Category Archives: Federal Reserve

Satyajit Das: Voodoo Economics Redux

n the film Ferris Bueller’s Day Off, an economics teacher, played by Ben Stein, launches into an improvised soliloquy: “… Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President Bush called this in 1980? Anyone? Something-d-o-o economics. “Voodoo” economics.”

In the late twentieth century, US President Ronald Reagan discovered voodoo economics. In framing policy responses to the global financial crisis, central bankers and governments have increasingly embraced more exotic forms of voodoo.

Rationalization of Biggest Foreign Bank Bailout Misses Regulatory Failure

Some aggressive spinning on the Fed data releases about its lending during the financial crisis has surfaced at Bloomberg (admittedly with some less favorable facts also included). The Friends of the Fed and other Recipients of Largesse are defending the central banks’ panicked and indiscriminate responses to the crisis. These efforts to rationalize emergency responses fail to acknowledge underlying regulatory failings that remain unaddressed.

The PR push surrounds the foreign bank that got the most support during the post-Lehman phase, namely, Dexia.

Banks Win Again: Weak Mortgage Settlement Proposal Undermined by Phony Consent Decrees

hink I’ve ever seen anything so craven heretofore.

As readers may recall, we weren’t terribly impressed with the so-called mortgage settlement talks. It started out as a 50 state action in the wake of the robosigning scandal, and was problematic from the outset. Some state AGs who were philosophically opposed to the entire exercise joined at the last minute, presumably to undermine it. Not that they needed to expend much effort in that direction, since plenty of Quislings have signed up for the job.

More Journalists Dignifying “TARP Was a Success” Propaganda

I hope NC readers don’t mind my belaboring the issue of the TARP’s phony success, but every time I see the Administration’s propaganda parroted I feel compelled to weigh in.

The trigger was an effort at a balanced assessment by Annie Lowrey at Slate, to which I have some objections, followed by some shameless and misguided cheerleading by Andrew Sullivan:

But two years ago, I sure didn’t expect the government to make a profit from TARP. And I sure didn’t expect the auto bailouts to become such huge successes.

What’s surprising to me is how pallid is the Obama administration’s spin has been on this. I never hear them bragging about how they managed to pull us out of the economic nose-dive we were facing. I know why: the recession isn’t over, even if TARP was a success, no one wants to hear about it, etc. But it’s one of the strongest and least valued part of Obama’s record – along with the cost control innovations in health insurance reform.

At some point, you have to stand up and defend your record. No doubt Obama is biding his time on this. But count me as surprised as I am impressed.

Quelle Surprise! Fed and Treasury Keen to Find As Few Systemically Risky Firms as Possible

We seem to be going back to the world before the crisis in number of respects. The first is that the Financial Times is again running rings around the Wall Street Journal on markets and financial services industry coverage. The crisis forced the Journal to throw a lot of resources on those beats, with the result that it became pretty competitive.

The second is that the authorities seem to be engaged in a weird form of cognitive dissonance. They clearly can’t pretend the crisis didn’t occur; if nothing else, all the extra new studies and rulemaking imposed by Dodd Frank make that impossible. Yet in every manner imaginable, they behave as if no financial markets near death event took place.

The object lesson of the evening is a story in the Financial Times on a battle between the FDIC, which is responsible for resolution of systemically important firms under Dodd Frank versus the Fed and Treasury. The struggle is over how many non-banks are to put on the systemically important watchlist as required by Dodd Frank. No one wants to be on that roster; it leads to the potential to be subject to all sorts of proctological examinations.

Quelle Surprise! Fed Lent Over $110 Billion Against Junk Collateral During Crisis

Former central banker Willem Buiter once remarked that the Federal Reserve’s “unusual and exigent circumstances” clause, which enables it to lend to “any individual, partnership or corporation” if it can’t get the dough from other banks, allows the Fed to lend against a dead dog if it so chooses.

It looks like the US central bank did precisely that.

Josh Rosner: Dodd Frank is a Farce on Too Big to Fail

Note: Josh Rosner, managing director of Graham Fisher & Co., submitted this written testimony for a March 30 panel for the House Oversight Committee that was cancelled. His testimony has been entered into the Congressional Record and will be available on the House Oversight Committee website in the near future. The text appears below..

