Focus On The Fed

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Trump Renews Attacks on Fed, Putting Central Bank in a Bind
President Trump in France last week. On Monday, Mr. Trump lamented that the Fed, which is independent of the White House, did not operate like China’s central bank, which is largely subservient to the government.
By Jeanna Smialek
June 10, 2019

President Trump renewed his criticism of the Federal Reserve on Monday, saying that the Fed erred in lifting interest rates last year and put the United States at a disadvantage to China.

Mr. Trump, in an interview on CNBC, said the Fed “made a big mistake: They raised interest rates far too fast.”

The president also seemed to lament that the Fed, which is independent of the White House, did not operate like China’s central bank, which is largely subservient to the government.

“The head of the Fed in China is President Xi,” Mr. Trump said in an interview on CNBC, asserting that “he can do whatever he wants.”

Mr. Trump has repeatedly attacked the Fed’s decision last year to raise interest rates, accusing it of undermining his economic policies and slowing growth. And he has urged the Fed to cut rates and take additional steps to stimulate economic growth.

His comments on Monday come as the Fed has paused its steady march toward higher rates and begun reorienting policy toward potential cuts amid slowing economic growth.

Markets now expect the Fed to cut rates within the next two months. Futures pricing suggested that a cut by the end of July is now about 84 percent priced into markets, up from less than 20 percent a month ago.

But Mr. Trump is putting Fed Chairman Jerome H. Powell and his colleagues in a difficult spot. The president’s ongoing trade war with China — including his threat to slap tariffs on virtually all remaining Chinese imports if no agreement is reached — is creating uncertainty, causing businesses to put off investment and hiring.

If it intensifies, the economic drag might be enough to prompt Fed rate cuts.

But by lowering borrowing costs, the central bank would be giving Mr. Trump exactly what he wants, creating a risk that it will look political even though it is acting on economic fundamentals.

The president has been particularly critical of the Fed’s policies in the context of his trade war. Mr. Trump has said that China devalues its currency, making its goods cheaper to buy and putting the United States at a disadvantage.

“They devalue their currency,” Mr. Trump said. “They have for years. It’s put them at a tremendous competitive advantage and we don’t have that advantage because we have a Fed that doesn’t lower interest rates. We should be entitled to have a fair playing field, but even without a fair playing field — because our Fed is very, very disruptive to us — even without a fair playing field we are winning.”

Before adopting its current cautious stance, the Fed had raised rates nine times since late 2015, with four of those coming after Mr. Trump nominated Mr. Powell to lead the central bank. It has also been shrinking its large balance sheet of government-backed bonds — which it amassed in the wake of the financial crisis to help prop up the economy — though it is in the process of slowing and stopping the drawdown.

Mr. Trump seemed to blame Fed policy partly on personnel. Mr. Trump has nominated four of the Fed’s five board members in Washington, but boards at the 12 regional central banks select their leaders. In total, 13 of the 17 people sitting around the policy-setting table were not selected by the White House.

He said in the interview that the Fed had not listened to him and that “they’re not my people.” All four of the Fed governors he selected voted in favor of rate increases last year, including Mr. Powell, Richard Clarida, Randal Quarles and Michelle Bowman.

The Fed operates independently of the White House by design, so that its officials are free to make decisions that could cause short-term pain but are better for the nation’s long-term economic health.

The president’s regular attacks on the central bank break with a decades-old tradition of respecting that independence.

Still, Fed officials regularly say that they will set policy with an eye toward achieving their two goals, stable inflation at around 2 percent and maximum employment, without paying attention to political commentary.

Mr. Powell and his colleagues have opened the door to potential rate cuts in recent weeks, saying that the Fed will set policy as appropriate to support its employment and inflation goals.

That’s not an explicit sign that a move is coming, but it puts investors and economists on watch for a cut in coming months, especially as uncertainty surrounding Mr. Trump’s trade negotiations with China lingers. Inflation was already running below the Fed’s goal, and an employment report released last week showed a sharp slowdown in hiring, further stoking those expectations.

https://www.nytimes.com/2019/06/10/business/economy/trump-attacks-fed-interest-rates.html

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Things Were Going Great for Wall Street. Then the Trade War Heated Up.

By Matt Phillips
May 31, 2019

Stocks began 2019 with the snappiest start in more than three decades, as the economy grew faster than expected, the Federal Reserve seemed to abandon its plans to keep raising interest rates, and trade-war rancor between Washington and Beijing seemed to end. By April 30, the S&P 500 had reached a record.

Then the tweets on trade began. In early May, President Trump threatened new tariffs on Chinese products, shattering the calm as markets began a tailspin that was capped with a 1.3 percent drop for the S&P 500 on Friday.

The benchmark index ended May down 6.6 percent, its first monthly decline of the year and its worst drop since an ugly sell-off at the end of 2018.

The decline on Friday came after President Trump tweeted that he would impose a new tariff on all imports from Mexico — a tax that could rise to as high as 25 percent — unless the country’s government took steps to address the flow of migrants across the United States’ border, and Beijing announced plans to unveil a blacklist of foreign companies and people. China’s move was seen as a retaliation against the Trump administration’s efforts to deny American technology to Chinese companies.

Earlier this month, the White House issued an order effectively barring sales by Huawei, China’s leading networking company, broadening the conflict away from trade deficits and toward the difficult-to-resolve issues of technological dominance.

“I think in some sense, the Huawei ban was a bigger deal,” said Maneesh Deshpande, a market strategist at Barclays in New York. “It really opened up a new front in the trade war.”

Investors worldwide responded by pricing in the growing economic cost to the fight. Stock markets in trade-dependent economies such as Japan, South Korea and Germany also saw steep losses in May.

On Friday, the drop in American stocks was sweeping: Investors dumped industrial and machinery stocks, shares of consumer products companies, and those of giant tech companies.

Firms with close links to Mexico suffered, in light of the threat of new tariffs. Large automakers, with complicated supply chains that crisscross the border between Mexico and the United States, were particularly hard hit. Ford was down 2.3 percent and General Motors fell 4.3 percent.


Constellation Brands, the brewer of Corona and other Mexican beer brands, was down roughly 5.7 percent. JPMorgan Chase analysts estimate that more than 70 percent of its sales come from products imported from Mexico.

Kansas City Southern, a railroad that has a large business transporting oil products and autos across the southern border, fell 4.5 percent.

The peso fell sharply, tumbling 2.5 percent against the United States dollar.

The Mexico-related catalyst was new, but the slump was in keeping with broader signals markets sent this month, suggesting growing weakness in the global economy.

Benchmark prices for American crude oil fell more than 5 percent Friday, and more than 16 percent on the month. Iron ore and copper, industrial metals closely tied to the outlook for Chinese growth fell after a key economic report showed Chinese factory activity contracted in May.

The rising risks to global growth appear somewhat at odds with an array of recent reports suggesting substantial strength in the United States economy. At 3.6 percent, unemployment remains at its lowest level since 1969. Wages are growing at a strong clip. And corporate profits remain high. In the recent first-quarter earnings season, roughly 75 percent of companies beat expectations from Wall Street analysts.

But this month, sound fundamentals have been drowned out by the increasing volume of the trade spat, with investors becoming increasingly fixated on any signs that growth is flagging.

Government bond markets have been sending some of the strongest warning signals. A global decline in long-term interest rates this month, typically viewed as a sign of threats to growth, has begun to unnerve investors across Wall Street.

It continued Friday, with the yield on the 10-year Treasury note falling to 2.13 percent, according to Bloomberg, its lowest level since September 2017.

To a certain extent, those low yields are pricing in growing expectations that the Federal Reserve will cut interest rates. According to the market for Fed Funds futures, traders are putting roughly 90 percent odds on the Fed cutting interest rates by the end of the year, up from about 38 percent in the middle of April.

The expectations that the Fed stands ready to support financial markets — a view that the central bank has never fully endorsed — has probably cushioned stocks to some extent this month. But it also probably means investors will be increasingly sensitive to any clues about whether rate cuts will actually materialize over the next few months.

The markets are saying “there is no inflation and you’ve got policy too tight and you need to start thinking about lowering interest rates,” said James Bianco, president of Bianco Research, an economic consulting firm in Chicago. “Now, I think the Fed’s hand is somewhat forced.”

https://www.nytimes.com/2019/05/31/business/trump-tariffs-markets.html

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Don’t Let Trump Mess With the Fed
Steady leadership at the Federal Reserve is keeping the economy on track.
By Steven Rattner
Mr. Rattner served as counselor to the Treasury secretary in the Obama administration.
April 29, 2019

Once again, the Federal Reserve has regrettably become a favorite whipping boy.

President Trump has been lobbying it to lower interest rates, even though the unemployment rate is 3.8 percent. Progressives are still complaining that the central bank didn’t do enough to stimulate the economy in the wake of the 2008 recession.

More worrisome, Mr. Trump has been attacking the Fed’s actions with more vitriol than any previous president in memory while proposing two highly partisan and unqualified nominees to join a distinguished board that has historically been free of any political agenda.

The policy critics on both sides are about as wrong as imaginable. And above all, we need to guard the independence of the central bank, the most important government institution that has not been divided by the deep partisanship so evident elsewhere.

In an era when even the Supreme Court divides routinely along ideological lines, the Fed still maintains an analytical and, as the former chairman Janet Yellen liked to say, data dependent approach to policymaking.

Sure, disagreements occur, and at times, one or two members of the committee that sets interest rates register a dissent. But contrast that general equanimity with the squabbling Supreme Court.

For that, credit goes to all recent presidents (including, in his first two years, Mr. Trump), who have appointed board members with strong economic and financial credentials and a shared commitment to analytical policymaking.

Now the president wants to change that.

Happily, the Senate has already made clear that Herman Cain — with little relevant experience and charges of sexual harassment swirling around him — would have been unlikely to survive confirmation. (Mr. Cain withdrew his name from consideration.) And Stephen Moore, with a raft of tax peccadilloes, would also have to explain past statements like “I’m not an expert on monetary policy.”

Mr. Trump and his aides base their call for the Fed to lower rates on quiescent inflation, a phenomenon that could well be either aberrational or a new normal. Put me down as generally skeptical of pronouncements of a new normal.

And having come of age as a young Times reporter covering economic policy during a period of rampant inflation, I’m particularly skeptical of declaring inflation dead and buried.

Regardless, few mainstream economists believe that the interest rate increases to date have impeded the recovery, nor would cutting them materially accelerate growth.

“The president is using the Fed as a scapegoat for his own economic policy mistakes,” Mark Zandi, the chief economist of Moody’s Analytics, told me. “The Fed’s actions last year have no bearing on long-term economic growth.”

Of course, the Fed doesn’t always get it right. (It famously missed the dangers of the credit bubble in 2007.) But neither do the rest of us, including the Trump officials who are now implicitly or explicitly criticizing the Fed.

In June 2005, as home prices began to soften in overbuilt markets, Lawrence Kudlow, now director of the National Economic Council, said that only “bubbleheads” believe that housing weakness would “bring down the consumer, the rest of the economy and the entire stock market.”

Then there was the open letter, penned by a distinguished group of economic thinkers in November 2010 when unemployment was still nearly 10 percent, decrying the Fed’s use of aggressive monetary tools to fight the effects of the huge downturn.

Among the signatories: Kevin Hassett, then at the American Enterprise Institute. Mr. Hassett is now chairman of the president’s Council of Economic Advisers but to his credit, has refrained from participating in the latest round of Fed bashing.

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Progressives have a different view of Fed policy over the past decade: Remarkably, they argue that the Fed was insufficiently aggressive in fighting the 2008 downturn.

Too timid? Really? In unprecedented actions, the Fed kept interest rates close to zero for seven years and engaged in an aggressive bond buying program known as quantitative easing.

That program, which prompted the enraged letter from conservatives when the Fed’s balance sheet totaled $2.3 trillion, ultimately reached $4.5 trillion. And after the economic data started to wobble late last year, the Fed announced that it would taper the reduction of its holdings.

What progressives don’t understand is that while it is immensely powerful, the Fed can’t solve all our economic problems. For example, weak productivity growth and raging income inequality need to be addressed through legislative action: better tax policy, increased spending on infrastructure and the like.

Meanwhile, as with so many other matters, Mr. Trump’s saber rattling has unnerved international allies. A week ago, the European Central Bank’s president, Mario Draghi, said that he was “certainly worried about central bank independence,” especially “in the most important jurisdiction in the world.”

We should all be worried. And most important, Mr. Trump should keep his hands off the Fed.

https://www.nytimes.com/2019/04/29/opinion/stephen-moore-fed.html

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What’s at Risk if the Fed Becomes as Partisan as the Rest of Washington
The credibility of the Federal Reserve around the world has been built over decades.
By Neil Irwin
April 6, 2019

Politicians have had strong opinions on what the Federal Reserve should and shouldn’t do throughout its 105-year history.

They have pushed for lower interest rates and easier money, or for this or that policy on bank regulation or consumer protection. They have summoned Fed leaders to the White House or Congress to persuade and cajole.

In that sense, there is nothing new in President Trump’s aggressive approach to the Fed. This week, he called for lower interest rates and new quantitative easing, and he signaled an intention to appoint two vocal supporters, Stephen Moore and Herman Cain, to the board of governors.

What makes Mr. Trump’s approach to the Fed so unusual is that he has repeatedly, publicly undermined a Fed chief he appointed (Jerome Powell), and, if successful, he would put two officials with a background in partisan politics in the inner sanctum of Fed policymaking. (Mr. Moore was founder of the Club for Growth, which supports conservative candidates for office, and Mr. Cain ran for president.)

“It’s more overtly political than anything we’ve seen since at least the ’80s, and historically when we’ve had political appointments and interventions in the Fed, there have been unintended consequences that last,” said Julia Coronado, president of MacroPolicy Perspectives and a former Fed staffer. “It may be expedient in the near term, but what’s good for the next year or two may not be good for the next decade.”

All presidential appointees to the Fed’s board of governors come with their own political point of view, which generally dovetails with the president who appointed them. But typically they have also brought deep technical expertise and an inclination to keep political dimensions out of Fed debates.

“People around the table did have political views, and I did, too,” said Alan Blinder, who was appointed vice chairman of the Fed by President Bill Clinton and is more recently the author of “Advice and Dissent,” about the role of politicians versus technocrats in shaping policy. “But you weren’t supposed to bring them into the room when it was time to make a decision, and people didn’t.”

That is the tradition that Mr. Trump’s approach endangers.

You can read thousands of pages of transcripts of closed-door Fed policy meetings without seeing a reference to the political jockeying that occupies the rest of Washington.

Three times in recent decades, a president has reappointed a Fed chairman first named by a president of the opposite party (Ronald Reagan with Paul Volcker, Mr. Clinton with Alan Greenspan and Barack Obama with Ben Bernanke).

You will see no political bumper stickers in the underground parking garage. When Dan Tarullo, an Obama campaign veteran and a banking expert, was named a governor in 2009, there was some tut-tutting among staff that he initially left his sticker on.

In effect, the risk is that the Fed becomes yet another partisan battlefield, as is already often the case with the Supreme Court nomination process, congressional intelligence oversight committees and regulators like the Federal Communications Commission.

In the immediate future, this probably wouldn’t mean much for policy. If nominated and confirmed, Mr. Moore and Mr. Cain would hold two of 12 votes on the Federal Open Market Committee. Their ability to sway the Fed toward Mr. Trump’s desired interest rate cuts and a new round of quantitative easing would depend on their ability to persuade their new colleagues.

“It will be their task to convince the others that their way of thinking about monetary policy will improve the Fed’s ability to meet its legislative mandates for maximum employment and stable prices,” said Don Kohn, a former Fed vice chairman who was appointed by George W. Bush. “That will require solid economic analysis backed up by research.”

The risk of more overt political divisions within the Fed would come over time, if the Fed came to be seen as basing decisions on the political impulses of appointees rather than on sound economic analysis.

The United States’ role as the global reserve currency — which results in persistently low interest rates and little fear of capital flight — is built in significant part on the credibility the Fed has accumulated over decades.

During the global financial crisis and its aftermath, for example, the Fed could feel comfortable pursuing efforts to stimulate the United States economy without a loss of faith in the dollar and Treasury bonds by global investors. The dollar actually rose against other currencies even as the economy was in free fall in late 2008, and the Fed deployed trillions of dollars in unconventional programs to try to stop the crisis.

The hazards of a more politicized Fed are evident from the experience of the early 1970s, when Richard Nixon used both political pressure and underhanded tactics to try to push the Fed chairman, Arthur Burns, to keep interest rates low heading into the 1972 election.

Among other things, the White House leaked a false story that Mr. Burns sought a large pay raise at a time the Fed was pressuring employers not to increase wages to fight inflation.

Mr. Burns and the Fed followed the president’s wishes, and Mr. Nixon won re-election handily in 1972, amid a booming economy. But it was in those years that inflationary pressures were building in the economy, and within a few years the rate of inflation reached double digits.

No one would argue that the Fed is divorced from politics. It is constantly making decisions that pit the interests of workers against owners of capital, and those of banks against those of consumers. But there is a difference between acknowledging that there are choices that must be informed by political values and putting those political values ahead of what are often highly technical discussions.

In Senate confirmation hearings, would Mr. Moore and Mr. Cain adopt the cautious, careful language typical of central bankers — or embrace a role as partisan warriors?

The safest bet is that investors around the world will be watching carefully for hints of just how politicized the Fed of the future will turn out to be.

https://www.nytimes.com/2019/04/06/upshot/fed-moore-cain-risk-partisanship.html

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Trump Nominates Famous Idiot Stephen Moore to Federal Reserve Board
By Jonathan Chait@jonathanchait

Stephen Moore’s career as an economic analyst has been a decades-long continuous procession of error and hackery. It is not despite but precisely because of these errors that Moore now finds himself in the astonishing position of having been offered a position on the Federal Reserve board by President Trump.

Moore’s primary area of pseudo-expertise — he is not an economist — is fiscal policy. He is a dedicated advocate of supply-side economics, relentlessly promoting his fanatical hatred of redistribution and belief that lower taxes for the rich can and will unleash wondrous prosperity. Like nearly all supply-siders, he has clung to this dogma in the face of repeated, spectacular failures.

I first started writing about Moore in 1997. Four years before, President Clinton had raised the top tax rate to 39.6 percent, and supply-siders had insisted this would without question cause tax revenues to drop. This prediction was a necessary corollary of supply-side economic theory, which holds that tax revenue moves in the opposite direction of the top tax rate. The prediction was spectacularly wrong — revenue not only rose, it rose much, much faster than even the most optimistic advocates of Clinton’s plan had predicted.

Most supply-siders simply ignored this fact altogether. Moore, somewhat unusually, attempted to defend the original failed prognostication. His effort was hilariously buffoonish, using a series of errors that would embarrass a high-school economics student, such as failing to correct for inflation, and combining payroll tax data with income tax data.

