On Wall Street, a trader who shades his opinions to bolster his investments is said to be “talking his book.” The “book” refers to the old ledger where traders tracked their inventory of stock positions. The “talking” part is self explanatory. “Somebody who is sitting on a ton of Acme Unlimited Inc. who tells you that Acme Unlimited is going to the moon is talking his book,” emails Lou Crandall, Chief Economist at Wrightson ICAP.
Lou adds that talking your book is “considered more deceptive in a trader (who might just be in and out of the position) than an investor (who ought to believe that Acme is going to the moon.)”
There’s a whiff of the old-style, cigar-chomping floor trader in the phrase “talking his book.” In today’s world of electronic trading and global markets, a more sophisticated way to imply bias is to accuse someone of “arguing his portfolio.”
Whatever you call it, there is surely a lot of book-talking and portfolio-arguing going on in financial markets today. Investors and speculators who have taken a beating on risky investments are clamoring for Federal Reserve Chairman Ben Bernanke to throw them a lifeline and bail them out. Of course, the pitch is more subtle than that. Some argue Bernanke is too “academic” and misunderstands markets. The implication is that a savvy Fed Chairman would have moved immediately to cut rates and rescue many a portfolio in the process.
That is not to say there is no case for an immediate rate cut. The economic risks are up – the Fed said as much in an August 17th statement – and central bankers often wait too long to act before the economic damage is done. Bernanke repeated the point in his recent speech to a monetary conference in Jackson Hole, Wyoming. And relieving stress in the financial markets is an important consideration for a central banker. To be sure, it is also impossible to look into another soul and tell if a trader/portfolio analyst/investment pro is arguing from belief or from the book. Just because an argument is self-interested, doesn’t mean it is not sincere.
Still, many of the analysts I respect the most say the loudest arguments for rate relief are coming from those who have lost the most money. No one is surprised those investors might be arguing their book.
The Fed is on to this lobbying game. Ben Bernanke and his colleagues understand some of the calls for relief are self-motivated. Even so, as losses rise, Wall Street is able to put a great deal of pressure on the Fed. And their argument strikes a cord: Wall Street’s pain today could be Main Street’s tomorrow. Already we see signs that nervous financial markets are making it harder for homebuyers in California and other states to get jumbo mortgages.
Just in case the Fed doesn’t get the message, Wall Street investors – some of the largest campaign contributors around – are also able to take their concerns to members of Congress. Fed Chairman have to be excellent economists, but they must also be competent politicians. The financial sector is one of the largest campaign contributors around, and lawmakers are only too willing to argue their book when Fed officials come to testify. No one in Washington can afford to ignore Congress.
This is, of course, why we have an independent Fed. It is also why remaining independent isn’t easy. For now, the Fed has decided to ignore those talking their book and run monetary policy by the book. Economists believe central banks should not protect investors from their own bad decisions. To do so would simply encourage more bad decision-making later, another point hammered home by Bernanke in Jackson Hole. Instead, monetary policy should be adjusted to protect the real economy out beyond the financial markets.
Traders understand timing. By waiting until their regular meeting later this month to consider a change in interest rates, Bernanke and his colleagues are sending a signal: “If you take a risk, don’t talk your book when it goes bad.”
