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Dallas Fed’s Richard Fisher Worries About Cost and Effectiveness of Bailout Bill

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Mirabile dictu, one of the Fed governors is expressing reservations about the stalled bailout proposal. Richard Fisher’s concern is that it would push Federal debt precariously high. From Bloomberg:

Dallas Federal Reserve Bank President Richard Fisher said the proposed $700 billion rescue of financial institutions backed by Fed Chairman Ben S. Bernanke would plunge the U.S. government deeper into a fiscal abyss.

The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions would put “one more straw on the back of the frightfully encumbered camel that is the federal government ledger,” Fisher said today in the text of a speech in New York. “We are deeply submerged in a vast fiscal chasm.”…

“Holding the Fed funds rate steady at 2 percent was the right thing to do, while our colleagues at the New York Fed and at the Treasury turned to dealing with the risk of AIG and other choke points in the markets,” Fisher said. He had dissented in favor of tighter policy on five votes this year by the rate- setting Federal Open Market Committee. This month he voted with the majority.

Money market rates worldwide surged today on concern lawmakers may weaken the Treasury’s proposed rescue of financial institutions.

Banks have all but stopped lending to one another. One money-market indicator, the Libor-OIS spread measuring the availability of cash among banks, widened today by 32 basis points to nearly 2 percentage points, the most on record. It averaged 8 basis points in the 12 months before the credit squeeze began in August last year.

“The seizures and convulsions we have experienced in the debt and equity markets have been the consequences of a sustained orgy of excess and reckless behavior, not a too-tight monetary policy,” Fisher said to the New York University Money Marketeers Club.

“I was, and I remain skeptical, that lowering the fed funds rate is the most effective antidote,” he said. “Rates held too low, too long during the previous Fed regime were an accomplice to that reckless behavior.”

The Bloomberg story missed some of the juiciest bits of the speech:

There is no nice way to say this, so I will be blunt: Our credit markets had contracted a hideous STD—a securitization transmitted disease—for which lowering the funds rate to negative real levels seemed to me to be not only an ineffective treatment, but a palliative and maybe even a stimulus that would only encourage further mischief.

I was and I remain skeptical that lowering the fed funds rate is the most effective antidote for such a pathology, given that, in my book, rates held too low, too long during the previous Fed regime were an accomplice to that reckless behavior. A fed funds rate of around 3 1/2 percent—that was the level at which I began to stray from “the pen”—did not appear to me to be the principal problem, particularly with commodities prices soaring and incipient inflation coming to our shores from demand-pull pressures and rising labor costs in the countries that we use to source the inputs needed to run our manufacturing base and stock the shelves of our retail stores…..

t may be useful to review the emergency initiatives taken by the Federal Reserve as the hemorrhaging patient was being rushed into the ER:

First, there was the administration of various emergency efforts to stabilize the situation. The Federal Reserve created three new facilities: the TAF, or term auction facility; the TSLF, or term securities lending facility; and the PDCF, or primary dealers credit facility. We used these improvised devices to intravenously inject liquidity in amounts and on terms that were unprecedented.

We worked with other “ERs” as we saw the infection spread and take on global dimensions. We established and expanded our swap lines with the Europeans and the British and the Swiss and the Canadians and the Japanese (and just this week with the Norwegians, Swedes, Aussies and Danes). Together, these central banks injected sizable amounts of liquidity to satisfy dollar demand in their respective home markets.

And, working with the Treasury, we cauterized certain blood vessels that seemed to burst almost spontaneously and threaten the system, like Bear Stearns and AIG and debilitated money market funds.

Meanwhile, other responders were at work—from the Federal Housing Administration, to the Federal Home Loan Banks, to the Securities and Exchange Commission, to the Treasury, to the Congress…

These various efforts were reactive responses. They were as deliberately and thoughtfully crafted and administered as they could be under the unusual and exigent circumstances. But they were necessarily ad hoc…Ben Bernanke, a careful student of the Depression of the 1930s and other crises, had long been warning the secretary of the Treasury and others that a more comprehensive solution might be required…

One could make the argument that isolating the infected assets that were the most active sources of contagion is a necessary but still insufficient condition for restoring a healthy credit system. That argument would suggest that once the TARP, or whatever comes of it, passes through the political process and debilitating toxic assets are removed from balance sheets, we must next go about buttressing the equity side of the balance sheets of the system’s key agents….

