Posts filed under 'The Geithner Watch'
Richard Smith, a London-based capital markets information technology manager, was kind enough to provide an advance copy of his review for the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism by Yves Smith, the author of the well-known financial blog Naked Capitalism.
Mr. Smith (real name, and no relation to Yves) helped in the proofing of the copy and fact searches, so he was already well familiar with the text. Perhaps this makes him a not entirely dispassionate source, given the regard that even copy editors can obtain for their associated works. But I thought it was a very nice summary of many of the salient points, and that you would enjoy having the opportunity to read it.
I intend to read the book in order to both learn something, and to be entertained as well. I love reading accounts of this period of time that are both authoritative and well-written, and understandable by the non-expert. Given the author’s performance on her blog, and her detailed industry knowledge and experience, it looks to be a ‘must read’ for those following the financial crisis and its associated developments.
Reading ECONned
By Richard Smith
http://jessescrossroadscafe.blogspot.com/2010/03/guest-post-econned-book-review.html
March 6th, 2010
In the present system, the more unrestricted the banks are, the more money they can generate “out of thin air,” and the more damage they can inflict upon the wealth-generation process. FULL ARTICLE by Frank Shostak
February 20th, 2010
“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues
‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.
The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”
Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN
“Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.
This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank…
New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.
That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.” Secret Banking Cabal Emerges From AIG Shadows – Reilly – Bloomberg
Hat Tip to : Jesse
January 31st, 2010
For almost a year now, Democratic pollsters have been pointing out how much the public hates the bank bailout and despises Wall Street. But there was no reason for Democratic leaders in Congress or the White House to pay much attention. After all, it was a Republican president and a Republican Congress that came up with the bank bailout plan to begin with. Some stalwart Republicans had grumbled about it, of course, but Republicans have always been on the side of Wall Street and big business and weren’t likely to call for strong measures to prevent the Street from getting into trouble again.
Larry Summers and Tim Geithner scuttled Paul Volcker’s plan to separate the banks’ commercial and investment functions, and didn’t want to limit the size of banks or the risks they could take on. Summers and Geithner have wanted to get the banks back to profitability as soon as possible. And Dems in Congress have had no stomach to take on Wall Street, a major source of campaign funding.
But suddenly the winds are blowing in a different direction over the Potomac. The 2010 midterms are getting closer, and the Dems are scared. Their polls are plummeting. The upsurge in mad-as-hell populism requires that Democrats become indignant on behalf of Americans, and indignation is meaningless without a target. They can’t target big government because Republicans do that one better, especially when they’re out of power. So what’s the alternative? Wall Street.
Perhaps I’m being too cynical. Maybe the Obama and congressional Democrats are now ready to give up Wall Street trickle-down economics and focus on Main Street trickle-up. “There are two ideas of government,” said William Jennings Bryan at the Democratic National Convention in Chicago in 1896. “There are those who believe that you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.” He couldn’t have said it better.
January 23rd, 2010
Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.
Then he got elected.
What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.
How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?
Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.
How did we get here? It started just moments after the election — and almost nobody noticed.
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December 13th, 2009
November 21st, 2009
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times
November 21st, 2009
One of the federal government’s most opaque methods for bailing out the banking system allowed a handful of giant institutions to save up to $25 billion on their borrowing costs, a Congressional panel estimated on Friday.
Seven companies received about 82 percent of those benefits, the panel estimated. General Electric Capital was able to reduce its borrowing costs by about $1.9 billion, while Goldman Sachs saved an estimated $606 million. The other big beneficiaries were Citigroup, Bank of America, JPMorgan Chase, Morgan Stanley and Wells Fargo & Company.
The savings came in the form of federal guarantees on more than $300 billion of bonds issued by banks and other financial institutions, and they were merely one component of a $4.3 trillion safety net of guarantees orchestrated last year by the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation.
In one of the first systematic efforts to analyze the maze of guarantees and hidden subsidies, the Congressional panel that oversees the Treasury’s $700 billion rescue program said the guarantees had provided a cheap but risky tactic for fighting the financial crisis last year.
The good news for taxpayers, the panel said, is that the government has actually turned a profit thus far on the guarantees. The government has collected $9 billion in fees for guaranteeing bonds issued by the big financial institutions and a total of $17 billion in fees for all its emergency guarantees. Thus far, it has lost only about $2 million.
At the height of the financial crisis late last year, the government provided guarantees to financial institutions, from money-market funds to expanded deposit-insurance for banks and $300 billion in troubled assets held by Citigroup. By providing guarantees instead of direct loans, the Treasury could avoid spending money upfront.
