The Fed

On April 21, 2010, in The Public, by Joe Costello

Bill Black gave some blistering and needed testimony before the Congress yesterday. Fraud is the operative word, not just by the banks, but “our” government regulators. You can catch part of his testimony here(tx ND 2.0). However, I’d really suggest reading the entire testimony and it’s scathing indictment of the NY Fed and

then president Mr. Geithner:

The FRBNY knew that Lehman was engaged in fraud designed to overstate its liquidity and, therefore, was unwilling to loan as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of the fraud. The Fed official doesn’t even make a pretense that the Fed believes it is supposed to protect the public. The FRBNY remained willing to lend to a fraudulent systemically dangerous institution (SDI). This is an egregious violation of the public trust, and the regulatory perpetrators must be held accountable. The Fed wanted to maintain a fiction that toxic mortgage product were simply misunderstood assets, so it allowed Lehman to keep dealing the three card monte scam.

…the Fed didn’t want Lehman and other SDIs to sell their toxic assets because the sales prices would reveal that the values Lehman (and all the other SDIs) placed on their toxic assets (the “marks”) were inflated with worthless hot air. Lehman claimed its toxic assets were worth “par” (no losses) (p. 1159), but Citicorp called them “bottom of the barrel” and “junk” (p. 1218). JPMorgan concluded: “the emperor had no clothes” (p. 1140). The FRBNY acted shamefully in covering up Lehman’s inflated asset values and liquidity. It constructed three, progressively weaker, stress tests – Lehman failed even the weakest test. The FRBNY then allowed Lehman to administer its own stress test. Surprise, it passed.

And with a straight face, Senate Democrat Chris Dodd, as the cornerstone of his banking reform announced a new Consumer Protection Agency and other regulatory powers to be placed under the aegis of the Fed, which is really all you need to know about what is being “debated” as financial reform.

Cross-posted from The Fed

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Obama’s pick for Fed Chief ain’t a matter

On March 16, 2010, in The Public, by Tiffiniy Cheng

Obama is most likely going to nominate Yellen. She’s the wife of Nobel economist George Akerlof, whom I like. The have written extensively about unemployment together. Then, I read this from Economist’s View:

Many in the markets … will be interested in only one question: How will the nomination affect monetary policy decisions, specifically the timing of exit from the current near-zero rate? Janet Yellen is today, certainly, among the doves on the Committee. I will be posting a commentary soon … where I explain what makes one a hawk or a dove … and whether it matters. The conclusion is that it does not matter… The reason is, as said to me by a member of the Board: “The Chairman owns the room.” When the Chairman wants to move away from the near-zero funds rate, the Committee will do so. Until that time, he will always enter the room with at least eight votes in his pocket and with assurance that there will be several more each time. As Vice Chair, Janet can never vote against the Chairman. She can never take a substantially different view than the Chairman around the table. This is the etiquette of being a Vice Chair… It goes with the territory. You don’t take this position if you cannot abide by this rule. Fortunately, this won’t be a problem for Janet. First, she holds views that are not very different than the Chairman’s. Second, she has utmost confidence in his judgment, and the feeling is mutual. She will, almost alone on the FOMC, continue to have the opportunity to help shape that judgment. Janet surely appreciates … that the only way she can affect the policy decision is to convince the Chairman to alter his recommendation to the Committee is to reach him before the meeting. What we can say for sure is that Janet will surely help the Chairman make the best decision, even in those occasions when he ends up disagreeing with her.

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Obama’s Pick for Fed Chief Asst is Possibly Awesome

On March 12, 2010, in The Public, by Tiffiniy Cheng

According to Bloomberg, Yellen is obama’s pick for spot under fed chief, bernanke. shewrote a bunch on unemployment and is at least married to economist I respect a lot. “She and her husband, George Akerlof, a Nobel Prize-winning economist, have written more than a dozen papers that included studies on unemployment, wages, street gangs and out-of-wedlock births.” More on who she will come out.

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The Fed is sick right now, CFPA is the next step

On March 3, 2010, in The Public, by Tiffiniy Cheng

Dodd is at the head of the financial reform effort in this country and is proposing new measures this week in the Senate, seemingly mostly written by Corker. The proposal is weak on almost all points and gets us back to where we started. Consumer Protection Agency given to the Fed, the Fed more regulatory powers, nothing real on derivatives, nothing really on too-big-to-fail. 

