leverage and the danger of leverage, which oddly, as my professional career evolved in the fixed income — that obviously became a keystone to that.

RITHOLTZ: So, you go to University of Pennsylvania and then you get your MBA at NYU Stern?

SCHNEIDER: Correct.

RITHOLTZ: And what was your first job right out of the school?

SCHNEIDER: So, when I graduated Penn, I wanted sort of a degree that was related to finance, but really more economics related and so I had a more customized degree in international finance economics and international relations and so, Penn was a perfect place to do that.

Unfortunately, when I was graduating and started with an interview in 1994, my background was a series of internships for a small — from a small shop in Oklahoma City called Stifel Nicolaus —

RITHOLTZ: Oh sure.

SCHNEIDER: And then —

RITHOLTZ: Which is now not such a small shop.

SCHNEIDER: Not such a small shop, but they were really focused on muni bonds back then, which is a good and bad thing and the other one was running a guy’s campaign for state treasurer of Oklahoma, which was successful, but that was both — it took me back to Oklahoma and so, as a result, at Penn, you’re looking out for internships and most of the kids in the East Coast had connections to New York and Wall Street and things like that and I didn’t have any of those connections, so to speak.

So, I was really trying to find my way to get to Wall Street at that point in time and it took a little bit more effort. That combined with the fact that when I was graduating in 1994, it wasn’t the best job market in the in the world and when you think about it, you had to get in on any floor whatsoever. So, I interviewed. I interviewed with people who were trying to sell limited partnerships, limited — people who were trying to trade stocks and be in the operations group, and oddly, coincidentally, the job I took was with Bear Stearns and I joined their operations training program at that that tender young age for a very small salary, but a great opportunity to learn.

## Transcript: MiB with Tom Gilovich of Cornell University

The transcript from this week’s MiB podcast with Tom Gilovich is below.

You can stream/download the full conversation, including the podcast extras, on BloombergiTunesOvercast, and Soundcloud. Our earlier podcasts can all be found on iTunesSoundcloudOvercast and Bloomberg.

~~~

ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST: This week on the podcast, I have an extra special guest. His name is Tom Gilovich, he is a professor of psychology at Cornell University and I have to say he is a person who has had over the years, tremendous influence on my career although admittedly unknowingly, I began in this industry as a trader and I was frequently perplexed and fascinated by why the people on the desk around me were doing either poorly or well any given day, week, month, and I eventually figured out it wasn’t that one guy was smarter than another or someone had more knowledge, it was their own behavior that led to their success or failures. And so I started hunting for some information about why people made certain behavioral decisions that they did.

I ended up tracking down a book of his from 1991, “How We Know What Isn’t So” and that pretty much sent me down the rabbit hole of behavioral economics which has been a tremendous asset to me both in the world of finance and media. Understanding what motivates people to make either good or bad decisions with their money is a tremendous asset both what you should be doing with your money and what you should be advising other people to do with their money.

This is, to me, one of the more fascinating conversations that you’ll hear if you are at all interested in fill in the blank, psychology, behavioral economics, heuristics, biases, et cetera, I could’ve gone on for another three hours with him I barely got to scratch the surface of all my questions.

With no further ado, my conversation with Tom Gilovich.

I have an extra special guest this week and his name is Professor Thomas Gilovich, he is a professor of psychology at Cornell University, he has published numerous peer-reviewed works on cognition and heuristics and is among the most cited academics in the field working on behavioral psychology and economics.

His work has debunked to the idea of the hot hand in basketball, the spotlight affect, the bias blind site, clustering allusion, and numerous other cognitive issues are in his purview, he is the author of numerous books including a textbook on heuristics and biases. He is the co-author of “Why Smart People Make Big Money Mistakes And What You Can Do To Correct Them.”

I became familiar with his work “How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life.” It was one of the first popular books on behavioral economics and one that I found incredibly influential. Thomas Gilovich, welcome to Bloomberg.

THOMAS GILOVICH, PROFESSOR, CORNELL UNIVERSITY: Happy to be here.

RITHOLTZ: Let’s start out with how we know what isn’t so, you begin the book with a quote from Artemis Ward, “It ain’t the things we don’t know that get us into trouble, it’s the things we know that just ain’t so.” Tell us about that.

GILOVICH: Well if we are convinced of things that aren’t true, we’re going to go down certain paths that aren’t going to be productive and that quote captures that idea very well. And what I like about that quote is that most people attribute it to Mark Twain or Will Rogers, the source I thought at the time was Artemis Ward and maybe two years after the publication of a book, a reader wrote to me and said well it’s really interesting, you are sort of telling everyone they got it wrong with Will Rogers and Mark Twain, but in fact it goes back even earlier than Artemis Ward to someone named Josh Billings that I hadn’t heard of.

So it’s kind of ironic starting off a book on allusion and error, the very first sentence of the book contains a citation error at least.

RITHOLTZ: But that citation error did not lead you down a path filled with errors, let’s discuss a little bit about the things that you discovered and published in the book and we’ll begin with a very simple question, what are heuristics and biases?

GILOVICH: Well the bias part is quite easy it’s a term that people are familiar with when there’s a systematic departure between a belief that you have in reality or a tendency to choose to veer in one direction when you should be bearing in another direction, so it’s a systematic departure from reality or the best assessment of reality.

Heuristics is a little more complicated for most folks, it’s generally defined in the behavioral economics world as a rough approximation seat-of-the-pants —

RITHOLTZ: Rule of thumb.

GILOVICH: Rule of thumb is another way of describing it, yes.

RITHOLTZ: And why do these heuristics lead people down the wrong path?

GILOVICH: Because they generally work pretty well in one of the earliest examples used and applied to psychology was Daniel Kahnemann and Amos Tversky’s examples of we use the clarity of an image as a cue for how far away it is. The farther things are, the harder it is to see them clearly, so they will see more indistinct and that generally works pretty well. We’re able to see whether something very far away is relatively close up.

But on a hazy day, that’s going to make things seem farther away than they really are and conversely on a spectacularly clear day, you often have the reaction of whoa those mountains are — I didn’t realize they were that close.

RITHOLTZ: Let’s use another example of some biases, you’re in line at the supermarket and your line doesn’t seem to be moving, the line next to you really looks like it’s flying, are you waiting for a tollbooth? I know parts of the country still have tollbooths and you switch lines and suddenly the line you’re in comes to a dead halt and the line you just left seems to be moving.

What is it about our life experience that causes that illusion or is it an illusion?

GILOVICH: That one as far as the grocery lines, I don’t know if anyone has formally studied it, but you have to ask what principle of the universe would there be that would systematically distort things such that whenever you moved to a line, it would slow down and the line that you are in suddenly sped up.

But it’s easy to explain why people would believe that, even if it’s not true. That is to say those times when you stay in your overly busy line, you’re tempted to move to another one and it turns out that that you can see that that would’ve been a better thing, your line stays slow, you can see people speeding through the other line, that bothers you, but you get over it.

If on the other hand you make the opposite mistake — you switch to the seemingly speedy line and it slows down — the line you are in suddenly speeds up, you are going to kick yourself and say why did I do that? I was in the right line, I brought this on myself and it’s more annoying and because it’s more annoying, it’s more memorable and therefore you’re going to have a distorted sense in your head of how common it is.

