Changing of the Guard

At a meeting of Associate Economists last fall, our department head casually asked how many of us were applying to grad school or otherwise planned on leaving in the next year or so. Given the competitive nature of grad applications, I am not entirely surprised that there was complete and total silence; no one responded and we all sort of shifted uncomfortably in our chairs. Since the probability of getting rejected from all the grad programs you apply to is quite nonzero, we have pretty strong incentives to ensure that we are not replaced by a new hire. Though, to be fair, many of us (myself included) were uncertain at that point about where we would be in a year.

Flash forward to the end of March, and grad school results are in. A quick survey reveals that 9 out of the 20 AEs currently employed will be gone by next August, a whopping 45% turnover. (I did not include the casework department in these figures.) Of the 11 remaining AEs, at least two are considering pursuit of unrelated fields (not econ/math/business). Perhaps my unorthodox exit strategy is rubbing off on others.

About a year ago, I was pondering the transient nature of my social circle and felt a little left behind. Today, I can say with confidence that I have not stagnated and I am going places. About 7,700 km away, in fact. And despite the large exodus of AEs this summer, life at the Fed will still go on and on and on and on...

Anyway, congrats to everyone who was accepted to grad school this year. Anecdotally, it seems like this year was as tough or even tougher than last year. (I heard of someone who won his school's undergrad thesis award and had two incredibly well-known recommenders who hasn't gotten in anywhere.) So, it is no small feat that many AEs have landed spots in respected econ PhD programs.

Today's Department Meeting Agenda

1. Kumbaya Sing Along*
2. Introductions
3. United Way Fundraiser
4. Project 26
5. Regulatory Reform Proposal

*Gotcha...yes, this is a joke!

Bank Structure Conference

The Chicago Fed hosted the 45th annual Bank Structure Conference this week, and I showed up for part of it, since today included such heavy-hitters like Ben Bernanke (Chairman of the Fed) and Sheila Bair (Chairman of the FDIC). I apologize that I didn't get a chance to ask Bernanke "What is the air-speed velocity of an unladen swallow?" during the Q & A, but my lame excuse is that I didn't have a pen at the time to submit a question. Some other highlights of his speech included:

• Q: So, the stress test results are due to be released later today...I don't suppose you could give us the answers ahead of time?
  Bernanke: No.
• Q: The Cubs are playing the Nationals tonight, and given their records, what do you think the chances are for subsidies for these teams?
  Bernanke: I think we need to get Soriano back.
• Hecklers: Midway through the speech, two college-age guys strode into the middle of the aisle and shouted: "Fractional reserve banking is fraudulent! Austrian economics is the answer!" They then bolted for the doors. I was a tad disappointed that they didn't wait to be forcibly removed by burly security guards; I was hoping for tasers in fact.

Of the panelists on financial regulation reform, the best speaker was definitely the finance professor from Chicago, while the worst speaker was the American Bankers Association COO. Let me qualify that statement by saying this is with regards to content, not presentation skills, because the ABA lobbyist had by far the best presentation jokes, and was the most entertaining/funniest speaker. Unfortunately, the content of her speech was at best mistaken, and at worst intentionally inaccurate. My blood was boiling as she kept trying to put the blame on other institutions (investment banks, insurance companies); the first half of her speech was pretty much "TISNF, I can't believe ya'll are trying to cut our compensation." She kept arguing that banks were already regulated enough, that they did not underwrite and purchase the vast majority of subprime securities, and it was the shadow banking industry that needed more oversight. This may be true for 98% of banks, but the part she neglected to mention is that the largest banks (Chase, Citi, B of A) were just as "negligent" in buying and underwriting subprime mortgages as the I-banks.

It's striking how a person's job title is a very good proxy for what their speech is going to say, and how good their presentation skills are. It really explains how idiot politicians get elected in this country.

Why Our Meetings Rock

"Is there a Super-Duper Senior?"

"Nationally, we're back to 2003-level home prices."

"That's so much better than the stock market!"

"So, this picture is telling me that I shouldn't be worried because my bank is well-capitalized?"

"Yeah, they're well-capitalized...by us."

"Instead of presenting the forecasts, why don't we just show the SNL skit on Geithner?"

