I know it may be hard for most readers to believe this, but once upon a time, the New York Times really was a very good paper. I trace its demise to its decision to become a national newspaper, which took place in the later 1990s, instead of a New York city newspaper that set national standards.
That is not to say the Times was perfect, Lord knows it wasn’t, but the average quality was high and there was not too much deviation in the caliber of its stories. Now, while the good stories are still fine indeed, the quality is inconsistent, and there are too many articles that look to be PR plants or are otherwise too obviously hewing to some sort of party line.
Like the New York Times, the Financial Times has decided to become important paper in the US, and the caliber of the paper as a whole has deteriorated. Yes, it still has some excellent reporters and columnists, but it like the Times has taken to writing up tidbits from influential sources with a notable lack of critical thought. I wish I could have my FT circa 2006 back.
Today’s object lesson is a story now on the front page of the Web edition that reports that the Federal Reserve “earned” $14 billion on its special facilities, according to an unpublished estimate by the central bank. That calculation is based on the interest it earned in excess of what it would have made on T-bills. The article then says,
The Fed assessment underlines the possibility that other central banks could make a profit on their crisis-fighting measures – at least before adjusting for the risk they assumed.
And a few paragraphs later, we get another caution:
The figure is not a complete picture of Fed finances as it excludes its company-specific bail-outs and purchases of long-term assets.
Ahem, that means it excludes some elephants in the room, such as the AIG and Bear rescue facilities. The Fed was ‘fessing up to combined losses of nearly $8.6 billion on them as of July. Willem Buiter and anyone else of a reasonable skeptical persuasion thought those losses were understated. And then we have the untallied losses on the Fed’s $1.050 trillion program of purchases of mortgage-backed securities and Treasuries. Unless the US winds up in Japan-style long-term mild deflation, those purchases are very likely to be worth less than what the Fed paid for them.
While the FT offers the right caveats. the “let’s not look at this palaver too deeply” posture means it sidesteps the real story. If anyone at the Fed treated this bogus analysis seriously, it says the Fed is not competent to oversee anything more complicated than a dog pound. pricing in the option to renew it or adjust the balance size periodically is missing a very big part of the real value here. The Fed is not going to deny renewal of these loans. Similarly, judging performance by comparison to a risk free asset is obviously bogus. Any student in a basic finance course who did a simple spread comparison, failed to assign a risk premium appropriate to the borrower, and ignored the option value of these facilities would get an F.
Since we assume that someone at the Fed does understand these issues, we are left with a second line of thinking which is actually not much more favorable to the central bank, namely, that it holds the financial press and the public in contempt and figures they will buy any and every superficial and misleading explanation, so long as it has a few numbers attached. The fact that the Financial Times dignified this rubbish will only reinforce the Fed’s imperial tendencies.
And the public is not as dumb as the Fed assumes it is. The Financial Times notes:
A recent Gallup Poll found the Fed had the worst public approval rating of nine government agencies, even lower than the tax authorities.
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