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Noteworthy 2015

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Four economists, four investors, two investment bankers, two CEOs, a former SEC chairman and a president made profound statements in 2015.

CreditPulse recaps the fascinating year of 2015 with our year-end montage of insightful comments from noteworthy people around the world.  "Monetary policy is important, but it is not omnipotent."

"Central banks in the U.S., Japan and Europe are trapped in a loop," wrote economist David Malpass (upper left corner), the former deputy assistant Treasury secretary in the Reagan adminstration, on January 22, 2015 in a Wall Street Journal editorial.  "They are fully invested in the theory that zero rates and bond buying are stimulative and add to inflation, yet growth, inflation and median incomes keep going down."

Each year, throughout the year, CreditPulse devotes front page coverage to noteworthy comments from individuals around the world who form a cadre of intellectual insight into the dynamics and fundamentals of free market economics, credit markets and credit risk.  These insightful comments, derived from media sources around the world, form a knowledge base that serves to enhance our understanding of markets. 

Malpass, the president of Encima Global LLC and former chief economist at the once venerable Wall Street investment firm of Bear Stearns, is a desciple of free market economics and, as a result, has been one of the leading critics over the years of the Federal Reserve's easy money policies.  His editorials in the Wall Street Journal, which typically number two or three per year, have served as a clinic on how Fed policy has distorted the flow of capital and credit. 

"Near-zero rates channel credit to the safest borrowers--the government, corporations and the wealthy--at the expense of small savers, small businesses and median incomes," wrote Malpass.  "In a market system, credit is allocated based on the price of credit and the riskiness of the borrower.  In our current system, however, the government is setting the price through zero rates and bond buying."

But Malpass wasn't the only influential critic of Fed policy in 2015 as investors and investment bankers finally started to speak out.  One of the most insightful was a commentary by French-American asset manager Romain Hatchuel that appeared in the Wall Street Journal in August.  Hatchuel said the policies of the world's largest central banks, the U.S. Federal Reserve, the European Central Bank, the People's Bank of China, the Bank of Japan and the Bank of England have undermined free markets.

"Unprecedented monetary easing, high public spending, repressive regulation and automatic debt forgiveness, while arguably useful in the midst of a severe crisis, cannot be sustainable remedies in the long term--that is unless one believes the world should do away with free-market principles altogether," wrote Hatchuel, the managing partner of Square Advisors LLC.  "Those who continue to advocate such measures, more than seven years after the global financial crisis, should at least admit that what they really want is a profound and permanent change in the system."

Hatchuel also noted that "since 2008, the combined balance sheets of the world's five leading central banks have increased by a staggering $9 trillion."  $4.5 trillion of that is sitting on the Fed's balance sheet.

Five months earlier, Michael Heise, the chief economist at Allianz SE in Munich, Germany, made similar remarks in his WSJ editorial on March 12, 2015: "Plunging interest rates in recent years have done little to make firms invest or households consume more.  Rather than stimulating growth, negative real interest rates and higher public debt might encourage consumers and investors to hunker down."

Heise emphasized that Europe needs pro-growth policies, not monetary deleveraging, to cure its economic ills.  "Europe's trend growth rate has been declining for decades, immune to swings in fiscal and monetary policies," Heise wrote.  "Among the first 15 countries to join the EU, average growth has fallen continuously from 4.3% in the 1960s to 0.4% from 2010-14."

But the seriousness of central bank actions became even more apparent when on February 24, 2015, Robert Rubin, former U.S. Treasury Secretary, former vice-chairman at Citigroup and one of the most connected men on Wall Street, warned of an over reliance of central bankers to solve the world's economic woes, in an op-ed in the WSJ.  Rubin was treasury secretary under President Bill Clinton. 

"Monetary policy is important, but it is not omnipotent," wrote Rubin (pictured bottom row, fourth from the left).  "The relentless focus on monetary policy creates serious moral hazard by taking attention away from elected officials' failure to act on the fiscal, public-investment and structural issues that are the key to short-term and long-term economic success." 

The unconventional actions of the U.S. Fed and its ripple effects around the world have aroused such controversy that some, such as Alex J. Pollock of the American Enterprise Institute, have called for end to Fed independence.  In an article entitled "It's High Time to Audit the Federal Reserve," Pollock (shown second row, third from the left) makes the case that since 2008 the Fed has run vast, and risky, economic experiments without effective congressional oversight.

"History shows that these so-called experts are prone to destructive inflationary and deflationary blunders, and that the Fed's actions over the last century represent the greatest systemic risk of any financial organization in the world." wrote Pollock.  "'The century-long record of the Fed provides no evidence that the Fed is competent to be entrusted with this enormous discretionary power."

In March, Arthur Leavitt, the chairman of the U.S. Securities and Exchange Commission (SEC) from 1993-2001, wrote an op-ed in the WSJ opposing an idea being floated by the commission to create a special exchange for companies with market capitalizations of less than $250 million.  "Public markets enforce a level of rigor on management and increase investor expectations," wrote Leavitt.  "If companies are locked out of public markets because they can't meet certain listing requirements, that may be a good thing."  Leavitt also noted that small-cap, low-standards markets in Canada and the U.K. have had mixed-to-poor success.

Speaking of capital markets, Martin Sorrell (pictured top row, fourth from the left), the CEO of advertising giant WPP, was asked about Saudi Arabia opening one of the world's most restricted stock markets to foreigners on a Bloomberg Business panel in June.  Sorrell replied that "the economic development in that part of the world is intensifying."  When asked if Riyadh is Dubaising their economy, Sorrell answered, "yes, the shift from Beriut to Dubai and now to Riyadh and Jedda."