EconomyCat is Sad

The next FOMC meeting is on the 27th, which means that here at the Chicago Fed we are busy as beavers, preparing our forecasts for the new year. At a department meeting this afternoon, there was abysmal news from nearly every sector and the mood was downright depressing. Financial markets? A few spreads are down from historic highs, which means credit conditions have gone from "outrageously bad" to "really bad." Labor? Last month's unemployment figures were uglier than Anna Nicole Smith. Manufacturing? Like Steve Jobs' weight, steel production is 41% of what it was a year ago. On the bright side, at least we don't have the inflationary pressures that we had a year ago, but this will change quite soon when the printing presses are running full-speed.

Toward the end of the meeting, we began brainstorming ideas for what to do when the economy is going to hell in a hand basket. As you might expect, there are no easy policy prescriptions, particularly when the federal funds target rate is already at/near zero. Should we continue introducing programs to buy troubled assets? This will at least keep the Acronym-Generating sector fully productive. What if we move into the business of buying longer-term debt? How can we justify buying some assets and not others, implicitly making value judgments on certain goods? Will the Fed be able to eventually disentangle itself when it needs to exit these markets?

At least the current situation makes for plenty of dark humor, as evidenced by the following comments:

"The unemployment numbers are in...the good news is, everyone in this room is still employed!"

(Looking at the S&P 500) "This is where I'd retire at 60, this is where I'd retire at 70, and this is where I'm never retiring."
Me: "Oh yeah? Well, this is where I pay for your social security."

"All the business guys want to know which sector is going to grow this year."
"Don't worry, academic publishing will save us all."

Let us all cross our fingers that Obama (and his $825B stimulus package) will prevent a crippling depression.

Finally, I particularly enjoyed these captions (courtesy of Dealbreaker) from yesterday's US Air plane crash in the Hudson. (Too soon? I've decided that since no one died, the answer is no.)

The 3rd Annual 21st Birthday Party

Chris has been making not-so-subtle noises all week about wanting me to come hang out, so on Friday I gave in and invited myself over. At 7 pm, when we were still at work, I was a mite irritated that he was still "finishing things up," but didn't think it was particularly out of the ordinary. Eventually, we got to his place around 7:45, and I thought it was a bit odd the way he was offering to take my bag for me...until we stepped into the kitchen and a dozen people jumped out and yelled, "SURPRISE! Happy Birthday!!" That's right, my surprise birthday party was that much more shocking, given that it was 10 days late. And here I was wondering why the Fed Crew hadn't planned anything fun for the weekend.

I was floored, particularly since I'd no idea that it was coming. Granted, we all know that I tend to be really unobservant. At one point last week, I glanced at Chris' monitor, which had an email with the subject line "Surprise party for 'stal" in the inbox, whereupon I commented, "Man, you have a lot of unopened NY Times emails!" and turned away. Also, Alex apparently stored the cake (an apple tart) in the Fed kitchen frig, and I didn't notice a thing, despite storing my lunch there every day.

Adhering to Nate's "Thou shalt not bring meat into the house of a vegetarian" rule, the gang had thrown together a potluck dinner with butternut squash soup, couscous, pasta salad, brie & baguette, and caprese kebabs in the shape of a bouquet of flowers. Just as we were settling in with full stomachs, there was a knock, and the door was thrown open to reveal...Rich and Sumit! Yes indeed, the economists had arrived, and Sumit was even toting a handle of vodka for additional libations. Can we discuss how the finance team has the best economists EVER?

The past week marked my 1-year anniversary of moving to Chicago and starting work at the Fed. Who would've known that a year later I'd be partying with a fabulous Chicago posse and my boss? What a surreal, magical ride. :)

Academia

Leland's last day at the Fed was Friday afternoon, and as the economists are wont to doing, an email was sent out to the department inviting everyone to go to Ceres for happy hour.

Despite Erik and Ryan trying to sway me, I'd already made up my mind that I wanted to go home. To be honest, I was never particularly close to Leland, and I'm not sure if any of the AEs could claim close bonds. But we do all have a healthy amount of respect, for his astounding work ethic and passion for economics. The ongoing joke is that the macro team's output is going to halve in the aftermath of Leland's departure. Moreover, Leland certainly has ample amounts of support and kinship from the macroeconomists.