Has Dodd-Frank Ended Too Big to Fail?

Almost three years have passed since the United States financial system shook, began to seize up, and threatened to bring the global economy crashing down. The seismic event followed a long period of neglect in bank supervision led by lobbyist-influenced legislators, “a chicken in every pot” administrations, and neutered bank examiners.

While the current cultural mythology suggests the underlying causes of the crisis were unobservable and unforeseeable, the reality is quite different. Structural changes in the mortgage finance system and the risks they posed were visible as early as 2001. Even as late as 2007 warnings of the misapplications of ratings in securitized assets such as collateralized debt obligations and the risks these errors posed to investors, to markets, and to the greater economy were either unseen or ignored by regulators who believed financial innovation meant that risk was “less concentrated in the banking system” and “made the economy less vulnerable to shocks that start in the financial system.” Borrowers, these regulators argued, had “a greater variety of credit sources and (had become) less vulnerable to the disruption of any one credit channel.”

In the wake of the crisis, and before either the Congressional Oversight Panel or the Financial Crisis Inquiry Commission delivered their final reports on the causes of the crisis, Congress passed the Dodd-Frank Act. The act claimed to end the era of “too-big-to-fail” institutions and sought to address the fundamental structural weaknesses and conflicts within the financial system. To falsely declare an end to Too Big to Fail without actually accomplishing that end is more damaging to the credibility of U.S. markets than a failure to act at all. The historic understanding that our markets were the most free to fair competition, most well regulated and transparent, has been the underlying basis of our ability to attract foreign capital. It is this view that, in turn, had supported our markets as the deepest, broadest, and most liquid.

In fact, Dodd-Frank reinforces the market perception that a small and elite group of large firms are different from the rest.

Hooray! Jamie Dimon Says New Capital Rules Will Kill Zombie Banks!

It really is a sign of how complete a victory that the banks have won over the rest of us that Jamie Dimon has the nerve to complain about banking regulations. Even worse, he is egging on a effort by Republican bank-owned Congresscritters to roll weak bank capital rules back.

His position is pure, simple, unadulterated bank propaganda: what is good for banks is good for America, when the converse is true. Simon Johnson warned in his May 2009 article “The Quiet Coup” that the financial crisis had turned American into a banana republic with a few more zeros attached, a country in the hands of oligarchs, in this instance, the financiers. And we playing out the same script he saw again and again in emerging economies:

OMG, Greenspan Claims Financial Rent Seeking Promotes Prosperity!

I was already mundo unhappy with an Alan Greenspan op-ed in the Financial Times, which takes issue with Dodd Frank for ultimately one and only one disingenuous and boneheaded reason: interfering with the rent seeking of the financial sector is a Bad Idea. It might lead those wonderful financial firms to go overseas! US companies and investors might not be able to get their debt fix as regularly or in an many convenient colors and flavors as they’ve become accustomed to! But the Maestro managed to outdo himself in the category of tarting up the destructive behaviors of our new financial overlords.

What about those regulators? Never never can they keep up with those clever bankers. Greenspan airbrushes out the fact that he is the single person most responsible for the need for massive catch-up. Not only due was he actively hostile to supervision (and if you breed for incompetence, you are certain to get it), but he also gave banks a green light to go hog wild in derivatives land. And on top of that, he allowed banks to develop their own risk models and metrics, which also insured the regulators would not be able to oversee effectively (there would be a completely different attitude and level of understanding if the regulators had adopted the posture that they weren’t going to approve new products unless they understood them and could also model the exposures).

And the most important omission is that the we just had a global economic near-death experience thanks to the recklessness of the financial best and brightest.

Scott Fullwiler: Paul Krugman—The Conscience of a Neo-Liberal?

By Scott Fullwiler, Associate Professor of Economics at Wartburg College

The old saying that bad press is better than no press is definitely true in this case. Without the advent of the blogosphere, our work would likely never even be noticed by the likes of Paul Krugman, so the fact that he’s writing about us (here and here) this weekend at least means we’re doing better than that, even if his assessment of us is far less than glowing. At the same time, and particularly given that Krugman is so widely read, it’s imperative to at the very least set the record straight on where MMT and Krugman differ. I should note before I start that others have done very good critiques already that overlap mine in several places (see here, here, here, and here).