Very much like there’s a belief in the sports world, the baseball world that if your team, your pitcher has a no-hitter in progress, don’t comment on it and that’s partly fed by the idea that if your pitcher does have a no-hitter and you say, oh we got a no-hitter going this is great and then they lose it, you draw an association between those two and those are going to stand out and you are going to think that it’s what you’ve done has played some determined role which of course hasn’t.

RITHOLTZ: So let’s talk a little about mean reversion. Very often, when we see things that are outliers to the upset or the downside, we’re sort of surprised when the next item in that series is not as extreme be it how fast the line is moving or how easily a no-hitter is lost and goes back to normal — issues why do people have such a hard time with mean reversion?

GILOVICH: That’s a great question and there are a number of things that contribute to this belief, the failure to recognize the fact that regression to the mean is happening and one of them is that it is the same story that I’ve described before which is when it reverts and particularly when it reverts after you’ve done something that that stands out in your memory more and distorts your — the intuitive database that you have in your head.

And so there a lot of superstitions that are essentially a failure to recognize the operational progression, the Sports Illustrated Jinx being one of them that it’s believed that if you get your picture on the cover of Sports Illustrated, but that’s bad luck and doesn’t take that much insight to recognize that really is a mean aversion account that is you only get your picture on the cover of Sports Illustrated if you had a run of success and extraordinary success at time one is going to be followed not by abject failure but by somewhat less extreme run of success afterwards.

So you’re right there on the peak on average people to do less well the next time that gives rise to this belief that it’s bad luck to be pictured on the cover of Sports Illustrated magazine. And people — athletes truly believe it, some of them have turned down the opportunity to be on the cover of Sports Illustrated simply because they thought it was bad luck.

GILOVICH: Yes, the paper came out in 1985.

My two for Tuesday morning train pool reads:

• One of 2016’s Worst-Performing Assets: Frontier Markets (Wall Street Journal)
• A Portrait of the Investing Columnist as a (Very) Young Man (Jason Zweigsee also Ten Things I’ve Learned From Blogging (Fortune Financial)
• Five doable strategies for financial success in 2017 (USA Today)
• Rationally Irrational (Irrelevant Investor) see also The Hierarchy of Investment Difficulty (A Wealth of Common Sense)
• Some States Create Lots of Jobs But Lose People (BloombergView)
• Soaring insulin prices are a case in point: A ‘free market’ in healthcare is doomed (LA Times) see also Carl Icahn Is a Good Investor. But He Has No Business Being Donald Trump’s Regulatory Scourge. (Slate)
• The US Is Vulnerable to Drone Attacks. Here’s How to Stop Them (Wired)
• Will somebody please give Norm Macdonald another TV show? (Washington Post) see also Norm Macdonald Tweeted About The SNL Anniversary & You’re Gonna Want To Read Every Word (Gothamist)
• Google’s top results for “Did the Holocaust happen” now expunged of denial sites (Search Engine Land)
• Rogue One: an ‘Engineering Ethics’ Story (SciFi Policysee also One of the best performances in ‘Rogue One’ is by an actor who died in 1994 (SF Gate)

Be sure to check out our Masters in Business interview this weekend with Bruce Tuchman, who brought numerous US cable channels — Nickelodeon, AMC Global, MGM, Sundance, etc to a global audience.

Bite back at your taxes: hold on to more of your earnings

Source: Quartz

## Reflections on Macroeconomics Then and Now

Reflections on Macroeconomics Then and Now
Vice Chairman Stanley Fischer
At the “Policy Challenges in an Interconnected World”
32nd Annual National Association for Business Economics Economic Policy Conference
Washington, D.C. March 7, 2016

I am grateful to the National Association for Business Economics (NABE) for conferring the fourth annual NABE Paul A. Volcker Lifetime Achievement Award for Economic Policy on me, thereby allowing me the honor of following in the footsteps of Paul Volcker, Jean-Claude Trichet, and Alice Rivlin.1 The honor of receiving the award is enhanced by its bearing the name of Paul Volcker, a model citizen and public servant, and a giant in every sense among central bankers.

One thinks of many things on an occasion such as this one. My mind goes back first to growing up in a very small town in Zambia, then Northern Rhodesia, and to the surprise and delight my parents would have felt at seeing me standing where I am now. They would have been even more delighted that my girlfriend, Rhoda, whom I met when my parents moved to a bigger town in Zimbabwe, and I have been happily married for 50 years. But that is not the story I will tell today. Rather, I want to talk about our field, macroeconomics, and some of the lessons we have learned in the course of the last 55 years–and I say 55 years, because in 1961, at the end of my school years, on the advice of a friend, I read Keynes’s General Theory for the first time.

Did I understand it? Certainly not. Was I captivated by it? Certainly, though “captured” is a more appropriate word than “captivated.” Does it remain relevant? Certainly. Just a week ago I took it off the bookshelf to read parts of chapter 23, “Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption.” Today that chapter would be headed “Protectionism, the Zero Lower Bound, and Secular Stagnation,” with the importance of usury laws having diminished since 1936.

There is an old joke about our field–not the one about the one-handed economist, nor the one about “assume you have a can opener,” nor the one that ends, “If I were you, I wouldn’t start from here.” Rather it’s the one about the Ph.D. economist who returns to his university for his class’s 50th reunion. He asks if he can see the most recent Ph.D. generals exam. After a while it is brought to him. He reads it carefully, looking perplexed, and then says, “But this is exactly the same as the exam I wrote over 50 years ago.” “Ah yes,” says the professor. “It is the same, but all the answers are different.”

Is that really the case? Not really, though it is true to some extent in the realm of policy. To discuss the question of whether the answers to the questions of how to deal with macroeconomic policy problems have changed markedly over the past half-century or so, I will start by briefly sketching the structure of a basic macro model. The building blocks of this model are similar to those used in many macro models, including FRB/US, the Fed staff’s large-scale model, and a variety of DSGE (dynamic stochastic general equilibrium) models used at the Fed and other central banks and by academic researchers.

The structure of the model starts with the standard textbook equation for aggregate demand for domestically produced goods, namely:2

2. Next is the wage-price block, which is based on a wage or price Phillips curve. Okun’s law is included to make the transition between output and employment;
3. Monetary policy is described by a money supply or interest rate rule;
4. The credit markets and financial intermediation are built off links between the policy interest rate and the rates of return on, and/or demand and supply functions for, other assets;
5. The balance of payments and the exchange rate enter through the balance of payments identity, namely that the current account surplus must be equal to the capital account deficit, corrected for official intervention;
6. Dynamics of stocks: There are dynamic equations for the capital stock, the stock of government debt, and the external debt.

When I was an undergraduate at the London School of Economics (LSE) between 1962 and 1965, we learned the IS-LM model, which combined the aggregate demand equation (1) with the money market equilibrium condition set out in (3). That was the basic understanding of the Keynesian model as crystallized by John Hicks, Franco Modigliani, and others, in which it was easy to add detail to the demand functions for private-sector consumption, C; for investment, I; for government spending, G; and for net exports. The Keynesian emphasis on aggregate demand and its determinants is one of the basic innovations of the Keynesian revolution, and one that makes it far easier to understand and explain what factors are determining output and employment.