The Fed is sick, it’s a feeding trough for the big banks. It has no accountability and has not upheld its stated mission to maximize employment in the country. But, it’s what big banks and undiscerning people think about by default and assign responsibility to by default. We’re here to change that. CFPA is set up to be democratized and transparent and independent — that’s what is important.

If you missed it, this Funny or Die video is doing amazingly well. Thank you, thank you for this god’s send. Please pass it on to your friends who haven’t gotten into bank reform or who lost their jobs…

AFR gave a great, strong statement on the status of the plans from Dodd in the Senate. I expect more of this from them in the weeks ahead:

“AFR supports the creation of a strong and independent Consumer Financial Protection Agency. We haven’t seen a real proposal for this yet. When we see one, we’ll evaluate it based on our concern that the agency be effective and not a captive of the forces that either caused the financial meltdown or failed to exercise their regulatory responsibilities. We need real protection for consumers from a still out-of-control financial sector, that’s our bottom line.”

There are some great quotes about why this plan is a bad idea:

The Hill reports,”Sen. Charles Schumer (D-N.Y.) cast doubt on a new compromise proposal for consumer financial protections, threatening its future in the Senate before it has been unveiled. Schumer said he is ” very leery of any consumer regulator being placed inside the Fed.” Senate Banking Committee Chairman Chris Dodd (D-Conn.) and Sen. Bob Corker (R-Tenn.) are pitching a proposal to put a consumer protection office at the Federal Reserve. The proposal is significantly different than the administration’s original effort to set up a standalone entity.

Schumer’s comments are the strongest indication of how difficult it will be for the proposal to garner support in the Senate.”

“In my 20 years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle,” Schumer said.

If the banks are asking you to do something, it’s probably wise to do the opposite as they simply have their own profit to think about. Bank groups call for stronger Fed Reserve:

“Bank lobbying groups are calling on senators to support the Federal Reserve’s power to supervise small and large banks.”

This headline from HuffPo is notable:

Bipartisanship Is Not a Substitute For Real Reform

From the Big Picture:“What a splendid idea: A Consumer Finance Protection Agency whose sole purpose is to provide a set of standards for the finance industry when it comes to marketing their products to otherwise naive US consumers.

The original plan was to have a standard form for major finance purchases — mortgages, cars, revolving credit. This would allow consumers to 1) Understand the amount of money the  financing would cost them; 2) Determine if they could afford this product; 3) Allow them to shop competitively for the best rates.

Good idea, right?

Considering that we are a nation that made the Snuggie, the Sham-Ease, and Hair-in-a-Can all best sellers, a little impulse control is probably a good idea. More accurate cost disclosures of credit will also help. We are, after all, a country of math-phobic shopaholic shit junkies. Anything that can help us figure out whether we can afford our bigger purchases — like cars and houses — should be a no-brainer.

Unfortunately, the banking lobby, in conjunction with the auto dealers lobby, had other ideas. A simple mandate to have all mortgages shown compared to a plain vanilla 30 year fixed was thwarted. It was to be similar to the FDA nutrition disclosures on the side of your kid’s cereal box. Who, could possibly object to that?”

William Black, the famed regulator of the S&L crisis, is speaking on the issue of the possibility of losing the CFPA:

“The proposal to amend the Senate bill to place consumer protection in Treasury, rather than an independent regulatory agency with institutional incentives to protect borrowers, is a sick joke. This is not even a case of putting a fox in charge of the proverbial chicken coop — the foxes have already slaughtered the chickens. The only reason we were successful in reregulating the S&L industry during the Reagan administration was because the Federal Home Loan Bank Board was an independent regulatory agency. The administration hated our successful reregulation, which kept the debacle from developing into a Great Recession, and would have blocked it had we not been an independent regulatory agency.

Ryan Grim writes in
Senator Promises Floor Fight For Strong CFPA, “The Consumer Financial Protection Agency, a cornerstone of banking reform, won’t go down without a floor flight. Sen. Jack Reed of Rhode Island, the third-ranking Democrat on the Banking Committee, will introduce an amendment to financial regulatory reform on the Senate floor calling for a strong, independent CFPA if the bill that emerges from the committee does not include one, a Democratic committee aide told the Huffington Post Tuesday.”

And he quotes Frank:

“I was incredulous,” the Massachusetts Democrat said. “After all the Fed bashing we’ve heard? The Fed’s such a weak engine, so let’s give them consumer protection? It’s almost a bad joke. I was very disappointed.”

Also, you should probably note that, “Eleven CEOs from the largest property casualty insurance companies in the country have formed a new coalition to urge Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) to leave them out of the financial services overhaul legislation.