Then Sumit (Chris' economist) came by, and asked why we were still dawdling, and why we weren't at Ceres. We made noises about not knowing anyone on the macro team, whereupon Sumit announced, "Well, that's ok. We're going to this thing and we're having a drink. Grab your bags, we're leaving." I gave Chris a stunned look and hastily grabbed my belongings. How could you not acquiesce? It was about as good as drinking with your profs.

Much to my surprise, a healthy crowd had gathered already, including Jeff and Francois from the macro team, Charlie Evans, the Chicago Fed president, and a handful of other AEs. I ordered a Blue Moon and sat back as they regaled us with Tales of Academia. Aside from Leland, who was leaving for grad school at Maryland, Ana was also there, and she'll be leaving for grad school at Berkeley. What advice then, would you give to an aspiring economist? Doesn't it seem like it's getting harder and harder every year to break into the field? Aren't all the good ideas already taken?

Jeff suggested looking for papers in third-rate journals from first-rate academics; it's an indication that they wrestled with a challenging idea and failed, so perhaps you can take a fresh look and solve the problem. He also suggested keeping up Fed ties, by say, working at the San Francisco Fed. This would also conveniently provide a place for you to escape when you need to write your dissertation.

Charlie gave some thoughts on giving presentations. Unfortunately, the first seminars you give are often your most important ones: job market seminars. If you skimp on background information, someone will say they don't understand the motivation behind this paper. If you give an elaborate literature review, others will invariably say they're only interested in seeing your regressions. How do you reconcile the contradictory opinions? It's practically impossible to strike a perfect balance; the best thing you can do is simply know your audience. Sumit: "Yeah Jeff, remember when I gave a seminar and you said you didn't like the title? I wasn't even past slide one!"

Sumit is a special case of an economist who was in the private sector and then left for a more academic position. (Generally, this only happens in reverse.) We asked if the transition had been easy, and he responded, "My recommendation for you guys is not to do what I did. There's a lot of disdain for private sector economists; you can never really come back after you've gone out there, and in many ways, I'm still paying for the six years I worked in industry." But why turn down the money, the hefty one or two million a year? Besides, it's not as though he doesn't work 12 hour days anyway at the Fed. "Well, that's not the same," Sumit replied. "That's a lifestyle choice. If I suddenly started working 8 hours a day tomorrow, no one would say anything. Even though I'm still working long hours, it's because I want to."

It took some pushing, but I'm glad I went. For the first time, I felt like a part of the economics field, as though I'd been initiated into an ancient guild of craftsmen. I realize this is silly, since I haven't even applied to grad school, nor am I confident that I want to apply, but for that shining hour, I could feel the invisible hand patting me on the back.

By the way, in case you ever wondered, Charlie is a gin & tonic kind of guy. In particular, a Beefeater gin kind of guy.

Fishy

Ana is moving up and out in the world, leaving the Fed for grad school, which means she is currently frantically trying to give away her possessions. Since I seem pretty "nurturing" out of the AEs, she approached me to ask if I wanted to assume the duties of Goldfish Mommy. I gave it some thought (what if I need to go on vacation? what if there's uncontrollable algae growth? what if I kill it??), then Tian told me to just stop thinking and say yes. Okay, here goes.

It's funny to think that for the first time ever, I have the responsibility of a life on my hands. At the moment, I'm a little concerned because the fish is swimming a bit erratically, and he didn't eat when we tried to feed him. But maybe that's simply due to the stress of the move. At any rate, we jokingly agreed that if he dies within the next month, it's Ana's fault, and if he dies after that, it's my fault. (However, as economists, we aren't sure what kind of lag variables should be included in the survival rate regression...so maybe it's no one's fault.)

I shall call him Fishy and he shall be mine and he shall be my Fishy! No really, Ana bequeathed him with the name Fishy, so out of respect for the precedent, I will probably stick with that. The previous AE owner called him "Sashimi," which seems oddly cannibalistic. All told, the fish is about 5 years old, and has been passed down from Fed AE to AE about once every year or two. Let's hope he (or she?) lives a happy life, at least during my tenure.