In the years since, I have continued following his career, and he has shown no intellectual growth at all. He is capable of writing entire columns that contain no true facts at all. He made so many factual errors he achieved the rare feat of being banned from the pages of a Midwestern newspaper. He has sold his policy elixir to state governments which have promptly experienced massive fiscal crises as a direct result of listening to him. He believes what he calls “the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy” should be lionized, and that the idea that a recession might be caused by anything other than excessively high rates on these heroes defies “common sense.” He was pulled into Trump’s orbit during the 2016 campaign and co-wrote a ludicrous hagiography of Trump and his agenda. By all appearances, Moore opposes mainstream fiscal theories because he simply doesn’t understand them.

And yet, for all their extravagant ignorance, Moore’s beliefs on fiscal policy are actually more sophisticated and well-developed than his views on monetary policy. It is the latter that he would be in a position to influence as a Federal Reserve governor.

Moore’s beliefs on monetary policy — it might be more accurate to describe them as “impulses” — tend to default to partisanship. During the Obama presidency, he warned that runaway government spending would produce hyperinflation. In 2009, he appeared on Glenn Beck’s program to wax hysteric. “We’ve seen this happened to Mexico, Bolivia, Argentina, Zimbabwe, Russia, all consumed by government, all do-gooders — some of that led to the decline of their civilizations,” he said, describing the scenario in lurid detail:

BECK: So, do we have hyperinflation with this scenario?

MOORE: Could be. I mean, that’s happened — in some countries, hyperinflation gets so bad, Glenn, that people have to go to the shopping stores literally with wheelbarrows full of their currency. In some countries, that people don’t even use the currency. In other countries, they print the currency but they don’t put the denomination on it because they write it down on the piece of paper.

BECK: Okay.

MOORE: And the currency becomes as valueless as the paper that it is printed on.

MOORE: And why do people buy gold?

(CROSSTALK)

MOORE: Because they don’t think money is worth anything anymore.

GERALD CELENTE: Not worth the paper it’s printed.

MOORE: Right. They don’t think it’s worth anything.

In 2010, Moore was still predicting hyperinflation and urging his audience to buy gold. Even by 2015, Moore was still urging the Federal Reserve to raise interest rates. “We’ve had seven years of zero interest rates and the lousiest recovery in 75 years,” he said, “So that’s one reason a lot of us feel like it’s time to get off the zero interest rate policy.”

There was no evidence for this position at all. Had Moore’s advice been followed, it would have led to a quick end to the recovery and a deep recession. It did, however, dovetail with the Republican Party’s political imperative of encouraging contractionary fiscal and monetary policy, in order to slow down or strangle the recovery.

Since Donald Trump moved into the White House, the Republican Party has reversed its views on both fiscal and monetary policy. Whereas it had previously deemed deficits and inflation a mortal threat, and called stimulus and lower interest rates counterproductive, the party line now demands both.

Moore has naturally ridden along with this reversal, but what has set him apart is the fervency with which he has embraced the volte-face. He has insisted on television that the economy is experiencing deflation, and when corrected by panelist Catherine Rampell on this unambiguous error of fact, refused to give ground. He has called for firing the Federal Reserve chairman as well as firing the entire Federal Reserve board.

Mooore’s current ultra-dovish stance is hardly anywhere near as ridiculous as his previous ultra-hawkish stance. The problem is that he has no grasp of the policy, and simply follows whatever line helps the Republican Party. While the internal workings of his mind remain a matter of speculation, I doubt he is consciously venal enough to tailor his thinking explicitly to partisan goals. Rather, Moore has extremely strong partisan instincts and extremely limited analytical skills. The combination results inevitably in the latter giving way to the former. He should not be permitted any position of serious responsibility, in government or anything else.

http://nymag.com/intelligencer/2019/03/stephen-moore-federal-reserve-trump.html

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Trump Takes a Rare Presidential Swipe at the Fed
By Jim Tankersley
July 19, 2018

WASHINGTON — President Trump criticized the Federal Reserve on Thursday for raising interest rates, a rare rebuke by a sitting president that upends longstanding White House protocol to avoid commenting on monetary policy.

Mr. Trump, in an interview with CNBC set to air on Friday morning, said that he was “not thrilled” about the Fed’s decision to raise interest rates twice so far this year, to a current range of 1.75 to 2 percent. He implied that the moves, which are aimed at getting interest rates back to historically normal levels, could derail his administration’s efforts to bolster the economy and put the United States at a disadvantage.

“I don’t like all of this work that we’re putting into the economy and then I see rates going up,” Mr. Trump said, according to excerpts released by CNBC. “I am not happy about it.”

The highly unusual comments come as Mr. Trump and Republicans try to make a booming economy a big issue in the midterm elections this year. At a White House event on Thursday, Mr. Trump — flanked by executives from some of the biggest companies in the country — announced a worker retraining program that he said would further goose employment. On Capitol Hill, Republican lawmakers are trying to pass a second round of tax cuts that would make permanent many of the individual cuts in last year’s $1.5 trillion package.

But as the economy finally gains steam after years of sluggish growth in the wake of the Great Recession, the Fed is facing a delicate political and economic balance. Unemployment is at an 18-year low. Inflation is running above the Fed’s 2 percent target. Gross domestic product growth could hit 3 percent this year, which would be the best rate in more than a decade, and growth for the second quarter is estimated to be as high as 5 percent when the numbers are released on Friday morning.

If the Fed raises rates too quickly, it risks slowing growth at a time when wages have stagnated for most American workers, after accounting for inflation. But if it raises rates too slowly, some Fed officials fear the economy could “overheat” and ignite a rapid spiral of price increases that could eventually prompt a recession. Historically, presidents have preferred lower rates, because faster economic growth typically helps incumbents win re-election.

Indeed, during his presidential campaign, Mr. Trump accused the Fed of getting political, saying that the bank’s chairwoman at the time, Janet L. Yellen, should be “ashamed” for keeping interest rates low — a move he said was meant to help President Barack Obama.

The Fed is on track to raise rates twice more this year, for a total of four increases in 2018, after cutting them to near zero in the wake of the financial crisis. The chairman of the Fed, Jerome H. Powell, has continued to express confidence that the United States economy is strong enough to handle higher borrowing rates. Typically, a period of economic expansion is the exact moment when a central bank seeks to raise rates, to keep price growth in check — and in part to maintain firepower to lower borrowing costs during the next economic downturn.

Larry Kudlow, who leads the National Economic Council, said on Thursday that Mr. Trump’s comments were not unusual in historical context.

“Lots of people talk about the Fed. That doesn’t mean they’re jawboning them,” Mr. Kudlow said, adding that the president was not “in any way, shape or form trying to influence the Fed or undermine its independence.”

Former White House officials said Mr. Trump’s words could backfire by building pressure on Fed officials to demonstrate political independence.

“Likely result of Presidential intervention is higher rates as Fed needs to assert its independence,” Lawrence H. Summers, a top economic official in the Obama and Clinton administrations, said Thursday on Twitter. “That is part of the reason why wise Presidents respect Fed independence.”


Lawrence H. Summers
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Attacking central bank is one more step in what seems like a Presidential strategy of turning the United States into a banana republic.

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It is not the first time that Mr. Trump and members of his administration have broken economic policy protocols. The president tweeted about the monthly jobs report shortly before its release on June 1, hinting that it would be strong. Steven Mnuchin, the Treasury secretary, moved currency markets in January when he said a weak dollar could help the United States in trade.

In his interview with CNBC, Mr. Trump said that rising rates were putting the United States at a disadvantage with its trading partners, including Japan and the European Union, which have kept their own interest rates near zero as the Fed has increased rates. The rate hikes have contributed to a strengthening of the dollar in recent months, which allows Americans to more easily buy imported goods and services. That can widen the trade deficit, a metric that Mr. Trump believes indicates weakness in the American economy.

Mr. Trump also seemed to suggest he would not try to meddle in the Fed’s affairs, saying “I’m letting them do what they feel is best.” He also called Mr. Powell, whom he nominated as Fed chairman last year, “a very good man.”

Mr. Trump said that he understood he was breaking with that protocol, but that he did not care.

“Now I’m just saying the same thing that I would have said as a private citizen,” he said. “So somebody would say, ‘Oh, maybe you shouldn’t say that as president.’ I couldn’t care less what they say, because my views haven’t changed.”

Presidents have no direct authority over interest rate decisions, only the power to appoint some of the Fed members that set those rates.

While there have been some instances in the past of presidents weighing in on monetary policy, those have been rare. Independence from presidential criticism has long been a hallmark of the Fed’s existence, and a contributor to its ability to maintain monetary policy that aims to keep inflation stable and the economy running at maximum employment.

A Fed spokesman declined to comment on Thursday. The two most recent past leaders of the Fed, Ms. Yellen and Ben S. Bernanke, also declined to comment.

Mr. Powell has said repeatedly that the president has not attempted to interfere with the Fed’s policy decisions and would have no success if he tried.

“Let me just say I’m not concerned about it,” Mr. Powell told the Marketplace radio program in an interview last week. “We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns.”

Asked about possible White House displeasure over rate increases at his inaugural news conference in March, Mr. Powell responded: “No. That doesn’t keep me awake at night. We don’t consider the election cycle.”

Mr. Trump has nominated five members to the Fed board, including Richard Clarida, a Columbia University economist who is awaiting confirmation by the Senate on his appointment as vice chairman, and Michelle W. Bowman, the Kansas banking commissioner, who has been nominated for a seat reserved for community bankers. Both pledged to carry out their jobs free of political interference during their confirmation hearings, and Mr. Clarida said that the president had “absolutely not” indicated a preference for how he should vote on interest rate decisions.

But one of the candidates Mr. Trump considered for chairman, the former Fed governor Kevin Warsh, said on a Politico podcast this year that during an interview for the position, the president had made his opinions on interest rate policy clear.

“If you think it was a subject upon which he delicately danced around, then you’d be mistaken. It was certainly top of mind to the president,” Mr. Warsh said. Later, he added: “In some sense the broader notion of an independent agency, that’s probably not an obvious feature to the president.”

Mr. Warsh said on Thursday that he was too busy to discuss Mr. Trump’s CNBC comments.

The most recent presidents to openly pressure a Fed chairman to keep interest rates low, to lift growth, were George Bush and Richard M. Nixon.

“I respect his independence,” Mr. Nixon said of the chairman at the time, Arthur F. Burns, at his swearing-in at the White House in 1970. “However I hope that independently he will conclude that my views are the ones that should be followed.” Mr. Nixon continued, “That’s a vote of confidence for lower interest rates and more money.”

His aides would later seek to undermine Mr. Burns, including by spreading a story that he had sought a big pay increase at a time he was urging lower pay hikes. Mr. Burns later wrote in his diary of Mr. Nixon, “I knew that I would be accepted in the future only if I suppressed my will and yielded completely — even though it was wrong at law and morally — to his authority.”

In the administrations of Ronald Reagan and Mr. Bush, there were efforts to influence the Fed chairmen Paul Volcker and Alan Greenspan, though those tended to be more subtle.

Nicholas F. Brady, Treasury secretary to Mr. Bush, privately urged Mr. Greenspan to lower interest rates in spring and summer 1991, as Mr. Greenspan’s reappointment as Fed chairman was being weighed.

However, upon being reappointed, Mr. Greenspan did not lower rates as much as the Bush administration preferred. Mr. Bush would later blame Mr. Greenspan for his election loss in 1992, which occurred in the aftermath of a recession.

“I reappointed him, and he disappointed me,” Mr. Bush said in a television interview in 1998.

Neil Irwin contributed reporting.

https://www.nytimes.com/2018/07/19/business/trump-fed-interest-rates.html

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Fed Officials Say Economy Is Ready for Higher Rates
By BINYAMIN APPELBAUMFEB. 21, 2018

WASHINGTON — Robust economic growth has increased the confidence of Federal Reserve officials that the economy is ready for higher interest rates, according to an official account of the central bank’s most recent policymaking meeting in late January.

The Fed did not raise its benchmark interest rate at the meeting on Jan. 30 and 31, but the account reinforced investor expectations the Fed would raise rates at its next meeting in March.

The account said Fed officials have upgraded their economic outlooks since the beginning of the year and listed three main reasons: The strength of recent economic data, accommodative financial conditions and the expected impact of the $1.5 trillion tax cut that took effect in January.

“The effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought,” said the meeting account, which the Fed published Wednesday after a standard three-week delay.

The Fed is seeking to raise rates gradually to maintain control of inflation without impeding an economic expansion that is nearing the end of its ninth year, one of the longest stretches of continuous economic growth in American history.

A wave of turbulence passed through global equity markets in the days after the Fed’s January meeting. The government reported an unexpected increase in wages, and investors worried the Fed would respond by raising rates a little more quickly. Then Congress passed a plan increasing government spending, tossing more logs onto the fire.

So far, however, Fed officials have treated the stronger economic news as a reason to carry out their plans for gradual rate hikes, rather than as a reason to start raising rates more quickly. Most Fed officials predicted in December the Fed would raise rates three times in 2018, as it did last year.

“If the economy evolves as I anticipate, I believe further increases in interest rates will be appropriate this year and next year, at a pace similar to last year’s,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said this month.

In the policy statement the Fed issued after the January meeting, the central bank outlined its approach to raising rates, saying it “expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.”

The meeting account said the addition of the word “further” in that statement reflected the increased confidence among officials that the Fed would continue raising rates.

Jesse Edgerton, an economist at JPMorgan Chase, said the Fed’s increased confidence was likely to translate eventually into more interest rate increases than the three Fed officials predicted.

“We think increased confidence in the need for further hikes will accompany a perceived need for more than three hikes among a growing portion of the committee,” he wrote Wednesday.

And the minutes did suggest the Fed might eventually raise rates to a level higher than financial markets presently anticipate. Fed officials predicted in December that the Fed’s benchmark rate would come to rest around 2.8 percent, well below its precrisis level. The rate is currently in a range between 1.25 percent and 1.5 percent.

At the January meeting, some Fed officials raised the possibility that the strength of economic growth might raise that ceiling. The Fed would welcome such a development, because it would preserve more room to reduce rates in future downturns.

The persistent question mark is inflation. The Fed aims to keep prices rising at an annual rate of 2 percent, but it has consistently fallen short of that goal since the end of the last recession in 2009.

The minutes said the Fed has gained some confidence in its prediction that inflation will rise toward 2 percent. The economy continues to gain strength, and the minutes said a decline in the foreign exchange value of the dollar was also likely to put upward pressure on inflation. Lower exchange rates translate into higher prices for imported goods.

But the Fed has made the same predictions repeatedly, without success, and the minutes said the Fed intends to raise rates slowly as it continues to watch inflation closely. Some officials argue that the Fed should stop raising rates until inflation shows clear signs of revival.

The Fed has good reason for its uncertainty about inflation: It lacks a convincing explanation of what causes inflation, or a model that accurately predicts future inflation.

In a presentation at the January meeting, economists on the Fed’s staff told policymakers that the most popular explanations had significant flaws. One class of theories says inflation is produced by excess demand for available resources. This suggests inflation should rise as growth approaches its natural speed limit, a pattern that can be seen in some historical data but is difficult to find in recent decades. Another class of theories argues, with some circularity, that inflation is determined by expectations about inflation. It is not clear, however, how those expectations are formed.

The account said that “almost all” Fed officials responded by expressing a continued commitment to both theories. They said they intended to raise interest rates as the economy gains strength, and to seek to maintain public confidence in the 2 percent inflation target.

The January meeting was the final meeting for Janet L. Yellen, who concluded her four-year term as the Fed’s chairwoman in early February. Her successor, Jerome H. Powell, is scheduled to make his public debut when he testifies before House and Senate committees next week.

https://www.nytimes.com/2018/02/21/business/economy/fed-economy.html?

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Boston Fed’s President Makes Case for Interest Rate Hikes
By BINYAMIN APPELBAUMOCT. 16, 2017

BOSTON — Eric Rosengren, president of the Federal Reserve Bank of Boston, was a leading advocate for the Fed’s economic stimulus campaign after the financial crisis. Lately, he has been equally outspoken in arguing that the Fed must continue to raise its benchmark interest rate even though inflation remains sluggish.

Mr. Rosengren, perhaps the Fed official whose views most reliably approximate those of Janet L. Yellen, the Fed chairwoman, argues that inflation will rebound as unemployment continues to fall. He also argues that raising rates slowly could prolong the economic expansion by averting any need to raise rates quickly.

In an interview on Saturday at the Boston Fed’s annual conference, Mr. Rosengren said he favored raising the Fed’s benchmark rate later this year, and that the rate should rise to about 2 percent by the end of 2018.

The conversation began on a broader subject: Policy rules. Republicans want the Fed to adopt a formula for moving interest rates up and down. Randal Quarles, sworn in Friday as the Fed’s vice chairman of supervision, favors that approach. So do some of the candidates to become the Fed’s next chairman.

The transcript has been edited for length and clarity.

Q. You opened this conference by offering your own judgment on policy rules, saying they should essentially be used as benchmarks and guidelines, but that it would be a mistake for the Fed to choose a rule and follow it.

A. A number of papers at the conference highlighted that some of the economic relationships that are frequently assumed to be stable over time have proven to be not so stable as we have come out of the financial crisis. These structural changes mean that if you tried to have a model that was fairly invariant to these changes, or a process that was invariant to these changes, there would start being big misses in monetary policy.

So I think a more flexible approach, that thinks about not one particular rule but a lot of rules, and does ask ‘Are we behaving quite differently than we have historically? And, if so, why?’” — I think that’s a good discussion to have. We should have it with the public; we should have it with each other.

Q. On the other hand, you argued in a recent speech the Fed has put too much emphasis on short-term fluctuations when adjusting long-term estimates, like the natural rate of unemployment.

A. So assuming it’s a constant is not good and assuming that it moves too much is not good. That’s where judgment comes in. I would say particularly the natural rate of unemployment has tended to go up when we’ve had high unemployment rates and go down when we’ve had low unemployment rates. And that’s the situation we’re in right now, where the unemployment rate is at 4.2 percent and people’s estimate of the natural rate has been coming down. I think if you look back over time those frequently are mistakes — that we move too much. That doesn’t mean you shouldn’t move, but it shouldn’t change abruptly and substantially over a short period of time.

Q. The Fed’s sensitivity to those short-term fluctuations are an effort to explain why inflation remains sluggish. You’re rejecting the explanation but not offering an alternative.

A. A mystery is unsatisfying. You always like to have an end to the book. My own view as of now would be that, more than likely, we’re going to find that it’s temporary. We’re seeing wages and salaries go up. That’s consistent with a labor market that’s gotten tight enough that it’s starting to be reflected in wages and salaries. If a year from now you’re at the conference and we’re still undershooting on inflation and wages and salaries went down, then I have to come up with another explanation. I’m not expecting that.

