Wednesday, June 25, 2008

Vizzini takes charge of the Fed

There was a remarkable development at the start of the Federal Open Market Committee's deliberations last night which somehow managed to stay out of the financial press. Fortunately, Macro Man has a mole in Washington who's filled him in on what went down.

Shockingly, Ben Bernanke and the rest of the committee have abdicated responsibility for determining monetary policy this month. Fortunately, the policy vacuum has been filled by an incomparable intellect: Vizzini, the Sicilian of Princess Bride fame. Macro Man's mole has provided him with a verbatim transcript of yesterday's policy deliberation after a black-cloaked stranger walked into the Federal Reserve conference room:

Vizzini: So it is down to you, and it is down to me. If you wish the economy dead, by all means, keep moving forward.

Dread Pirate Inflation: Let me explain--

V: There is nothing to explain. You are trying to kill the consumer that I have rightfully supported.

DPI: Perhaps an arrangement can be reached?

V: There will be no arrangement, and you're killing the consumer.

DPI: Well if there can be no arrangement, then we are at an impasse.

V: I'm afraid so. I can't compete with you physically, and you're no match for my brains.

DPI: You're that smart?

V: Let me put it this way. Have you ever heard of Bernanke, Greenspan, Volcker?

DPI: Yes.

V: Morons.

DPI: Really. [pause] In that case, I challenge you to a battle of wits.

V: For the economy? [DPI nods] To the death? [Pirate nods] I accept.

DPI: Good. Inhale this. [DPI pulls out a small vial and uncorks it.]

V: I smell a viscous, tarry substance.

DPI: What you smell is called petroleum. It powers the global economy, as well as the US consumer. And despite a drop in US vehicle miles traveled, its price continues to rise.

V: Hmmmm.

DPI: [Turns away from Vizzini, then turns back and places two pieces of paper on the table.] All right. Which is the appropriate monetary policy statement? The battle of wits has begun. You must choose whether to turn hawkish in the face of high and rising headline inflation, or to remain dovish in the face of significant consumer distress. It ends when you have made your decision, and we find out who is right....and who is dead.

V: But it's so simple. All I have to do is divine from what I know of you: are you the sort of problem that will respond well to a tightening of domestic monetary policy that will not kill the consumer? Now, an endogenous inflation problem will respond to reduced demand and a slackening of labour markets, so I can clearly not choose the dovish policy in front of me. But only a great fool would think that US consumer demand is driving the price of oil. I am not a great fool, so I can clearly not choose the hawkish policy in front of you. But you must have known I was not a great fool, you would have counted on it, so I can clearly not choose the policy in front of me.

DPI: You've made your decision then?

V: Not remotely. Because oil comes from the GCC and Russia, as everyone knows, and the GCC and Russia are entirely peopled by currency piss-takers who would be bailed out of their piss-taking by tighter US monetary policy, so I can clearly not choose the policy in front of you.

DPI: Truly, you have a dizzying intellect.


DPI: The oil producers.

V: Yes, the oil producers. You must have suspected I would have known petroleum's origin, so I can clearly not choose the policy in front of me.

DPI: You're just stalling now.

V: You'd like to think that, wouldn't you? You've beaten my jawboning, which means you're exceptionally strong, so you could trust in your ability to overcome a moderate policy tightening, so I can clearly not choose the policy in front of you. But you've also bested my econometric models, which means that you've studied, and in studying you must have learned that the sacrifice ratio has risen, so you would have put the suboptimal policy as far from yourself as possible, so I can clearly not choose the policy in front of me.

DPI: You're trying to trick me into giving away something.


DPI: Then make your choice.

V: I will, and I choose-- holy cow, how bad is that confidence data? [Vizzini points at the chart below. Inflation turns and looks.]

DPI: What? Where?

V: Well, I- I could have sworn I saw something. No matter. [Vizzini smirks.]

DPI: What's so funny?

V: I'll tell you in a minute. First, let's announce policy. I'll use this statement in front of me.

DPI: You chose the wrong policy.

V: You only think I chose wrong! That's what's so funny! I switched policies when your back was turned! Ha ha! You fool! You fell victim to one of the classic blunders! The most famous is never get involved in a land war in Asia, but only slightly less well-known is this: never offer more than one policy choice to a two-handed economist! Ha ha ha ha ha ha ha ha--

[Vizzini stops suddenly, as the US consumer falls dead to the ground.]