Original Prankster

Working at the fed is Very Serious Business, but we also know how to mix some levity into the day. Specifically, we've elevated the office prank almost to a new art form. At various points, I have come back to my cubicle to find the batteries in my keyboard have been switched, or that my page-a-day calendar has had the next week's pages stapled together, or that my granola bars have been taped to my desk, my pear taped to my desk, my mouse taped to my desk...Once, I returned to see that my chair had been lowered as far as possible, and my desk had been raised about 5 inches. As I was puzzling over this, Rich, my economist, walked by, and I explained that my desk seemed to be different. He commented wryly, "Well, you do shrink as you get older."

Phil was out yesterday, so we took it upon ourselves to help him "redecorate." Although he espouses distaste for many things (Xbox, the Berghoff, Hawaii), he has a particularly virulent hatred for Hillary Clinton. Accordingly, we posted print-outs of Hillary photos all over his cube. I also printed out 15 small "Vote for Hillary" buttons that we hid inside his coffee, under his mousepad, in his phone cradle, in the middle of books...I predict he'll be finding nasty surprises for the next few weeks.

Much to my shock, Phil sent out the following email the next morning:

Thanks guys…. I found this in my inbox

-----Original Message-----

From: Sherry Smith [mailto:Sherry.Smith@chi.frb.org]
Sent: Tuesday, May 6, 2008 4:03 PM
To: Philip S Doctor
Subject: Re: Political stances and Federal Reserve Bank standards

Phil—

It has come to our attention that you have recently been displaying political paraphernalia within your cubical at the Federal Reserve Bank of Chicago. As you were informed during your orientation, the Fed is a politically neutral entity, and maintaining that neutrality is one of our top priorities, especially as we near the national elections. In accordance with internal policies, I am requiring you to remove all signage from the building and have asked that your supervisor verify this for me. Additionally I will be required to have a meeting to discuss your professional conduct. Please get in touch with me to set up a meeting time, hopefully this week.

Regards,
Sherry Smith

AACK! I panicked; should we fess up to our crimes so that Phil doesn't get in trouble? Were we going to get written up? Was I about to get fired from my first (and last) job ever, over a silly prank?! Then Matt pointed out, wouldn't it be funny if Phil was trying to counter-prank us instead? I quickly searched the Fed Directory, and lo and behold, there was no one named "Sherry Smith." Upon closer scrutiny, we noticed that the email was "sent" at 4:03 pm, and we left his cubicle at around 3:45 pm the day before. Whew!

The "R" Word

Here at the Fed, we've been in a bit of a tizzy, looking for signs that we are, in the words of former Chairman Greenspan, undergoing a "cumulative dynamic unwinding of economic activity that feeds upon itself," also known as a recession. To make things even more interesting, I am in the finance group, which means I have an upfront view of the hottest-burning fires. It's ironic that I came to the Fed because I wanted nothing to do with investment banking...yet here I am, 6 months later, learning all sorts of things about finance, albeit from a much more theoretical vantage. Who knows, I may end up working at a big bank after all...

A lot of people have been asking me questions like "Why does the economy suck balls?" The short non-answer is, it's complicated. In a nutshell, in the aftermath of 9/11, the Fed lowered interest rates and credit became cheap, e.g. borrowing money was really easy. Mortgage brokers began underwriting loans to borrowers with checkered credit histories. Why would you lend money to unreliable borrowers though? Well, here's an innovative idea: you can bundle these subprime mortgages into new securities and sell them to investors, like other banks, hedge funds, institutional investors, etc. That way, rather than holding the loans on your balance sheet, you can resell these securities and escape risk-free. But who would buy securities based on crappy loans? Well, we could bundle a large portfolio of mortgages into separate tranches, with a range of risk levels, say, AAA through CCC. If some borrowers default, investors in the lower-rated tranches will not get paid, but the higher-ranked senior tranches will continue to pay. To compensate for the increased risk, junior tranches will also receive higher interest pay-offs. Wow, now we've even managed to create AAA securities out of a bundle of sketchy loans! This process sort of cycles through (you can repackage securities again), until homeowners decide they can't afford their mortgage payments, bank balance sheets are a black hole of intangible assets, and investors suddenly realize the emperor is wearing no clothes.