Q. So the Fed should keep raising its benchmark rate?

A. If at the end of the next year we were at the point where inflation was around 2 percent and the unemployment rate was below 4 percent, I’d be concerned if we hadn’t moved to remove accommodation.

Q. It’s hard to know what to make of the Fed’s forecasts given that the central bank’s leadership could change completely in the next few months.

A. Chairs do matter. But it is a committee that’s making this decision. I wouldn’t expect a dramatic divergence from what we’ve been doing over the recent period. The staff stays the same, the presidents stay the same. We’ll have some new governors but I would be surprised if there are dramatic shifts in what we’re doing. I think it’s more likely we would see changes over time if there was somebody that had a different view about what we should be doing, and other governors with that same view came onto the committee. But I agree it’s harder to forecast what monetary policy will be when you don’t necessarily know who the chair or some of the governors will be in key slots, including the vice chair.

Q. Where should the interest rate be at the end of 2018?

A. If the data comes in as I’m expecting, that would be consistent with having something much closer to 2 percent on the federal funds rate.

Q. And that march toward 2 percent with a rate hike by the end of 2017?

A. Unless the data turns out otherwise, based on what I’m expecting I would think that a rate increase by the end of the year would be appropriate.

Q. Would you oppose a more rapid change in the course of monetary policy?

A. As long as inflation is below our 2 percent target there’s no reason to move quickly.

Q. Mr. Quarles says he wants to relax some financial regulations imposed after the 2008 crisis. Does that concern you?

A. There are areas that I could pull back in and areas that I would certainly not want to pull back in. Areas in which I think assessment is probably warranted: The Volcker Rule is a pretty cumbersome rule. Some fresh eyes looking at that actually makes sense.

I would say over all I wouldn’t want to see the capital ratios of our largest institutions go down. So I’m quite supportive of having a very well capitalized banking system that is resilient. I think the stress tests are a key component of that. It’s a fairly significant process that’s expensive for both the Federal Reserve and banks, so I think looking at ways that we could make that process go more smoothly I think is worth thinking about. But the overall idea of making sure that our banks are resilient to very significant stresses that may change over time is, I think, a key component of changes in supervision that we should keep.

If Congress cuts taxes, should the Fed raise rates more quickly?

It depends on the nature of what actually gets changed. If you can credibly believe that the productive capacity of the country is going to change as result of the way they do the tax cuts, you might view that as a positive. If you have a lot more workers coming back into the labor force and you have firms that are doing a lot more capital investment, that’s a situation where there’s some very big positive spillovers from the change in the policy. But you can easily imagine something that doesn’t do either of those, in which case I would be more concerned that it would be adding to aggregate demand, which seems strong enough now.

https://www.nytimes.com/2017/10/16/us/politics/federal-reserve-interest-rates.html?

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Yellen rejects Trump approach to Wall Street regulation, says post-crisis banking rules make economy safer
By Damian Paletta August 25 at 10:00 AM

Jackson Hole, Wyo. — Federal Reserve Chairwoman Janet L. Yellen offered a forceful defense of broad new banking regulations enacted after the 2008 financial crisis, saying the rules safeguard the economy against another crisis and rejecting assertions from President Trump and top aides that they should be rolled back.

Yellen’s speech, delivered here to an annual gathering of central bankers, finance ministers and economists, comes as Trump considers whether to reappoint her to a four-year term as head of the U.S. central bank.

Yellen, 71, made clear in her speech on Friday that she believes tighter regulations and standards have made the banking system safer and that while some improvements could be made, they should be modest, not structural.

“The evidence shows that reforms since the crisis have made the financial system substantially safer,” Yellen said, according to prepared remarks.

[Trump’s economic adviser says president ‘must do better’ to denounce white nationalism]

Trump has waffled on whether he would renominate Yellen to the post. She was first nominated by President Barack Obama for the four-year term, after having served as president of the Federal Reserve Bank of San Francisco. Trump has said he likes her cautious approach to raising interest rates, but declaring her opposition to rolling back new banking rules could put a wide chasm between her and the White House.

There are numerous banking regulators that have input in how the financial system is overseen, but none are as powerful or as influential as the head of the Fed.

Yellen’s speech comes just hours after the Financial Times published an interview with Gary Cohn, Trump’s top economic adviser, in which he openly criticized the way Trump handled violence carried out by neo Nazis and white supremacists in Charlottesville.

Cohn was also considered a front-runner for the Fed chairman post, and the separate decisions by Cohn and Yellen to distance themselves from Trump could mean that neither is interested in cozying up to him as a way to try to get the nomination.

Yellen’s speech reflected on the government’s response to the Great Recession.

A financial crisis in 2008 and 2009 caused a global panic, with some of the world’s largest financial companies wobbling or toppling and the U.S. government injecting hundreds of billions of dollars into the financial system to prevent a collapse. Large financial companies were interconnected and had amassed large amounts of risk without cushions to absorb losses or access to cash to prevent bank runs.

Banks and financial companies were chasing profits by making loans to people who lacked the ability to repay, at times falsifying documents and betting on the false premise that the housing market would continue to soar. As the banking system began to falter, consumers panicked, the stock market crashed, hundreds of thousands of Americans lost their jobs, and the U.S. and many other economies went into recessions.

In 2008, the Bush administration and Congress passed a law that allowed the government to inject money into the banking system to try to arrest the crisis. In 2010, the Obama administration and Congress passed a law that imposed new consumer protection rules, required banks to hold bigger cushions against losses, put new limits on their ability to take risk, tried to establish a process to help wind down large financial companies.

Trump has said these changes went too far, calling the law a “disaster” that has made it hard for consumers and businesses to access credit and restricted economic growth. One of his arguments, supported by many banks, is that requiring banks to hold more capital to cushion against losses makes it harder for them to lend money.

Yellen addressed these criticisms head-on in her speech, saying that research is mixed but that Fed officials believe there were “sizable net benefits to economic growth from higher capital standards.”

She acknowledged, though, that some borrowers could see a decrease in access to loans because of the new rules.

“While material adverse effects of capital regulation on broad measures of lending are not readily apparent, credit may be less available to some borrowers, especially home buyers with less-than-perfect credit histories and, perhaps, small businesses,” she said.

She added that the Fed, one of the nation’s bank regulators, is taking steps to ease regulatory complexity that small banks face to help more small businesses obtain loans.

Yellen did not say in her speech whether she was interested in being appointed to another term. She also didn’t comment specifically on Trump or any conversations she has had with him.

https://www.washingtonpost.com/news/wonk/wp/2017/08/25/yellen-rejects-trump-approach-says-post-crisis-banking-rules-make-economy-safer/?hpid=hp_hp-top-table-main_yellen-1015a%3Ahomepage%2Fstory&utm_term=.259495976cdf

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If Janet Yellen Goes, the Fed’s Current Policy May Go With Her
By BINYAMIN APPELBAUMAUG. 24, 2017

GRAND TETON NATIONAL PARK, Wyo. — Liberal activists who stage an annual protest in favor of lower interest rates at the Federal Reserve’s annual conference here are planning a different kind of demonstration this year. They plan to don “Yellen wigs” on Friday to demonstrate in support of Janet L. Yellen, the Fed chairwoman, whose first term ends in February.

President Trump must soon decide whether to renominate Ms. Yellen or pick someone similarly inclined to emphasize economic growth. Or, instead, he could accede to the wishes of many conservatives for a Fed chairman more worried about inflation.

The looming decision is injecting an element of uncertainty into monetary policy after years of relative stability. Ms. Yellen continued the aggressive economic stimulus campaign that was launched by her predecessor, Ben S. Bernanke, during the financial crisis that began 10 years ago, and she has moved slowly to end it.

Gene B. Sperling, the former director of President Barack Obama’s National Economic Council, said the choice was a “fascinating test” for Mr. Trump, pitting conservative ideology against “the stark reality of politicians worried about how the economy performs.”

The approaching fork in the road is likely to be a major topic of conversation as Fed leaders, central bankers from other countries and academic economists gather in Grand Teton National Park on Friday and Saturday for an annual policy conference.

The basic question nearly everyone is asking is how quickly the Fed will raise interest rates.

The Fed already has raised its benchmark rate twice this year, to a range of 1 percent to 1.25 percent. Officials are debating whether to raise rates for a third time, but no decision is expected before the final meeting of the year in December.

That would leave the benchmark rate at a level Fed officials regard as neutral. Low rates increase economic growth by encouraging borrowing and risk-taking, while high rates weigh on economic growth by reducing those activities.

Mr. Trump has said that he is considering another term for Ms. Yellen. But Gary D. Cohn, the director of his national economic council, is also a candidate. Ms. Yellen has not commented on her own plans, beyond committing to serve out her term.

Mr. Trump has not named other candidates, but likely possibilities for any Republican president include Kevin Warsh, a former Fed governor; John B. Taylor, an economist at Stanford University; and Glenn Hubbard, an economist at Columbia University.

Mr. Trump has sent mixed signals about his priorities. In public comments, he has repeatedly described himself as a lover of low interest rates. But last month, he nominated Randal K. Quarles, a financial industry executive who has advocated the Fed to raise interest rates more quickly, as the Fed’s vice chairman for supervision.

The Trump administration also plans to nominate Marvin Goodfriend, a Carnegie Mellon University economist who is an even more outspoken critic of the Fed’s stimulus campaign, to an open seat on the Fed’s board.

Regulatory issues may prove an even more important consideration. Mr. Trump wants to relax some of the restrictions placed on the financial industry in the wake of the 2008 crisis. Ms. Yellen has agreed that there is room for improvement, but she has cautioned against any significant reduction in regulation.

Ms. Yellen is scheduled to speak here about financial regulation on Friday morning.

Mr. Cohn has rarely spoken publicly about his views on monetary policy, but he is a key adviser to Mr. Trump on the administration’s plans to cut financial regulation.

In addition to criticism from conservatives, Ms. Yellen also has faced criticism from liberals who argue that the Fed is moving too quickly to raise rates.

Fed Up, a coalition of liberal groups, has made a tradition of bringing protesters to the Jackson Hole conference to press for more stimulus, and it staged a teach-in on Thursday to emphasize that the economic recovery remains incomplete.

“Let’s not prematurely choke off this recovery,” Susan Helper, an economist at Case Western Reserve University, told the activists gathered outside the conference hotel.

But this year, the group is less concerned about what Ms. Yellen might do, and more concerned about someone else taking her place.

Mr. Sperling, who also addressed the protesters, compared Ms. Yellen to Jim Harbaugh, the University of Michigan football coach who has improved the performance of that program but not yet beaten its archrival Ohio State.

“The Bernanke and Yellen Fed do deserve praise for very expansive and creative monetary policy and that there has been real policy since 2010,” Mr. Sperling said. “We should also equally recognize it doesn’t mean things are good enough.”

The choice confronting Mr. Trump parallels the Fed’s internal policy debate.

Inflation remains persistently sluggish. The Fed aims for 2 percent annual inflation, and it expects to miss that target for the fifth-straight year. Some Fed officials want to wait for evidence that inflation is rebounding before raising rates again.

Most officials, however, see the low level of unemployment as a sufficient reason for confidence that inflation will rebound. “I think we should continue with the gradual rate path,” Esther L. George, president of the Federal Reserve Bank of Kansas City, which hosts the annual monetary policy conference here, told CNBC. “While we haven’t hit 2 percent, I’m reminded that 2 percent is a target over the long term, and in the context of a growing economy, of jobs being added, I don’t think it’s an issue that we should be particularly concerned about unless we see something change.”

Both Mr. Bernanke and Ms. Yellen were nominated in October, but there is little sign that the Trump administration is moving toward a quick decision. Mr. Trump had told The Wall Street Journal that he plans to make a decision by the end of the year.

That would leave relatively little time for the person selected by Mr. Trump to be questioned and confirmed by the Senate before Ms. Yellen’s term ends in February.

https://www.nytimes.com/2017/08/24/us/politics/if-janet-yellen-goes-the-feds-current-policy-may-go-with-her.html?

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Richmond Fed President Resigns, Admitting He Violated Confidentiality
By BINYAMIN APPELBAUM
Jeffrey M. Lacker, the president of the Federal Reserve Bank in Richmond, said on Tuesday that he confirmed information about internal deliberations in a 2012 conversation.

https://www.nytimes.com/2017/04/04/business/lacker-leak-fed.html?ref=business

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Fed’s Proponent for Regulation to Depart, Leaving 3 Vacancies
By BINYAMIN APPELBAUMFEB. 10, 2017

WASHINGTON — Daniel K. Tarullo, the Federal Reserve official who led its efforts to strengthen financial regulation over the last eight years, announced on Friday that he planned to leave the central bank in early April.

With Mr. Tarullo’s resignation, there will be three vacancies on the Fed’s seven-seat board, providing an opportunity for President Trump to start reshaping the Fed’s approach to monetary policy and to the regulation of the financial industry.

The Trump administration and congressional Republicans are pressing for the Fed and other financial regulators to reduce the constraints on financial institutions imposed in the aftermath of the 2008 financial crisis.

Mr. Tarullo offered no explanation for his departure in a terse, two-sentence letter to Mr. Trump. But eight years is an unusually long tenure for a Fed governor — many leave after just two or three — and people who know Mr. Tarullo said that in recent years he had become increasingly worn down by the job.

Daniel K. Tarullo, a Star at the Fed JUNE 3, 2010
DEALBOOK

After Mr. Trump’s victory, some Democrats privately urged Mr. Tarullo to remain in place for at least another year, but they did not convince him.

In an interview on Friday, Mr. Tarullo said that he was proud of the progress made over the last eight years in strengthening financial regulation, particularly of the largest financial institutions.

“I think everybody that has been working on this can take some satisfaction in how much has changed,” he said.

Mr. Tarullo also said he was optimistic that what he regarded as the most important changes were likely to endure.

“I do think that the core changes, with respect to the biggest institutions in particular, which is increased capital, stress testing, liquidity requirements, increased risk-management expectations and a feasible resolution regime — I think that those are both very important, and I believe durable,” he said.

The “resolution regime” refers to rules for unwinding a large financial institution that fails.

Mr. Tarullo acknowledged that congressional Republicans want to rewrite portions of the 2010 Dodd-Frank Act, and he said that he favored some changes, particularly easing the burden of regulation for smaller institutions.

Democrats publicly saluted Mr. Tarullo. Michael S. Barr, a top Treasury official in the Obama administration, described him as “a hero of financial reform.”

Dennis M. Kelleher, chief executive of Better Markets, a group that sometimes clashed with Mr. Tarullo because it wanted stricter regulations, said that he worried about Mr. Trump’s plans for a replacement.

“I’ve got a black armband on,” Mr. Kelleher said. “Anybody who cares about protecting the American people from another financial crash should be very worried merely from the statements President Trump has made and the people he has surrounded himself with.”

Republicans, by contrast, were eager to wrest regulatory control from Mr. Tarullo.

Representative Patrick McHenry, Republican of North Carolina, wrote an open letter last month to Janet L. Yellen, chairwoman of the Fed, blasting the agency for pursuing an unaltered regulatory agenda since Mr. Trump’s election. Mr. McHenry, the vice chairman of the House Financial Services Committee, demanded that the Fed wait until Mr. Trump’s appointees take over.

“It is incumbent upon all regulators to support the U.S. economy,” Mr. McHenry wrote in the letter, dated Jan. 31. “Accordingly, the Federal Reserve must cease all attempts to negotiate binding standards burdening American business until President Trump has had an opportunity to nominate and appoint officials that prioritize America’s best interests.”

Mr. Trump has no direct control over the Fed. Immediately upon taking office, he issued an executive order freezing regulatory work in the executive branch, but the order does not apply to independent agencies like the Fed.

Senate Republicans preserved two board vacancies by refusing to vote on nominees recommended by President Obama, the same strategy they employed to hold a seat on the Supreme Court. Now Mr. Trump will be able to fill the third of seven seats almost as quickly.

That could give Republicans four of the seven seats on the Fed’s board. In 2012, in an effort to conciliate Senate Republicans, Mr. Obama appointed a Republican governor, Jerome H. Powell.

Mr. Trump could also replace Ms. Yellen as chairwoman when her term ends in February 2018, although she could choose to remain on the board.

Regulations mandated by law cannot be erased by the Fed, but the central bank has amply demonstrated in recent decades that indifferent enforcement serves the same purpose. Mr. Tarullo was a proponent of vigorous enforcement; under his leadership, the Fed asserted greater control over the regulators who worked at the Fed’s 12 regional reserve banks. The Trump administration, by contrast, has expressed sympathy with industry complaints over that approach.

Mr. Tarullo, an early supporter of Mr. Obama’s 2008 presidential campaign, joined the Fed in January 2009, when he assumed responsibility for overhauling the Fed’s approach to regulation. He was particularly influential in pushing for higher capital standards that require banks to obtain a larger share of their funding from investors, reducing reliance on borrowed money.

In 2010, the Dodd-Frank Act created a new position at the Fed, a vice chairman for regulation. The Obama administration, judging that the Senate would not confirm Mr. Tarullo, chose to leave the position unfilled, allowing Mr. Tarullo to perform the work without the title.

The Trump administration has begun a search for candidates for that position. Among those under consideration is David Nason, a former Treasury Department official who is now an executive at General Electric, according to a person familiar with the search.

https://www.nytimes.com/2017/02/10/us/politics/daniel-tarullo-federal-reserve.html?ref=business

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Fed, With 3 Officials in Dissent, Stands Firm on Interest Rates While Noting Improving Economy

By BINYAMIN APPELBAUM

Three members of the central bank’s 10-member policy-making group voted to raise rates. Most officials said that they still expected to raise rates before the end of the year.

http://www.nytimes.com/2016/09/22/business/economy/fed-interest-rates-yellen.html?ref=business

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Nation’s Biggest Banks Would All Withstand Recession, Fed Says

By NATHANIEL POPPER and MICHAEL CORKERY

In its annual stress tests, the Fed looked at how America’s 33 largest banks would do in a recession with sustained high unemployment and negative interest rates.

http://www.nytimes.com/2016/06/24/business/dealbook/nations-biggest-banks-would-all-withstand-recession-fed-says.html?ref=dealbook

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Janet Yellen Hints That Fed May Hold Back on Raising Interest Rates

By NELSON D. SCHWARTZ

The central bank chairwoman told senators that data on the labor market and the weak pace of investment indicated that domestic demand “might falter.”

http://www.nytimes.com/2016/06/22/business/economy/janet-yellen-federal-reserve-interest-rates-senate-testimony.html?ref=dealbook

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Janus's Bill Gross: 'Helicopter money' is coming in a year or so
By Jennifer Ablan
Reuters
May 4, 2016

NEW YORK (Reuters) - The next big monetary and fiscal policy move should include an airdrop of "money from helicopters" to stimulate the U.S. economy and avoid an extended recession, says Bill Gross, a portfolio manager at Janus Capital Group Inc <JNS.N>.

