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While You Were Working – April 11

Trump talks regulatory reform, Caruana on monetary policy, Using news sentiment as an economic indicator and when to trust a chart

5 min read

Modern Money

President Donald Trump

Trump leaves room for Cohn to work on FinReg reform - Photo credit: Kevork Djansezian/Getty Images

Trump talked financial regulatory reform

During his meeting with a group of CEOs at the White House today, President Trump reiterated his administration’s goal of rolling back the taxpayer protections implemented as part of the Dodd-Frank Act. True to form, Trump was light on specifics:

“For the bankers in the room, they’ll be very happy because we’re really doing a major streamlining and, perhaps, elimination, and replacing it with something else. … That will be the minimum. But we’re doing a major elimination of the horrendous Dodd-Frank regulations, keeping some obviously, but getting rid of many.”

The “something else” portion of his comments is probably what caught the ear of the the bankers. As covered in this space last week, a renewal of something similar to Glass-Steagall has been gathering momentum in Washington. If that comes to pass, Trump won’t have to worry about knowing the specifics; that’s what he has Gary Cohn for.

Sometimes it’s OK to listen to what a chart is telling you

It has been reported that President Trump likes more images and charts as part of his Presidential Daily Briefing and fewer words. That’s all well and good because Trump knows that sometimes a chart can tell a story in ways that words can’t. And sometimes a chart provides an obvious answer.

With that in mind, let’s take a look at this Wall Street Journal story about how no one can quite put their finger on why lending has slowed in recent months. The words in the article offer up all kinds of hypotheses. But there is also this handy-dandy chart:

It’s almost as if something important might have happened in the first week or two of November 2016. Was there some kind of event that might have caused bankers to re-think their business plans? Oh yeah … there was a surprise result in a little thing called the US election for president.

Imagine you run a bank and you have resigned yourself to the hum-drum life of actually lending a big chunk of your money out into the economy. Then, literally overnight, something happens that suddenly spawns realistic talk of the removal of some or all of Dodd-Frank. Would you keep on plying your funds into boring old lending, or would you keep some of your powder dry juuuuuust in case something like the elimination of the Volcker rule actually happens?

Speaking of election surprises…

Banks like Credit Suisse, Deutsche Bank and Goldman Sachs say they are pretty certain Marine Le Pen will not be the next president of France. Of course if bankers’ predictions on things like the US election and Brexit are any indicator, Le Pen should be packing up her stuff and getting ready to move into the Palais Elysee.

Is news about the economy a better economic indicator than economic indicators?

You might have to read that headlines again to get where I am going with this … or you can read this research from the Federal Reserve Bank of San Francisco. Researchers used computational text analysis to gauge sentiment in economic news stories from 16 US newspapers spaning 35 years. Their conclusion: “Sentiment extracted from newspaper articles correlates with both contemporaneous and future key business cycle indicators.”

Sadly, the report does not list which US newspapers it used for the analysis. After all, what if the newspapers are reporting fake news!?!?

BIS boss Caruana talked Trump, Brexit and monetary policy

Jaime Caruana, the general manager of the Bank for International Settlements, sat down for a lengthy and wide-ranging interview with Borsen-Zeitung and shared his thoughts on the past, present and current state of central bank policies. Caruana was surprisingly blase about the impact the policies of President Trump will have on global financial regulation. He also said he doesn’t believe Brexit represents a risk to the global economy.

Here are a couple of my other favorite highlights from the Q&A:

Where do you currently see the greatest risks for the global economy or the financial system?

There is a series of risks. In some emerging market countries, financial cycles are far advanced, and if these end abruptly, there may be turbulence. In the industrialised countries, we have to go through the process of normalisation, which may not be easy. Worldwide, overall indebtedness has increased further and is now markedly higher than before the financial crisis.

What’s your overall verdict of the crisis policy of recent years – of the bond purchases (quantitative easing, QE) as well as the zero and negative interest rates?

A final verdict will only be possible when normalisation has been completed. We’re a long way off that, and from normality. As regards what we have seen so far, my provisional assessment is the following. At the onset of the crisis, central banks played a decisive role. If they hadn’t responded the way they did, the crisis would have been much worse. With regard to the later phase, we have expressed concerns about how the balance of risks and rewards worsens over time: the impact of ultra-expansive monetary policy on growth declines, and the risks of that policy are cumulating. Negative interest rates have their own set of problems.

What do you mean exactly?

In particular, negative interest rates become a big problem when they persist over a long period. They increase risk-taking [but not necessarily where it is desirable]. They induce greater indebtedness. They act as a burden on financial institutions, particularly banks, and thus may affect their intermediation.


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