To further complicate matters, most of the financial terminology being thrown around is confusing for economists, not to mention reporters and novitiate news readers. Alt-A mortgages? SIVs? ABS? CDOs? CLOs? A new acronym seems to pop up every week. No wonder the mainstream press is replete with errors when they try to explain the unfolding events. When our department gathered for a meeting earlier this week, someone commented, "Who knew 3 weeks ago what an auction-rate security was?" This garnered a lot of laughs.

The combination of bubbles in the housing market and the financial sector is a bludgeoning one-two blow to the economy. Whereas a few years ago, credit was too cheap, now credit is too expensive, and businesses and consumers who should be able to borrow are being denied loans. Banks are nervous about lending out money, particularly to each other, and the anxiety is pervasive. This credit crunch is unusually far-reaching in scope, and seems to be taking down arcane sectors of the financial markets that have nothing to do with housing. A month ago, the leveraged loan market was under pressure. The next week, it was municipal bonds and student loans. The week after that, auction-rate securities fell victim. And now, it looks like Bear Stearns (the 5th largest investment bank on Wall St) is on the verge of going bust.

This news scares me more than any other development so far. Basically, at the beginning of the week, rumors and speculation began swirling that Bear Stearns didn't have the cash flows to meet the demands of its creditors. Despite releases and press conferences by Bear Stearns' top brass stating that their liquidity positions were sound, the market's fears were not eased. By Thursday, investors were pulling funds out en masse, and by Friday, it was clear that, regardless of whether the original rumors were true, Bear Stearns' "liquidity position in the last 24 hours had significantly deteriorated." Take a good, hard look, because we have just witnessed the modern-day equivalent of a bank run. For more details, Felix Salmon has an excellent, clear explanation of what just blew up.

Luckily, J.P. Morgan and the Federal Reserve are working to partially bail-out Bear Stearns. Amusingly enough, almost exactly one century ago, J. P. Morgan himself stepped with large sums of cash to quell the Panic of 1907, and stabilize the US economy.

As FDR once said, the only thing we have to fear is fear itself.

The next FOMC meeting is on Tues the 18th. I intend to take my final exam for stochastic processes (man, those quarters zip by fast compared to semesters!), and then dash back to my computer to see what sort of rate cut will be unfurled.

Recruitment Season

One year ago, I was trekking to Chicago for my interview at the Fed. In a whirlwind 24 hours, I flew into town, did a Table for One dinner (for the first and last time) at Giordano's, had a series of 6 interviews with 14 economists, and then flew back to Ithaca that night. The whole experience felt like a dream, but with more awkwardness, less nudity, and equivalent amounts of flying.

Recruitment season is once again in full swing, and the Fed is busy interviewing for new Associate Economists who will replace those of us leaving for grad school or other jobs. So far, we've had about 8 or 10 candidates come in for interviews with Micro, Macro, and Payments. My group (Finance) is actually not hiring this year, since we've already asked an intern from last summer to come back for a full-time stint. Essentially, my already limited influence is now down to nil.

The only contact we really have with prospective AEs is during lunch, when they are treated to a meal at the Fed cafeteria and then immersed in a conversation that usually has nothing to do with economics. For instance, lunchtime topics in the recent past have included chupacabras, whether a plane will take off while on a moving conveyor belt, and the difference in behavior between male and female lobsters in a pot.

So, do we lowly AEs have any say on who gets hired? The answer is, not much, but there is still the potential to influence the opinions of hiring economists. One candidate in particular came off as creepy, and after we discussed this in the elevator, a senior economist asked what we thought of the recruit. I never thought I'd be on the other side of the table, and I must admit, it's kind of nice. Moreover, HR is responsible for much of the initial candidate screening, but since they often don't know what to look for, sometimes AEs will help do some screening. That means we read your cover letters, resumes, recommendations, and transcripts..

Good luck to all the job applicants out there, for the Fed and otherwise.

The Market is Gyrating

At the risk of losing my veneer of coolness and respectability, I am going to confess: the subprime mortgage tumult in global financial markets makes me really excited.

I know, this is barely on the radar for most people unless you are working on Wall Street, or have been trying to obtain a mortgage. But this is a market crisis on the order of the 97-98 Asian financial crisis, and I'm in a prime (ha!) position to analyze and perhaps even influence what is going on.