Gross may not be entirely serious about "helicopter money," but in his latest Investment Outlook note published Wednesday, he said the Federal Reserve and U.S. Treasury should engage in another round of quantitative easing (QE), printing trillions of dollars to buy government bonds and thereby boost the economy.

"Drop the money from helicopters," wrote Gross, manager of the $1.3 billion Janus Global Unconstrained Bond fund.

"There is a rude end to flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die."

"Helicopter money" is an idea made popular by the American economist Milton Friedman in 1969, when he suggested that dropping money out of helicopters for citizens to pick up was a sure way to restart the economy and effectively fight deflation.

Gross noted that the Federal Reserve, the European Central Bank, Bank of Japan, and the Bank of England have effectively bought bonds from their governments for six years and allowed them to spend money to support their sagging economies.

"They buy the bonds by printing money or figuratively dropping it from helicopters, expanding their balance sheets in the process," said Gross.

"They then remit any net interest from their trillions of dollars or yen bond purchases right back to their Treasuries. The money in essence is free of expense and free of repayment as long as the process continues uninterrupted."

Gross said he believed central banks would print more helicopter money via QE "perhaps even in the U.S. in a year or so and reluctantly accept their increasingly dependent role in fiscal policy."

Such a move would allow governments to focus on infrastructure, health care, and introduce a "universal basic income" for displaced workers amongst other increasing needs.

Overall, Gross said the renewed QE from the Fed would lead to a less independent central bank, and a more permanent mingling of fiscal and monetary policy that has been in effect for over six years now.

"Chair (Janet) Yellen and others will be disheartened by this change in culture," he said.

Gross said interest rates will stay low for longer, asset prices will continue to be artificially high, and at some point monetary policy will create inflation and markets will be at risk. He also said investors should be content with low single-digit returns.

https://www.yahoo.com/news/januss-bill-gross-helicopter-money-coming-115359821--sector.html?ref=gs

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IMF Warns Fed Should Delay Rate Hike Until 2016
By REUTERSJUNE 4, 2015, 9:37 A.M. E.D.T.

WASHINGTON — The U.S. Federal Reserve should delay a rate hike until the first half of 2016 until there are signs of a pickup in wages and inflation, the International Monetary Fund said in its annual assessment of the economy on Thursday.

The fund's report comes amid signs that some rate setters at the U.S. central bank are also pushing for rate hikes to be delayed until there are clearer signs of a sustained recovery. U.S. data has been mixed and the economy shrank 0.7 percent in the first quarter.

"Based on the mission’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016," the fund said.

Fed chair Janet Yellen has insisted the economy remains on track and that a rate rise this year is on the cards, although others including Fed governor Lael Brainard, viewed as a centrist on the rate-setting committee, have raised concerns over growth.

The fund forecast that the Fed's favored measure of inflation, the personal consumption expenditures (PCE) reading, would hit the central bank's 2 percent target only in mid-2017.

"A later lift-off could imply a faster pace of rate increases following lift-off and may create a modest overshooting of inflation above the Fed’s medium-term goal (perhaps up toward 2.5 percent)," the Fund said.

"However, deferring rate increases would provide valuable insurance against the risk of disinflation, policy reversal, and ending back at zero policy rates."

The prolonged period of zero interest rates has prompted a hunt for yield in U.S. assets, although the IMF said that at present this had created "pockets of vulnerabilities" rather than "broad-based excesses".

It warned that a migration of financial intermediation to non-banks which are more lightly regulated and the potential for insufficient liquidity in a range of fixed income markets could lead to "abrupt" moves in market pricing.

It called on all the agencies involved in the Financial Stability Oversight Committee, a grouping of regulators, the central bank and government agencies, to have specific financial stability mandates.

"While coordination between agencies has clearly improved, there is a need for greater clarity on the roles and responsibilities for system-wide crisis preparedness and management under the FSOC umbrella."

(Reporting by David Chance; Editing by Chizu Nomiyama)

http://www.nytimes.com/reuters/2015/06/04/business/04reuters-usa-imf.html?src=busln

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Federal Reserve’s Bond-Buying Fades, but Stimulus Doesn’t End There
By BINYAMIN APPELBAUMJUNE 19, 2014

WASHINGTON — THE Federal Reserve is poised to keep purchasing large volumes of mortgage bonds, and potentially Treasury securities too, even after the likely conclusion of its prominent bond-buying program later this year.

It is a prospect that reflects both the breadth of the Fed’s campaign to stimulate the economy — one initiative ending, others still running — and the concern among many Fed officials that the central bank should not pull back too quickly.

The Fed is gradually curtailing the expansion of its enormous portfolio of Treasuries and mortgage bonds, from $85 billion a month last year to $35 billion a month starting in July. It plans to end the expansion by the end of the year.

At the same time, however, the Fed reinvests billions of dollars from maturing securities — about $16 billion each month this year — to maintain the size of its holdings.

The Fed once planned to stop reinvesting, allowing its holdings to dwindle, soon after it ended the expansion of the portfolio. In 2011, the Fed said this would be its first signal that it was winding down the stimulus campaign. But there is growing support among Fed officials to preserve the portfolio’s size instead.

“Ending reinvestments as an initial step risks inadvertently bringing forward any tightening of financial conditions, as this might foreshadow the impending lift-off date for rates in a manner inconsistent with the committee’s intention,” William C. Dudley, the influential president of the Federal Reserve Bank of New York, said last month.

Continuing to reinvest could also help to keep borrowing costs low.

Fed officials generally argue that the effect of bond buying on the economy is determined by the Fed’s total holdings, not its monthly purchases. In this view, reinvestment would preserve the effect of the stimulus campaign.

By contrast, some analysts and academics see the flow of purchases as more important. A 2013 analysis by Arvind Krishnamurthy, an economist at Northwestern University, and Annette Vissing-Jorgensen, an economist at the University of California, Berkeley, found that buying bonds was beneficial, while holding bonds mattered little. In this view, reinvestment would provide a continuing jolt to the economy.

In either case, the benefits would be relatively modest in the short term, because the volume of reinvestment is likely to reach a low point in the next year, even as the Fed’s holdings — now more than $4 trillion — remain at a historic high.

The Fed in recent years has almost completely replaced its inventory of short-term government debt with longer-term securities that do not begin to mature until 2016. It has reinvested just $332 million in Treasuries so far this year, and would need to reinvest just $4 billion in 2015, according to calculations by Lou Crandall, chief economist for Wrightson ICAP, a financial research firm in New Jersey.

Reinvestment of mortgage bonds is also in decline. The Fed received and reinvested about $24 billion a month as borrowers refinanced loans or sold homes in 2013. But as interest rates have ticked upward, prepayments have declined. Reinvestment averaged $16 billion a month during the first six months of 2014, and Mr. Crandall estimates that the volume will stabilize a little below that level next year.

“The numbers are not zero, and it’s still important because they’re very mindful of the signaling effect of their operations,” he said. “But for 2015, it’s largely symbolic.”

That would change, however, in early 2016. Mr. Crandall calculates that $39 billion in Treasuries will mature in February that year, and about $177 billion during the rest of the year. Reinvesting those amounts would have a significant effect, he said.

Among Fed officials, the debate over reinvestment has become a proxy for the broader debate about how quickly the Fed should end its stimulus campaign. The Fed’s chairwoman, Janet L. Yellen, and her allies, including Mr. Dudley, see clear evidence that low borrowing costs can still help to improve the pace of growth, and they have sought to extend the Fed’s stimulus campaign accordingly.

Eric S. Rosengren, president of the Federal Reserve Bank of Boston and a strong proponent of the stimulus, suggested this month that the Fed could taper its reinvestments just as it has gradually slowed the expansion of its portfolio.

“If the economy was substantially stronger or substantially weaker than was expected, the reinvestment program would need adjustment,” he said.

Officials also have come to accept the bond holdings as a fact of life. In 2011, when the Fed first described its exit plans — which at the time it expected to enact much more quickly — officials believed that reducing the Fed’s bond holdings was a necessary step to maintain control of inflation. They now insist other tools will serve the purpose, and that the size of the balance sheet doesn’t really matter.

John Williams, president of the Federal Reserve Bank of San Francisco, said at a news conference last month that the reinvestment issue was simply “not that important” and that changing the policy would just create a distraction.

“My view is that we want to keep the communication as clear as possible,” he said.

Indeed, some officials argue that raising short-term interest rates may be a more important measure to prepare for future downturns than reducing the Fed’s bond holdings.

Already, the current recovery has run longer than the average period of growth between recessions since the Great Depression. And with short-term rates near zero, the Fed has little ability to respond if the economy falters.

“It would be desirable to get off the zero lower bound in order to regain some monetary policy flexibility,” Mr. Dudley said in a speech last month before the New York Association for Business Economics. “In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer.”

http://www.nytimes.com/2014/06/20/business/economy/federal-reserves-bond-buying-fades-but-stimulus-doesnt-end-there.html?ref=business

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Fed's Fisher bashes U.S. politicians for slowing economic growth
Reuters
3 hours ago
By Michael Flaherty

HONG KONG (Reuters) - Political gridlock is slowing U.S. economic growth, impacting the confidence and budgets of businesses across the country, a top Fed official said here on Friday.

Dallas Federal Reserve Bank President Richard Fisher took a swipe at U.S. politicians and their inability to cooperate, and accused them of impeding jobs growth.

In a question and answer session following a speech he gave at the Asia Society on forward guidance, Fisher referred to "our feckless Congress and poor government leadership" needing to get their act together.

"Someone has to provide the incentive to step on the accelerator and move the economy forward. And right now they're stepping on the brakes," he said. "And that's Democrats and Republicans and the lower and the upper house and a president that just don't work together. Until we have that, we will not have the confidence we need to proceed."

Fisher added that if the U.S. had the right fiscal policy, the country would have an "incredibly fast-moving economy".

On the subject of the Fed's projections for the market, Fisher said the U.S. Federal Reserve must avoid being locked into calendar-based policy commitments and instead ensure its forward guidance is flexible enough to allow it to respond to changing conditions.

In his speech, Fisher said he worried that predictable commitments were unsound policy as they could lead to false complacency and market instability.

"I question if it is sound policy to remove all uncertainty or volatility from the market," Fisher, a voting member of the Federal Open Market Committee (FOMC), said in his speech.

"At its worst, I fear calendar-based commitments can lead, perversely, to market instability by encouraging markets to overshoot, as they appear to be doing in some quarters at present," Fisher said.

His stance against specific guideposts was an apparent stab at other Fed officials who have advocated such commitments - an approach the U.S. central bank is backing away from in favour of more qualitative measures.

The market's sensitivity to the Fed's timing forecasts was in full view last month. Stock, bond, and currency markets were hit hard by comments from Fed Chair Janet Yellen that an interest rate hike could follow around six months after the central bank ends its bond-buying stimulus, earlier than investors had expected.

Fisher said based on the current pace of the taper, the Fed's quantitative easing would end in October, and that even after that is done, the central bank's balance sheet would remain "quite large."

The Dallas Fed president said he was on his way to Beijing where he was planning to meet with senior economic officials. Part of the motive of the trip, he said, was to get a better view of the reforms taking place and the impact that would have on China's economic growth.

"My preference is that, ultimately, they (China) have an open capital account, maybe by the time we tighten monetary policy. And that market forces determine the value of their currency," he said.

NO COMMITMENTS

Yellen, like her predecessor Ben Bernanke, has offered the markets forward guidance on policy to try to help people understand the direction and thinking of the Fed.

"Those who think we can be more specific in stating our intentions and broadcasting our every next move with complete certainty are, in my opinion, clinging to the myth that economics is a hard science," Fisher said.

The Fed is currently winding down its quantitative easing, massive asset purchases that pump money into the economy. Monthly bond buying has been cut from $85 billion to $55 billion per month, a figure which Fisher, a long-time policy hawk, said was "still somewhat promiscuous".

(Editing by John Mair and Richard Borsuk)

http://finance.yahoo.com/news/feds-fisher-bashes-u-politicians-080137743.html?l=1

[BullNBear52]

Yellen Wins Backing of Senators to Lead Fed

By ANNIE LOWREY


WASHINGTON — The Senate confirmed Janet L. Yellen as the chairwoman of the Federal Reserve on Monday, marking the first time that a woman will lead the country’s central bank in its 100-year history.

As a Fed official, Ms. Yellen, 67, has been an influential proponent of the Fed’s extraordinary measures to revive the economy, even though interest rates are already close to zero.

But as chairwoman, Ms. Yellen will face the arduous task of overseeing the gradual unwinding of those measures, despite an uncomfortably high unemployment rate of 7 percent and subdued inflation.

During the confirmation process, senators from both sides of the aisle criticized the Fed for not doing enough to aid the economy and help middle-class Americans, and for trying to do too much, thus distorting the markets and risking new bubbles.

“I fear that they are already in way too deep,” said Senator Charles E. Grassley, an Iowa Republican, on the Senate floor, before the confirmation vote. Mr. Grassley questioned how the Fed would pull back on its recent campaign of large-scale asset purchases “without spooking investors,” and whether that might stoke inflation.

Despite those objections, Ms. Yellen won confirmation easily. Ms. Yellen was approved 56 to 26, with many senators kept away from the Capitol by inclement weather.

Nearly a dozen Republicans — including Kelly Ayotte of New Hampshire, Saxby Chambliss of Georgia and Tom Coburn of Oklahoma — crossed the aisle in support of Ms. Yellen. She will be the first Democratic nominee to run the Fed since President Jimmy Carter named Paul Volcker as chairman in 1979.

Still, Ms. Yellen’s was the thinnest margin of Senate approval for a Fed chairman in the central bank’s history. Ben S. Bernanke, the most recent chairman, was confirmed for a second term with 70 yes votes and 30 no votes in 2010.

As a woman, Ms. Yellen will be a rarity among the world’s central bankers, a club dominated by men. “Practically one hundred years to the day from when the Federal Reserve was created, the central bank finally has its first woman president,” said Terry O’Neill, president of the National Organization for Women. “It’s about time.”

Ms. Yellen has been a powerful force in the Fed during the deep recession and sluggish recovery. She has argued for the central bank to provide more clarity to market participants and supported its campaign to soak up trillions of dollars of Treasury and mortgage-backed debt in order to bring down interest rates and spur investors to start spending.

She has also publicly expressed concern over the problems in the American labor market. In particular, she has focused on the persistent high rate of long-term joblessness — which might scar the unemployed even after they find a job, depressing their earnings and even their children’s earnings down the road.

The employment crisis “has imposed huge burdens on all too many American households and represents a substantial social cost,” Ms. Yellen warned in a major speech last year. “If these jobless workers were to become less employable, the natural rate of unemployment might rise,” meaning a higher jobless rate and a less vibrant economy even during good economic times.

Her views have prompted speculation among market participants that Ms. Yellen — long considered a contender for the top position at the Fed — might be a stronger proponent for the Fed’s extraordinary policies than Mr. Bernanke.

But their views have not differed all that much.

In December, Ms. Yellen joined Mr. Bernanke in supporting the Fed’s decision to start tapering its purchases of Treasury and mortgage-backed debt to a pace of $75 billion a month from $85 billion a month. The decision came as new data showed stronger economic growth and a significant drop in the unemployment rate, to 7 percent in November from 7.8 percent a year before.

The Fed’s decision “to modestly reduce the pace of asset purchases at its December meeting did not indicate any diminution of its commitment to maintain a highly accommodative monetary policy for as long as needed,” Mr. Bernanke said in a speech this month, reflecting on his tenure. “It reflected the progress we have made toward our goal of substantial improvement in the labor market outlook.”

The strategic shift will likely dominate the early part of Ms. Yellen’s tenure, which is expected to start on Feb. 1. Fed watchers have warned that withdrawing support from the economy comes with significant risks. Pull back too soon and the economy could face subpar growth; Wait too long and the markets could overheat.

“The Fed will need to exercise caution as it scales back further on its pace of asset purchases,” David J. Stockton of the Peter G. Peterson Institute for International Economics said in an analysis of the challenges that lie ahead for Ms. Yellen. “We have experienced several episodes in the past few years when a burst of favorable data led to increased optimism that soon proved unwarranted.”

“The Fed could taper purchases now and then ramp them back up should economic results fall short,” he continued. “But reversing course like that would be a difficult maneuver to execute and communicate.”

There are already signs that the Fed’s decision to ease up on stimulus has affected lending activity. Interest rates on 30-year mortgages jumped after Mr. Bernanke indicated that the Fed might start to reduce its asset purchases last year, although rates remain low by historical standards.

In her confirmation testimony, Ms. Yellen stressed that the Fed’s extraordinary measures were bolstering growth, even if the pace of the economy’s expansion had been frustratingly sluggish at times. She also said that the Fed’s policies had helped not only Wall Street, but Main Street.

The bank’s stimulus campaign has “made a meaningful contribution to economic growth,” Ms. Yellen said. “The ripple effects go through the economy and bring benefits to, I would say, all Americans.”

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Announcing Fed Nomination, Obama Praises Yellen

By JACKIE CALMES


WASHINGTON — President Obama on Wednesday announced what he called perhaps his most important economic decision, nominating Janet L. Yellen to lead the Federal Reserve system and be his independent co-steward of the economy, calling her “one of the nation’s foremost economists and policy makers.”

Ms. Yellen, 67, would be elevated from the Fed’s vice chairwoman to become the first woman to lead the 100-year-old central bank. The Senate is generally expected to confirm her nomination for the four-year term.

For the announcement, she joined Mr. Obama in the State Dining Room of the White House, along with the retiring chairman, Ben S. Bernanke, whom the president hailed for helping guide the economy through the worst financial crisis since the Depression.

The president said Ms. Yellen was “renowned for her good judgment,” and he credited her with sounding early alarms about the financial and housing bubbles that caused the economy’s near-collapse in 2008.

“Given the urgent economic challenges facing our nation, I urge the Senate to confirm Janet without delay,” Mr. Obama said. “I’m absolutely confident that she will be an exceptional chair of the Federal Reserve.”

In a brief response, she said: “While I think we all agree, Mr. President, that more needs to be done to strengthen the recovery, particularly for those hardest hit by the Great Recession, we have made progress. The economy is stronger and the financial system sounder.” Her comments are likely to be parsed by lawmakers and markets looking for signs of whether Ms. Yellen will continue the Fed’s stimulative monetary policies.

Her nomination comes amid the rancorous partisan battle over the economy. The government has been partly shut down since Oct. 1, and next week the Treasury Department will hit the limit of its authority to borrow to pay the nation’s bills. That is forcing emergency actions and contingency plans that could be financially destabilizing at best and provoke a global crisis at worst.