If this is a DNA issue, perhaps no financial system—no matter how enlightened its central bank or sophisticated its regulatory architecture or wise its Congress or executive—can prevent nature from running its course.

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36 comments

  1. Matthew Dubuque

    Matthew Dubuque

    Thanks for posting this. Rather than being a monolith that is “THE GREAT SATAN”, the Fed is actually a group of remarkably diverse and brilliant economists with extraordinarily sharp and emphatic debates.

    Hopefully continued posts like this will help the American public understand just how diverse the Fed actually is.

    This is why, over the decades, I keep close track of the various papers published by these VERY diverse branches.

    I find reading a representative sample of Federal Reserve opinion to be: Kansas City, Dallas, Cleveland, San Francisco and New York. (I don’t have time for the rest; central banks and the bond market are not my primary interests in life).

    If I have extra time, Richmond can also be occasionally interesting.

    Matthew Dubuque
    mdubuque@yahoo.com

  2. Dean

    bTW, to understand my comment above on Fisher it is my view that the Fed will not survive this crisis (give it a year or so). The office will be abolished and perhaps absorbed under a different department or agency.

    History and the public wll not be kind on the Federal Reserve legacy.

  3. LJR

    At least Fisher acknowledges that the disease may just have to run its course. Bravo to that. His DNA comment is a pathetically bad analogy but the idea behind it is OK. The DNA problem we actually have is called GREED and there’s probably no cure for that other than regulation.

    The trillion dollar question is whether we can have a stable financial system that is controlled by ad hoc computer mediated strategies. I strongly doubt it. Greed can hide and flourish undetected in such systems. We wouldn’t have CDOs if it weren’t for the enabling technology of computers.

  4. The Social Pathologist

    Ben Bernanke, a careful student of the Depression of the 1930s and other crises, had long been warning the secretary of the Treasury and others that a more comprehensive solution might be required…

    I actually fell sorry for Bernake, he inherited the pile of crap from Greenspan. Conventional history states that the Depression was made worse by lack of liquidity, Bernarke can’t be accused of this error.

    What interests me is that Ben has been telling Paulson for a while that a systemic solution is required for the problem. Why all the rush then? It seems Paulson was sitting there hoping everything was going to go away with “liquidity”. It seems he had plenty enough time to formulate a politically acceptable bailout formulation but chose not to. Instead fostering a politically unacceptable plan on congress while at the same time trying to ram the deal through. I have become more and more convinced that he is looking after his brother pigmen.

    September 25, 2008 10:52 PM

  5. PrintFaster

    The nugget is hidden in Fisher’s speech:
    “incipient inflation coming to our shores from demand-pull pressures and rising labor costs in the countries that we use to source the inputs needed to run our manufacturing base and stock the shelves of our retail stores…..”

    Doh!

    The problem the Fed and treasury have is the catastrophe of currency support. Currency support is what dictatorships and banana republics try to do in the face of the inabilty to produce anything of value except a few bananas. The bananas are enough to buy foreign goods for the big shots, usually the dictators cronies, and the currency is supported artificially for their benefit.

    This currency support when overextended has the perverse effect of destroying the capital needed for industrial, mineral or agricultural development. All the money flows to BMWs, Mercedes, Corums, and Rolexes. Gee, what has happened in the US? All the wealth has flowed from Main street to Wall street. Main street ain’t drivin beemers, thaze drivin Hyundais cause the US auto industry is dead.

    Time to shoot Wall Street and put it out of its misery. It has failed miserably in its charter to provide capital for industry, but is only providing capital for capitalists.

    Alexander Hamilton would be firing his cannons today at Wall street instead of the British.

  6. Anonymous

    printfaster, Hamilton was the Hank Paulson to Geo Washington, created a private monopoly national bank over Jefferson’s protest. Argued for “implied powers” [to save the nation] in a financial crisis.

    Eh?… skip it. We don’t need no stinking Founders.

  7. Dean

    Ano10:59, The Austrian School of Economics explains many aspects of this crisis very well. Problem is it is not accepted by main stream economists; it’s thought of as an anti-establisment school of economic theory. Off course Marc Faber and a few other bright guys think it’s both appropriate and revealing (if Yves forgives us for the term use, it exposes the naked part of capitalism).

  8. Merry-will-go-round

    Any writer who begins with, “Mirabile Dictu” to refer to this surprising display of disloyalty, deserves 4 gold stars in my book. Yves, if we ever do meet, I look forward to some scintillating conversation. Thanks for staying up ’til the wee hours to keep us gluttons for the truth stressed out.

