The Fed's New Job Description

Robert Shiller says changes in the institutional structure of the financial system such as the breakdown of the traditional lines between what is and what isn't a bank require the Fed to reevaluate and expand its role in managing the economy. I agree, and I also agree that Ben Bernanke is well-suited to the role of leading the Fed through this change:

The Fed Gets a New Job Description, by Robert Shiller, Economic Scene, NY Times: The plan of Treasury Secretary Henry M. Paulson Jr. to overhaul the financial system includes a crucial proposal: it would officially transform the Federal Reserve into a “market stability regulator” rather than merely a banker’s bank.

This aspect of the Treasury plan is a natural step in a historical trend. The Fed is no longer just a regulatory agency presiding over a narrow group of businesses called banks. Rather, its mission increasingly is to maintain macro confidence — confidence that the entire financial system is functioning well as part of the whole economy.

In contrast, traditional securities regulators like the Securities and Exchange Commission have as their primary mission the maintenance of micro confidence — confidence that individual firms are disclosing the truth about their own internal operations and are not manipulating information. But as the current financial crisis attests, it is macro confidence that requires the most subtle attention. ...

[T]he nature of financial institutions is changing... In the new financial order, in fact, we do not clearly know what is or is not a bank, so a narrow definition of the mission of the central bank is no longer appropriate. ...

The Fed has been taking an expansive view of its own powers recently, for the most part with considerable public approval. Witness its decision to give a $29 billion line of credit to JPMorgan Chase to encourage the purchase and rescue of Bear Stearns. There was very little criticism of this move because so many people rightly feared the systemic effects on financial institutions if the Fed did not act. ...[T]he whole financial house of cards could have collapsed.

Because we sense that maintaining confidence in our financial system is so important, we are permitting the Fed to expand its role. ... Two of the Fed’s most important innovations were internationally coordinated measures. These were the establishment of the Term Auction Facility in December, ... and the creation last month of the Term Securities Lending Facility...

It has been said that Ben S. Bernanke chose an awful time to become chairman of the Federal Reserve — ... just as the economy was about to enter its worst financial crisis since the 1930s. But it was also the perfect time, because it presented him with challenges for which he had a lifetime of preparation. His most famous academic work concerned the crisis of the Great Depression, and he has thought deeply about systemic economic problems.

Mr. Bernanke’s own analysis of history, as well as that of other economists, emphasizes the essential importance of confidence in financial institutions and the subtlety of the issues involved in promoting such confidence. ...

Confidence is too complex for the consumer confidence indexes — which are based on surveys of ordinary people — to measure adequately. It has to do with confidence in specific institutions — confidence that they will behave properly and that the leaders who are trying to promote others’ confidence will act in a constructive way.

Formalizing the Fed’s transformation into a market stability regulator makes sense. The Fed has already begun to play this role. And by doing so, it is taking a significant step toward reducing the fundamental instability of our economy.

Comments

[cm]

"We put the 'free' in your market."

[gordon]

Just burn a pinch of incense before the statue of Roma Dea.

[hari]

My take is bit different on Feds *new armour* to defend the dollar and hi fi markets, and so on.

In this age of globalization, it'd seem appropriate to find collaborative approaches to intrinsic global monetary constraints to policy and outlook. In other words, Fed/ECB must endure a bit more *closer and deeper* relationship on how policy is finally set....including other CBs.

[ndd]

I would just like to remind people of the crucial axiom: "Power corrupts and absolute power absolutely corrupts."

30+ years ago we decided to fix public corruption by anointing white knights called "independent counsel" prosecutors with lots of power. Until along came one named Kenneth Starr who showed what all that power could do when corrupted by political purpose.

Those who think the human beings in the Federal Reserve Bank are any different do not understand political power.

[Organic George]

This is the same Fed chief that fiddled while the financial markets went wild.

We need not give more authority to the Executive branch, we need to prosecute the felons who earn hundreds of millions of dollars for running the financial system onto the shoals of corruption.

[Winslow R.]

Shiller wrote:" Witness its decision to give a $29 billion line of credit to JPMorgan Chase to encourage the purchase and rescue of Bear Stearns"

Get it straight, the counter-parties to Bear Stearns were rescued, not Bear Stearns.

Shiller should be asking what would have happened to Bear Stearns stock holders had the Fed opened its lending facility to investment banks a week earlier.

[Winslow R.]

Shiller wrote :"In 1932, Congress extended the Fed’s power by giving it the authority “in unusual and exigent circumstances” to make discount-window loans to any organization or individual, not just to member banks. "

Everyone should understand this is the same fight that has been going on for centuries.

Alexander Hamilton vs. Thomas Jefferson

Corporate elite vs. common man

We have a Fed that has the power to provide the balance between these two groups.

So far Ben has chosen to be Hamiltonian as he as expanded access only to corporations. Where are the Jeffersonians? I am not a Jeffersonian as I believe both the corporation elite and individuals should have access to the Fed. But to get to that point we need some Jeffersonians.

Though both Alexander Hamilton and Thomas Jefferson served as members of President Washington's cabinet, the two held very different views on the newly founded U.S. government and the role of the masses in that government. During the 1790s the views of Hamilton and Jefferson would develop into two competing political ideologies and eventually form the basis of the first political parties in the U.S. The following are excerpts of Hamilton and Jefferson's views on popular rule. Notice each man's view of the elite and the masses. What role does each man see for the elite and the masses in government? Why?

http://www.pinzler.com/ushistory/hamjeffpopsupp.html

[baileyman]

Why should anyone celebrate an expansion in domain by the manager of the "big financial balance sheets" cartel"

[bullbust]

http://www.sacbee.com/103/story/835662.html

Home Front: Few solutions on horizon for strapped homeowners
By Jim Wasserman - jwasserman@sacbee.com

Published 12:00 am PDT Friday, April 4, 2008
Story appeared in BUSINESS section, Page D1

After all the intellectual assessments and recital of statistics about the subprime loan crisis, a woman from Chicago asked the question on the minds of many people in neighborhoods where so many have lost their homes.

