Fed Regional Presidents Conduct Regulatory Land Grab Road Show

The Fed, having performed abysmally in recognizing the growth of a global debt bubble, and then having botched the early-stage reactions (after each of the first three acute phases, it went into Mission Accomplished mode), now is pushing not simply to hold its turf, but expand its sphere of influence. From the New York Times:

In a speech Wednesday to the Council on Foreign Relations in Manhattan, Richard W. Fisher, president of the Federal Reserve Bank of Dallas, compared the financial crisis to a near-fatal heart attack.

He warned that stripping the Fed of its supervision powers “would be the equivalent of ripping out the patient’s heart.”

Mr. Fisher added: “That would surely prevent another heart attack but would likely have serious consequences for the patient.

The amazing bit is that the Fed keeps shamelessly harping on the “we stopped the crisis” message, trying to drown out anyone who points out inconvenient facts, like its abject failures before and during the crisis, and even worse, its apparent lack of recognition that its performance left a great deal to be desired. For instance, why was the Fed caught utterly flat footed by the failure of Lehman and the risk posed by AIG? The big reason for not letting Bear go was concern over credit default swaps counterparty failures. Lehman, Merrill, and UBS were all known to be wobbly when Bear failed. The first order of business should have been to understand the CDS market much better, to map the nature and extent of exposures. The Fed, in concert with the ECB and the Bank of England, should have gone on full bore data gathering mission to understand the issues and problem involved with the CDS market. Even a superficial inquiry would have led them straight to AIG.

If the Fed exhibited some humility and had engaged in some post-mortems to understand what it needed to do better next time, I’d have far more respect for it as an organization. But it bears all the hallmarks of being arrogant, insular, jealous of its authority, and resentful of legitimate criticism.

The Fed refuses to recognize the fact that it failed abysmally as a regulator and it wants a bigger regulatory role. Or more accurately, it wants oversight responsibility, but is likely to continue to rely heavily on self-regulation. Willem Buiter, a former central banker and now chief economist of Citigroup, once said that regulation is to self regulation as regard is to self-regard.

And if you think I am exaggerating, consider: the Fed, in Congressional testimony, said it intended to rely on and improve on the stress test approach used in 2009 (and the improvements, needless to say, were on the macro data side). Yet the stress tests greatly understated the true capital needs of banks. Josh Rosner at the Roosevelt Institute Let Markets Be Markets symposium, pointed out that the stress tests had grossly underestimated losses from second mortgages, and allowing for that alone would reveal that many banks needed to go back to the TARP trough. But no one involved can possibly admit failure, so the charade that the stress tests were a good idea is not simply being kept alive as a necessary bit of propaganda, but are actually going to be hard coded into continuing practice.

So who does this arrangement serve? Aside from the Fed, the industry, of course. Simon Johnson, in his talk at the same conference, made an aside that if the IMF found a governance structure like that of the Fed, it would deem it to be unacceptable. Even though it came at the end of the article, the New York Times deigned to mention the Fed’s problematic structure and Congressional concern over it, which says the issue is still a live one:

Critics of the Fed say the district presidents are often too cozy with the banks they regulate. The 12 banks have their own boards, which choose the presidents, in consultation with Fed headquarters.

Member banks elect two-thirds of each board (half are bankers and half are other members of the public), and the Fed’s board of governors names the remaining third.

“I always thought that the reserve banks, the way they appoint the presidents, was a conflict of interest,” said Senator Richard C. Shelby, the senior Republican on the Banking Committee. He said of the member banks, “They appoint their own regulator, and I’d like to knock that out.”

Damon A. Silvers, policy director at the A.F.L.-C.I.O., agreed. “If the Federal Reserve is going to have additional regulatory responsibility, it should be clear that it’s a public body, and not a self-regulating body or an arm of the banks,” he said.

I am told that the fight over Bernanke’s reappointment did penetrate the Fed’s reality distortion sphere, but its response, like Team Obama, is that it needs to conduct a PR campaign rather than take the critics’ case seriously. That means that even more pressure needs to be applied.