In essence, subprime mortgages are those given to borrowers with less than perfect credit. The practice began in 2005 or so, when mortgage brokers began offering adjustable rate mortgages, with low interest rates and payments for the first 2 years, and an adjusted (higher) rate afterwards. Now it is 2007, and in a lovely surprise, families are suddenly finding themselves unable to pay their mortgages.

Just 2 weeks ago, Fed Chairman Bernanke released a statement suggesting the credit woes would not impact the wider economy, and that the market was going through a necessary self-correction. The global markets continued to slide, as lenders and securities tied to subprime mortgages murmured about bankruptcy and default. Ten days later, the Fed reversed course, and in an unusual move, cut the discount rate at which banks loan money to each other. It's becoming clear that a few risky mortgages are coming to impact financial sectors in unforeseen ways.

Today, I was doing research on asset-backed commercial paper, which is normally the most mundane security instrument out there, relatively risk-free. Until credit tightens and liquidity dries up, that is. In recent weeks, the yields on CP have risen overnight to 6-year highs. Here's an introduction to what commercial paper is exactly:

A: Can I borrow $10 till tomorrow?
B: Sure.
A: I'm good for it, you know.
B: But you're not earning any money tomorrow, how will you pay me back?
A: Oh, there's lots of liquidity at the short end of the yield curve.
B: In English, please?
A: You're going to lend it to me.
B: Lend what to you?
A: The $10 I need to pay you back.
B: Ah.

In other words, this is the kind of scheme that will work until it doesn't. CP is safe because investments mature quickly (say, tomorrow), but issuers must be able to roll over debt by borrowing what they owe. Thus, CP yields have increased to premium levels in order to attract skittish buyers.

I did some work and gave my results to Rich, who will be talking to Chicago Fed president Moscow tomorrow morning, who will be giving Bernanke an earful at the next FOMC meeting. So there, I like to think I've done my part to contribute to history.

Fed $hred$

Since I started work exactly 4 weeks ago, they decided to finally give us an orientation today. The bulk of the morning was spent watching cheesy videos on how to recognize sexual harassment (“Your performance review is this afternoon…why don’t you come to my office in 20 minutes to review me?”) and other mundane lectures on benefits and ethics. Apparently, we are barred from trading in financial securities, not that I have a portfolio. So much for that J.P. Morgan stock.

The more entertaining segment was the Fed money museum and building tour. Most of the exhibits focused on (you guessed it) money, and you can have your picture taken next to a suitcase filled with a million dollars! Or, you can battle inflation by playing the monetary policy game. The rare and historical bills collection includes a “Grand Watermelon” bill, so named because the zeros are shaped like watermelons. Although the face value is a thousand dollars, one was sold to a collector earlier this year for over $2 million.

We also took a peek at the cash processing department, where cash is offloaded from armored cars, catalogued by inspectors, examined for counterfeits, and unfit bills are taken out of circulation and shredded. The more modern Fed branches use automated robots and carts to access their vaults, which reminded me a lot of Gringotts (from Harry Potter). Around $13 billion is stored at this branch, on pallets like any other warehouse. It’s funny to think that people joke about having a license to print money, and well, we have one. Interestingly, there has never been a known break-in or attempted burglary of a Federal Reserve Bank.

At the end, I was handed a souvenir briquette of shredded currency, containing around 200 bills worth about $2,158 per inch. The ink used to print money contains heavy metals; rather than burning it, bills are shredded. Let me know if you think you can piece it all back together…

Top 10 reasons why working at the Chicago Fed rocks:

So, today was my first day on the job:

• The cafeteria has bright pretty colors, cheap yummy food, and Appel-style conveyor belt tray returns.
• There is a gym upstairs. And a masseuse comes by once a week.
• There is a candy & snacks shop. You could charge stuff with your ID card. This could get dangerous.
  
• The building is open 24/7, so I could potentially work 9p-5a.
• “Business casual” attire means I saw at least one guy wearing jeans and one girl wearing a tank top today.
• I love my wireless keyboard and mouse.
  
• People nap in the lounge. Although you could watch the plasma TV instead.
• Federal holidays: who doesn't want to observe President's Day?
• My supervisors all have PhDs, and are accordingly adroit.
• My coworkers discuss NPR and spamming techniques at lunch.
• I'm within walking distance to tons of restaurants, bars, theaters and concerts after work.