Continuing down the list, on price and wage dynamics, the Phillips curve has flattened somewhat since the 1950s and 1960s.3 Further, the role of expectations of inflation in the Phillips curve has been developed far beyond what was understood when A.W. Phillips–who was a New Zealander, an LSE faculty member, and a statistician and former engineer–discovered what later became the Phillips curve. The difference between the short- and long-run Phillips curves, which is now a staple of textbooks, was developed by Milton Friedman and Edmund Phelps, and the effect of making expectations rational or model consistent was emphasized by Robert Lucas, whose islands model provided an imperfect information reason for a nonvertical short-run Phillips curve. In Okun’s law, the Okun coefficient–the coefficient specifying how much a change in the unemployment rate affects output–appears to have declined over time. So has the trend rate of productivity growth, which is a critical determinant of future levels of per capita income.

In (3), the monetary equilibrium condition, the monetary policy decision was typically represented by the money stock at the LSE and perhaps also at the Massachusetts Institute of Technology (MIT) after the Keynesian revolution (after all, “L” represents the liquidity preference function and “M” the supply of money); now the money supply rule is replaced by an interest-rate setting rule, for instance a reaction function of some form, or by a calculated “optimal” policy based on a loss function.

The development of the flexible inflation-targeting approach to monetary policy is one of the major achievements of modern macroeconomics. Flexible inflation targeting allows for flexibility in the speed with which the monetary authority plans on returning to the target inflation rate, and is thereby close to the dual mandate that the law assigns to the Fed.

A great deal of progress has been made in developing the credit and financial intermediation block. As early as the 1960s, each of James Tobin, Milton Friedman, and Karl Brunner and Alan Meltzer wrote out models with more fully explicated financial sectors, based on demand functions for assets other than money. Later the demand functions were often replaced by pricing equations derived from the capital asset pricing model. Researchers at the Fed have been bold enough to add estimated term and risk premiums to the determination of the returns on some assets.4 They have concluded, inter alia, that the arguments we used to make about how easy it would be to measure expected inflation if the government would introduce inflation-indexed bonds failed to take into account that returns on bonds are affected by liquidity and risk premiums. This means that one of the major benefits that were expected from the introduction of inflation-indexed bonds (Treasury Inflation-Protected Securities, generally called TIPS), namely that they would provide a quick and reliable measure of inflation expectations, has not been borne out, and that we still have to struggle to get reasonable estimates of expected inflation.

As students, we included NX, net exports, in the aggregate demand equation, but we did not generally solve for the exchange rate, possibly because the exchange rate was typically fixed. Later, in 1976, Rudi Dornbusch inaugurated modern international macroeconomics–and here I’m quoting from a speech by Ken Rogoff–in his famous overshooting model.5 As globalization of both goods and asset markets intensified over the next 40 years, the international aspects of trade in goods and assets occupied an increasingly important role in the economies of virtually all countries, not least the United States, and in macroeconomics.

At the LSE, we took a course on the British economy from Frank Paish, whose lectures consisted of a series of charts, accompanied by narrative from the professor. He made a strong impression on me in a lecture in 1963, in which he said, “You see, it (the balance of payments deficit) goes up and it goes down, and it is clear that we are moving toward a balance of payments crisis in 1964.” I waited and I watched, and the crisis appeared on schedule, as predicted. But Paish also warned us that forecasting was difficult, and gave us the advice “Never look back at your forecasts–you may lose your nerve.” I pass that wisdom on to those of you who need it.

I remember also my excitement at being told by a friend in a more senior class about the existence of econometric models of the entire economy. It was a wonderful moment. I understood that economic policy would from then on be easy: All that was necessary was to feed the data into the model and work out at what level to set the policy parameters. Unfortunately, it hasn’t worked out that way. On the use of econometric models, I think often of something Paul Samuelson once said: “I’d rather have Bob Solow’s views than the predictions of a model. But I’d rather have Solow with a model than without one.”

We learned a lot at the LSE. But wonderful as it was to be in London, and to meet people from all over the world for the first time, and to be able to travel to Europe and even to the Soviet Union with a student group, and to ski for the first time in my life in Austria, it gradually became clear to me that the center of the academic economics profession was not in London or Oxford or Cambridge, but in the United States.

There was then the delicate business of applying to graduate school. There was a strong Chicago tendency among many of the lecturers at the LSE, but I wanted to go to MIT. When asked why, I gave a simple answer: “Samuelson and Solow.” Fortunately, I got into MIT and had the opportunity of getting to know Samuelson and Solow and other great professors. And I also met the many outstanding students who were there at the time, among them Robert Merton. I took courses from Samuelson and Solow and other MIT stars, and I wrote my thesis under the guidance of Paul Samuelson and Frank Fisher. From there, my first job was at the University of Chicago–and I understood that I was very lucky to have been able to learn from the great economists at both MIT and Chicago. Among the many things I learned at Chicago was a Milton Friedman saying: “Man may not be rational, but he’s a great rationalizer,” which is a quote that often comes to mind when listening to stock market analysts.

After four years at Chicago, I returned to the MIT Department of Economics, and thought that I would never leave–even more so when MIT succeeded in persuading Rudi Dornbusch, whom I had met when he was a student at Chicago, to move to MIT–thus giving him too the benefit of having learned his economics at both Chicago and MIT, and giving MIT the pleasure and benefit of having added a superb economist and human being to the collection of such people already present.

MIT was still heavily involved in developing growth theory at the time I was a Ph.D. student there, from 1966 to 1969. We students were made aware of Kaldor’s stylized factsabout the process of growth, presented in his 1957 article “A Model of Economic Growth.” They were:

1. The shares of national income received by labor and capital are roughly constant over long periods of time.
2. The rate of growth of the capital stock per worker is roughly constant over long periods of time.
3. The rate of growth of output per worker is roughly constant over long periods of time.
4. The capital/output ratio is roughly constant over long periods of time.
5. The rate of return on investment is roughly constant over long periods of time.
6. The real wage grows over time.

Well, that was then, and many of the problems we face in our economy now relate to the changes in the stylized facts about the behavior of the economy: Every one of Kaldor’s stylized facts is no longer true, and unfortunately the changes are mostly in a direction that complicates the formulation of economic policy.6

While the basic approach outlined so far remains valid, and can be used to address many macroeconomic policy issues, I would like briefly to take up several topics in more detail. Some of them are issues that have remained central to the macroeconomic agenda over the past 50 years, some have to my regret fallen off the agenda, and others are new to the agenda.

1. Inflation and unemployment: Estimated Phillips curves appear to be flatter than they were estimated to be many years ago–in terms of the textbooks, Phillips curves appear to be closer to what used to be called the Keynesian case (flat Phillips curve) than to the classical case (vertical Phillips curve). Since the U.S. economy is now below our 2 percent inflation target, and since unemployment is in the vicinity of full employment, it is sometimes argued that the link between unemployment and inflation must have been broken. I don’t believe that. Rather the link has never been very strong, but it exists, and we may well at present be seeing the first stirrings of an increase in the inflation rate–something that we would like to happen.