But Elizabeth Warren, director of the oversight panel, warned that the guarantees also exposed taxpayers to potentially huge costs and had created new risks by encouraging financial institutions to count on future bailouts and take bigger risks.
“The guarantees, when they work, provide big market stability at very low cost,” Ms. Warren said. “But they come with a very high risk to the taxpayer and a powerful distortion of market pricing and moral hazard.”
The panel’s most striking finding was about the size of the effective subsidy that G.E. Capital and Wall Street giants like Goldman reaped in the form of below-market borrowing costs.
The panel estimated that the federal guarantees lowered those firms’ borrowing costs by about 39 percent. Using two different approaches to measure the value of the subsidy, the panel said the savings ranged from $12.8 billion to $25 billion.
The oversight panel said it found “no significant flaws” in how Treasury officials and banking regulators designed the guarantees. But Ms. Warren warned that they were a “dangerous tool,” adding that “next time we may not be so lucky.”
Big Breaks for Companies in Bailout’s Fine Print – New York Times
November 14th, 2009
I have a column in Financial Express today on the rationale for independence of the central bank, and how this is operationalised in democracies.
The rationale for central bank independence
The starting point of modern thinking on monetary policy is the issue of central bank independence. Watching the world across the centuries, a pattern has been found that non-independent central banks distort monetary policy to support the incumbent political party. When elections are approaching, rates tend to be dropped. This makes households feel a bit happier and more inclined to vote for the incumbent. This threatens the fairness of elections. And after elections, it tends to kick off higher inflation. Non-independent central banks are thus associated with election-induced fluctuations. Instead of monetary policy being a force for stability, it becomes (to some extent) a source of shocks for the economy, and of unfairness in elections.
Major countries have chosen a remarkable solution: politicians relinquish control over the central bank. This is a truly rare feature in public administration. In almost all other elements of government, democracies work by holding politicians accountable in elections, and giving politicians the reins in public administration. In this one area, the world has done something unusual.
This requires accountability mechanisms
Two issues follow hard on the heels of independence. First, independence goes with a narrowing of the functions of the central bank. There is no economic case for having independence from politicians for functions such as running the payments system, regulating or supervising financial markets or banks, running a bond exchange and depository, manning a system of capital controls, etc. The rationale for independence is limited to one specific problem: that of setting the short-term interest rate of the economy. Hence, giving RBI independence requires narrowing down its functions to the core where economic logic suggests independence. All other functions need to be placed in conventional agencies, with control in the hands of accountable politicians.
The second issue is that of accountability. The standard route of accountability through elections is being eschewed in this unique problem. But a central bank cannot be handed over to a set of unelected officials with no accountability. This would induce abuse of power, where the agency will focus on its own interests at the expense of the country.
The solution involves transparency, predictability and inflation targeting. The agency must be fully transparent about everything that it does. It must use rules rather than discretion, so as to limit the extent to which discretionary power is wielded by unelected officials. They must write down a monetary policy rule, discuss this in public, and live by it. The third element of accountability is inflation targeting. Independent central banks must have a quantitative monitorable target. Setting an inflation target for the medium term binds the agency to achieving a goal, as opposed to arbitrary exercise of power without accountability.
Commen sense and monetary economics come together
All this reasoning is rooted in the basic hygeine of good public administration. Once we accept the starting premise — that central bank independence is desirable — then careful thinking about public administration leads us to the remaining conclusions: narrow the functions placed in an independent central bank to only those where independence is required (i.e. setting the short-term interest rate), have full transparency, have a monetary policy rule, and require inflation targeting.
In historical sequence, the above reasoning led the way in monetary policy reform. It was a bit later that the best monetary economists started closing their models by putting in an inflation targeting central bank. They found it works very well. So in this strategy for monetary policy reform, we have a happy consensus between the common sense of good administrators and the state of the art of monetary economics. The central banks of the bulk of OECD GDP are now de facto or de jureDe jure inflation targeting is particularly important in countries with weak institutions, where the behaviour of an agency that is not tied down by law can be more erratic. inflation targeting, and the emerging markets with high standards of governance have also made the switch.
Indian monetary policy reform
The Indian monetary policy debate is about the key ideas of the successor to the RBI Act of 1934, which was drafted by the British in the 1920s. The authors of this act never envisioned the conditions of 2009, either in terms of the Indian economy, or our knowledge of monetary economics. In this debate, RBI staff are interested parties and have to recuse themselves.
Operationalising inflation targeting involves addressing many practical problems. A focus on these practical problems is premature. All these practical problems can be solved – as has been done myriad times in other countries – once the principle is accepted. The existence of these practical problems does not invalidate the basic strategy.