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  1. attempter

    The “we stopped the crisis” Big Lie is manifest in the fact that nobody stopped the crisis, which continues its inexorable development. “Jobless recovery” is a contradiction in terms. “Recovery” without bringing history’s worst larcenous criminals to justice, indeed while leaving them in place to accelerate their stealing, is a contradiction in concept.

    The Fed, by design, has presided over nothing but kleptocracy and destruction, and its intent is to make these far worse.

    The round of MSM lies continues to swirl, and unfortunately many who should know better seem willing to still believe in nonsense.

    Thus we see “debate” about whether or not Obama and Congress really want a CFPA. But the very fact that they want to embed it in the Fed is proof that they don’t want anything but the sham facade.

    No unbiased, informed person is unaware that the Fed is unwilling to regulate, so no unbiased, informed person could believe that anyone who wants a real CFPA would ever agree to place it under the Fed.

    Ergo, Dodd and Congress don’t want a real CFPA, and when Obama fails to fight and fails to veto, that will prove that he never wanted it either. (Just like he never wanted health reform.)

    So similarly we see the MSM propagating the Big Lies that (1) there is any “recovery” at all, (2) that anything good which ever might happen is the result of Fed and establishment policies, rather than in spite of them.

    The NYT has been in the bag for these kinds of Fed lies for the duration. I’m reminded of Edmund Andrews’ absurd piece on Bennie’s alleged political education, and how reasonable and restrained he’s being in the face of all the unfair attacks and unjust attempts to diminish god-given Fed authority.

    I wrote about it here:


  2. ks song

    ‘..these 12 private credit monopolies were deceitfully and disloyally foisted upon this country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions.’-Louis Mcfadden 1934.
    2010 nothing changed.

  3. killben

    “If the Fed exhibited some humility and had engaged in some post-mortems to understand what it needed to do better next time, I’d have far more respect for it as an organization. But it bears all the hallmarks of being arrogant, insular, jealous of its authority, and resentful of legitimate criticism.”

    What do you expect from a team which is led by a guy who gives a damn to moral hazard, who treats the economy as a guinea pig to try out his foolish theories, who knows how to lobby and retain his job, who knows how to use scare mongering tactics (aka ” if Bernanke not elected, markets will tank”), who knows how to form the right cohort in establishment (Bernanke, Paulson, Geithner), who knows no cure other than print money and dip his grubby fingers (along with the still more grubby fingers of his bankster pals) into tax-payers money jar, who cannot spell humility even if his life depends on it, who proclaims now and then that he has saved the world?

    When you have a shameless and delusional rat at the top, what do you expect the others in the team to be?

  4. Sasher

    Guys: don’t give up! Like Yves Smith says: “the fight over Bernanke’s reappointment did penetrate the Fed’s reality distortion sphere”, we need to continue fighting the good fight against Bernanke, Kohn, Plosser, Mishkin, Fisher, and the like. They continue to hire from their own and display arrogance that we won’t notice their tribal loyalties.

    Due to my and other astute Americans’ continued rants, we had our first breakthru last month: The Minneapolis Regional Fed President is finally a guy who last name doesn’t sound German like (http://www.minneapolisfed.org/about/whoweare/president.cfm). So we have begun to penetrate Da Club and even though he may sound like a garden variety academic, at least he didn’t come from the same background as these other crooks and thugs. So he would be expected at least in meetings to nod off on whatever these thugs do.

    We are definitely making progress, trust me.

    Kohn, the rat, is out. So Obama has really got a chance to approve a non-German. Get Obama’s ear and make your views heard that you want someone other than from Bernanke, Summers and Geithner’s inner circle of friends and family.

    The idea that we should have most of the Fed governors and presidents to come from a small minority of 1% of the population as if they are the only ones with talents is ridiculous. Just as the Minneapolis Fed President was found by real search, they should be able to find real qualified people in the other 99% of the country that the non-elites are from. Trust me, we need to demand DIVERSITY in the Fed and the US media. if we demand it, we will get it.

    I am optimistic…

  5. Hugh

    A friend of mine was at a meeting with the head of the Atlanta Fed and his spiel sounded much the same:


    This looks like there is a concerted PR campaign by the Fed going on to defend its turf and its policies. Because its policies have been so wrong and continue to be, we should be looking at when and how the next collapse is going to play out.

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