2. Productivity and growth: The rate of productivity growth in the United States and in much of the world has fallen dramatically in the past 20 years. The table shows calculated rates of annual productivity growth for the United States over three periods: 1952 to 1973; 1974 to 2007; and the most recent period, 2008 to 2015. After having been 3 percent and 2.1 percent in the first two periods, the annual rate of productivity growth has fallen to 1.2 percent in the period since the start of the global financial crisis.The right guide to thinking in this case is given by a famous Herbert Stein line: “The difference between a growth rate of 1 percent and 2 percent is 100 percent.” Why? Productivity growth is a major determinant of long-term growth. At a 1 percent growth rate, it takes income 70 years to double. At a 2 percent growth rate, it takes 35 years to double. That is to say, that with a growth rate of 1 percent per capita, it takes two generations for per capita income to double; at a 2 percent per capita growth rate, it takes one generation for per capita income to double. That is a massive difference, one that would very likely have severe consequences for the national mood, and possibly for economic policy. That is to say, there are few issues more important for the future of our economy, and those of every other country, than the rate of productivity growth.At this stage, we simply do not know what will happen to productivity growth.Robert Gordon of Northwestern University has just published an extremely interesting and pessimistic book that argues we will have to accept the fact that productivity will not grow in future at anything like the rates of the period before 1973. Others look around and see impressive changes in technology and cannot believe that productivity growth will not move back closer to the higher levels of yesteryear.7 A great deal of work is taking place to evaluate the data, but so far there is little evidence that data difficulties account for a significant part of the decline in productivity growth as calculated by the Bureau of Labor Statistics.8
3. The ZLB and the effectiveness of monetary policy: From December 2008 to December 2015, the federal funds rate target set by the Fed was a range of 0 to 1/4 percent, a range of rates that was described as the ZLB (zero lower bound).9Between December 2008 and December 2014, the Fed engaged in QE–quantitative easing–through a variety of programs. Empirical work done at the Fed and elsewhere suggests that QE worked in the sense that it reduced interest rates other than the federal funds rate, and particularly seems to have succeeded in driving down longer-term rates, which are the rates most relevant to spending decisions.Critics have argued that QE has gradually become less effective over the years, and should no longer be used.It is extremely difficult to appraise the effectiveness of a program all of whose parameters have been announced at the beginning of the program. But I regard it as significant with respect to the effectiveness of QE that the taper tantrum in 2013, apparently caused by a belief that the Fed was going to wind down its purchases sooner than expected, had a major effect on interest rates.More recently, critics have argued that QE, together with negative interest rates, is no longer effective in either Japan or in the euro zone.That case has not yet been empirically established, and I believe that central banks still have the capacity through QE and other measures to run expansionary monetary policies, even at the zero lower bound.
4. The monetary-fiscal policy mix: There was once a great deal of work on the optimal monetary-fiscal policy mix. The topic was interesting and the analysis persuasive. Nonetheless the subject seems to be disappearing from the public dialogue; perhaps in ascendance is the notion that–except in extremis, as in 2009–activist fiscal policy should not be used at all. Certainly, it is easier for a central bank to change its policies than for a Treasury or Finance Ministry to do so, but it remains a pity that the fiscal lever seems to have been disabled.
5. The financial sector: Carmen Reinhart and Ken Rogoff’s book, This Time Is Different, must have been written largely before the start of the great financial crisis. I find their evidence that a recession accompanied by a financial crisis is likely to be much more serious than an ordinary recession persuasive, but the point remains contentious. Even in the case of the Great Recession, it is possible that the U.S. recession got a second wind when the euro-zone crisis worsened in 2011. But no one should forget the immensity of the financial crisis that the U.S. economy and the world went through following the bankruptcy of Lehman Brothers–and no one should forget that such things could happen again.The subsequent tightening of the financial regulatory system under the Dodd-Frank Act was essential, and the complaints about excessive regulation and excessive demands for banks to hold capital betray at best a very short memory.We, the official sector and particularly the regulatory authorities, do have an obligation to try to minimize the regulatory and other burdens placed on the private sector by the official sector–but we have a no less important obligation to try to prevent another financial crisis. And we should also remember that the shadow banking system played an important role in the propagation of the financial crisis, and endeavor to reduce the riskiness of that system.
6. The economy and the price of oil: For some time, at least since the United States became an oil importer, it has been believed that a low price of oil is good for the economy. So when the price of oil began its descent below $100 a barrel, we kept looking for an oil-price-cut dividend. But that dividend has been hard to discern in the macroeconomic data. Part of the reason is that as a result of the rapid expansion of the production of oil from shale, total U.S. oil production had risen rapidly, and so a larger part of the economy was adversely affected by the decline in the price of oil. Another part is that investment in the equipment and structures needed for shale oil production had become an important component of aggregate U.S. investment, and that component began a rapid decline. For these reasons, although the United States has remained an oil importer, the decrease in the world price of oil had a mixed effect on U.S. gross domestic product. There is reason to believe that when the price of oil stabilizes, and U.S. shale oil production reaches its new equilibrium, the overall effect of the decline in the price of oil will be seen to have had a positive effect on aggregate demand in the United States, since lower energy prices are providing a noticeable boost to the real incomes of households. 7. Secular stagnation: During World War II in the United States, many economists feared that at the end of the war, the economy would return to high pre-war levels of unemployment–because with the end of the war, demobilization, and the massive reduction that would take place in the defense budget, there would not be enough demand to maintain full employment.Thus was born or renewed the concept of secular stagnation–the view that the economy could find itself permanently in a situation of low demand, less than full employment, and low growth.10 That is not what happened after World War II, and the thought of secular stagnation was correspondingly laid aside, in part because of the growing confidence that intelligent economic policies–fiscal and monetary–could be relied on to help keep the economy at full employment with a reasonable growth rate.Recently, Larry Summers has forcefully restated the secular stagnation hypothesis, and argued that it accounts for the current slowness of economic growth in the United States and the rest of the industrialized world. The theoretical case for secular stagnation in the sense of a shortage of demand is tied to the question of the level of the interest rate that would be needed to generate a situation of full employment. If the equilibrium interest rate is negative, or very small, the economy is likely to find itself growing slowly, and frequently encountering the zero lower bound on the interest rate.Research has shown a declining trend in estimates of the equilibrium interest rate. That finding has