State Farm Insurance, Allstate Corp., Travelers Companies Inc., Chubb Corp. and Zurich Financial Services Group were among the insurers to take the unusual step of forming the Property; Casualty Leaders Coalition. The last time the insurers joined in a coalition effort was in 2005 over asbestos legislation.

“There is no public policy justification for taking funds from companies in our industry, especially on a pre-event basis, to bail out other financial institutions deemed to be overexposed to failing ‘systemic’ companies,” wrote CEOs from the coalition companies, including the ACE Group, Nationwide Insurance and Liberty Mutual. “Recoupment payments made to companies should come from the benefitting companies.”

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Fed Vice Chair resigned yesterday. He was a Greenspan person. Obama gets a pick now. Leading the Fed are Bernanke, an academic economist specializing in the Great Depression, and a community banker and a JP Morgan Chase person. According to NYTimes, it’s likely they will name a woman academic economist to sit beside Bernanke to show that the Fed is not entrenched in the big bank econom. Surprisingly, as the Fed got slack from us and the public for being a feeding trough to the big banks, the Senate is going to give them more power, by housing the CFPA there. Senate, are you listening to anything the public wants?

We don’t think the Fed deserves any new powers unless it is democratized. Now’s probably a good time to sign the petition for no new powers for the fed, if you haven’t already. Any new regulator is simply going to get captured by the financial elite unless we make the regulators transparent, accountable, and operate in the context of public input or rather in democratic ways.

It’s notable that one of handful of Fed governors who has talked about addressing too-big-to-fail, using antitrust law, and breaking up the banks, Daniel Tarullo, is an Obama pick. My pick is Tarullo, just push him up. Doesn’t the guy look nice? Or give me a woman who has talked seriously about addressing the issue and is an expert at monetary policy AND employment.

Baseline Scenario has this to say about hand-picking Fed chiefs:

“Second, why is the Democratic establishment uniting behind Bernanke? Bernanke was a Bush appointee to the board, a chair of the Bush Council of Economic Advisers, and then Bush’s pick to replace Greenspan. He’s a Republican whose main selling point to Obama was that he was already in the job and accepted by “the markets,” and he was the clear choice of Wall Street this winter. Does this mean that Obama is going to appoint three centrists who follow the (recent) central banking orthodoxy of putting inflation control over economic growth, and who oppose tighter regulation of banks? For anyone who thinks that there is such a thing as a coherent Democratic economic policy, that seems like shooting yourself in the foot.

Finally, and I know I’m in the minority here, why are we trying to increase the power of the Fed chair — especially a Fed chair from the opposite party? Leaving aside policy questions, I think the deification of the Fed chair in the past two decades has been a decidedly bad thing. The sensitivity of the markets to one man’s pronouncements (and, just imagine, his health) is a bad thing; the fact that an unelected person is widely considered the second-most powerful person in the country is a bad thing; and if our economic fate actually depends on one person’s wisdom, that’s also a bad thing. The point of a committee is to have differing views, arguments, and a vote — not to have a bunch of suck-ups and yes men. If we put some real progressives on the board, then that’s what you would have — diversity of opinion and meaningful votes. (Including Bernanke, three of the four current members are Bush appointees, including a former investment banker and a former chair of the ABA.)

I know people will say I don’t understand, and if we had debate on the board the markets would be spooked. I think that effectively amounts to saying that dictatorship is good for the markets, so we should have a dictator.”

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On Money VI

On February 10, 2010, in Background and Research, by Joe Costello

on money VI

But the volume of trading in financial instruments, i.e. the activity of financial business, is not only highly variable but has no close connection with the volume of output whether of capital goods or of consumption-goods. – JM Keynes

Over the last forty-years, money was untethered from any objective value and became another product to trade. Money became, in many respects, simply another trade in the entirety of a financialized economy. One component of the definition of financialization is “to make trade-able”. However, a monetary system, and even more so an economy, which become entirely trade-able, are prone to instability and catastrophic volatility. Unless you’re purely a speculator, instability is the exact opposite of what you want from a sound money system.

Previously, I explained Keynes very helpful notion that, in part, money is valued through its constant interaction with the rest of the economy. Money gains value from an economy’s wealth, debt and prices. He placed the various valuing mechanisms into the categories of Money of Account and the General Purchasing Power of money. Again, for this exercise, it’s not necessary to go into detail on Keynes’ definitions, for as he remarks in the Treatise:

The fundamental equations of Chapter 10 are in themselves no more than identities, and therefore not intrinsically superior to other identities which have been propounded connecting monetary factors.