Ms. Yellen’s nomination hearings will add another wild card to a complicated mix of year-end legislative business. Mr. Bernanke’s term ends Jan. 31.

A few Senate Republicans, like Bob Corker of Tennessee, have spoken out against Ms. Yellen as too dovish on monetary policy; he and others made the same complaints in 2010 when the president named her as vice chairwoman. But no Senate Republicans have signaled any intention to try to block her appointment, said a leadership aide.

That suggests that Ms. Yellen could be confirmed with a majority vote, not a 60-vote supermajority, in a Senate where Democrats have 52 members and often count on support from the two independent senators. Ms. Yellen has nearly unanimous support among Democratic senators.

By contrast, had Mr. Obama nominated his first choice for Fed chief, Lawrence H. Summers, his former economic adviser, he would have alienated many Congressional Democrats when he needs a united party as he confronts the Republican-controlled House of Representatives over government financing and the debt ceiling. And it would have assured a confirmation fight when markets crave greater certainty in monetary policy.

Ms. Yellen would be the first Democrat to be Fed chief in a quarter-century — President Bill Clinton and Mr. Obama previously named two Republicans, Alan Greenspan and Mr. Bernanke, to second terms. Progressive senators and outside groups had pressed for Ms. Yellen’s nomination rather than Mr. Summers’s, viewing her as more inclined to regulate big banks and more likely to stress the job-creation aspect of the Fed’s dual mandate to fight unemployment and inflation.

Senator Michael D. Crapo of Idaho, the senior Republican on the Senate Banking Committee, which must clear the nomination before it moves to the full Senate, took a neutral tone in a statement reacting to the announcement.

“The next Fed chair faces a unique set of challenges,” he said, “including winding down unconventional monetary policy.”

He also said the Fed must carry out a long list of tightened financial regulations without “over-regulating the community banking sector” and effectively communicate policies to the markets and the public.

“I continue to strongly disagree with the Fed’s use of quantitative easing,” Mr. Crapo said, “and am eager to learn Ms. Yellen’s vision for the direction of the Federal Reserve as we go through the nomination process.”

The president’s decision came weeks later than the markets and even some in the administration had hoped, delayed by Democratic infighting.

Financial markets have been anxious over who would take over from Mr. Bernanke and wind down the expansionary monetary policy that he engineered to help the recovering economy. The Bernanke-led Fed has maintained those policies partly to offset the fact that the White House and Congress were providing no fiscal stimulus, and instead have pursued contractionary spending cuts since Republicans took over the House.

Generally, market analysts favored Ms. Yellen’s selection, seeing her as a welcome continuity after Mr. Bernanke, and more likely, perhaps, than Mr. Summers to continue the monetary expansion a bit longer.

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The Power Behind the Throne at the Federal Reserve

By JESSE EISINGER


The debate over whether Janet Yellen or Lawrence H. Summers will be the next Federal Reserve chairman — or some dark horse, Timothy F. Geithner perhaps? — is doubtlessly important.

But few outside the arcane world of banking rules understand that on matters of financial regulation and reform, the Federal Reserve staff is just as powerful, maybe even more.

Federal Reserve chairmen and governors come — and then go back to their gilded Wall Street corners or quiet academic redoubts. Regulatory staffs form the permanent government of Washington.

So now we turn to the man they call the “eighth governor,” the general counsel of the Federal Reserve, Scott G. Alvarez.

The Office of the Comptroller of the Currency had Julie Williams, who could be counted on by the banks as a bulwark against periodic regulatory squalls. She has since decamped, joining the banking consulting firm Promontory Financial Group last year.

Mr. Alvarez joined the Fed in 1981 and has been the general counsel since 2004. A top regulator who regularly deals with the Fed told me: “He’s a major player in everything. You can’t overstate his role. Everything has to go to him for approval and to be passed on.”

And he certainly has defenders. Mr. Alvarez is “decent, honorable and dedicated,” said Jerome H. Powell, a Fed governor. “Without question, he is a very careful attorney. He has no ideological agenda. His agenda is advancing the public good and advancing the board’s views.”

In a statement, Ben S. Bernanke, the chairman of the Federal Reserve, said: “During his more than 30 years of public service, Scott Alvarez has skillfully and knowledgeably represented the views of the Federal Reserve Board — before the courts, in interagency discussions, and before the Congress — in exemplary fashion.”

Mr. Alvarez rarely if ever gives interviews — through the Fed, he declined to speak to me for this column — and the central bank’s famous secrecy veils many of his actions and opinions. So there’s a lot about Mr. Alvarez that we don’t know. Even those who negotiate directly with him cannot know for sure if he is expressing his views or those of the board.

To his critics, he has become the personification of the Fed’s intransigence, the power behind the throne. He is, they argue, a smart, genteel and assiduous protector of its power and prerogatives.

“General counsels in regulatory agencies tend to grow more conservative — not politically but temperamentally. They become more resistant as matter of instinct to change, and that makes it more difficult to implement new regulation,” said Robert C. Hockett, a Cornell law professor and a regular consultant to the New York Fed.

The general counsel often controls what is presented to the board, narrowing the range of possibilities. I’ve been talking to fellow regulators, Congressional and executive branch staff members, academics, Washington lobbyists and banking reformers. Mr. Alvarez has managed to convince most of them of his innate bank friendliness.

The problem is that the Fed often confuses protecting its power with protecting the banks. Take disclosure. In fighting against having to divulge more about its extraordinary lending during the crisis, the central bank wrapped its arguments in legal justifications, which Mr. Alvarez oversees. They just happened to be arguments that would also prevent the release of information the banks didn’t want revealed.

In the recent debate about how much capital the leviathan banks should carry, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, which has become a more skeptical regulator under Thomas J. Curry, pushed for greater levels of protection. The Fed resisted. Those two agencies wanted 6 percent at the level of bank holding companies. The Fed ultimately didn’t, and the three agencies compromised at 5 percent.

Was this Mr. Alvarez’s position? It’s hard to say. But the board of governors is filled with capital hawks, including Daniel K. Tarullo, the powerful governor responsible for regulatory matters. Yet when it came down to it, the Fed didn’t hold out for a higher number, which would have made the banking system safer with little downside.

Mr. Alvarez typically keeps his views out of the public eye, but seems to be willing to express them privately. During a nonpublic briefing to Congressional staff members on May 18, 2012, about the JPMorgan Chase trading loss, known as the London Whale episode, Mr. Alvarez made a series of comments that alarmed some staff members, according to one who attended. He came off to this person as cavalier about the Fed’s responsibilities and the loss itself. He emphasized that the Fed did not review individual trades but instead oversaw banks’ risk management, policies and procedures.

Of course, that is true. But the Fed, and all the other regulators (as well as JPMorgan’s management), had missed the buildup of dangerous positions at the giant bank, only to find out about it when the news media broke the story. To my source, Mr. Alvarez didn’t seem too interested in thinking about the larger implications of the loss.

Such aloofness would be particularly disturbing in light of what others who were more concerned about the losses eventually found. The Senate Permanent Subcommittee on Investigations uncovered a number of troubling aspects of the trading fiasco, including that traders had manipulated the accounting to game their capital standards.

Perhaps more alarming, Mr. Alvarez opined at the meeting about the origins of the financial crisis, attributing the cause to “regular mortgage lending,” according to the attendee.

This just happens to be what the banks contend, too, minimizing the spectacular failures of their own risk management, their accumulation of disastrous positions in mortgage securities, their inability to understand their own books and how entwined they were with their counterparties. In fact, “regular” government-backed mortgage lending was at most a minor contributing factor.

In response, the Fed points out that in an interview with the Financial Crisis Inquiry Commission, Mr. Alvarez replied to a similar question with a more wide-ranging answer that got to some of these issues.

When Scott Brown, the former Massachusetts senator, was in the re-election fight that he would eventually lose to Elizabeth Warren, the stalwart banking reform advocate, one of his staff members appealed to Mr. Alvarez for some help on the so-called Volcker Rule. The regulation, which prevents banks from speculating for their own profits with money that is effectively backed by taxpayers, is deeply unpopular with the banks.

Mr. Alvarez seemed to share their skepticism, according to an account in The New York Times, saying that the Volcker Rule raised complicated issues and encouraging Mr. Brown to go public with his concerns. An alternate interpretation is that he wasn’t seeking to stir up action against the rule, but merely stating that anyone has the right to file a public comment.

That’s possible. But when the Volcker Rule was being written, Mr. Alvarez and the Fed pushed to open exemptions in the rule that would soften its impact, according to people involved in drafting the rule.

Recently, the Fed has produced legal analyses, over which Mr. Alvarez has final approval, regarding aspects of the Dodd-Frank financial reform act that would call for regulatory fixes. Two of these involve capital regulations at insurance companies and derivatives reform. The Fed’s interpretations could mean that Congress will have to make some legislative fixes. That could open the door for Dodd-Frank critics, who want to gut the reforms with new legislation. Reopening Dodd-Frank now is a recipe for rolling it back.

The revolving door is often cited as a major problem in Washington, and it is. But it’s not the only one. Holdouts from the deregulatory era still carry weight in the capital.

http://dealbook.nytimes.com/2013/07/31/the-power-behind-the-throne-at-the-federal-reserve/?pagewanted=print

[BullNBear52]

Summers of Our Discontent

By MAUREEN DOWD


WASHINGTON — I have no doubt that Larry Summers can speak truth to power. Indeed, I’ve seen him yawn at power.

Once, when Vice President Biden was talking to a small group at a holiday party, Summers yawned, checked his watch and walked away while Biden was in midsentence.

While he’s not exactly socialized — he had a lot of unhappy colleagues when he ran the Obama White House’s economic team — I have no doubt that Summers is genuinely smart and gets some credit for the policies that produced the recovery. I’m sure the imperious economist is more mellow than he used to be, because life has taught him he has to be.

But the idea that it is somehow historically inevitable that the chairmanship of the Federal Reserve should go to Summers, that it belongs to him, that he would be an enthusiastic enforcer of bank regulation to protect the little guy?

I have my doubts.

This idea is being pushed by the boys’ club around President Obama, and also by the bullying cool kids, some of the Wall Street types like former Treasury Secretary Robert Rubin who paved the way for the country’s ruin. Larry’s loyal former protégée Sheryl Sandberg aside, it evokes a sexism of complacency — just a bunch of alpha males who prefer each others’ company and who all flatter themselves that they’re smart enough to know how smart Summers is.

These days, it’s impolite to mention that all those cool bankers that President Cool didn’t punish enough brought the country to the brink of disaster.

One person unafraid to recall it is the Divine Miss M, who has been trashing the Disheveled Mr. S in tweets this week, picked up by Washington Post economic columnist Neil Irwin.

@BetteMidler
2:34 AM — 10 Aug 2013
HUH. The architect of bank deregulation, which turned straitlaced banks into casinos and bankers into pimps, may be next Head Fed: Summers.


@BetteMidler
11:26 PM — 11 Aug 2013
Larry Summers, Mr. De-Regulation, has never stepped forward to say ... “Oops! My bad!”


Even Bill Clinton has offered an “oops,” saying he got bad advice from Summers and Rubin.

In the late 1990s, when the prescient Brooksley Born, then chief of the Commodity Futures Trading Commission, wanted to publicly examine derivatives, Summers, who was deputy Treasury secretary, worked with Rubin and Alan Greenspan to block her.

Michael Greenberger, a University of Maryland law school professor and former Born lieutenant, told The Post that Summers called and said: “I have 13 bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.” Instead, these bankers were behind the policies that caused the worst financial crisis since before World War II.

As The Times reported this week, when the 58-year-old Summers came to the Obama White House, he was worth $7 million; when he left at the end of 2010, he “jumped into a moneymaking spree” at a hedge fund and at Citigroup — a bank rescued by a government bailout — so he could be a gazillionaire by the time Ben Bernake retires and the job is open.

His stuffing of his pockets within hours of leaving the White House job now makes it unseemly for him to lead the Federal Reserve in enforcing the important new regulations from the Dodd-Frank financial reform bill.

He is an exemplar of, rather than a solution to, the obscenely lucrative revolving-door problem mocked by Mark Leibovich in his new book, “This Town.”

The Fed is entering a new era when it is supposed to be getting tough on the banks, even if it means that the banks are smaller and less profitable and that shareholders make less.

Sure, Summers, the son of two economists and nephew of two Nobel laureates in economics, has a high I.Q. and inspired a great cameo bit in “The Social Network.” But there has to be somebody out there to run the economy who wasn’t a part of the culture that ran the economy into the ground.

Janet Yellen, the Fed’s vice chair, has generally been more publicly aligned with Bernanke than Summers has been in using monetary policy to revive the economy. If the president passes over the trailblazing and more temperamentally stable Yellen to appoint Summers, he’ll be giving Larry some vindication on his infamous critique of women that helped get him ousted as president of Harvard — a job he got thanks to Rubin.

Does the fact that we’ve had no female Fed chairs and no female Treasury secretaries mean that Summers was right when he said women are less likely to have the kind of brains that would allow them to get top jobs requiring math skills?

Is that what makes Larry Summers so brilliant?

http://www.nytimes.com/2013/08/14/opinion/dowd-summers-of-our-discontent.html?hp&pagewanted=print

[BullNBear52]

Divining the Regulatory Goals of Fed Rivals

By BINYAMIN APPELBAUM


WASHINGTON — Lawrence H. Summers, as Treasury secretary, presided over the group of senior Clinton administration officials who reached the fateful decision in the late 1990s that there was no need to regulate a new family of financial transactions known as over-the-counter derivatives. Janet Yellen attended some of those meetings, too, as chairwoman of President Clinton’s Council of Economic Advisers. But she did not speak.

Mr. Summers and Ms. Yellen are now the leading candidates to head the Federal Reserve, and the winner is likely to spend far more time on financial regulation than previous Fed chairmen. Congress has greatly expanded the Fed’s regulatory purview; moreover, the central bank’s basic responsibility to try to keep the economy on an even keel, experts say, will require a much greater focus on ensuring the stability of the financial system.

The two candidates share similar views on many regulatory issues, according to a review of their public statements and interviews with friends and colleagues. Both forged academic careers as members of the economics counterculture that attacked the dogma of efficient markets. Both say they believe that markets require regulation to prevent abuses, ensure fair competition and prevent disruptions of economic growth.

But those meetings 15 years ago highlight a basic difficulty in predicting what kind of regulators they would be. Ms. Yellen, during her two decades in prominent public roles, has left few footprints on the era’s debates about the government’s role in the markets. Mr. Summers, in helping to shape the regulatory policies of two administrations, has taken positions that critics say amounted to not following his own advice.

For supporters of stronger regulation, it comes down to a choice between someone they do not know and someone they do not trust.

The overhaul of financial regulation that Congress passed in 2010 — known as the Dodd-Frank law after its two principal authors, Senator Christopher J. Dodd and Representative Barney Frank (both since retired from Congress) — amounted to an instruction manual for the creation of a new system. The construction process remains substantially incomplete.

The next head of the Fed faces controversial decisions, in particular, about what safeguards to impose on the largest financial institutions to make it credible that if they falter, they will be allowed to fail.

“There’s a huge plate of unfinished business where the Fed has lead — if not sole — authority and the next chairman could derail a lot of that, or water it down,” said Sheila Bair, who was chairwoman of the Federal Deposit Insurance Corporation during the financial crisis. “That’s why it’s important for the next Fed chairman to have a good focus on regulation.”

President Obama has said that he intends to nominate a successor this fall for the current Fed chairman, Ben S. Bernanke. The White House has said he is also considering a third candidate, Donald L. Kohn, who was Ms. Yellen’s predecessor as Fed vice chairman. While past Fed chairmen have been selected almost exclusively for their views on monetary policy, this time the White House is focused on the fact that it is picking a financial regulator, too.

Mr. Summers and Ms. Yellen declined to comment for this article. Both, however, have spoken in recent months about the need for stronger regulation. Ms. Yellen, in a June speech, detailed areas where she believed stronger regulation was required. Mr. Summers, in an April interview, made a similar point, although he did not discuss specific proposals.

“The world is moving in the right direction,” he told Maclean’s, a Canadian newsmagazine. “Whether it is moving rapidly enough, and aggressively enough, is a judgment we will have to make in the next several years.”

Mr. Summers and Ms. Yellen were academic stars before entering public service. Menzie Chinn, an economist and professor of public affairs at the University of Wisconsin, said that both were “at the forefront” of research undermining the idea that markets were self-correcting. By contrast, the former Fed chairman Alan Greenspan frequently argued that government regulation did more harm than good.

Mr. Summers is known for perhaps the most efficient rejoinder to the efficient-markets theory. “THERE ARE IDIOTS. Look around,” he famously wrote in an unpublished paper. Professor Chinn said that Ms. Yellen’s work showed an even clearer pattern of viewing markets as inherently flawed.

“She and her husband were thinking about how to model the economy in a realistic fashion,” said Professor Chinn, referring to Ms. Yellen’s husband and his own former teacher, the economist and Nobel laureate George Akerlof. “The willingness to do that took a little bit of courage.”

In keeping with this worldview, both Mr. Summers and Ms. Yellen have long argued that government must protect people from abuses.

As Treasury secretary in 2000, Mr. Summers joined with the Department of Housing and Urban Development to produce an exposé of predatory lending practices. The report recommended modest changes in federal law but Congress, then controlled by Republicans, made none. The Fed and other banking regulators also ignored the findings. Years later, however, it was a source for elements of Dodd-Frank.

As President Obama’s chief economic adviser in the wake of the crisis, Mr. Summers advocated the creation of a regulatory agency, the Consumer Financial Protection Bureau, arguing that the Fed could not be trusted to retain that role.

Mr. Summers also was an architect of the administration’s broader approach to overhauling financial regulation; he and the Treasury secretary, Timothy F. Geithner, oversaw the staff that hammered out the details. At the time, he described it as an effort to ensure that participants in the financial system, like drivers, wear seat belts and carry insurance, and submit their cars to regular inspections, to limit the chances and the consequences of crashes.

“I think Larry looked at the financial market and had the basic view that it was broken,” said Michael Barr, a member of the group.

But the administration’s initial proposal in June 2009 was a disappointment to many Congressional Democrats, who added or significantly strengthened some of the key provisions — sometimes in conflict with the White House — before passing a bill in 2010.

“Everything in that original working paper was marginal change to the existing regulatory structure,” said Jeff Connaughton, then an aide to Senator Ted Kaufman, a Delaware Democrat who became one of the most persistent voices for making more fundamental changes.

Critics of Mr. Summers say that he has a record of showing too much trust in financial markets to regulate themselves. And the most important example concerns over-the-counter derivatives — basically, customized bets on the movements of other prices, which could be used as insurance or, just as easily, to magnify risk-taking.