become more firmly established since the start of the Great Recession and the global financial crisis.11 Moreover, the level of the equilibrium interest rate seems likely to rise only gradually to a longer-run level that would still be quite low by historical standards. What factors determine the equilibrium interest rate? Fundamentally, the balance of saving and investment demands. Several trends have been cited as possible factors contributing to a decline in the long-run equilibrium real rate. One likely factor is persistent weakness in aggregate demand. Among the many reasons for that, as Larry Summers has noted, is that the amount of physical capital that the revolutionary information technology firms with high stock market valuations have needed is remarkably small. The slowdown of productivity growth, which as already mentioned has been a prominent and deeply concerning feature of the past six years, is another important factor.12 Others have pointed to demographic trends resulting in there being a larger share of the population in age cohorts with high saving rates.13 Some have also pointed to high saving rates in many emerging market countries, coupled with a lack of suitable domestic investment opportunities in those countries, as putting downward pressure on rates in advanced economies–the global savings glut hypothesis advanced by Ben Bernanke and others at the Fed about a decade ago.14 Whatever the cause, other things being equal, a lower level of the long-run equilibrium real rate suggests that the frequency and duration of future episodes in which monetary policy is constrained by the ZLB will be higher than in the past. Prior to the crisis, some research suggested that such episodes were likely to be relatively infrequent and generally short lived.15 The past several years certainly require us to reconsider that basic assumption. Moreover, recent experience in the United States and other countries has taught us that conducting monetary policy at the effective lower bound is challenging.16 And while unconventional policy tools such as forward guidance and asset purchases have been extremely helpful and effective, all central banks would prefer a situation with positive interest rates, restoring their ability to use the more traditional interest rate tool of monetary policy.17 The answer to the question “Will the equilibrium interest rate remain at today’s low levels permanently?” is also that we do not know. Many of the factors that determine the equilibrium interest rate, particularly productivity growth, are extremely difficult to forecast. At present, it looks likely that the equilibrium interest rate will remain low for the policy-relevant future, but there have in the past been both long swings and short-term changes in what can be thought of as equilibrium real rates. Eventually, history will give us the answer. But it is critical to emphasize that history’s answer will depend also on future policies, monetary and other, notably including fiscal policy. Concluding Remarks Well, are the answers all different than they were 50 years ago? No. The basic framework we learned a half-century ago remains extremely useful. But also yes: Some of the answers are different because they were not on previous exams because the problems they deal with were not evident fifty years ago. So the advice to potential policymakers is simple: Learn as much as you can, for most of it will come in useful at some stage of your career; but never forget that identifying what is happening in the economy is essential to your ability to do your job, and for that you need to keep your eyes, your ears, and your mind open, and with regard to your mouth–to use it with caution. Many thanks again for this award and this opportunity to speak with you. References Bernanke, Ben S. (2005). “The Global Saving Glut and the U.S. Current Account Deficit,” speech delivered at the Homer Jones Lecture, St. Louis, April 14. Blanchard, Olivier (2014). “Where Danger Lurks: The Recent Financial Crisis Has Taught Us to Pay Attention to Dark Corners, Where the Economy Can Malfunction Badly,”Finance and Development, vol. 51 (September), pp. 28-31. ——– (2016). “The U.S. Phillips Curve: Back to the 60s? (PDF) Policy Brief 16-1. Washington: Peterson Institute for International Economics, January. Blanchard, Olivier, Eugenio Cerutti, and Lawrence Summers (2015). “Inflation and Activity–Two Explorations and Their Monetary Policy Implications (PDF),” IMF Working Paper WP/15/230. Washington: International Monetary Fund, November. Blanchard, Olivier, and John Simon (2001). “The Long and Large Decline in U.S. Output Volatility (PDF),” Brookings Papers on Economic Activity, 1, pp. 135-74. Brunner, Karl, and Allan H. Meltzer (1972). “Money, Debt, and Economic Activity,” Journal of Political Economy, vol. 80 (September-October), pp.951-77. Byrne, David M., John G. Fernald, and Marshall Reinsdorf (forthcoming). “Does the United States Have a Productivity Problem or a Measurement Problem?” Brookings Papers on Economic Activity. Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas (2008). “An Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates,” American Economic Review, vol. 98 (1), pp. 358-93. Daly, Mary C., John G. Fernald, Òscar Jordà, and Fernanda Nechio (2014). “Output and Unemployment Dynamics (PDF),” Working Paper Series 2013-32. San Francisco: Federal Reserve Bank of San Francisco, November. ——– (2014). “Interpreting Deviations from Okun’s Law,” FRBSF Economic Letter 2014-12. San Francisco: Federal Reserve Bank of San Francisco. D’Amico, Stefania, Don H. Kim, and Min Wei (2014). “Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices (PDF),” Finance and Economics Discussion Series 2014-24. Washington: Board of Governors of the Federal Reserve System, January. Dornbusch, Rudiger (1976). “Expectations and Exchange Rate Dynamics,” Journal of Political Economy, vol. 84 (December), pp. 1161-76. Dornbusch, Rudiger, Stanley Fischer, and Richard Startz (2014). Macroeconomics, 12th ed. New York: McGraw-Hill Education. Fischer, Stanley (forthcoming). “Monetary Policy, Financial Stability, and the Zero Lower Bound,” American Economic Review (Papers and Proceedings). Friedman, Milton (1968). “The Role of Monetary Policy,” American Economic Review, vol. 58 (March), pp. 1-17. Gordon, Robert J. (2014). “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections,” NBER Working Paper Series 19895. Cambridge, Mass.: National Bureau of Economic Research, February. ——– (2016). The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Princeton, N.J.: Princeton University Press. Hall, Robert E. (2014). “Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis,” in Jonathan Parker and Michael Woodford, eds., NBER Macroeconomics Annual 2014, vol. 29. Chicago: University of Chicago Press. Hamilton, James D., Ethan S. Harris, Jan Hatzius, and Kenneth D. West (2015). “The Equilibrium Real Funds Rate: Past, Present and Future,” NBER Working Paper Series 21476. Cambridge, Mass.: National Bureau of Economic Research, August. Hicks, John R. (1937). “Mr. Keynes and the ‘Classics’: A Suggested Interpretation,”Econometrica, vol. 5 (April), pp. 147-59. Johannsen, Benjamin K., and Elmar Mertens (2016). “The Expected Real Interest Rate in the Long Run: Time Series Evidence with the Effective Lower Bound,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, February 9. Jones, Charles I., and Paul M. Romer (2010). “The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital,” American Economic Journal: Macroeconomics, vol. 2 (January), pp. 224-45. Kaldor, Nicholas (1957). “A Model of Economic Growth,” Economic Journal, vol. 67 (December), pp. 591-624. Keynes, John Maynard (1936). The General Theory of Employment, Interest and Money.London: Macmillan. Kiley, Michael T. (2015). “What Can the Data Tell Us about the Equilibrium Real Interest Rate? (PDF)” Finance and Economics Discussion Series 2015-077. Washington: Board of Governors of the Federal Reserve System, August. Knotek, Edward S., II (2007). “How Useful Is Okun’s Law? (PDF) Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter, pp. 73-103. Laubach, Thomas, and John C. Williams (2003). “Measuring the Natural Rate of Interest,”Review of Economics and Statistics, vol. 85 (November), pp. 1063-70. Lucas, Robert E., Jr. (1972). “Expectations and the Neutrality of Money,” Journal of Economic