Outside the Box

Moral Hazards

John Mauldin

June 5, 2006

Any time a central bank speaks there are scores of investors lined up and waiting to listen. Each is interested in any number of tidbits that might have a plethora of implications affecting his positions and portfolio. Even after the long-winded speeches and discussions, that action does not stop as investors continue to try and anticipate the next set of policies.

My readers are well aware of how keen I find the writing to be of Paul McCulley, managing director of PIMCO. In his global central bank focus article, Paul ventures beyond the normal apparatus to discover what he labels a "moral hazard."

My Friday letter, Thoughts from the Frontline, has been written about some of the data variables that affect the decision making policies of the Fed. I believe that Paul's piece will shed some light on what the Fed might be facing, as well as add some global perspective to the central banks as a whole. May you find this editorial to be helpful in your outside the box thinking.

John Mauldin, Editor
Outside the Box

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Global Central Bank Focus

By Paul McCulley, June 2006

Moral Hazard Interruptus

Over the last year, monetary policy makers and market practitioners have spent a huge amount of mental energy, loads of computer time and gallons of ink examining the conundrum - the putatively too-low level of long-term real interest rates, both absolutely and relative to real short-term interest rates. We've certainly done so here at PIMCO, and our empirical findings mirror those of others,…

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