One periodically encounters criticism of low inflation as the prime goal of monetary policy. However, anyone who proposes that inflation targeting is not the answer has to come up with an alternative accountability mechanism, for no democracy can have an independent central bank without accountability. In addition, advocates of novel schemes have to explain why India should be a guinea pig for something not found in good countries.
October 25th, 2009
An Inside Look at How Goldman Sachs Lobbies the Senate, by Matt Taibbi: …Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned…, but it turns out that there’s no way to talk about Bear and Lehman without going into the weeds of naked short-selling…
It’s the conspicuousness … that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn’t a better example of “regulatory capture” … than this issue.
In that vein, starting tomorrow, the SEC is holding a public “round table” on the naked short-selling issue. What’s interesting about this round table is that virtually none of the invited speakers represent shareholders or companies that might be targets of naked short-selling, or indeed any activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are either banks, financial firms, or companies that sell stuff to the first two groups.
In particular, there are very few panelists — in fact only one, from what I understand — who are in favor of a simple reform called “pre-borrowing.” Pre-borrowing is what it sounds like; it forces short-sellers to actually possess shares before they sell them.
It’s been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement…
The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.
In advance of this panel and in advance of proposed changes to the financial regulatory system, these players have been stepping up their lobbying efforts… Goldman Sachs in particular has been making its presence felt.
Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss’s office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.
Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman’s fact sheet.
Now, the mere fact that two different congressional aides were so disgusted by Goldman’s performance that they both called me on the same day — and I don’t have a relationship with either of these people — tells you how nauseated they were.
I would later hear that Senate aides between themselves had discussed Goldman’s lobbying efforts and concluded that it was one of the most shameless performances they’d ever seen from any group of lobbyists, and that the “fact sheet” … was, to quote one person familiar with the situation, “disgraceful” and “hilarious.” …
October 3rd, 2009
Sept. 21 (Bloomberg) — The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.
The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”
Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and “propose any changes to the Fed’s governance and structure.”
“It is not obvious at all why that is a Treasury responsibility or even appropriate why the Treasury would undertake that kind of study,” said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey, and a former Atlanta Fed research director. “The Fed was created by Congress and it is not part of the executive branch.”
U.S. lawmakers have also called for a review of the Fed’s power and structure, saying Fed Chairman Ben S. Bernanke overstepped his authority as he bailed out creditors of Bear Stearns Cos. and American International Group Inc. while battling a crisis that led to $1.62 trillion in writedowns and losses at financial firms.
No Work Done
While the report requested by the Treasury hasn’t been formally scrapped, no work has been done on the project, which was due Oct. 1, the people said. Treasury spokesman Andrew Williams declined to comment, as did Fed spokeswoman Michelle Smith.
The central bank is performing its own reviews of possible operational changes following the financial crisis. Fed Governor Elizabeth Duke is leading an internal study of the roles of the directors that serve on each of the boards at regional Fed banks.
“The institution is trying to keep a low profile,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and the former director of Division of Monetary Affairs at the Fed Board. “To publish a report now invites comment on that report.”
‘Associated Costs’
The Senate passed 96-2 a nonbinding budget amendment in April supporting “an evaluation of the appropriate number and the associated costs” of the district banks. The measure was sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Alabama Senator Richard Shelby, the senior Republican on the panel.
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has also called for more scrutiny of the central bank, saying last year he aims to probe how the 12 regional Fed presidents are appointed and their role in setting interest rates. The Fed banks are semi-private entities, each overseen by a nine-member board of directors.
Legislation in both houses of Congress would allow for audits by the Government Accountability Office of the central bank’s monetary policy and other operations. Bernanke opposes the measure, which was introduced in the House by Representative Ron Paul of Texas, a Republican. Frank has scheduled a committee hearing on the issue for Sept. 25.
Lessons Learned
Along with the study by Duke, the Fed is reviewing how to overhaul supervision based on lessons learned from the financial crisis.
The Treasury interest in a Fed structural review partially stems from the administration’s proposal to make the central bank the lead regulator for the largest, most inter-connected financial institutions.
Fed Governor Daniel Tarullo, an Obama appointee, is working on changes to the supervisory process that are preparing the central bank for a larger role in tracking risks across the financial system.
Tarullo is focusing on bank-to-bank comparisons and quantitative scenario testing of bank portfolios. The Fed is currently examining the vulnerability of banks with assets under $100 billion to falling commercial real estate values.
Congressional leaders have balked at the notion of giving the Fed more power and are leaning toward vesting authority over capital, liquidity and risk-management practices of big banks in a council of regulators.
Supervisory Council
“There will be a council,” Frank told Bloomberg Television Sept. 14.