"I want to know – how many people are going to jail?" asked Yevette Boutall, director of a community development fund that works in lower-income neighborhoods of Cook County.

She asked the question in a setting far removed from those neighborhoods, at a California conference hosted earlier this week by the Federal Reserve Bank of San Francisco.

"That's how angry people are in communities," said Boutall. "They want to know how many people are going to go to jail, people who misled them and got away with it and earned money on their misery."

In San Francisco at the Fairmont Hotel, Boutall's question went unanswered for the moment. But it struck a real note about people bearing the consequences of a time when mortgages and home prices went wild. They will bear plenty more if the nation's leading foreclosure trackers are to be believed.

Speakers at the San Francisco Fed conference uniformly estimated that 2 million households will surrender their keys to lenders in the next year or two. That was their prediction despite all the voluntary lender-government agreements, the millions of dollars for new nonprofit loan counselors and the average $40,000 to $70,000 a lender loses with every foreclosure.

"I wish I had better news for you in the short term," said Tom Cunningham, director of the risk monitoring and analysis group at the Fed's San Francisco bank.

He called the situation "unprecedented. We have never seen this before."

It is hardly new that the problem is bad and can cause further declines in home prices. What seemed new at the Fed conference was how few major ideas there are to stop it. Speakers defined the problem, defined proposals to help assure it doesn't happen again. But they could not be encouraging about solutions.

The thousands of loan modifications done so far to buy homeowners time represent the easy cases, said Cunningham. The harder work is more "problematic."

Speakers from the Fed, NeighborWorks America, the Center for Responsible Lending, Colorado Foreclosure Prevention Task Force and JPMorgan Chase talked about proposed legislation at state capitols and in Congress. They detailed efforts to reach out to struggling borrowers. But the big number – 2 million households during the next year or two – didn't change.

During questions and answers, Cunningham was asked why former Chairman Alan Greenspan's Federal Reserve didn't step in to prevent this meltdown. Fair question, he said.

The Fed's examiners did probe risky loans. But lenders told them the loans commanded high prices from investors, earned profits and had no track record of defaults.

"I'm not going to criticize my colleagues," said Cunningham. "But in hindsight, I do say we should have questioned some of the assumptions they (lenders) were using and some of the variables they were relying on.

"But again, it's difficult to tell bankers to stop doing something when they're making a huge profit with no losses. You know, we just have to wait for it to crash before you come and tell them what they did was wrong. It sounds nonsensical, but that was reality."
....

Yes. The same idiot Fed that collaborated in this massive bubble con job is going to solve this problem.

Sure it will. It will make sure that the pig men never go to jail. And all the financial pundits and economists will abet that con job too.

Give me, John McCain (Bernanke), the power, and I will stay here for 100 years if needed. (I'll give pigmen trillions of taxpayer money if needed). For we cannot fail

[Lafayette]

Hyping the game

Article: Mr. Bernanke’s own analysis of history, as well as that of other economists, emphasizes the essential importance of confidence in financial institutions and the subtlety of the issues involved in promoting such confidence

Financial engineering is an imaginative business. There is no sense whatsoever regulating it. Besides, once they regulate one bit, the business simply mutates into another version.

The Junk Bond scandal already has taught us that lesson. Did we learn? Of course not.

What needs regulation is not the practice per se but its practitioners. Doctors who make a serious mistake in their profession can have their licenses removed. Lawyers can be disbarred.

Financial engineers, in fact, the entire management structure should be taken to task when it gets wrapped up in its greedy "exaggerated exuberance". As said elsewhere, the capital offsets can be regulated according to the market's bent, up when hot and down when tepid. And, the collusion between the rating agencies and the credit institutions is characterized negligence of professional duty.

More poignantly, the front-end, that is where the business meets the client, needs a set of standards that show the way.

To jail, if necessary.

NB: And, frankly, at the very bottom of the get-rich-quick motivation is the fact that marginal are tax rates hyping the game extravagantly. Raise them significantly and watch the exaggerated-exuberance dampen to more tolerable levels.

[Lafayette]

Bullbust: (Article) Speakers at the San Francisco Fed conference uniformly estimated that 2 million households will surrender their keys to lenders in the next year or two.

I've seen this same figure cited elsewhere.

Everything should be in perspective. If the above is true, it represents less than 2% of total American households.

Three million foreclosures would be about 2.6% of the total.

Either percentage makes for a lot of grief, but is by no means a Financial Tsunami upon the American economy. It will take time to console that grief, but the constrained numbers themselves augur for inevitably avoiding disaster.

[dd]

The Fed as ultimate market-maker will have unrivaled power to designate winners and losers. The current crisis winner is unregulated derivatives and its small circle of favored players. The losers are regulated investments and everyday investors. Traditional bond investors now know their position is undermined by derivatives; just as shareholders are now subject to risks unnamed and unknown. This is not a confidence inspiring outcome.

[Lafayette]

dd: The current crisis winner is unregulated derivatives and its small circle of favored players.

Somehow, I don't think the people at Bear Stearns would agree with that statement, particularly the hundreds or so who have lost their jobs.

Not all have been taken into the new management line-up at JPMorgan.

[dd]

Laf, thanks for a Laf. Favored players as in management.
Take a gander at the Proxy for 4/18/07 page 19, compensation tables.
http://www.sec.gov/Archives/edgar/data/777001/000120677407000789/bearstearns_def14a.htm