The Prospector spoke to Douglas Duncan, the senior vice president and chief economist at the US Federal National Mortgage Association, which is commonly known as Fannie Mae. It is an organisation founded in the 1930s in response to the Great Depression, but is now a private company which acts in the mortgage market to help lenders maximise their borrowing capacity by securitising mortgage debt and issuing residential mortgage-backed securities.
Duncan is responsible for managing Fannie Mae’s Economics & Strategic Research Group and the conversation covered a broad spread of subjects, the results of which will be published here in the coming days.
Jay Elwes: What did you think of the comments made by Governor Rajan of the Indian Central Bank? I think he used the word “selfish” in relation to the United States’ monetary policy because of the effects it had on capital flows into emerging markets. Do you think he was right to say what he said?
Doug Duncan: Well, I think that’s going to be a debate that will be going on for quite a while. The transmission of monetary effects globally is much more rapid today. It’s not as if the world has not had a global economy since the 1500s or 1600s, it’s just that the information is transmitted so rapidly these days that it is a lot easier to talk about it in real time.
One of the comments that I saw from the Fed that I agree with is that the countries where the effect of the change in US monetary policy were most immediately and severely felt were those that had some difficult fiscal policy issues of their own, which were not prepared for a change in the global flows. To the extent that any of the commentators globally have expressed frustration, which was reflective of their own national fiscal policy and its side effects, I think that is unfortunate. But it’s simply a suggestion that they would want to get more balance into their domestic policies so that there wasn’t as much of an impact.
That said, the size of the US economy relative to the rest of the world, it is impossible for US monetary policy not to have some global effects. And while the Fed makes comments about their responsibility being a domestic responsibility, they have also participated over the last number of years in some attempts at global coordination of monetary policy. So their actions would indicate that they have at least some degree of sensitivity to their effect globally.
JE: And what did you make of Mark Carney effectively reversing his position on forward guidance?
DD: My personal view is that forward guidance is continually updated by incoming information. You may have the desire to see a plan take place, but if data move against your ability to execute on that plan, then you have to react to that. I view it much as the way I respond when people say, “Gosh, you’re pessimistic” or “Gosh, you’re optimistic.” My response to that is, “No. Actually, I’m realistic.” What you see in my forecast is what I do with my own money, and that is not optimistic or pessimistic, it is what I think will happen. And if terms and conditions change, then I have to adjust to that because my expectations were not appropriately calibrated. That’s kind of what I took from his comment, and I actually think that any central bank has to have, to some degree, that point of view.
JE: Will the US have to bail out Puerto Rico at some point?
DD: Well, we actually have been doing a little work on trying to understand the full issue within Puerto Rico. We do have, as Fannie Mae, some mortgage loans that we have guaranteed in Puerto Rico. They are actually performing pretty well, which probably means we did a good job of underwriting them properly. Puerto Rico has some serious long-term issues, and whether the US will bail them out, I don’t know the answer to that.
I am doubtful that on a wholesale basis that would happen. I would expect that there may be some political support, in return for some change in Puerto Rico’s domestic policies, to attempt to reverse some aspects of their decline.
There are a couple of issues. The manufacturing component of their economy has declined for a while because of some tax preference expirations. They had a burgeoning pharmaceutical industry, and the expiration of those tax provisions has led to some out migration. The general economic decline has led to significant out migration of prime working-age folks. And, in part, those things led to government employment being a large part of employment, so when their economy started to slow, and they had to cut expenditures, that reduced employment in that space. What they would do in terms of fiscal policy to reverse that would be a contingency for the US probably stepping in, I would think. That, of course, would be determined in the political arena. And I think that there will be some focus brought on that with their ability, or inability, to raise bond funding.
Duncan is responsible for managing Fannie Mae’s Economics & Strategic Research Group and the conversation covered a broad spread of subjects, the results of which will be published here in the coming days.
Jay Elwes: What did you think of the comments made by Governor Rajan of the Indian Central Bank? I think he used the word “selfish” in relation to the United States’ monetary policy because of the effects it had on capital flows into emerging markets. Do you think he was right to say what he said?
Doug Duncan: Well, I think that’s going to be a debate that will be going on for quite a while. The transmission of monetary effects globally is much more rapid today. It’s not as if the world has not had a global economy since the 1500s or 1600s, it’s just that the information is transmitted so rapidly these days that it is a lot easier to talk about it in real time.
One of the comments that I saw from the Fed that I agree with is that the countries where the effect of the change in US monetary policy were most immediately and severely felt were those that had some difficult fiscal policy issues of their own, which were not prepared for a change in the global flows. To the extent that any of the commentators globally have expressed frustration, which was reflective of their own national fiscal policy and its side effects, I think that is unfortunate. But it’s simply a suggestion that they would want to get more balance into their domestic policies so that there wasn’t as much of an impact.
That said, the size of the US economy relative to the rest of the world, it is impossible for US monetary policy not to have some global effects. And while the Fed makes comments about their responsibility being a domestic responsibility, they have also participated over the last number of years in some attempts at global coordination of monetary policy. So their actions would indicate that they have at least some degree of sensitivity to their effect globally.
JE: And what did you make of Mark Carney effectively reversing his position on forward guidance?
DD: My personal view is that forward guidance is continually updated by incoming information. You may have the desire to see a plan take place, but if data move against your ability to execute on that plan, then you have to react to that. I view it much as the way I respond when people say, “Gosh, you’re pessimistic” or “Gosh, you’re optimistic.” My response to that is, “No. Actually, I’m realistic.” What you see in my forecast is what I do with my own money, and that is not optimistic or pessimistic, it is what I think will happen. And if terms and conditions change, then I have to adjust to that because my expectations were not appropriately calibrated. That’s kind of what I took from his comment, and I actually think that any central bank has to have, to some degree, that point of view.
JE: Will the US have to bail out Puerto Rico at some point?
DD: Well, we actually have been doing a little work on trying to understand the full issue within Puerto Rico. We do have, as Fannie Mae, some mortgage loans that we have guaranteed in Puerto Rico. They are actually performing pretty well, which probably means we did a good job of underwriting them properly. Puerto Rico has some serious long-term issues, and whether the US will bail them out, I don’t know the answer to that.
I am doubtful that on a wholesale basis that would happen. I would expect that there may be some political support, in return for some change in Puerto Rico’s domestic policies, to attempt to reverse some aspects of their decline.
There are a couple of issues. The manufacturing component of their economy has declined for a while because of some tax preference expirations. They had a burgeoning pharmaceutical industry, and the expiration of those tax provisions has led to some out migration. The general economic decline has led to significant out migration of prime working-age folks. And, in part, those things led to government employment being a large part of employment, so when their economy started to slow, and they had to cut expenditures, that reduced employment in that space. What they would do in terms of fiscal policy to reverse that would be a contingency for the US probably stepping in, I would think. That, of course, would be determined in the political arena. And I think that there will be some focus brought on that with their ability, or inability, to raise bond funding.