The review led by Duke followed the resignation in May of Stephen Friedman as New York Fed chairman because of ties to Goldman Sachs Group Inc. Friedman is a director on Goldman Sachs’s board.
Goldman Sachs became a bank holding company in September 2008, a change that would have normally barred Friedman from continuing to serve in his New York Fed post. Officials gave him a waiver so he could remain in the job, which has mostly an advisory role.
Friedman, chairman of Stone Point Capital LLC, said at the time of his resignation that he had complied with all the Fed’s rules and his service on the board was “mischaracterized as improper.”
Some analysts said a Fed revision of the role of directors is overdue.
“Allowing local bankers to play a leading role in selecting reserve bank presidents is the most worrying aspect of the current system,” Lou Crandall, chief economist at Wrightson ICAP LLC, wrote to clients in July.
District bank presidents are nominated by committees made up of people whose institutions the nominees may have supervised.
“The conflicts of interest inherent in the current system are glaring,” Crandall said.
Fed Rejects Geithner Request for Study of Structure – Bloomberg
September 23rd, 2009
And then there was the rate cut the next morning. And anyone who was privileged enough to have gotten that information on Thursday afternoon was able to make a huge profit.
It was clear that someone knew about the Fed’s move ahead of time and was trading stocks based on that information.
I always wondered what Paulson did after the meeting — who he called, who he met. But until this week the information was unavailable. First, Treasury told me the phone records didn’t exist, but then just as quickly they directed me to a part of the Treasury’s Web site that had everything I needed.
Read: What Did Henry Paulson Know, and When? – John Crudele, New York Post
September 22nd, 2009
Stocks’ Rise Hinges on Fed And Data
New York Times
… Investments Advisers LLC in Newark, New Jersey. He said people will closely watch the Fed’s take on what comes for the economy after the rebound. …
September 21st, 2009
“When an unprecedented amount of taxpayer dollars were lent to financial institutions in unprecedented ways and the Federal Reserve refused to make public any of the details of its extraordinary lending, Bloomberg News asked the court why U.S. citizens don’t have the right to know”
-Matthew Winkler, the editor-in-chief of Bloomberg News.
>
I would have been surprised if it went the opposite way.
“Federal Reserve must make records about emergency lending to financial institutions public within five days because it failed to convince a judge the documents should be exempt from the Freedom of Information Act.
Manhattan Chief U.S. District Judge Loretta Preska rejected the central bank’s argument that the records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions. The collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” according to the lawsuit that led to yesterday’s ruling.
The Fed has refused to name the borrowers, the amounts of loans or the assets put up as collateral under 11 programs, saying that doing so might set off a run by depositors and unsettle shareholders. Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued Nov. 7 on behalf of its Bloomberg News unit.”
The only way this has been historically been allowed is when it imoacts National Security . . .
>
Source:
Fed Must Release Reports on Emergency Bank Loans, Judge Says
Mark Pittman and Karen Gullo
Bloomberg, Aug. 25 2009
http://www.bloombergs.com/apps/news?pid=20601087&sid=afi7TJiJFys0
August 29th, 2009
Fed Interest Rate Path: More of the Same at the August Meeting
- The Federal Open Market Committee (FOMC) decided at its August meeting to keep its rate targets and most of its credit easing programs unchanged “for an extended period”. The Fed will slow purchases of Treasuries and extend purchases until the end of October 2009 but did not expand the program.
- Some analysts speculate the FOMC may later expand quantitative easing, particularly TALF purchases of private sector assets. An expansion of Treasury purchases is unlikely given recent economic improvement. Contrary to market expectations, many believe the Fed is unlikely to begin rate normalization until 2010 or 2011 due to a persistent output gap and stubbornly tight credit.
August 13th, 2009
In light of the recent allegations of trade secrets theft at Goldman Sachs, Ethan S. Burger and Kenneth Gray look at whether corporate security and policy are prepared to handle a “new generation of economic disruption”. Read Goldman Sachs’ Code and the Elephant in the Room.
August 4th, 2009
New York Fed President William C. Dudley served 10 years as Goldman Sachs’s chief economist. (By Kevin Clark — The Washington Post)
By
Washington Post Staff Writer Monday, July 20, 2009
NEW YORK — The low-slung cubicles wrap around the ninth floor of a building three blocks from Wall Street, each manned by a young staffer staring at flashing numbers on a flat-screen computer monitor and working the phones to gather the latest chatter from financial markets around the world.