    Continuing your medical treatment analogy, too much antibacterial agent given too frequently results in bacterial mutation sufficient to confer resistance upon the invading bacteria. Sometimes rescue plans can kill the patient.

  9. Matt Dubuque

    Social Pathologist, I’m glad you are able to distinguish between Bernanke and Paulson. They each have very different agendas in many ways.

    You point out their differences and this is clear and their are other instances of them.

    But I must point out that they DID have one broad area of agreement months ago that, if followed, would have greatly lessened systemic risk.

    That is, they BOTH agreed that the Fed needed enhanced jurisdiction, but this was shot dead on arrival by Barney Frank in Congress.

    So the SEC continued to have primary jurisdiction over the investment banks and the ignorance, corruption and incompetence of the SEC led to the extinction of them all.

    But at least Bernanke and Paulson agreed on that key point months ago.

    But again, Barney Frank and the Congress get ZERO blame, as if FNM and FRE corruption and criminality had been a complete surprise…..

    Matt Dubuque

  10. Matt Dubuque

    I have posted far less over the last 10 days and far less than Doc Holliday does daily. I’ve reduced the number of my posts by over 80%. Generally it is one per thread, far, far less than many others here.

    Yves is free to comment on my frequency of posting. This forum is not hosted by nameless and faceless Anonymous people.

    This is a topic of relatively narrow interest and I was delighted that Dean was cognizant of the diversity within the Fed. Very, very few people in the world can discuss that topic intelligently.

    I think Dean and I bring a level of expertise on this one narrow subject (personalities of different Fed branches) that others may actually be able to learn from.

    Matt Dubuque

  11. Jesse

    I think a significant portion of this bailout is geared towards addressing the specific problems of Goldman Sachs and Morgan Stanley as the last two essentially depositless banks standing with empty pockets. As noted on my site earlier, the ‘investment banks’ helped drive the discount window this week to a record 262 billion.

    There is more to this than meets the eye.

  12. PrintFaster

    Response to Anonymous on Hamilton

    Hamilton first recognized the need for a place to capitalize the development of the United States. That was Wall Street, and in his view the role of Wall Street included business capital, foreign trade capital, and government capital. Hey in Hamilton’s day, even Hamilton provided cannons for defense.

    What we have now is nothing but capital for investment, and that investment has no further purpose than investment. It is not there to further industry.

    Wall Street and its instruments are in large part owned by US governments, state, local, and government union retirees, and foreign banks and their agents. It has ceased to be of any practical use, nor is managed by any human. It is managed by programs and models.

  13. Anonymous

    It’s Alright, Ma (I’m Only Bleeding)

    Love that quote, “money doesn’t talk, it swears”

    Who would have expected that the Dallas Fed Pres would be a Dylan fan, and actually mention this song in connection with this mess.

    Suggested bedtime listening…..

  14. Anonymous

    Yves

    “If this is a DNA issue, perhaps no financial system—no matter how enlightened its central bank or sophisticated its regulatory architecture or wise its Congress or executive—can prevent nature from running its course.”

    Which is what I think. Remember the Ecologists paradigm of the arctic foxes and rabbits.
    The bubble must deflate and then maybe a little overshoot.
    Maybe its a little like twelve step. We must first hit bottom before we can be helped.
    All that is possible is to save our resources to help us on the way up.

    I am reminded of all the “extreme measures” used in hospital to gain a few extra weeks of life. My memory here is hazy but some large fraction of the total cost of the illness is used in this futile attempts to beat nature.

    Off topic but maybe not:
    Political Conservatives Fear Chaos; Liberals Fear Emptiness
    (religious types when asked to think of a world without God)
    http://www.sciencedaily.com/releases/2008/09/080924124549.htm
    plschwartz

  15. Anonymous

    I’m running out of popcorn because I just can’t sit and watch the show without some.

    This banking system is coming to an end as they speak. Make a new one, why transfuse blood (cash) into a dying patient? Building a new bank before the other one burns down would be prudent.

  16. bg

    Greg Mankiw posts a defense of the bailout. I disagree, but I think there are good arguments worth hearing from the Bushie economists.

    I put in a good word for Dubuque too.

  17. Rob C

    I’ve learned a lot from this blog, and although I don’t feel I’m qualified to comment directly on the subject at hand, I appreciate the contributions by posters like Matt Dubuque.