Krugman makes three incorrect assumptions about what MMT policy proposals actually are while also demonstrating a lack of understanding of our modern monetary system (as is generally verified by volumes of empirical research on the monetary system by both MMT’ers and non-MMTer’s). These are the following:

Assumption A: The size of the monetary base directly (or indirectly, for that matter) affects inflation if we’re not in a “liquidity trap”

Assumption B: MMT’s preferred fiscal policy approach or strategy—Abba Lerner’s functional finance—is Non-Ricardian

Assumption C: Bond markets alone set interest rates on the national debt of a sovereign currency issuer operating under flexible exchange rates

Assumptions A and C are central to the Neo-Liberal macroeconomic model. Assumption B is a common misconception about MMT and a common perception of Neo-Liberals about the nature and macroeconomic effects of fiscal policy (i.e., Neo-Liberals often believe that activist fiscal policy is Non-Ricardian).

While MMT’ers argue that all three assumptions are false, one does not need to necessarily agree. The point is that to critique MMT on the basis of assumptions that are inconsistent with MMT is to actually not critique MMT at all. It is a straw man.

Richard Alford: Fed Policy, Market Failures and Irony

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side. “..there is always a well-known solution to every human problem — neat, plausible, and wrong.” H L Mencken One […]

Matt Stoller: The Federal Reserve’s Wheezy Independence Takes Another Hit

By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is:
http://www.twitter.com/matthewstoller

You might have noted a few days ago that the Supreme Court ruled against Federal Reserve secrecy. The case had to do with a lawsuit by Bloomberg’s Mark Pittman demanding access to emergency loan documents relating to the Fed’s bailout of Bear Stearns. As the case traveled up the court system, major banks joined the Fed’s attempt to shield the information from public scrutiny. Eventually, the Fed dropped the suit, but the banks didn’t give up.

A few days ago, the Supreme Court refused to hear the case, letting a lower court decision in favor of Pittman stand. The Fed will now be releasing Bear Stearns-related emergency lending documents in a few days.

It’s a historic case. You wouldn’t know that, however, by the response from Wall Street.
You might have noted a few days ago that the Supreme Court ruled against Federal Reserve secrecy. The case had to do with a lawsuit by Bloomberg’s Mark Pittman demanding access to emergency loan documents relating to the Fed’s bailout of Bear Stearns. As the case traveled up the court system, major banks joined the Fed’s attempt to shield the information from public scrutiny. Eventually, the Fed dropped the suit, but the banks didn’t give up.

Sleaze Watch: NY Fed Official Responsible for AIG Loans Joins AIG As AIG Pushes Sweetheart Repurchase to NY Fed

The corruption in high places is getting more and more brazen with every passing day. The only thing that separates the US from conventional banana republic status is that no one leaves keys to new luxury cars on the desks of officials to secure their cooperation. It’s just not enough of an inducement to get anyone to take action.

Quelle Surprise! Geithner Gutting Dodd Frank via Intent to Exempt Foreign Exchange

I have mixed feelings about an article by Robert Kuttner, “Blowing a Hole in Dodd-Frank.” On the one hand, he’s found an important example of the Administration’s lack of interest in meaningful financial reforms, which is its intent to exempt foreign exchange derivatives from the implementation of Dodd-Frank. But his discussion of what this matters at critical junctures confuses foreign exchange cash market trading with derivatives and thus leaves the piece open to criticism.

Kuttner warns that Geithner has signaled strongly his preference to exempt foreign exchange from Dodd Frank implementation:

Treasury Secretary Timothy Geithner is close to a decision to exempt the $4 trillion-a-day foreign-currency market from key provisions of the Dodd-Frank Act requiring greater transparency in the trading of derivatives. In the horse-trading over the final conference version of that legislation last year, both Geithner and financial-industry executives lobbied extensively to give the Treasury secretary the right to create this loophole.