It could be any investment bank or hedge fund. Instead, it is the markets group of the
Federal Reserve Bank of New York, which has been on the front lines of the government’s response to the financial crisis. Federal Reserve and Treasury Department officials make the major decisions, but the New York Fed executes them. The information gathered there provides crucial insights into the financial world for top policymakers. But the bank is so close to Wall Street — physically, culturally and intellectually — that some economic experts worry that the New York Fed puts the interests of the financial industry ahead of those of ordinary Americans. “The New York Fed sticks out as being not just very, very close to Wall Street, but to the most powerful people on Wall Street,” said Simon Johnson, an economist at MIT. “I worry that they pay too much deference to the expertise and presumed wisdom of a sector that screwed up massively.” Even some former insiders at the Fed say the bank does not pay enough attention to the fundamental flaws in the country’s financial system or to the risks associated with bailing out financial firms — for instance, the chance that banks will be encouraged to take more unwise gambles. These experts worry that the New York Fed has adopted the mindset of a trading floor: well attuned to ripples in financial markets but not to long-term trends and dangers. Last month, for instance, Wall Street bond traders wanted the central bank to ramp up its purchase of Treasury bonds, which would help the traders by driving up prices. But Fed officials in Washington and around the country concluded that such a move would be counterproductive in the longer run, in contrast to some New York Fed staffers, whose views more closely mirrored those on Wall Street. New York Fed employees “play a very valuable role, day in, day out, with detailed contacts with the big financial firms,” said William Poole, a former president of the Federal Reserve Bank of St. Louis who is now at the Cato Institute. “What I think is missing is a longer-run perspective. They tend to be sort of short-term in their outlook, which is true of a lot of the financial firms. Traders have a horizon of a few hours or a few weeks, at most.” The New York Fed’s home is a fortresslike building, with bars securing the windows on lower floors. Its main lobby resembles a Gothic cathedral: dim, quiet, with stone walls, as if to inspire a mix of fear and awe. Like the other 11 regional Federal Reserve banks, the New York Fed is a curious mix of public and private, part of a system Congress created in 1913 to avoid concentrated power in Washington or New York alone. Its board of directors is composed of bankers, businesspeople and community leaders, who select the bank president with approval from Fed governors in Washington. Banks in New York, Connecticut and parts of New Jersey own shares in the New York Fed, though its profits are returned to the U.S. Treasury. The man in charge is a soft-spoken economist named William C. Dudley, who took over as president in January, replacing Timothy F. Geithner when he became Treasury secretary. With a proclivity for button-down Oxford shirts and rumpled suits, Dudley does not fit the mold of a Wall Street executive. He has won fans across the Federal Reserve System for a collaborative style, as well as a talent for explaining complicated problems in the financial world and drawing up solutions to them. It is his résumé that alarms some critics, who see an example of a too-cozy relationship between financial firms and their lead regulator. One of several bank officials who have worked in the private sector, Dudley was at
Goldman Sachs for two decades, including 10 years as chief economist, before joining the New York Fed in 2007.
Some Fear N.Y. Fed Too Influenced by Wall Street – Washington Post
July 24th, 2009
How to Turn a Recession Into a Depression – Bill Niskanen, Cato Institute
Upgrading Our China Outlook – Wang, Yam & Zhang, Morgan Stanley
Weekly Economic & Financial Commentary – Wells Fargo Economics
Weekly Economic Report – Diana Furchtgott-Roth, Hudson Institute
July 24th, 2009
Hank Paulson appeared before the House committee on (Lack of) Oversight and (Prevention of) Government Reform last week to defend his actions in the Bank of America/Merrill Lynch deal. For those of you who haven’t been following along, Bank of America CEO Ken Lewis has accused Ben Bernanke and Hank Paulson of pressuring him to complete the Merill acquisition even after discovering that the losses at Merrill were several orders of magnitude higher than what he thought when the deal was struck. Bernanke and Paulson allegedly told Lewis that he and the entire board would be replaced if he didn’t conceal the losses until the deal was approved by shareholders.
I didn’t think Hammerin’ Hank’s reputation could fall any further but after listening to his arrogant testimony this week, I think I have to revise that. Paulson cast himself as the hero in his testimony:
“Many more Americans would be without their homes, their jobs, their businesses, their savings and their way of life,” he said in written testimony prepared for a hearing Thursday.
While losses have been staggering, “that suffering would have been far more profound and disturbing” had the government not intervened, he will tell the House Oversight and Government Reform Committee.
“Our responses were not perfect … But, having had the benefit of some time to reflect, and to consider views expressed by others, I am confident that our responses were substantially correct and they saved this nation from great peril,” Paulson wrote.