Theory, vol. 4 (April), pp. 103-24. Mendoza, Enrique G., Vincenzo Quadrini, and José-Víctor Ríos-Rull (2009). “Financial Integration, Financial Development, and Global Imbalances,” Journal of Political Economy,vol. 117 (3), pp. 371-416. Modigliani, Franco (1944). “Liquidity Preference and the Theory of Interest and Money,”Econometrica, vol. 12 (January), pp. 45-88. Mokyr, Joel, Chris Vickers, and Nicolas L. Ziebarth (2015). “The History of Techonological Anxiety and the Future of Economic Growth: Is This Time Different?” Journal of Economic Perspectives, vol. 29 (Summer), pp. 31-50. Obstfeld, Maurice, and Kenneth Rogoff (1996). Foundations of International Macroeconomics. Cambridge, Mass.: MIT Press. Okun, Arthur M. (1962). “Potential GNP: Its Measurement and Significance,” Proceedings of the Business and Economics Statistics Section of the American Statistical Association,pp. 98-104. Phelps, Edmund S. (1967). “Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time,” Economica, vol. 34 (August), pp. 254-81. Reifschneider, David, and John C. Williams (2000). “Three Lessons for Monetary Policy in a Low-Inflation Era,” Journal of Money, Credit, and Banking, vol. 32 (November), pp. 936-66. Reinhart, Carmen M., and Kenneth S. Rogoff (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton, N.J.: Princeton University Press. Rogoff, Kenneth (2001). “Dornbusch’s Overshooting Model after Twenty-Five Years (PDF),” speech delivered at the Mundell-Fleming Lecture, Second Annual Research Conference, International Monetary Fund, Washington, November 30 (revised January 22, 2002). Solow, Robert M. (2004). “Introduction: The Tobin Approach to Monetary Economics,”Journal of Money, Credit, and Banking, vol. 36 (August), pp. 657-63. Stock, James H., and Mark W. Watson (2003). “Has the Business Cycle Changed and Why?” NBER Macroeconomics Annual 2002, vol. 17 (January). Tobin, James (1969). “A General Equilibrium Approach to Monetary Theory (PDF),” Journal of Money, Credit, and Banking, vol. 1 (February), pp. 15-29. U.S. Executive Office of the President, Council of Economic Advisors (2015). Long-Term Interest Rates: A Survey (PDF). Washington: EOP. Williams, John C. (2013). “A Defense of Moderation in Monetary Policy (PDF),” Working Paper Series 2013-15. San Francisco: Federal Reserve Bank of San Francisco, July. Woodford, Michael (2010). “Financial Intermediation and Macroeconomic Analysis,”Journal of Economic Perspectives, vol. 24 (Fall), pp. 21-44. 1. I am grateful to David Lopez-Salido, Andrea Ajello, Elmar Mertens, Stacey Tevlin, and Bill English of the Federal Reserve Board for their assistance. Views expressed are mine, and are not necessarily those of the Federal Reserve Board or the Federal Open Market Committee. Return to text 2. A fuller description of the equations is contained in the appendix. Return to text 3. See Blanchard (2016). Return to text 4. See D’Amico, Kim, and Wei (2014). Return to text 5. See Dornbusch (1976) and Rogoff (2001). Return to text 6. See Jones and Romer (2010). Return to text 7. See, for instance, Mokyr, Vickers, and Ziebarth (2015). Return to text 8. See Byrne, Fernald, and Reinsdorf (forthcoming). Return to text 9. Inside the Fed, the range of 0 to 1/4 percent is generally called the ELB, the effective lower bound. Return to text 10. I am distinguishing in this section between secular stagnation as being caused by a deficiency of aggregate demand and another view, that output growth will be very slow in future because productivity growth will be very low. The view that future productivity growth will be very low has already been discussed, with the conclusion that we do not have a good basis for predictions of its future level, and that we simply do not know whether future productivity growth will be extremely low or higher than it has been recently. There is no shortage of views on this issue among economists, but the views to some extent appear to depend on whether the economist making the prediction is an optimist or a pessimist. Return to text 11. This research includes recent work by Johannsen and Mertens (2015) and Kiley (2015) that uses extensions of the original Laubach and Williams (2003) framework. An international perspective on medium-to-long-run real interest rates is provided by U.S. Executive Office of the President (2015). Reinhart and Rogoff (2009) and Hall (2014) discuss the long-lived effects of financial crises on economic performance. See also Hamilton and others (2015). I have, in addition, drawn on Fischer (forthcoming). Return to text 12. It is also a major factor explaining the phenomenon of the economy’s impressive performance on the jobs front during a period of historically slow growth. Return to text 13. See, for instance, Gordon (2014, 2016). Return to text 14. See Bernanke (2005). See also the recent work by Caballero, Farhi, and Gourinchas (2008); and Mendoza, Quadrini, and Rios-Rull (2009). Return to text 15. See, for instance, Reifschneider and Williams (2000), Blanchard and Simon (2001), and Stock and Watson (2003). Return to text 16. For a discussion of various issues reviewed by the Federal Open Market Committee in late 2008 and 2009 regarding the complications of unconventional monetary policy at the ZLB, see the set of staff memos on the Board’s website. Return to text 17. See Williams (2013). Return to text Accessible Version Appendix The following model includes a number of elements that play a central role in the analysis of economic fluctuations and in larger policy models as I have encountered them at the Federal Reserve and other institutions. An aggregate demand relationship, in the form of the investment-saving (or IS) curve, characterizes the negative dependence of economic activity on the real borrowing rate, iBπe, and the positive dependence on expected output, ye; government spending, G; and net exports, NX, as a function of the exchange rate, e, and foreign output, yf:  y=A(iB−πe,ye,G,NX), with NX=f(ePfP,yf). (1) The Phillips curve describes a relationship between inflation and labor market slack. Inflation responds negatively to the level of the unemployment gap, u^, and to changes in aggregate productivity, z (including shocks to commodity prices). Current inflation also responds positively to expected future inflation, πe, and to the level of the borrowing rate and of the exchange rate, ϕ(iB,e) (cost – push shocks):  π=f(u^)−z+πe+ϕ(iB,e). (Phillips curve) (2) Current issues regarding the role of expectations, the size of the slope, and the pass-through from exchange rate movements to domestic prices and wages can be addressed in this context. Recent discussions can be found in Blanchard’s (2016) reference to the back-to-the-1960s thinking about the Phillips curve and in Blanchard, Cerutti, and Summers’s (2015) thoughts on hysteresis mechanisms underlying the inflation and unemployment dynamic. To connect cyclical fluctuations in the level of aggregate activity with changes in employment, Okun’s law has been proved useful as an empirical description of the relationship between the output gap and the unemployment gap, u^=uuu (see Knotek (2007); and Daly, Fernald, Jordà, and Nechio (2013, 2014)):  y^=−γu^. (Okun’s law) (3) To characterize monetary policy, it is nowadays useful to consider how the central bank affects the level of interest rates by setting the federal funds rate, i, in response to deviations of expected inflation from its target, π^=πeπ (inflation gap), and percent deviations of output from its potential level, y^=yyy (output gap):  i=f(πe−π∗,y^). (4) To capture the role of credit and financial intermediation in the economy, consider a loan market equation, where the demand on the left-hand side depends negatively on the borrowing rate, iB, and the level of economic activity (higher income implies lower financing needs). The supply of loans depends negatively on the level of interest rates, i, and positively on the level of intermediation spreads, ω, and income, y (to the extent that higher aggregate income increases deposits and banks’ capitalization and hence the supplies of intermediated funds). This equation pins down the equilibrium level of the intermediation spread, ω:  Ld(iB,y)=Ls(i,ω,y). (5) The borrowing rate, iB, is then equal to the sum of the risk-free rate set by the central bank, i, and the spread, ω:  iB=i+ω. (6) This analysis is in the spirit of James Tobin’s