Mr. Summers, as a senior Treasury official in the late 1990s, played a leading role in the suppression of an effort by the head of the Commodity Futures Trading Commission to establish oversight of these customized derivatives, whose misuse already had contributed to financial catastrophes, including the bankruptcy of Orange County, Calif., and the collapse of a ballyhooed hedge fund, Long-Term Capital Management.

At the time, Mr. Summers emphasized that he wanted to maintain the status quo to preserve the stability of domestic markets, and to avoid pushing the business overseas. In July 1998, he told Congress that he also saw no reason for regulation because “the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves.”

The Clinton administration subsequently agreed with Congressional Republicans to formalize the lack of regulation, allowing the market to grow in the dark. That helps explain why regulators were blindsided a decade later when the world’s largest derivatives gambler, the American International Group, nearly brought down the financial system.

More than a decade later, in 2010, President Clinton said on ABC’s “This Week” that he had been wrong to listen to his advisers. “Sometimes people with a lot of money make stupid decisions and make it without transparency,” Mr. Clinton said.

Mr. Summers, too, changed his mind in the aftermath of the crisis. “By 2008, our regulatory framework with respect to derivatives was manifestly inadequate,” he told the Financial Crisis Inquiry Commission. But he and his supporters have maintained that the failure occurred because the use of derivatives changed over a decade in ways that they did not anticipate.

Michael Greenberger, a senior official at the futures trading commission in the late 1990s, said that did not explain the reluctance to establish safeguards. The problem, he said, was not the failure to predict the specific problem but the willingness to trust that there would be none. “I don’t think that required 20/20 foresight,” he said.

Lewis A. Sachs, a senior Treasury official in the late 1990s, said that Mr. Summers backed him in his bid to increase the transparency of derivatives by requiring them to be processed through clearinghouses, but that he was unable to win the support of Mr. Greenspan or Senate Republicans, so the idea was dropped.

Mr. Sachs, whose private investment firm now pays Mr. Summers as an outside adviser, noted that the administration’s report called for the regulators to revisit the derivatives market as it grew. The Bush administration failed to do so, he said.

Some of Mr. Summers’s supporters also argue that better oversight of derivatives would not have prevented or significantly diminished the crisis.

Ms. Yellen found a ringside seat in the years before the financial crisis. She was named president of the Federal Reserve Bank of San Francisco in 2004 and, the next year, she became one of the first officials to describe the rise in housing prices as a bubble.

Over the next few years, in public speeches and meetings of the Fed’s monetary policy committee, she spoke with growing concern about the potential for broad economic damage when the bubble burst. But the San Francisco Fed, which oversaw the nation’s largest mortgage lender, Countrywide Financial, did not move to check its increasingly indiscriminate lending. The regional banks take their marching orders from Washington, which had adopted a hands-off policy.

Ms. Yellen told the Financial Crisis Inquiry Commission in 2010 that she and other San Francisco Fed officials pressed Washington for new guidance, sharing the problems they were seeing. But Ms. Yellen did not raise those concerns publicly, and she said that she had not explored the San Francisco Fed’s ability to act unilaterally, taking the view that it had to do what Washington said.

“For my own part,” Ms. Yellen said, “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.” Her startled interviewers noted that almost none of the officials who testified had offered a similar acknowledgment of an almost universal failure.

Chastened by the financial crisis, Ms. Yellen now favors stricter regulation. “This experience,” she told the commission, “has strongly inclined me toward tougher standards and built-in rules that will kick into effect automatically when things like this happen, that make tightening up a less discretionary matter.”

Mr. Summers’s supporters contrast his long experience on regulatory issues with Ms. Yellen’s more limited record to argue that he would be more effective in carrying forward a set of reforms that he helped to shape. Ms. Yellen’s supporters draw a different lesson from the same contrast.

“Between the two of them,” said Mr. Connaughton, the former Democratic Senate aide, “I would rather roll the dice on her than get the known quantity of Larry Summers.”

http://www.nytimes.com/2013/08/14/business/economy/careers-of-2-fed-contenders-reveal-little-on-regulatory-approach.html?ref=business&pagewanted=print

[BullNBear52]

The Fed, Lawrence Summers, and Money

By LOUISE STORY and ANNIE LOWREY


When Lawrence H. Summers left his job as President Obama’s top economic policy adviser at the end of 2010 to return to Harvard University, one of his first steps was to set up a roster of part-time positions that would touch on just about every corner of the financial world.

But as he negotiated with a prominent venture capital firm in Silicon Valley, Mr. Summers made one thing very clear: he needed an exit plan, in case he returned to public service.

“That was generally the assumption,” said Marc Andreessen, the co-founder of the firm. “If he did, he needed a way to do a clean disengage.”

Today, the Obama administration is considering nominating Mr. Summers as the next chairman of the Federal Reserve. If the White House does so, Mr. Summers’s financial disclosure — including his recent consulting jobs, paid speeches and service on company boards — will be one of the hottest documents in Washington. Among the top contenders for the position, Mr. Summers has by far the most Wall Street experience and the most personal wealth.

In addition to rejoining the Harvard faculty in 2011, he jumped into a moneymaking spree. His clock was ticking partly because he knew that the Fed chairmanship, to which he has long aspired, was likely to open up in early 2014, when Ben S. Bernanke’s second term will come to an end.

“With Larry, my wife always says that it’s hard to be happy if you want to have the most money because you’ll never have the most money,” said Jeremy I. Bulow, an economics professor at Stanford University who is a friend and co-author of academic papers with Mr. Summers. “He’s kind of been going about his life just on the basis of ‘who knows what’s going to come next?’ and just sort of maximizing his experiences, given the opportunities in front of him.”

The opportunities have been many over the last two years. Mr. Summers, 58, has been employed by the megabank Citigroup and the sprawling hedge fund D. E. Shaw. He works for a firm that advises small banks as well as the exchange company Nasdaq OMX. And he serves on the board of two Silicon Valley start-ups: both financial firms that may pursue initial public offerings in the next year. One of them, Lending Club, offers loans to consumers and small businesses by making arrangements directly with online investors, a new business model that falls into a regulatory gap that consumer advocates say may lead to risky borrowing.

Before his tenure in the Obama administration, Mr. Summers had accumulated personal wealth of at least $7 million; the last two years have most likely added considerably to that. But his money and Wall Street connections put him in an awkward position, partly because the next person to lead the Federal Reserve will oversee the writing of several key new regulations from the Dodd-Frank financial reform bill.

Wall Street experience is not unprecedented for a Fed chairman. The departing chairman, Mr. Bernanke, has never been employed on Wall Street, spending most of his career at Princeton. But his predecessor, Alan Greenspan, was the president of a consulting firm and worked in investment banking early in his career, and Paul A. Volcker, an earlier chairman, did some work at Chase Manhattan Bank, which is now a part of JPMorgan Chase.

Still, some senators are speaking out against Mr. Summers. They are raising questions about potential conflicts of interest and noting his role in the repeal of the Glass-Steagall law, which limited the sorts of activities banks could undertake, and his opposition to regulating derivatives in the 1990s — decisions that many critics say contributed to the financial crisis.

“I start from a position of being extraordinarily skeptical that Larry Summers is appropriate to chair the Fed,” said Senator Jeff Merkley, a Democrat from Oregon. “I have serious doubts that Mr. Summers, who as a committed deregulator drove policies that set the stage for the Great Recession, is the right person for a key regulatory position.”

Mr. Summers declined to comment. But whatever his views on regulatory policy, those who know and admire Mr. Summers say he arrived at them honestly.

“There has to be a distinction between talking to people, even for payment, and doing what they want you to do,” said Robert Z. Lawrence, a professor who taught a course at Harvard with Mr. Summers this year. “When it comes to Larry Summers, for good or for bad, he’s uncontrollable when it comes to the positions he takes. He doesn’t take them for that reason.”

Wall Street Wealth

Mr. Summers’s wealth comes mainly from two periods of private sector work between government postings. After a lengthy tenure at the Treasury Department in the 1990s, he became the president of Harvard — a job that Robert E. Rubin, who preceded Mr. Summers as Treasury secretary, helped him obtain.

But in 2006, Mr. Summers was forced out of the university presidency for a variety of reasons, including remarks he made questioning why few women engage in advanced scientific and mathematical work. Soon after, a young Harvard alum brought him into the hedge fund world with a part-time posting at D. E. Shaw. That firm, one of the largest in the industry, paid Mr. Summers more than $5 million.

Mr. Summers’s wealth soared from around $400,000 in the mid-1990s to between $7 million and $31 million in 2009, when he joined the Obama administration, according to a financial disclosure he filed at the time. Before returning to government service, he earned $2.7 million from speeches in one year alone.

As for his current work, representatives for Citigroup, Nasdaq and D. E. Shaw declined to disclose his pay. His speaking rates today run into the six figures, according to an associate who spoke on the condition of anonymity, and Mr. Summers has spoken to Wall Street companies like Goldman Sachs, JPMorgan Chase and Citigroup.

The job that is likely to generate the most scrutiny for Mr. Summers is his work with Citigroup, which was rescued from the brink of bankruptcy by the federal government’s bailout. Though he does not have an office there, two people with direct knowledge of the matter said he was a regular consultant. In a statement, Citigroup said he provided “insight on a broad range of topics including the global and domestic economy” to prestigious clients, and attended internal meetings.

Citigroup hired Mr. Summers in part to advise Vikram S. Pandit, who resigned as chief executive last year. With his work there, Mr. Summers followed in the footsteps of his friend, Mr. Rubin, who joined Citigroup after he left the government and earned more than $100 million.

Some of Mr. Summers’s employers used to work with him in government.

“I don’t think of him as an employee, I like to think of him as an adviser,” said Lewis A. Sachs, a former Treasury official who runs a Maryland firm called Alliance Partners that is backed by BlackRock, the asset management firm, and BlueMountain Capital, a hedge fund active in the derivatives market.

Mr. Sachs, a frequent visitor to the White House and Treasury, said Mr. Summers’s financial work would make him a better Fed chairman.

“It will certainly give him a lot of windows into different parts of the financial system, different parts of the economy,” Mr. Sachs said.

Asked why Mr. Summers would not have simply opted out of financial work, given the questions it could raise if he were nominated to lead the Federal Reserve, Mr. Bulow, the Stanford economist, said he thought Mr. Summers’s early experience with cancer (at the age of 28, he was treated for Hodgkin’s disease) had been formative. It shaped him to make decisions based on present options, Mr. Bulow said, rather than worrying about future unknowns, like whether President Obama would choose him for the Fed.

“He doesn’t proceed that way,” Mr. Bulow said. “I think basically, you know, it’s a little bit like Sheryl Sandberg says, ‘Don’t leave before you’re leaving.’ ”

Mr. Summers’s spokeswoman, Kelly Friendly, declined to provide details about his current pay, but said his “broad exposure to different parts of the economy gives him a unique perspective on what makes America work.”

In 2009, Mr. Summers said in an interview with The New York Times that he kept boundaries between his private and public work. “I wanted to be involved as an economist, not as a lobbyist,” he said. “I never wanted to be in a position of taking public policy positions based on anything other than my convictions as an economist or a potential policy maker.”

Close Contacts in Finance

Mr. Summers not only has a variety of professional contacts on Wall Street, he also has many friends there. At D. E. Shaw, for instance, Mr. Summers has worked with Darcy Bradbury, the firm’s head of external affairs, who has known him for more than 30 years, ever since she was a student at Harvard.

Ms. Bradbury, who also worked with Mr. Summers in the Clinton administration, was elected chairwoman of the hedge fund industry’s association shortly after Mr. Summers began his work in the White House in 2009. That group, the Managed Funds Association, has been involved in discussions of industry trading rules as well as pushing for the preservation of a tax loopholes that benefit investment firms.

Trey Beck, a managing director of D. E. Shaw, said in a statement that Ms. Bradbury did not meet with Mr. Summers on behalf of D. E. Shaw or the hedge fund association while he was in the White House. He added that “Darcy’s friendship with Larry had absolutely nothing to do with Darcy becoming M.F.A. chair.”

Richard W. Painter, a former chief ethics lawyer for President George W. Bush, predicted that Mr. Summers’s work in finance would not derail his nomination or confirmation.

“Remember, we had two secretaries of the Treasury, which is a regulatory position, who were chairmen of Goldman Sachs,” said Mr. Painter, who is now a professor at the University of Minnesota. “We did it with Hank Paulson. Clinton did it with Bob Rubin.”

Mr. Painter noted that if Mr. Summers became Fed chairman, he would have to fully divest himself of all interests in the financial companies he works with.

The divestitures, he said, would include even the start-ups, companies that have the potential for Mr. Summers to make sizable future earnings, if they pursue public offerings.

If Mr. Summers goes to the Fed, Mr. Andreessen said, “it would be a reasonable statement that he’s leaving money on the table.”

A Toehold in Silicon Valley

Mr. Summers has also made contacts in Silicon Valley. Ms. Sandberg, chief operating officer of Facebook, best-selling author of “Lean In,” and Mr. Summers’s chief of staff at the Treasury, helped introduce Mr. Summers to Silicon Valley, where he is gaining a good reputation, according to Mr. Andreessen, whose venture capital firm has hired Mr. Summers to give advice to companies like Airbnb and Dwolla, a payments company.

Mr. Summers serves on the board of two start-ups. The chief financial officer of one of the companies, Square, a mobile payments company, described Mr. Summers in a statement as “a really important member of our team.”

The other start-up is Lending Club, which facilitates peer-to-peer loans. Prospective debtors post their personal stories online, asking for money for everything from debt consolidation to in-ground pools to wedding parties. Prospective lenders review the solicitations and offer financing.

“He’s been very high-profile for the company,” said Renaud Laplanche, the company’s chief executive.

When Mr. Summers was considering joining the board, he performed due diligence, calling regulators and other board members, Mr. Laplanche said, adding that “he thought what we were doing was good for the consumer.”

Lending Club falls into a tricky space in financial regulation. The company itself is not regulated as a bank. But it has teamed up with a bank in Utah, one of the states that allows banks to charge high interest rates, and that bank is overseen by state regulators and the Federal Deposit Insurance Corporation.

Consumer advocates said Lending Club was so new that they had not yet seen many examples of its loans and collection practices in action. But Sarah Ludwig, the co-director of the New Economy Project, a nonprofit in New York, expressed concern that the company did not verify all borrowers’ income and employment.

“This should be another red flag,” Ms. Ludwig said of Mr. Summers’s involvement. “What is he doing on the board of this company? What is a potential Fed chairman doing on the board of a company that doesn’t check if people can afford loans?”

Of the loans Lending Club has made in 2013, it did not verify income about half of the time, according to data available on its Web site.

Mr. Laplanche said the company had models that dictated when it scrutinizes income and that the company was verifying income on more loans than it did in the past. He said that many other lenders also did not verify employment history and income. He added that Mr. Summers had pushed for strong consumer protection. “He was the most adamant about making sure we were tracing the loan in such a way that we were making sure the people getting the loan had the ability to repay,” he said.

And he said consumers would not be coming to Lending Club if they thought they could get better rates elsewhere.

But some consumer credit experts said Lending Club’s rates on many loans might be higher than what was available at a credit union or other lenders. Of the loans Lending Club has issued in 2013, 12.9 percent of the loans are charging annual percentage rates of 12.4 percent or lower, but 37 percent of the loans are charging annual percentage rates of 19 percent or more, with some as high as 29 percent.

Mr. Summers has been encouraging Lending Club to spend time in Washington to share its story with regulators and policy makers, said John J. Mack, another company board member who was the chief executive of Morgan Stanley during the financial crisis. “The facts are all over the place, but to me, for it to be growing at the rate it is growing, it is serving a need for small consumers,” Mr. Mack said.

On top of all his other jobs, Mr. Summers has continued economic research. He is currently the co-chairman of a study at the Center for American Progress about stagnating wages for the middle class.

“I definitely don’t think of him as a Wall Street guy,” said Neera Tanden, the center’s president. “He runs in the crowd enough to know they’re not always right.”

She added that since hearing about Mr. Summers’s many paid assignments, she was happy with their arrangement. He works, she said, as a volunteer.

http://www.nytimes.com/2013/08/11/business/economy/the-fed-lawrence-summers-and-money.html?ref=politics&pagewanted=print

[BullNBear52]

Jacob Lew’s Signature, Squiggle-Free

By CATHERINE RAMPELL


7:50 p.m. | Updated

Those awaiting a new, Slinky-like John Hancock to grace their dollar bills may be disappointed. On Tuesday, the Treasury Department released a copy of Secretary Jacob Lew’s signature, to appear on the bottom of newly printed dollar bills as early as the fall, and Mr. Lew’s famous loops are gone.

Treasury Secretary Jacob J. Lew's signature as it will appear on currency.United States TreasuryTreasury Secretary Jacob J. Lew’s signature as it will appear on currency.

The new signature is illegible, but it looks like a traditional signature. It is starkly different from previous copies of his signature that surfaced from his days as White House chief of staff and director of the Office of Management and Budget:

The White House

That earlier signature – a roller-coastering series of (usually) seven connected loops, resembling a long series of zeros or O’s – had attracted widespread mockery and armchair psychoanalysis from the media and Twitterverse, and had been compared to a crazy straw, the icing on a Hostess cupcake, and Charlie Brown’s hair. The signature even made appearances on “The Daily Show” and “The Colbert Report.”

Asked about his opinion of the new signature on Tuesday afternoon, John Oliver, who is the host of “The Daily Show” this summer, said he hadn’t seen it yet. “What is it now, a series of squares?” he said. “Has he moved onto a new form of geometry? Or does it look like a real adult’s signature?”

The Treasury Department declined to provide a comment from Mr. Lew about the evolution of his signature, but said he did not go through any particular training to get his signature up to snuff.

A spokeswoman explained that once a new secretary is sworn in, there is an 18-week process during which the Bureau of Engraving and Printing produces a new currency. That process includes getting the signature (the secretary sat down and signed a couple of sheets of paper in a binder 10 times, one of which was ultimately chosen to be used on every new bill that is printed); approving the signature for technical reproduction; and getting the printing plates made.

The first bills to feature Mr. Lew’s signature will be five-dollar bills that will roll off the presses later this summer, and appear in circulation as early as the fall. The Federal Reserve, which controls the money supply, determines exactly when the bills appear in circulation.

It’s common for both Treasury secretaries and treasurers, who also sign currency, to “practice and refine” their signatures, the spokeswoman said. Mr. Lew’s predecessor, Timothy F. Geithner, had also acknowledged in an interview on “Marketplace” that his signature had evolved. When the interviewer, Kai Ryssdal, said he preferred the old version of the signature, Mr. Geithner said, “I think on the dollar bill I had to write something where people could read my name.”