Well, gee, thanks Hank. There is no way to know how things would have turned out if you hadn’t bailed out every firm that acted as a counterparty to your net worth (Goldman Sachs), but it’s nice to know it hasn’t affected your self esteem.
While Bernanke prudently fell back on the “I don’t recall” defense, Paulson, believe it or not, defended his threat to Lewis:
Paulson said he told Lewis that reneging on the promise to purchase Merrill would show “a colossal lack of judgment.” He then pointed out to Lewis that the Fed could remove management at the bank if it saw fit, he said.
“By referring to the Federal Reserve’s supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America’s regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment,” Paulson said.
Paulson said he believed his remarks to Lewis were “appropriate.”
Faced with being forced out with only a golden parachute to cushion his fall, Lewis decided that maybe those Merrill losses weren’t really so important that they needed to be disclosed to BAC shareholders prior to voting on the merger. Based on the performance of BAC’s stock price since then, shareholders might disagree, but hey that’s a small price to pay for saving the “system”, right?
The charge that the failure of large financial institutions represents a systemic risk is one that suffers from a lack of evidence. Is the system really better off maintaining Citigroup on life support rather than letting it die a natural death? Is the system really better off by expanding the allegedly already too large to fail Bank of America? Is the system really better off when poorly managed companies are rescued at the expense of those who acted more prudently? Is the system really better off when losses are spread far and wide rather than concentrated with those who took the risks? What message does it send to prudent managers when their imprudent competitors are bailed out? Will they be so prudent next time?
The economic success of the US is not dependent on maintaining the status quo. Capitalism is a system which requires failure to advance. The failure of a few companies is not evidence that capitalism has failed but evidence that it is working. Failure sends a message to other market participants that the practices that caused the failure should be avoided. That message applies not only to private companies but to the government institutions that also failed us in this crisis. Attempting to return to the status quo rather than allowing private company failures and reforming failed government institutions does not advance us as a society. It mires us in mediocrity.
It is Paulson, Bernanke and Bush who showed a colossal lack of judgment. It is the management of Bear Stearns, AIG, Lehman, Merrill Lynch, Fannie Mae and Freddie Mac who showed a colossal lack of judgment. It is Alan Greenspan and all the member of the Federal Reserve who showed a colossal lack of judgment. It is most of Congress that showed a colossal lack of judgment. It is Tim Geithner and President Obama who continue to show a colossal lack of judgment. And it is the American taxpayer who will have to pay the tab for the colossal lack of judgment shown by all of them.
The long term consequences of government actions over the last two years will become evident to investors in the coming years, but for now, attention is focused on the immediate situation. And the immediate situation is still improving. The stock market rallied 7% last week as earnings season kicked off with some highly visible positive surprises. Goldman Sachs, JP Morgan, Bank of America and Citigroup all reported better than expected earnings (thanks in large part to the implicit guarantee of the government) and the remainder of the financial sector seems likely to follow suit in the coming weeks. Intel and IBM got the tech sector off to a good start. Next week will see a flood of companies reporting their second quarter results and while there will be a few disappointments such as Google last week, I believe the aggregate numbers will continue to be better than the market expects.
Paulson: A Colossal Lack of Judgment – Joseph Calhoun, Alhambra Inv.
July 22nd, 2009
The reason that the savings gauge has leapt is not that Americans are saving more, but only that they are paying off their past, huge borrowings because of financial distress. Americans actually cut savings in the form of financial assets held by 0.5 per cent of their incomes in the first quarter, while cutting borrowing even more aggressively, by 5 per cent of income. This telling data leads to two important conclusions.
First, it suggests that immediate US recovery prospects may be even more frail than supposed, and than Mr Bernanke is liable to admit. With Americans now battling to pay down debt against a backdrop of still-plunging house prices and soaring unemployment, while shoring up spending power with cuts in their savings, the resurgence of consumer demand on which recovery hopes are pinned may well prove elusive. The position could grow worse still once the boost to US personal incomes from the Obama Administration’s fiscal giveaway also fades, as it soon will.
Second, and critically, it is clear that America has yet to begin to address the real roots of this crisis and embark on the long road to a more sustainable economic future. Until it does so, the future will remain a hostage to fortune.
The U.S. Is Not Yet Free of Economic Peril – Gary Duncan, Times of London
July 21st, 2009
Is there a clandestine understanding between the world’s two most powerful central banks, the Federal Reserve and the People’s Bank of China?
Naturally, no one can talk about it, let alone confirm or deny anything. But it’s not too difficult to make out the broad outlines of how Chinese-American monetary cooperation may be working.