  18. Anonymous

    there’s at least one more big slide job that has to happen under hank’s watch. get his buddy steel and the crippled wachovia machine under goldman. then they will be able to offload their garbage when hank gets his big checking account.

    now that wamu is gone, markets will probably start that attack tomorrow.

  19. Anonymous

    Hard to feel sorry for Bernanke just yet. His current situation reminds me of a scene in the movie “Patton” where George C. Scott reflects on how he’d prepared his entire life for just that moment in time where he was leading the world’s greatest army (US economy) and had the enemy (credit crisis) on the run, and he was lamenting the shortage of gasoline (capital). Of course, Bernanke is more of an “Air Cav” (helicopter) guy…

    John M

  20. Richard Kline

    B’God! A public financial official who’s brain is still connected to a circulating blood supply. Let’s keep Richard Fisher’s name in mind when it comes time to find someone to actually administer an effective financial recovery program for the US.

  21. Anonymous

    Matthew Dubuque why do you print your name at the front and back of each post?

    Just curious. I enjoy your contributions thx.

    Doug

  22. Anonymous

    http://market-ticker.denninger.net/

    You have to love this. Here is the story as originally posted on Bloomberg:

    “Sept. 25 (Bloomberg) — Dallas Federal Reserve Bank President Richard Fisher said the proposed $700 billion rescue of financial institutions backed by Fed Chairman Ben S. Bernanke would plunge the U.S. government deeper into a fiscal abyss.

    The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions would put “one more straw on the back of the frightfully encumbered camel that is the federal government ledger,” Fisher said today in the text of a speech in New York. “We are deeply submerged in a vast fiscal chasm.”

    Now here is how it reads after “Update 1″

    “Sept. 25 (Bloomberg) — Dallas Federal Reserve Bank President Richard Fisher said the U.S. Treasury’s proposed $700 billion rescue of financial institutions would be “a critical first step” toward calming markets even while adding to the U.S. government’s fiscal burden.

    The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions “is an incremental addition to the federal government ledger,” Fisher said today in a speech in New York. Existing federal obligations in Medicare and Social Security mean “we are deeply submerged in a vast fiscal chasm,” he said. “

    Hmmm.

  23. Doc Holiday

    This morning I was pro-plan, pro-paulson, pro-patriotic poster — but now, many hours later, many parts of this soap opera have been played out and the curtain falls in darkness.

    The stage is being re-set for morning glory, new performances from characters that have new lines, thus, I (we) now have the addition of Shelby’s Deus ex machina, i.e, the waving pages of hidden and unspoken words, from 200 of the smartest people that are able to not speak!! These unseen phantoms may be upstaging the dramatic theatrics from stage left by McCain’s ghost-like Lady McBeth entrance, which caught some of the slower members by surprise, because they fell asleep thinking, waiting for some distraction in the wings with Palin, who needed to be looking for an opportunity to be out of character and become heroic. What luck that these magic unseen waving words bailed her out. What next Mr Dickens?

    High drama indeed, and now I feel like a fool for having rushed to the conclusion that money markets may have liquidity problems. There probably are other ways to skin this cat, but what words are written in those pages that Shelby waves. Magic dust and glitter may need added, but who gives a shit?

  24. Anonymous

    Matt D may have some good points, but he is condescending and self important. And he doesn’t always have his facts right either, which makes his superior tone particularly annoying.

    Doc Holiday is not argumentative or presumptuous, and I like his extracts from various, sometimes obscure sources, even when they go OT, provided they aren’t hugely long.

  25. Scott

    “I think Dean and I bring a level of expertise on this one narrow subject (personalities of different Fed branches) that others may actually be able to learn from.”

    Personally, I’ve gotten little value from your blowhard comments. Your cheerleading the Fed is sad. Three years ago the Fed reported that swaps accounting was in disarray at the banks; did they do anything about it? No, because the Fed obviously puts the profit of Wall Street first, and good accounting rules and financial structure second. So your comments about how brilliant so many minds are at the Fed TOTALLY misses the point.

    But like all blowhards, you’ll keep at it. Carry on.

  26. Matt Dubuque

    Thanks for the generally kind tenor and tone of the comments.

    Scott, why do you omit the work of Corrigan and the FSF?

    They are clearly just a proxy for the central banks.

    The CDS fallout from Lehman would have been far worse without their efforts.

    Can you IMAGINE what would have happened without his efforts on clearing last year?

    Matt Dubuque

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