approach to monetary economics as was recently described by Solow (2004) and extended by Woodford (2010) to describe the role for financial intermediation shocks. It also captures the work by B. Friedman, B. Bernanke, and A. Blinder in thinking about the role of credit and credit spreads in the transmission of monetary policy impulses. Open economy aspects are captured by the following equations: The balance of paymentis in equilibrium when net exports are compensated by capital flows of opposite sign. Capital flows depend on the difference between the domestic interest rate and the foreign rate adjusted for depreciation:  NX(ePfP,yf)+CF(i−if−dee)=0. (7) Furthermore, the uncovered interest rate parity equates the rate of return on domestic assets, i, to the rate of return on foreign assets, if, plus future expected changes in the exchange rate, dee, and a residual risk premium component, RP:  i=if+dee+RP. (8) For a detailed description of these relationships, see Dornbusch, Fischer, and Startz (2014); and Obstfeld and Rogoff (1996). ## BLOOMBERG VIEW COLUMNS (UPDATED 9.17.15) LET GREECE GO The status quo is torture for all concerned with no end in sight. Read more RITHOLTZ’S READS: BULL MARKETS ARE ALIVE Markets were in rally mode yesterday, recovering almost all of the downside from Friday’s bloodletting. Futures look like they might make that happen today. Oh, and morning train reads. Read more SUPPLY-SIDE DOOM IN KANSAS Cutting taxes is often sold as a way to stimulate the economy at little or no cost to government revenue. It doesn’t work. Read more RITHOLTZ’S READS: IT’S NOT 1999 It’s a “mixed” batch of news this morning, but we never let that stop us from curating the best damned morning train reads in the business. Read more MASTERS IN BUSINESS: CHARLEY ELLIS Barry Ritholtz interviews Charley Ellis, former chairman of the Yale Investments Office and CFA Institute and founder of Greenwich Associates. Read more LOW RATES? GET USED TO IT Those who predicted a rise in interest rates in the past were wrong, and there’s no reason to think rates will rise soon. Read more APPLE IS A LAGGING DOW INDICATOR The addition of Apple to the Dow Jones Industrial Average shows the keepers of the index are late again to keeping track of the market. Read more FED GIVES COVER TO BUMBLING CONGRESS By helping to prevent a depression after the financial crisis, the Federal Reserve gave the Republican-controlled Congress cover to shirk its duties. Read more WAL-MART’S MINIMUM WAGE BREAKDOWN Wal-Mart plans to raise the wages of hourly workers because it didn’t have much choice as minimum-wage rates rise and the labor market tightens. Read more BREAKING WITH BOGLE John Bogle’s investing philosophy needs some updating to reflect new findings. Read more THE JOY OF GROWTH What the pickup in the economy means for stocks, bonds and the Federal Reserve. Read more BE SMART ABOUT CHARITY Giving to charity is personally fulfilling and it helps those in need, but some charities are better than others in channeling donations to where they are most needed. Read more MASTERS IN BUSINESS: LAKSHMAN ACHUTHAN In the latest “Masters in Business” podcast, Barry Ritholtz speaks with Lakshman Achuthan, co-founder and chief operations officer of Economic Cycle Research Institute. Read more THE GOLD FAIRY TALE FAILS AGAIN The stories devised to explain why gold will rise, even though it has fallen for four years, are exercises in valuing narrative over analysis. Read more BLACK FRIDAY’S GUESSWORK GLOOM There’s lots of gloom about the latest Thanksgiving holiday weekend retail sales, though the truth is that the surveys don’t give an accurate picture of how retailers performed. Read more RITHOLTZ’S READS: A DROP OF OIL I’m back from the holiday and five pounds heavier. Our morning train reads, however, are the same lean format you’ve come to know and love. Read more RETAILING’S BLACK FRIDAY HOAX Forecasts for large increases in holiday retail sales, designed to get consumers into stores, are highly inaccurate and should be ignored. Read more MARKETS, LIES AND GARBAGE Too much of what passes for debate about financial markets is massaged and manipulated to support biases. Read more TRADE AGAINST A SELF-HELP GENIUS Self-help guru Tony Robbins may help people realize their personal potential, but his financial advice won’t do anyone much good. Read more RITHOLTZ’S READS: BUFFETT’S CASH TRAIN The markets are in record territory, there are very few signs of inflation and this remains an unloved equity rally. Commodities, bonds and factors, all make it into our morning train reads. Read more MASTERS IN BUSINESS: MARK CUBAN Barry Ritholtz talks with Mark Cuban, owner of Dallas Mavericks, co-founder of Broadcast.com and a regular on ABC’s ‘Shark Tank,’ in this week’s ‘Masters in Business’ podcast. Read more MONEY BUYS HAPPINESS UNTIL IT DOESN’T It looks as if you can buy happiness, after all.At least, in limited amounts, and up to a point.That seems to be the conclusion based on a recent survey by … Read more CROSSING OFF THE RED CROSS New revelations about how the Red Cross mismanaged the Hurricane Sandy relief effort should be troubling to anyone who donates to the charity. Read more STOP FEARING THE WRONG THINGS We irrationally fear small risks while ignoring those that are much more likely to do harm to our health and investments. Read more ZOMBIE IDEAS THAT KEEP ON LOSING Bad ideas take on a life of their own because of think tanks financed by the rich designed to perpetuate them — even though they have been proven wrong or invalid. Read more JUST TRY TO REFINANCE. I DARE YOU The difficulty homebuyers and owners have had in getting mortgages or refinancing existing loans offers insight into why economic growth has been so disappointing. Read more WHAT I SUSPECT AND FEAR FOR THE STOCK MARKETS The stock market has had a significant retreat this month, but whether it’s a modest pullback or the start of a true bear market is anyone’s guess (the author fears and suspects the later). Read more YOUR FIVE-YEAR FORECAST IS A JOKE Forecasts about where the stock market will be in 2019 are likely to be about as accurate as forecasts made in 2009 were about today’s stock market. Read more MASTERS IN BUSINESS: JACK SCHWAGER Barry Ritholtz interviews Jack Schwager, the author of ‘Market Wizards: Interviews With Top Traders,’ in this week’s ‘Masters in Business’ podcast. Read more HOW LOW CAN GOLD GO? Gold has declined to its lowest price in more than four year, yet that doesn’t seem to have sunk in with many of its devotees. Read more BIGGEST LOSSES START WITH BRILLIANCE When the Fed bailed out the hedge fund Long Term Capital Management in 1998, it set the precedent for the Wall Street bailout almost 10 years later. Read more MASTERS IN BUSINESS: JEFF SAUT Barry Ritholtz chats investment strategy with Jeff Saut, chief strategist at Raymond James, in this week’s Masters in Business podcast. Read more WHY HEDGE WITH A HEDGE FUND? The big takeaway from the decision by California’s public employees pension fund to end its investments in hedge funds is that there is no reason for long-term investors to bother with hedge funds. Read more THE BIGGEST LIE OF THE NEW CENTURY The list of wrongdoing by banks is too long for senior executives to credibly claim that they were unaware of what was going on within their companies. Read more THE REASONS BANKERS WEREN’T BUSTED There is ample evidence of wrongdoing in the run-up to and during the financial crisis, though no senior bankers have been charged with committing a crime. Read more FORECASTING FOLLIES Today’s economic news proved, once again, the foolishness of thinking that anyone can make forecasts about the future with any degree of reliability. Read more THE HYPOCRITICAL ATTACKS ON WARREN BUFFETT There are valid criticisms of billionaire Warren Buffett, but the claim that he advocates for changes in tax law while trying to maximize gains for his shareholders is baseless. Read more MASTERS IN BUSINESS: SHEILA BAIR Barry Ritholtz interviews Sheila Bair, the former chairman of the U.S. Federal Deposit Insurance Corporation, in this week’s ‘Masters in Business’ podcast. Read more GLOOM AS AN INVESTOR’S BEST FRIEND There are invaluable lessons to be learned in events from the past, including the notion that moments of great pessimism can offer ideal opportunities for investors. Read more YOUR CREDIT