People’s Bank governor Zhou Xiaochuan and other figures in the Chinese leadership seem to use every opportunity to broadcast finely calibrated skepticism over the dollar’s future. Such Jeremiahs feed on and — in turn — feed doubts about potential American inflation caused by the Fed’s quantitative easing and exploding budget deficits.
But both Washington and Beijing appear to recognize — whatever the saber-rattling — that large-scale shifts in the currency composition of Chinese currency reserves are more or less impossible. Roughly two-thirds of Chinese reserves of more than $2 trillion are thought to be held in the greenback.
Heavy Chinese sales, or even a deliberate policy of diverting export proceeds into Euro or yen by re-dominating sales contracts, would depress the U.S. currency and lower the value of Chinese reserves. It’s the well-known Beijing dollar trap. And it has to be said: the Chinese have maneuvered themselves into it of their own volition, and in full knowledge of the potential problem.
So Governor Zhou’s strictures are, to a certain extent, shadow boxing. However, in return for a tacit standstill agreement on the currency composition of reserves, the Americans have to acknowledge that the renminbi’s value will rise only moderately.
If the Chinese continue taking in dollars, logic tells us the Chinese currency can hardly revalue strongly. A signal of the U.S. authorities’ acceptance of this state of affairs is that the word “manipulation” for Chinese currency management now clearly is banned.
There is another, still more intriguing, side to Chinese currency pronouncements. The doubts voiced from Beijing on the dollar’s stability, far from unsettling the U.S. monetary authorities, are actually manna from heaven for the Federal Reserve. The Obama administration hardly can go in for years of reckless deficit spending when the country’s largest creditor is emitting so many warning signals.
More importantly, the Fed is getting a certain amount of cover from Beijing for its eventual “exit strategy” — a reversal of quantitative easing and a rise in interest rates as soon as economic recovery gets under way.
The Chinese even are giving a strong tailwind to Fed Chairman Ben Bernanke’s bid for re-nomination after his initial four-year term ends in January. The reason? With the Chinese appearing to turn the knife through gloom-laden dollar prognostications, President Obama knows that appointing a heavily political successor to Bernanke would be fraught with great risks.
Any Fed chairman who looks less than squeaky-clean on currency stability is likely to send dollar holders heading for the exits — and could spark the full-scale currency collapse that Wall Street bears have been growling about for months.
So, if Obama wishes to replace Bernanke, he can do so only by bringing in a full-scale monetary hawk — a step that he must rule out on domestic political grounds. The conclusion is that the Chinese maneuverings leave Obama with no choice but to re-appoint Bernanke, whatever the doubts about his stewardship that have arisen in recent months.
When Bernanke a little later this year eventually is confirmed in a second term of office, what’s the betting that a laconic red-rimmed telegram from Governor Zhou will turn up in his in-tray?
The missive and its contents, of course, will remain secret. We can only guess at the possibility that the two men, just for a moment, will share the opportunity for a modicum of discreet self-congratulation.
David Marsh is chairman of London and Oxford Capital Markets. The Marsh on Monday column appears in German in the newspaper Handelsblatt.
A Deal Between the Fed and Bank of China? – David Marsh, MarketWatch
July 20th, 2009
Most of them did not see the crisis coming; many were deep in denial about the recession long after it started. They missed the housing boom and bust, the credit crisis. They continued to see phantom bottoms and false recoveries again and again.
In general, they were institutionally biased, preternaturally accepting of questionable data, and wed to outmoded belief systems of efficient markets. Oh, and if you listened to their advice, you lost shitloads of money.
Now, I don’t wish to paint with too broad a brush. There were plenty of individual economists who have done an outstanding job in terms of 1) seeing the coming crisis; 2) making reality-based observations about the present situation; and 3) provided helpful insight to investors and traders. Not to name names, but you frequently see their superior work highlighted here.
It reminds me of an grad school classmate, a fellow cum laude — an amusing asshole who obnoxiously said at graduation “those of us in the top 10% want to thank the rest of you for making all this possible.” Rude, but with an element of truthiness in it: You can’t have outstanding anything without a vast bulk of mediocrities.
Which brings me back to the original question: Why should anyone listen to these folks as a group? Do we want to get it wrong yet again, or do you still have some remaining cash to lose . . . ?
Why Should You Care If Economists Raise U.S. Outlook? – The Big Picture
July 14th, 2009
William White predicted the approaching financial crisis years before 2007’s subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.
William White had a pretty clear idea of what he wanted to do with his life after shedding his pinstriped suit and entering retirement.
White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.