Vizzini: Who are you?

Dread Pirate Inflation: I am no one to be trifled with. That is all you ever need know.

Vizzini: And to think, all that time the suboptimal policy was in front of you.

Dread Pirate Inflation: They were both suboptimal. I've spent the last few years getting ready to bugger the Western consumer.


Barry Ritholtz said...

Very very funny usage of a great movie (Princess Bride) and an intractable problem (Inflation)

One small correction -- the 2 last Vizzini quotes should be the Princess -- or in your metaphor, perhaps bond traders

John said...

My name is Inigo Montoya, you killed my father, now prepare to die.

Macro Man said...

Barry, the misquotation/attribution was deliberate. While Vizzini cops it the film, it seems to me that it's the consumer/Princess in the real-world scenario who faces the "heads you win/tails I lose" situation.

If central bankers make the wrong choice, they still have the luxury of writing books/going on the lecture circuit a la Greenspan, or even enjoying a subsidized mortgage and a guaranteed £200k/year pension like Mervyn King....hence Vizzini's unlikely survival in my little pastiche!

Anonymous said...

brilliantly done...

Anonymous said...

Stagflation? Inconceivable!
Excellent as ever,

D said...

How has Arthur Burns done on the lecture/book-signing circuit? Greenspan's greatest accomplishment was knowing when to walk away.

Anonymous said...

That made my day!

OldVet said...

The problem is classic: How to solve a three dimensional problem with only two dimensional tools.

D said...

I think 3 dimensions is being too simplistic yet. Central bankers never should have had the reverence people have for them, they've got it coming to them.


Corey said...

i believe the fed is trying to convey exactly the problem here - we are at an impass, the fed can do nothing to solve either problem of inflation expectations or the ongoing slowdown. with all those words, the fed says "its up to the market now".

shtove said...

Brilliant. You should have gone on to screenwriting with your liberal arts degree instead of wasting your talent on that MBA.

Macro Man said...

Corey- Sadly, it was the market (housing, credit, etc.) that helped get us into this mess to begin with! So relying on market pricing to light the way would appear misguided, to say the least.

Shtove, I did skip the MBA....but took my liberal arts degree to Chicago and started trading options instead.

D said...

The market did not force the Fed's hand. IRX/EFF model wins again!

Reminder - FFR is a "target" rate.

Macro Man - the market as you described it (housing/credit) can be distilled to simply credit that should not have been originated. The fault is 99% bankers for violating the immutable law of lending: borrower has skin in the game.

No fear though, Thursdays are usually huge SOMA injection days. We need a good whip to flush out the weak shorts and inject a little more hope into the situation.

Richard said...

If the esteemed Vizzini advised this administration, he’d have his third dimension in fiscal policy. To believe the press, someone in the government sees the solution to our problems is to write a bunch of tax rebate checks to stimulate the economy, and then to bomb Iran.

In that event, the best advice a Wally Shawn character could offer is from “My Dinner with Andre”.-
“I would never give up my electric blanket, Andre. I mean, because New York is cold in the winter.”

Manc Trader said...

Nice one MM, I just love that movie.
Showed it to my kids a month or so ago and they already have a several lines memorized.

Anonymous said...

Genius. Thank you.

RN said...

This is the funniest thing I've seen in weeks.


Ok, now that out of the way, since you're this brilliant, please tell me where to invest a million dollars for 10 years!

Macro Man said...

RN, thanks. Brazil.

RN said...

You're welcome, and done!


zippy said...

Brilliant post.

Daniel said...

I made the same Vizzini post earlier this year. Have to say I enjoyed seeing the same thing, focused on the macro instead of the micro, and of course written better.

"A: The market is obviously throwing investors some "fat pitches" right now--the only question is whether grenades or baseballs are being tossed their way. That, my friend, is the battle of wits. And it is this game which has begun. It ends when you decide whether to sell your holdings or to purchase new investments, after which we will see who lives in luxury. And who is dead-broke..."

Macro Man said...

Daniel, it's a bit scary that so many situations these days are fit for the Vizzini treatment.....

Daniel said...

You're right. But the reality of today is much more like the Fire Swamp, is it not?

Here, there are only two problems. The fire spout (commodity inflation) and lightning sand (financial asset deflation).

Some people say to fear the R.O.U.S.'s but others say they don't exist...