SCORE MAY NEVER BE THE SAME The Consumer Finance Protection Bureau has pressed Fair Isaac Corp., the company that developed the modern credit-scoring system, to revise the information that goes into its calculations Read more DOING THE RIGHT THING Doing the right thing in investing may seem harder in some ways, but the payoff is often more rewarding. Read more THE MURDOCH MARKET INDICATOR Can the actions of any one person, in this case Rupert Murdoch of Twenty-First Century Fox, ever signal anything meaningful about financial markets? Read more ARE YOU READY TO BE A MUPPET? Why would a small investor be interested in any of the vehicles that offer ‘hedge-fund-like’ investments? These tend to underperform real hedge funds, which tend to underperform the broader market. Read more THE THREAT OF RISING RATES One of the oldest rules on Wall Street is, don’t fight the Fed. When the Federal Reserve is cutting rates, you want to be long equities, and when it … Read more GETTING OVER HEDGE FUNDS Big public pensions funds might be losing their unaccountable fascination with hedge funds after many of them underperformed while charging high fees. Read more THE INFLATION TRUTHER CRANK INDEX Quirks in the model for measuring inflation lead critics of President Barack Obama to mistakenly think inflation is much higher than it really is. Read more THE U.S. CORPORATE TAX DODGE There are ways to lower the incentives for U.S.companies to shift the location of their incorporation overseas to avoid paying U.S. taxes. Read more IS THIS THE WORST CONGRESS EVER? We have a Congress that seems incapable of carrying out its most basic duties and you, the American citizen, are to blame by failing to vote. Read more HOW TO PROFIT IN THE SECOND HALF The first half of 2014 turned out very different from what the experts forecast at the start of the year. What will the second half hold for investors? Read more RED CROSS NEEDS TO TELL ALL Until the Red Cross discloses how it spent the donations received after Hurricane Sandy, I’m not giving it more money. Read more WHEN CORRELATIONS LIE If you work in finance, you will invariably come across an example of single-variable analysis. Almost daily, we see terrible examples of this sort of … Read more THE SHAME OF ALTERNATIVE INVESTMENTS University endowments and corporate and state pension funds are underperforming because of putting too much money in so-called alternative investments. Read more EMBRACE YOUR MISTAKES Owning up to your mistakes pays off; it has for Ray Dalio,head of the world’s biggest hedge fund. Read more FINING BANKS IS ONLY HALF THE JOB Since 2008, the U.S. authorities have meted out$87.53 billion in fines to global banks. That number comes from data complied by the Financial Times. Some … Read more

GEITHNER’S STRESS TEST FAILURE

Fornmer U.S. Treasury Secretary Timothy Geithner argues that the bailouts were the best response to the financial panic. His claims don’t stand up to close scrutiny. Read more

THE PARASITES OF FINANCE

I am always amazed at how some business models manage to hang on despite overwhelming proof of their lack of purpose or value added. Read more

HARSH REALITY OF HOME FLIPPING

Home flippers bought houses that needed some TLC, fixed them up, then sold them for a profit. They mostly went extinct during the housing crash.  Read more

HATING HOMEOWNERSHIP

The perception that housing is a bad investment is influenced too much by recent events. Read more

BANKS TAKE THE ECONOMY HOSTAGE

Prosecutors are considering bringing criminal charges against two overseas banks for charges ranging from perjury and fraud to laundering money.  Read more

U.S. ON HIGHWAY TO FLUNKING OUT

Roads are crumbling, bridges are collapsing, and what was once considered one of the greatest achievements of any government anywhere has fallen into embarrassing disrepair.  Read more

DO YOU SEE A BUBBLE?

Newsletter writer Mark Hulbert recently raised the question of what the rate of initial public offerings means for the stock market.  Read more

BEAR MARKET EXCUSES

Stock market investors have many theories about why the market has slumped. None of them are satisfactory. Read more

THE BEST SEC MONEY CAN BUY

The retirement speech from a Securities and Exchange Commission lawyer sums up much that is wrong with the agency. Read more

BULLS AND BEARS IN ROLE REVERSAL

After large gains in the stock market, bulls and bears seems to have switched places — bulls are pessimistic, while bears act as if they have been vindicated.  Read more

TECH STOCKS IN RETREAT

New high-stocks have taken a beating this year, while old tech stocks that are profitable and pay dividends have held up. Read more

With Facebook acquiring virtual-reality company Oculus, one of the all time great sucker plays — the “Jumpstart Our Business Startups Act,” signed by President Barack Obama on April 1, 2012 — has been revealed as the massive bait-and-switch it is.  Read more

SOCIAL NETWORKS THAT BREED ANONYMOUS STUPIDITY

Venture capitalist Marc Andreessen is none too happy these days. The inventor of the Web browser and co-founder of Netscape is miffed at the latest Silicon Valley fad: Anonymous sniping from within the tech industry. Read more

With all the bubble chatter and talks of over-valued stock markets, I thought it was time to have a discussion with someone expert on the subject.  Read more

GOODBYE POLAR VORTEX, HELLO MARKET BEARS

Perhaps the market’s ongoing rally is a testament to the evolutionary intelligence of market’s bears. The ursine crowd seem to have disappeared, but do not be fooled.  Read more

NO, MARKET HIGHS ARE NOT A BAD SIGN

The day’s trades had barely closed, when the Johnny one-notes began their usual litany of complaints. The market is long in the tooth, we are told; the bull cycle is Fed-driven, it’s temporary, its “toppy.” Read more

GEORGE SOROS IS NOT A GANGSTER

This weekend, I found myself in the rather unusual position of defending hedge funds. Before I explain why that is so unusual, allow me to explain what I was defending them against. Read more

YOUR NEW 2014 FOMC!: RITHOLTZ CHART

Perhaps it is time to review all the players in the FOMC, given upcoming personnel changes. Michael Hanson at Bank of America Merrill Lynch notes some of these changes. Read more

LOOK OUT BELOW, FOLLOW-THROUGH EDITION

Why the sudden shift, from excess bullishness and exuberant expectations of more double-digit gains, to a recognition that perhaps the party won’t go on forever? Read more

WHY ‘PEAK-EARNINGS MODELS’ ARE NONSENSE

Lately, there has been a spate of research, analysis and commentary telling us that earnings are at a cyclical high that must mean revert. Stock valuations, therefore, are elevated and earnings will soon begin to fall, bringing stocks down with them. Read more

NOBODY LIKES BONDS!: RITHOLTZ CHART

Earlier this week, we noted that “the Consensus Hates Bonds.” That is a small part of the reason we decided to increase our exposure to specific types of fixed income this year after having been significantly underweight bonds in 2013 Read more

WANT TO KNOW JUST HOW RICH YOU ARE?: RITHOLTZ CHART

If you and your spouse have a quarter million dollars in real estate or other real assets, and the same in financial (401k, investments, etc.) and less than \$50,000 in debt, this puts you at the 85th percentile in terms of wealth in America. Read more

THE BEST HOUSING PROGRAM YOU’VE NEVER HEARD OF

Of all of the various government housing programs run by various federal agencies — Federal Housing Administration, Federal Housing Finance Agency, Housing and Urban Development and, of course, Fannie Mae — HARP is the most effective and efficient one out there.  Read more

WHERE THE POOR ARE: RITHOLTZ CHART

If you missed it over the weekend, Sunday’s New York Times had an amazing interactive graphic on where poverty is in the U.S. Over the past 50 … Read more

YET ANOTHER HOUSING COVER STORY FROM BARRON’S

Over vacation, I almost missed this cover story on housing last weekend by Jonathan Laing, Betting on the House. In it, they forecast 5 percent annual increases in home prices over the next 3 years. Read more

AM I TOO BULLISH?

John Coumarianos of theÂ Institutional ImperativeÂ is a prudent value guy. He wonders aloud in a recent blog post ifÂ I am too bullish?. He raises a number of interesting points via (mostly) valid criticisms. Read more