Phew, what trouble such honesty could cause our economic priesthood today! However, the point to be made is, at all

times, money constantly interacts with the whole financial system and economy to gain its value. When an economy becomes completely financialized, that is trade-able, and money is removed from all fixed standards, you allow traders to gain too strong a hand in valuing money, thus increasing volatility.

The so-called “financial innovations” of the last three decades have added further to this instability. Financial innovation was a way to make money more trade-able by adding layers of “swaps” and “obligations” on top of the real assets. This process let the entire banking system carry less reserves – money in the vault – allowing more money, liquidity, into the system. Innovation meant formerly illiquid stores of money, such as long-term mortgages or government bonds, became trade-able, all adding to the overall volatility and instability of the system.

Thus a system in which everything is trade-able, demands a greater volume of money to keep things liquid, literally becoming addicted to greater liquidity, which, as Keynes notes in the opening quote, does not necessarily impact the real economy. What helped along the great elite financial panic in the fall of 2008 was a fall in liquidity, instigating a fall in inflated prices. Suddenly with no excess cash to keep inflated asset prices afloat, the entire system began a major contraction, racing to reach what would be more realistic levels in a system that was not so trade-able, that is liquid.

However, the Fed, other central banks, and governments stepped in to boost “liquidity”, flooding market with dollars, euros, et al, not allowing a deflation in prices and thus transferring the inflated values of assets and the layers of “financial innovations” on top of them, into the currencies themselves. An aside, a better outcome would have been gained by allowing the deflation of financial assets and instead the government flooding the real economy with money to first and foremost keep unemployment from steeply rising. But Ben rolled the dice and how this eventually plays out will be interesting to see, but volatility is increasing in currency markets and as Keynes noted:

…this tendency towards sympathetic movement on the part of the individual elements within a banking system is always present to a certain extent and has to be reckoned with…in the case of the world as a whole, the tendency to instability by reason of sympathetic movement is a characteristic of the utmost practical importance.

In a global monetary system that is hyper-trade-able and currency value is derived in a great extent from trading, volatility combined with what Keynes termed “sympathetic movement” can create great instability.

What we need to begin to do is re-tether money, make it less trade-able. This can be done various ways, for example by keeping mortgages on the originating banks’ books, making it much more difficult to trade such things a municipal bonds, or tying certain money or amounts to fundamental commodities like grain or oil. The question of how to solidify excessively liquid money is quickly gaining the utmost importance.

Next: Tethering Money

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A quiet ceremony for Bernanke

On February 4, 2010, in Background and Research, by Tiffiniy Cheng

Bernanke was sworn in for another 4 year-term. In contrast to his swearing-in ceremony 4 years ago, this one was quiet and more “humble”.

This video commemorates Bernanke’s swearing-in under Bush. Obama’s Bernanke is the same Bush Bernanke; same game plan, same priorities, same feeding trough. This is a well-done and surprisingly fact-based video.

NYTimes has a great piece on the real issue with regulation and the Federal Reserve. It’s not really about who is the regulator. It’s about what a harmonized oversight architecture looks like that is actually set up to maximize the safety and soundness for the whole economy, which includes the general public. We haven’t seen a really serious regulatory reform plan yet. A smart economist and Fed governor is featured in the article saying,

“Policy makers, in my view, should be more focused on what constitutes effective prudential supervision, rather than be diverted to the less consequential discussion as to who should perform it,” Mr. Warsh told the New York Association for Business Economics.

Mr. Warsh said the idea of “resolution authority” — which would empower a regulator to step in and dismantle a failing financial institution before it jeopardized the economy — “is unlikely, in the near term, to drive the market discipline required to avoid the recurrence of financial crises.”

Mr. Warsh called for more accurate and timely information to be provided to shareholders, creditors and regulators; more robust competition in the financial services industry, which he described as “ripe for a healthy dose of creative destruction”; and stronger capital and liquidity requirements, along with better corporate governance and risk management.

“We need a new financial architecture, one in which improved regulation and supervision play an important but co-extensive role with greater market discipline,” he said.

What’s odd to me about the article is Bernanke’s admission that the Federal Reserve need be more democratic (my words), or rather more transparent and accountable, yet pushback on an audit of their goings-ons.