Then, after 15 years in the world’s most secretive gentlemen’s club, White decided it was time to step down. The 66-year-old approached retirement in his adopted country the way a true Swiss national would. He took his money to the local bank, bought a piece of property in the Bernese Highlands and began building a chalet. There, in the mountains between cow pastures and ski resorts, he and his wife planned to relax and enjoy their retirement, and to live a peaceful existence punctuated only by the occasional vacation trip. That was the plan in June 2008.
And now this.
White is wearing his pinstriped suits again. He has just returned from California, where he gave a talk at a large mutual fund company. Then he packed his bags again and jetted to London, where he consulted with the Treasury. After that, he returned to Switzerland to speak at the University of Basel, and then went on to Frankfurt to present a paper at the Center for Financial Studies. From there, White traveled to Paris to attend a meeting at the Organization for Economic Cooperation and Development (OECD). Finally, he flew back across the Atlantic to Canada. White is clearly in demand, including in North America.
Since the economy went up in flames, the wiry retiree has been jetting around the globe like a paramedic for the world of high finance. He shows no signs of exhaustion, despite his rigorous schedule. In fact, White, with his gray head of hair, is literally beaming with energy, so much so that he seems to glow.
Perhaps it is because someone, finally, is listening to him.
Listening to him, that is, and not to his rival of many years, the once-powerful former chairman of the US Federal Reserve Bank, Alan Greenspan. Greenspan, who was reverentially known as “The Maestro,” was celebrated as the greatest central banker of all time — until the US real estate bubble burst and the crash began.
Before then, no one in the world of central banks would have dared to openly criticize Greenspan’s successful policy of cheap money. No one except White, that is.
The Economist Who Predicted the Crisis – Balzli & Schiessl, Der Spiegel
July 11th, 2009
THE FEDERAL RESERVE IS NOT PROVIDING HINTS about any exit strategy from its policy easing.
Following its two-day policy meeting, the Federal Open Market Committee Wednesday reaffirmed its rock-bottom 0%-0.25% federal-funds rate target and its plans to purchase up to $1.75 trillion of Treasury, agency and mortgage-backed securities.
But for bond-market vigilantes looking for Bernanke & Co. to set a timetable to begin to reverse their policy of aggressive credit easing, it was a disappointment. Treasury yields ticked higher.
Since the FOMC’s previous meeting on April 29, the Fed’s policy-setting panel noted, “Conditions in financial markets have generally improved in recent months,” a nod to the sharp rallies in the equity and corporate fixed-income markets, both investment-grade and high-yield.
The Committee also noted, “The prices of energy and other commodities have risen of late.” That was a reversal from the observation at previous meetings that “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” In other words, the dreaded D word, deflation.
But the FOMC was quick to add this time: “However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”
Indeed, by pointing out that “economic activity is likely to remain weak for a time,” the monetary authorities clearly signaled their policy stance remains on hold for “an extended period.” The panel’s vote on the policy action was unanimous, as it was at the April meeting.
While the Fed did not lay out any exit strategy for its current program of aggressive easing to combat the worst credit contraction since the Great Depression, it left itself some wiggle room to reassess its program of securities purchases.
“The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted,” a slightly more definite and less-conditional tone than it took in the previous statement.
That could be significant should the central bank decide to alter the mix of its securities purchases, which currently are projected to consist of $1.25 trillion of agency MBS and $200 billion of agency debt purchased by the end of the year and $300 billion by autumn. Given the rise in mortgage rates, the Fed might want to tilt more to MBS purchases to try to bring down the cost of loans for home purchases and refinancings, which have been flagging in recent weeks.
Even with the Fed’s acknowledgement that “the pace of economic contraction is slowing” — a far cry from a recovery — the financial futures markets continue to put better than two-to-one odds on a rate hike by year’s end.
The December fed-funds futures contract puts a 69% probability on a half-point hike in the current funds target at the Dec. 15-16 FOMC meeting, unchanged from Tuesday, Dow Jones Newswires reports. The February 2010 contact fully prices a half-point hike for the Jan. 26-27 meeting.
Yet, the overall outlook for Fed policy remains unchanged among economists.
The Fed Offers No Hints on an Exit Strategy – Randall Forsyth, Barron’s
June 26th, 2009
The blunt fact is that the economic recoveries that have been rapid and seen fast growth in employment are those that ended when a central bank, following strongly restrictionary policies to fight inflation, eased off and significantly lowered interest rates. No such lowering of interest rates is possible this time—interest rates are already as low as they can possibly go. So I can see no reason to anticipate a rapid recovery and rising employment when the cliff-diving stops. And I do not understand why the Obama administration is following policies that presume such a rapid recovery—a V rather than an L for the shape of the recession—is not just possible but probable.
How Far We’ve Come from Last December – Brad DeLong, Free Exchange
June 19th, 2009
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