“I didn’t try for elegance. I tried for clarity,” he added.

One Web site offers a collection of all the Treasury secretary signatures that have appeared on American currency.

http://economix.blogs.nytimes.com/2013/06/18/jacob-lews-signature-squiggle-free/?ref=business

[BullNBear52]

Uncertainty at Fed Over Its Stimulus Plans and Its Leadership

By BINYAMIN APPELBAUM


WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, faces the increasingly difficult challenge of shaping investor expectations about the future course of Fed policy amid growing signs that the Bernanke era at the central bank is drawing to a close.

President Obama suggested late Monday that he was likely to nominate a new Fed chairman this year, saying that Mr. Bernanke had “already stayed a lot longer than he wanted or he was supposed to.” Mr. Obama added that Mr. Bernanke, whose second four-year term in office ends in January, has done an “outstanding job.”

The comments bounced around Washington on Tuesday even as Mr. Bernanke convened a regularly scheduled meeting of the Fed’s policy-making committee to debate how much longer the Fed will continue its current efforts to stimulate the economy. The Fed is not expected to announce any immediate changes on Wednesday, at the close of the meeting, but investors are watching for signs that the Fed is considering scaling back later this year.

The central bank is buying $85 billion a month in mortgage-backed securities and Treasury securities, in addition to holding short-term interest rates near zero. Both measures are intended to encourage job creation by easing financial conditions, and the Fed pledged to press the campaign until it saw “sustained improvement” in the outlook for the labor market.

But that message has been muddled recently by conflicting pronouncements about the duration of the asset purchases from several of the 19 Fed officials who help make policy. Mr. Bernanke contributed to the confusion by telling Congress last month that the Fed might begin to reduce the pace of its purchases this year — but might not — while avoiding any clear account of how the central bank would make such a decision.

Uncertainty about the Fed’s plans and its leadership has focused attention on the news conference that Mr. Bernanke plans to hold on Wednesday afternoon after the Federal Open Market Committee releases a policy statement. The Fed also will release economic projections by the 19 officials, which could help to explain the apparent momentum toward doing less by showing how quickly they expect the economy to grow and unemployment to decline.

“Federal Reserve officials believe that clear communication about policy intentions can help manage market expectations and so increase the effectiveness of monetary policy,” Kevin Logan, chief United States economist at HSBC, wrote to clients on Monday. “Lately, however, the policy makers appear to have muddled the message and so have created confusion rather than clarity on the policy outlook.” The news conference, he said, is a chance “to clarify.”

The confusion is costly. A recent survey of the 21 companies authorized to trade securities with the Federal Reserve Bank of New York, a list that includes most of the nation’s largest financial companies, found widespread agreement that uncertainty about the Fed’s plans was effectively tightening financial conditions. Interest rates on 10-year Treasuries, a benchmark for the Fed’s efforts to reduce borrowing costs, rose to 2.20 percent on Tuesday from a low of 1.66 percent at the start of May.

Some analysts argue that the Fed still intends to press ahead with asset purchases at least through the end of the year. They note that Mr. Bernanke has allowed dissenters to command the public stage even as they exercise relatively little influence over the course of Fed policy. Some also see the cacophony as an intentional damper on the ebullience of investors, carving out time for the benefits of low interest rates to spread through the economy.

The unemployment rate has fallen only slightly since the Fed began its latest round of bond buying, to 7.6 percent in May from 7.8 percent in September. And even that decline happened mostly because people stopped looking for work. The share of American adults with jobs has not increased in three years. The Fed’s preferred measure of inflation has sagged to 1.05 percent, the lowest level in more than 50 years and markedly below the 2 percent annual pace the Fed considers healthy.

“In our view it would be risky to deliver a hawkish monetary policy message at a time when growth remains sluggish, inflation continues to trend down and market inflation expectations are dropping sharply,” Goldman Sachs economists wrote in a note to clients last week.

Other analysts, however, see mounting evidence that Mr. Bernanke and his allies would like to buy fewer bonds, although most still do not expect the Fed to reduce the pace of its asset purchases before September at the earliest. Fed officials have described the asset purchases as an experiment with uncertain consequences, particularly the potential disruption of financial markets, and warned that those risks might increase with the size of the Fed’s holdings.

While the pace of growth has increased only modestly, the worst-case possibility, in which mismanaged fiscal policy sends the economy sliding back into recession, has faded. “The asset purchases may have been simply insurance against a fiscal disaster that did not materialize,” wrote Tim Duy, an economist at the University of Oregon.

Moreover, some Fed officials have concluded that large job gains are beyond reach. Economists at the Federal Reserve Bank of Cleveland wrote recently that the Fed should be satisfied if the economy adds 150,000 jobs a month — well below the monthly average of 176,000 so far this year. Economists at the Federal Reserve Bank of Chicago set the bar even lower, at 80,000 jobs a month. Both estimates are based on the assumption that many of the people who stopped looking for work in recent years will never return, allowing the unemployment rate to return closer to its normal levels during an economic expansion even without a rebound in employment.

Some of these decisions will most likely be made after Mr. Bernanke leaves office. Mr. Obama, in an interview with the journalist Charlie Rose on PBS, avoided answering a direct question about reappointing Mr. Bernanke. He said instead that Mr. Bernanke “has been an outstanding partner along with the White House, in helping us recover much stronger than, for example, our European partners, from what could have been an economic crisis of epic proportions.”

The interview, taken together with earlier comments by Mr. Bernanke, reinforces a growing expectation that the administration plans to nominate a new Fed chairman this year. The position requires Senate confirmation. Only three people have held the Fed chairmanship in the last 30 years, and the Obama administration has an opportunity to put a Democrat atop the central bank for the first time since the resignation of Paul Volcker in the late 1980s.

Janet L. Yellen, the Fed’s vice chairwoman, is widely regarded as a leading candidate. She would become the first woman to head the Fed or any other major central bank. Other possible candidates include Timothy F. Geithner and Lawrence H. Summers, both former Obama advisers, and Roger W. Ferguson Jr., a former Fed vice chairman.

http://www.nytimes.com/2013/06/19/business/economy/uncertainty-at-fed-over-its-stimulus-plans-and-its-leadership.html?ref=business&pagewanted=print

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Fed Endorses Stimulus, but the Message Is Garbled
By NELSON D. SCHWARTZ

WASHINGTON — Despite signs of improvement in the job market, the chairman of the Federal Reserve, Ben S. Bernanke, and most other Fed officials signaled Wednesday that they remained cautious about easing back too quickly on their efforts to stimulate the economy.

While some Fed policy makers suggested that the central bank could begin reducing its monthly purchases of government bonds as early as next month, most still want to see continued evidence of an upswing in the job market and a decline in unemployment first, according to minutes of the most recent meeting of the Fed’s policy arm that were released Wednesday afternoon.

Confusion on Wall Street over the Fed’s intentions led to a topsy-turvy day in the stock market. The major indicators were up in the morning after Mr. Bernanke testified to a Congressional committee but then fell sharply after the meeting minutes were disclosed.

In his testimony, Mr. Bernanke said that ending the $85 billion monthly bond-buying effort too soon would do more harm than good.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery,” he said.

While Mr. Bernanke clearly enjoys the support of a majority of the Fed’s Open Market Committee, the minutes suggested that he was finding it challenging to forge a consensus.

Under questioning from a lawmaker, Mr. Bernanke suggested that the Fed might cut back on bond purchases some time in “the next few meetings.” That statement took on greater significance on Wall Street after the minutes hinted at the more unnerving prospect of action as early as June.

Still, many analysts said the odds were against a change of direction at the Fed’s meeting next month.

“It’s been on the minds of committee members, but I don’t think the minutes mean they’re going to collectively take their foot off the gas in June,” said Erik Johnson, an economist with IHS Global Insight.

More likely, he said, would be a pullback beginning in late summer or early fall if the economy sustains its momentum. Even if that happens, the Fed will remain extraordinarily accommodative by many other measures, with short-term interest rates staying very low.

In response to a question from Representative Kevin Brady, a Texas Republican who is chairman of the Joint Economic Committee, Mr. Bernanke said that whenever the stimulus began to taper off, it would not happen in an “automatic, mechanistic program. Any change would depend on the incoming data.”

Further evidence for a move in a few months, rather than weeks, came in an interview shown on Wednesday on Bloomberg TV with the president of the Federal Reserve Bank of New York, William C. Dudley, that seemed aimed at clearing up some of the confusion.

“I think three or four months from now you’ll have a much better sense of is the economy healthy enough to overcome the fiscal drag or not,” said Mr. Dudley, who is a close ally of Mr. Bernanke.

Outside the canyons of Wall Street and the world of Fed watchers, the difference between June and August or September might not appear significant. But with interest rates at historical lows, any move to cut back on bond purchases by the Fed would undoubtedly cause an uptick in bond yields. That would affect the huge market for government and corporate bonds and force stock market investors to recalibrate their positions.

When the trading day began on Wednesday, investors were in a buoyant mood, sending stock indexes higher as Mr. Bernanke began his testimony. Markets around the world have rallied this year on hopes that the Fed and other central banks will continue to support financial markets with monetary policies.

As the day went on, though, traders began to reconsider some of Mr. Bernanke’s comments. After the details of the Federal Open Market Committee meeting on April 30 and May 1 were released, many strategists said they were surprised by the number of voices inside the Fed calling for a slowdown in the stimulus effort in the near future.

The minutes said, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.”

In response, the Standard & Poor’s 500-stock index finished the day at 1,655.35, down 13.81, while the Dow Jones industrial average fell 80.41 to 15,307.17. The tech-heavy Nasdaq index, which has been on a tear lately, sank 38.82 to 3,463.30, or slightly over 1 percent.

Mr. Bernanke indicated that he was not particularly worried that the stock market was moving into bubble territory, despite the 16 percent surge in the S.& P. 500 since the beginning of the year.

“Our sense is that major asset prices like stock and bond prices are not inconsistent with fundamentals,” he said. Commonly used yardsticks for measuring the value of stocks, like price-to-earnings multiples, Mr. Bernanke concluded, are “fairly normal.”


Nathaniel Popper contributed reporting from New York.

http://www.nytimes.com/2013/05/23/business/economy/bernanke-fed-stimulus-still-needed-to-help-recovery.html?ref=business&pagewanted=print

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A Call for New Blood on the JPMorgan Board

By SUSANNE CRAIG and JESSICA SILVER-GREENBERG


An influential shareholder advisory firm has recommended that investors withhold their support for three JPMorgan Chase directors, citing “material failures of stewardship and risk oversight” in the wake of a big trading loss last year.

The firm, Institutional Shareholder Services, or I.S.S., urged shareholders not to vote for three directors who serve on the board’s risk policy committee — David M. Cote, James S. Crown and Ellen V. Futter. The results of the vote will be announced at the bank’s annual meeting later this month.

In its report released late Friday, I.S.S. noted that only under “extraordinary circumstances” does it consider recommending shareholders oppose directors.

Several big investors interviewed over the weekend say they were struck by the harshness of the criticism directed toward the bank’s directors.

“The board appears to have been largely reactive, making changes only when it was clear it could no longer maintain the status quo,” I.S.S. wrote in its 33-page report on the bank. “The company’s board is in need of refreshment and it should begin searching for seasoned directors with financial and risk expertise.”

The firm, which advises shareholders on proxy votes and corporate governance issues, also backed, as expected, a proposal to split the roles of chairman and chief executive, a move that could strip Jamie Dimon, the bank’s powerful leader, of the dual roles he has held since 2006. I.S.S. does not actually vote shares, but many investors follow its recommendations, or use them as a basis on how to vote.

The report is another challenge to the bank’s effort to restore its reputation as an astute manger of risk following last year’s embarrassing multibillion-dollar trading loss by the bank’s chief investment office in London.

Since the loss was first disclosed a year ago, Mr. Dimon and the board have vowed to correct problems and bolster risk controls.

In a statement on Sunday, the bank said: “The company strongly endorses the re-election of its current directors and disagrees with I.S.S.’s position. The members of the board’s risk committee have a diversity and breadth of experiences that have served the company well. While the company has acknowledged a number of mistakes relating to its losses in C.I.O., an independent review committee of the board determined that those mistakes were not attributable to the risk committee.”

While the three directors had served on the risk committee when JPMorgan navigated through the financial crisis, I.S.S. criticized the three for failing to have strong backgrounds in risk management. Its report said “it is odd” that the bank’s biggest rivals have managed to find directors with stronger qualifications.

I.S.S. said it took its concerns about the risk policy committee to Lee Raymond, the board’s presiding director. Boards typically appoint presiding or lead directors to act as a counterbalance when the chairman also serves as chief executive.

Mr. Raymond, a former chief executive of Exxon Mobil, cited the challenges of finding qualified board members who were not conflicted from serving, according to I.S.S.

I.S.S. said that after its conversations with Mr. Raymond it concluded that any changes made since the 2012 trading loss were headed by management and not the board.

That assessment may sway some shareholders who are deciding how to vote their shares on another issue. A number of big investors grade the quality of a company’s lead director in considering whether to vote to split the roles of chairman and chief executive, said one major shareholder.

If shareholders conclude Mr. Raymond is not an adequate lead director, it may result in more investors supporting a split of the top jobs.

“We look at the lead director and ask ‘is this person up to the task, are they a leader and do they stand up to the C.E.O.?’ ” said one shareholder, who spoke on condition of anonymity because this person was not authorized to speak publicly. “If the answer is no, we support splitting the roles.”

JPMorgan shareholders are now deciding how to vote on the question of splitting the chairman and chief executive roles, and whether to vote for the company’s directors. The results will be announced on May 21 at the annual meeting in Tampa, Fla.

Their calculations come as the bank has found itself under scrutiny over its relations with regulators and over investigations into the trading loss and compliance problems.

At the same time, however, JPMorgan shareholders have much to be thankful for. Last month, the bank reported its 12th consecutive quarterly profit, aided by strong revenue gains from investment banking and mortgage-related activity. JPMorgan has gained market share and has managed to buck trends rattling its rivals.

Still, I.S.S. emphasized risk controls in its report, saying that the need for risk policy members “who can go toe-to-toe with management is particularly acute.”

The three directors it singled out “lack robust industry-specific experience,” and the failures of the last year have “demonstrated their unsuitability” on the risk policy committee and the board, the report said.

One of the three, Ms. Futter, is president of the American Museum of Natural History. She had served on the board of the insurance giant American International Group, which nearly collapsed in the 2008 financial crisis.

Last year, 86 percent of shareholders voted for Ms. Futter, the lowest level of support for any director. Some executives inside the bank, though, say that while Ms. Futter may not be a banker, she does bring perspective on reputational risk.

Mr. Cote, as chief executive of Honeywell International, heads an industrial company, not a financial firm, I.S.S. noted, leaving him potentially lacking in relevant experience.

Mr. Crown, who has been a director of JPMorgan or one of its predecessor companies since 1991, is chairman of the risk policy committee. He is president of Henry Crown & Company, a private investment firm.

“While Mr. Crown leads a privately owned investment company and has three years of investment banking experience, it is unclear if his experience is sufficiently robust for a large and complex institution like JPM,” I.S.S. said in its report.

The only member of the risk policy committee who is being backed is Timothy Flynn, a former KPMG executive who was appointed in August 2012 as part of the board and bank’s efforts to improve oversight and controls in the wake of the London trading loss.

In addition to Mr. Flynn’s appointment, an executive at the bank who was not authorized to speak on the record said that while an independent committee of the board looked into the trading loss and found the risk policy committee was not at fault, a number of changes have been made over the last year and that group now receives more timely information from management.

The proxy firm reserved some of its harshest criticism for the board itself, faulting it for its lack of communication with shareholders over the last year.

“Unlike company managers, boards have a fiduciary responsibility to shareholders and should play an active role in crisis management and shareholder communication,” I.S.S. wrote. “In this case, however, the board does not appear to have conducted any significant outreach to shareholders.”

http://dealbook.nytimes.com/2013/05/05/a-call-for-new-blood-on-the-jpmorgan-board/?pagewanted=print

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The Seductive Simplicity of a New Banking Bill

By PETER EAVIS


We all want to live in a world where we can stop worrying about the banks. Would a tough new piece of legislation, introduced in the Senate on Wednesday, get us there?

Senators Sherrod Brown, Democrat of Ohio, and David Vitter, Republican of Louisiana, have two aims in writing their bank bill. They say they not only want to toughen the overhaul of the financial system, but also to simplify it.

Think of the senators as punk rockers reacting against the sophisticated progressive-rock scene of the 1970s. Sick of an ornate status quo, they have come out swinging with an uncluttered approach that many will find invigorating.

Before looking at what the bill would do, it’s interesting to note what it wouldn’t. The legislation doesn’t stipulate a maximum size for banks. And, strangely, it takes no big steps to force Wall Street operations out of the safety net that the Federal Reserve provides to banks in times of crisis.

Even so, the bill will of course face enormous resistance, and not just from the bank lobbyists who seem reflexively to oppose any measure to overhaul their industry. There are analysts who want to do more to rein in the banks, but who think the senators are naïve, or intellectually lacking, to think that today’s complex financial system can be made safer with their seemingly simple fixes.

They have a point.

The financial system will be safer than it was once the two big postcrisis overhauls are in place. Those are the Dodd-Frank legislation, passed by Congress in 2010, and the internationally agreed-upon banking rules known as Basel III.

These two efforts don’t set out to radically remake banks. They opt for a technocratic, pragmatic approach. Both take steps to make lenders more resilient to losses, and they introduce incentives to make riskier activities less attractive for banks. In an indirect way, they also try to keep banks from getting much bigger than they are today.

There’s one other important element to Basel III and the Dodd-Frank Act: they assume regulators are up to the task of monitoring big banks. That trust has been undermined by recent events. Regulators didn’t grasp the full danger of the gargantuan derivatives trades at JPMorgan Chase that led to big losses last year. Some analysts are questioning whether the Basel III figures put out by European banks reflect the true riskiness of their assets. And, of course, regulators did little to gird the banks ahead of the American housing bust or the European sovereign debt debacle.

And in a major way, the Brown-Vitter bill effectively sidesteps the need for reliable regulators. It simply says that all big banks would have to set up a buffer for potential losses – called capital in the industry – that is equivalent to 15 percent of their total assets.

Take TBTF Finance Corporation, a hypothetical bank that holds $300 billion of mortgages and $300 billion of government bonds. It would have to set aside 15 percent of $600 billion, or $90 billion, as capital under the proposed rule.

Basel III and Dodd-Frank also require certain levels of capital. But their capital calculations are heavily influenced by a practice called risk weighting. This says banks can hold less capital against assets that are perceived to have less chance of showing future losses.

At TBTF Finance, the Basel risk weightings might allow the bank to hold no capital against government bonds, and they might ask for 4 percent, or $12 billion, against the mortgages.