“At the Federal Reserve and other agencies, the crisis revealed weaknesses and gaps in the regulation and supervision of financial institutions and financial markets,” Mr. Bernanke said. The Fed, he said, was revamping how it conducts oversight and collaborating with Congress and financial authorities in other countries to reform banking regulations.

However, Mr. Bernanke also defended the Fed’s autonomy, at a time when some critics in Congress have called for auditing its monetary policy.

“Institutional independence brings with it fundamental obligations of transparency, responsiveness and accountability,” Mr. Bernanke said, adding: “It is essential that the public have the information it needs to understand and be assured of the integrity of all our operations, including all aspects of our balance sheet and our financial controls.”

Earlier on Wednesday, Kevin M. Warsh, another Fed governor, suggested in a speech in Manhattan that the regulatory debate in Congress was not addressing the right questions.

“Policy makers, in my view, should be more focused on what constitutes effective prudential supervision, rather than be diverted to the less consequential discussion as to who should perform it,” Mr. Warsh told the New York Association for Business Economics.

Another one for some kind of size cap

On February 2, 2010, in The Public, by Tiffiniy Cheng

Volcker is a former Fed chief and served during the 80′s. He never fought for jobs first and foremost, though that is a mission of the Fed. These days he is making a come back by pushing for policies in the public interest. The Volcker proposal to break up the banks is gaining some steam, especially since Obama announced he wanted it as a part of regulatory plans going forward. Volcker had a hearing on his ideas and Dodd suprisingly supported them:

“The Obama administration has proposed bold steps to make the financial system less risky. We welcome those ideas,” said Dodd. “The first would prohibit banks – or financial institutions that contain banks – from owning, investing in, or sponsoring a hedge fund, a private equity fund, or any proprietary trading operation unrelated to serving its customers… I strongly support this proposal. I think it has great merit.”

“The second would be a cap on the market share of liabilities for the largest financial firms, which would supplement the current caps on the market share of their deposits. I think the administration is headed in the right direction with these two proposals,” Dodd continued.

Paul Volcker, Chairman of the President’s Economic Recovery Advisory Board and Former Chairman of the Federal Reserve, and Deputy Treasury Secretary Neal S. Wolin testified at the hearing.

The Committee will hold a second hearing on the proposals on Thursday.

Testimony and webcast will be available after the hearing here.

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A Bank Director’s Guide from the Fed

On February 1, 2010, in Background and Research, by Tiffiniy Cheng

“Many people who are asked to serve on bank boards have little training or experience to prepare them for their new roles,” said Patrick M. Parkinson, director of the Federal Reserve Board’s Division of Banking Supervision and Regulation.”

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Bernanke, Most Voted Against Ever, Wins

On January 29, 2010, in Current Leadership, by Tiffiniy Cheng

We started our campaign against the Bernanke confirmation with no real support. In the end, and thanks to Bernie Sanders and most of all, to all of you, he was confirmed with the MOST VOTES AGAINST A FED CHAIRMAN EVER. He needed 50 votes to pass reconfirmation, he got 70 and 30 people voted no. We had over 3,700 signatures.

This is the roll call: 28 Republicans, 11 Democrats, and 1 Independent voted against Bernanke. What’s up with the Democrats — what are they trying to do? They’re helping to put more holes into a sinking ship.

Do you think our ANWF members would appreciate a message about this? Would like to know your thoughts.

Simon Johnson nails the problem:

Some on Wall Street, of course, would disagree – arguing that the financial sector growth he fostered is not completely illusory, that we have indeed reached a new economic paradigm due to the Greenspan tonic of deregulation, neglect, and refusal to enforce the law. Prove the ill-effects, they cry.

What part of 8 million net jobs lost since December 2007 do you still not understand?

Reappointing Ben Bernanke solves none of our problems. In fact, given his stated intensions, a Bernanke reappointment implies larger bailouts in the future – thus compromising our budget further with contingent liabilities, i.e., huge payments that we’ll have to make next time there is a crisis. What kind of fiscal responsibility strategy is this?

Rather than messing about with a meaningless (or damaging) freeze for part of discretionary spending, the White House should fix the financial system that – with too big to fail at its heart – has directly resulted in doubling our net government debt to GDP ratio from 40 percent (a moderate level) towards 80 percent (a high level) in a desperate attempt to ward off a Second Great Depression.

If you think we can sort out finance with Ben Bernanke at the helm, it was sensible to reappoint him. But when the time comes for members of the Senate themselves to be held accountable, do not be surprised if people point out that pushing Bernanke through – come what may – was the beginning of the end for any serious attempt at reform.

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