Basel III wouldn’t allow TBTF Finance to get away with just holding 4 percent capital. It could demand as much as 9.5 percent. But that 9.5 percent would be calculated on TBTF Finance’s total risk-weighted assets of $300 billion. That would mean the bank would have to hold $28.5 billion of capital, far less than the $90 billion under Brown-Vitter.

Clearly, under Basel, the banks have an incentive to get their risk-weighted assets down.

A lender with many different types of assets and a big trading operation will be doing thousands of risk-weighting calculations when setting its capital, some of which will involve complex computer models. Critics ask, How can regulators stay on top of everything? In addition, skeptics say that assuming some assets are less risky than others will end in tears, since it’s almost impossible to tell ahead of time where big losses will occur.

The Brown-Vitter bill sweeps all that aside. It would get rid of Basel III, and by insisting on 15 percent capital against all types of assets, it avoids stipulating which bank holdings are riskier than others.

But Brown-Vitter may have its own shortcomings. Granted, risk weightings may never accurately reflect what’s going on in the real world, but the newest proposal may fall into the same trap.

It treats all assets the same, an approach that may prove even more disconnected from reality. It is possible that the United States Treasury could default one day, which would make United States government bonds as risky as mortgages, but is it really right to build that unlikely occurrence into capital rules?

In fact, assuming all assets are equally risky could create perverse incentives, says Mayra Rodríguez Valladares, managing principal at MRV Associates, a firm that consults on Basel issues. Freed from risk weights, banks may be more inclined to make certain types of loans that have historically experienced big losses, like home equity mortgages. “Banks might invest more in high-yielding, high-risk assets,” said Ms. Rodríguez Valladares. “It’s totally inaccurate to lump everything into one category.”

Also, Basel III may end up being significantly stronger than its critics say. For instance, the world’s largest banks will be subject to a special surcharge. Ms. Rodríguez Valladares says there are discussions about whether to calculate this extra capital on total assets, not risk-weighted assets. Go back to TBTF Finance with its $28.5 billion of capital. Adding 2 percent of its total assets, or $12 billion, would take capital up to $40.5 billion.

That’s still less than half of what Brown-Vitter would require. Of course, it may be more closely matched to the risk of TBTF Finance’s assets. But if the risk weights are faulty, and TBTF Finance racks up crippling losses, the lender may burn through all its capital and fail. That could paralyze the financial system, weaken the wider economy and even prompt the government to bail it out.

The beauty of Brown-Vitter is that all that extra capital makes that awful outcome much less likely.

http://dealbook.nytimes.com/2013/04/26/the-seductive-simplicity-of-a-new-banking-bill/?ref=business&pagewanted=print

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A Debate in the Open on the Fed

By BINYAMIN APPELBAUM


RICHMOND, Va. — Federal Reserve officials regularly air their views in public speeches, but they rarely engage in public debates. On Tuesday night, two of the officials who disagree most sharply about the Fed’s current policy did just that.

The exchange between Charles L. Evans, an outspoken advocate for the Fed’s efforts to stimulate the economy, and Jeffrey M. Lacker, the Fed’s most persistent internal critic, suggested their differences are as much a matter of temperament as economics.

Mr. Lacker, the president of the Federal Reserve Bank of Richmond, said he did not expect the economy to recover the losses sustained during the recession. “It’s hard to talk about the economic outlook without being a little bit of a sourpuss,” he said during a panel discussion sponsored by Virginia Commonwealth University.

Mr. Evans, the president of the Chicago Fed, describing himself as “the happy guy in the room,” said the recovery had been postponed rather than canceled.

Mr. Lacker said he doubted monetary policy had more power to increase growth.

Mr. Evans said the Fed had an obligation to try because unemployment remained high.

Mr. Evans said the Fed would have sufficient warning of inflationary pressures to keep price increases under control. Mr. Lacker said he was worried the Fed was overconfident about its ability to manage the risk.

Both men emphasized that their views could prove to be wrong.

Their basic difference is about whether it would be better to do too little or too much.

The Fed is trying to stimulate the economy by suppressing interest rates, reducing borrowing costs and encouraging risk-taking. It intends to hold short-term rates near zero at least as long as the unemployment rate remains above 6.5 percent. The rate stood at 7.7 percent in February. To hasten that process, the Fed also is buying $85 billion a month of Treasury and mortgage-backed securities.

The Fed’s course continues to be set by its chairman, Ben S. Bernanke, and a centrist majority he has carefully assembled who regard asset purchases as necessary and effective. In recent months, Mr. Bernanke and his supporters have argued forcefully that the risks of doing too little exceed the risks of doing too much.

“I do not claim that there are no costs or risks associated with our unconventional monetary policy regime,” one of Mr. Bernanke’s closest allies, William C. Dudley, the president of the Federal Reserve Bank of New York, said last month. “But I see greater cost and risk in moving prematurely to a policy setting that might not prove sufficiently accommodative to ensure a sustainable, strengthening recovery.”

Mr. Bernanke said last month that the Fed’s next step is likely to be a reduction in the volume of monthly asset purchases rather than an abrupt cessation. And even that first step may not come for some time.

Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said Tuesday that he thought the Fed would need to keep buying bonds at least until the end of this year, and possibly into next year.

“There are encouraging developments in the economy, to be sure, but the evidence of sustainable momentum that will deliver ‘substantial improvement in the outlook for the labor market; is not yet conclusive,” Mr. Lockhart said. “I favor a ‘wait and watch’ mode for the time being. Several more months of positive data — especially in a range of employment data — would give me confidence that the economy has real traction and is unlikely to backslide.”

Mr. Evans made clear that he, too, wants the Fed to keep buying bonds. He has said that the central bank needs to demonstrate that its commitment to reduce unemployment equals its commitment to control inflation.

The Fed is charged by Congress with minimizing unemployment, which has persisted at high levels since the financial crisis, and stabilizing prices.

“Our credibility will ultimately be judged by how we do on both of these mandates, not just the price mandate,” Mr. Evans said Tuesday night. “I think we will be judged very badly” if officials do not act forcefully to reduce unemployment and instead, he said, “worry obsessively” about inflation.

Only one Fed official has gone further than Mr. Evans and suggested that the Fed should increase its efforts to stimulate the economy.

Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, reiterated in a speech Tuesday that the Fed should hold short-term rates near zero at least so long as the unemployment rate was above 5.5 percent, one percentage point lower than the Fed’s current 6.5 percent threshold.

Mr. Lacker, by contrast, said Tuesday night that he saw little evidence the Fed’s efforts were helping the economy. He said that reflected the limits of monetary policy, particularly the experimental strategies the Fed has deployed in recent years. He also noted that the Fed had repeatedly overestimated the strength of the recovery.

“There’s little more that we can do,” Mr. Lacker said of monetary policy. “There’s little more that we can contribute to growth.”

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Promises, Promises at the New York Fed
By GRETCHEN MORGENSON
TWO weeks ago, I wrote a column about a secret agreement struck in July 2012 by the Federal Reserve Bank of New York and Bank of America. The existence of the confidential deal was disclosed recently in court filings, which showed the New York Fed releasing Bank of America from all fraud claims on mortgage securities the Fed had bought as part of the government’s rescue of the American International Group in 2008.

A.I.G., which is suing Bank of America to recover losses it suffered on those securities, has calculated the value of the fraud claims at $7 billion.

Late on Thursday, a copy of the actual agreement came to light. It was filed by Bank of America in a California court that is hearing the matter of who owns those fraud claims — A.I.G. or the New York Fed. The agreement was also filed by the New York Fed in a related lawsuit in the Southern District of New York, where the New York Fed asked that the court keep the agreement under seal.

A reading of the document makes it clear why.

The agreement spells out the terms of a deal in which the New York Fed received $43 million from Bank of America’s Countrywide unit. The money changed hands to settle a narrow dispute involving cash flows on several mortgage securities held by an investment vehicle, known as Maiden Lane II. That vehicle was created by the New York Fed as part of the rescue of A.I.G., which had held the Countrywide securities. The previously confidential agreement released Bank of America from all litigation claims on the securities held by Maiden Lane II.

But in exchange for that $43 million, the New York Fed did something else for Bank of America. It agreed to testify on behalf of the bank in its legal battle against A.I.G. over fraud claims.

In that matter, Bank of America has argued that A.I.G. has no right to sue it for fraud because A.I.G. sold the securities to Maiden Lane II and so transferred the litigation rights to the New York Fed. A.I.G., however, maintains that the Maiden Lane agreement never specified the transfer of the right to sue for fraud and that an explicit transfer is required by New York law, which governs the agreement. The New York Fed provided Bank of America with two affidavits supporting the bank’s view of who owned the mortgage securities’ fraud claims.

Two weeks ago, it was unclear why the New York Fed gave Bank of America the affidavits. But now, its promise to testify “as needed,” shown in the formerly confidential settlement, addresses that oddity. It was a contractual obligation.

Interestingly, the New York Fed did not tell the California court that its affidavits came about because of its deal with Bank of America. The affidavits came from James M. Mahoney, a vice president at the New York Fed, and Stephanie A. Heller, its deputy general counsel.

But those affidavits differ from the position taken earlier by Thomas C. Baxter Jr., the New York Fed’s general counsel. In a letter to A.I.G. in October 2011, Mr. Baxter said that he and his colleagues “agree that A.I.G. has the right to seek damages” under securities laws for the instruments it sold to Maiden Lane II.

Michael Carlinsky, A.I.G.’s lawyer at Quinn Emanuel Urquhart & Sullivan, said on Friday that he found it “disturbing” that the New York Fed made a contract to “assist Bank of America in its defense of A.I.G.’s lawsuit.”

Also on Friday, I asked the New York Fed why it had included this promise of legal support for Bank of America in the settlement agreement. Jack Gutt, a spokesman, said in a statement that the New York Fed had intended to hold the litigation rights and that the declarations were true.

“The New York Fed did not agree to provide the declarations to benefit B. of A., but rather because doing so helped the New York Fed obtain the best possible settlement” for Maiden Lane II, Mr. Gutt said. “In agreeing to this provision as part of what the New York Fed believed was a favorable settlement agreement, the New York Fed was concerned exclusively with advancing the taxpayer interest.”

I also asked a Bank of America spokesman whether the bank had paid more in the settlement because of the New York Fed’s promise to testify. He declined to answer that question, saying, “Countrywide provided fair value for a complete release of claims by the Federal Reserve Bank of New York, and the Fed agreed to provide testimony standing behind what it had formally represented to Countrywide regarding the assignment of claims from A.I.G.”

Edward J. Kane, a professor of finance at Boston College who has written extensively about financial regulators who are too close to the industries they regulate, discussed with me the unusual terms of the New York Fed’s deal with Bank of America.

“The Fed seems to have thrown off all restraints on its behavior in just trying to get through the crisis and the aftermath of the crisis,” Mr. Kane said. “It’s like a slippery slope, and they just keep sliding a little further.”

The New York Fed was also criticized last week in a related ruling by Lewis A. Kaplan, a federal judge for the Southern District of New York. A.I.G. had asked Judge Kaplan to oversee the dispute over who — A.I.G. or Maiden Lane II — owns the fraud claims in these securities. Even though the Maiden Lane agreement required that any disputes between the New York Fed and A.I.G. be heard in a New York court, the New York Fed argued that the matter should be decided in California.

Although Judge Kaplan declined to take the case from the California court, he said in his ruling that the New York Fed appeared to be trying “to circumvent and defeat the forum selection clause to which it is bound by its agreement with A.I.G.” The New York Fed’s actions, he wrote, “perhaps are unattractive and, indeed, wrongful.”

Mr. Gutt said that the New York Fed was not trying to “defeat a forum selection clause, but rather to fulfill a contractual obligation.”

The federal judge’s words are nonetheless strong. And they highlight the reputational risk that the New York Fed may have taken on as a result of these events.

Of course, the reputations of many financial institutions have taken a beating in the years after the crisis, as Sarah Bloom Raskin, a governor of the Federal Reserve System, acknowledged in a speech last Thursday. Her remarks, titled “Reflections on Reputation and Its Consequences” and delivered at a Federal Reserve Bank of Atlanta conference, explored the reputational damage suffered recently by United States financial institutions.

Ms. Raskin called on policy makers to think about reputation as it relates to the banks they oversee. If examiners are watchful for threats to an institution’s reputation, she said, other risks posed to investors, creditors, trading partners and taxpayers may come to light.

“Sociologists and economists have long remarked upon the central role that social trust plays in healthy markets,” she said, according to her written remarks. “Social trust is the glue that holds markets and societies together. In the context of banking, social trust and reputation are related concepts.”

Surely this holds true in the context of central banking as well.

http://www.nytimes.com/2013/03/03/business/new-york-fed-agreed-to-testify-for-bank-of-america.html?ref=business&pagewanted=print

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Fed Defends Stimulus in Testimony to Senate
By BINYAMIN APPELBAUM

WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, played down concerns about the Fed’s economic stimulus campaign on Tuesday, describing it as necessary and effective and making clear it was likely to continue for some time.

In testimony before the Senate Banking Committee, Mr. Bernanke was relatively upbeat about the broader economy, which he said was growing again after pausing in the fourth quarter. But he said unemployment remained unacceptably high.

“In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear,” Mr. Bernanke said. “Monetary policy is providing important support to the recovery” even as inflation remains in check.

The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities to promote more borrowing and lending, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent.

Other Fed officials unsettled some investors in recent weeks by raising concerns that the Fed was encouraging excessive risk-taking, or that it would be difficult to unwind the extensive purchases, which might lead the central bank to pull back. Mr. Bernanke’s remarks appeared to soothe those concerns. Stocks rose as he spoke, and stayed up. The Standard & Poor’s 500 index climbed 0.61 percent on the day.

Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, wrote that the testimony amounted to a “robust defense” of the aggressive efforts by the Federal Open Market Committee that “gives no ground to those within and without the F.O.M.C. who think asset purchases will soon need to be curtailed.”

The reception on Capitol Hill was frostier, as several Republican senators challenged Mr. Bernanke’s assertion that the purchases were producing clear economic benefits, and questioned the potential costs. Senator Bob Corker, a Tennessee Republican, drew Mr. Bernanke into an unusually sharp exchange.

Mr. Corker, asserting that low interest rates were “throwing seniors under the bus,” by reducing returns on some kinds of investments, asked Mr. Bernanke, “Do you all ever talk about the longer-term degrading effect of these policies?”

“One thing we talk about is unemployment,” Mr. Bernanke responded. He added that the best way to increase interest rates was to increase growth.

Mr. Corker then accused Mr. Bernanke of insufficient concern about potential inflation, saying, “I don’t think there’s any question that you would be the biggest dove since World War II,” using the term “dove” to denote a Fed official who is more concerned about unemployment than higher inflation.

Mr. Bernanke, clearly piqued, responded, “You call me a dove, but my inflation record is the best of any chairman in the postwar period.”

The Fed chairman was more measured on the subject of asset bubbles.

Jeremy C. Stein, a member of the Fed’s Board of Governors, and some other Fed officials have expressed concern in recent months that low interest rates were encouraging excessive risk-taking by investors pursuing higher returns. Mr. Stein in a recent speech highlighted rising demand for junk bonds and certain kinds of real estate investments, and shifts in bank balance sheets, as areas of potential concern.

Mr. Bernanke said the Fed took these concerns “very seriously,” noting that the central bank had significantly expanded its efforts to monitor financial markets, as well as giving greater priority to financial regulation.

But he said that low interest rates also were helping to strengthen the financial system, by encouraging companies to increase reliance on long-term financing, allowing debt levels to decline and fostering growth.

He added that he saw no reason to consider a change in course.

“To this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Mr. Bernanke said.

He also played down the concern expressed by some Fed officials and analysts that the central bank’s plans to control inflation as the economy recovers could be complicated by a political penalty because it may lose money as it sheds some of its vast holdings of Treasuries and mortgage bonds.

Such losses could be large enough to prevent the Fed from transferring profits to the Treasury Department for the first time since 1934, according to a Fed analysis.

Mr. Bernanke, noting that the Fed had transferred $290 billion to Treasury since 2009, said it was “highly likely” Treasury still would see a net benefit from the purchases because any losses would not exceed those profits.

“Moreover,” he said, “to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury.”

Much of the hearing focused on fiscal policy as Mr. Bernanke renewed his warning that short-term spending cuts have become a major impediment to faster growth. He urged Congress to make cuts more gradually.

Several senators vainly pressed Mr. Bernanke to agree that the economic impact could be reduced by calibrating the cuts without altering the pace.

“The near-term effect on growth would not be substantially different,” he said, although he eventually agreed that there might be modest benefits.

He even offered senators a little pep talk. “I know that you’re trying,” he said, “and I hope you can find the agreement to achieve these important objectives.”

http://www.nytimes.com/2013/02/27/business/economy/fed-chairman-defends-stimulus-efforts.html?ref=politics&pagewanted=print

[BullNBear52]

Withdrawn: $114 Billion From Big U.S. Banks
By Nick Summers on January 23, 2013

More than $114 billion exited the biggest U.S. banks this month, and nobody’s quite sure why.

The Federal Reserve releases data on the assets and liabilities of commercial banks every Friday. The most current figures, covering the first full week of 2013, show the largest one-week withdrawals since the Sept. 11, 2001, attacks. Even when seasonally adjusted, the level drops to $52.8 billion—still the third-highest amount on record, and one for which bank experts and analysts were reluctant to give a definitive explanation.

The most obvious culprit is the expiration of the Transaction Account Guarantee program, the extraordinary federal effort to shore up the country’s non-gigantic banks during the 2008 financial crisis. Big banks were considered “too big to fail,” while smaller ones were vulnerable to runs. The TAG program backstopped their deposit bases by temporarily offering unlimited insurance on money kept in non-interest-bearing accounts. That guarantee ended on Dec. 31, so a decrease in deposits would be expected first thing in January.



But hold on: The Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks because the big ones are still considered too big to fail. “I think [customers] are going to go back to the mega banks,” the head of a regional bank in Bethesda, Md., told The Washington Post in December. “They’ve been assured by the government that mega banks are too big to fail. It’s a horrible, bad, poorly-thought-out situation.” Small banks fearfully lobbied the Senate to extend TAG, with analysts telling the New York Times that they expected $200 million to $300 million—yes, with an m—to move from affected accounts into money market funds or elsewhere.

So if the missing $114 billion is not the result of the TAG program expiration—or at least not all related to TAG—what’s going on? Paul Miller, a bank analyst with FBR Capital Markets, cautions against reading too much into the Fed’s weekly data. “It’s a noisy database,” he says. Among large U.S. banks, there have been movements of greater than $50 billion (not seasonally adjusted) during 107 different weeks since 2000. It’s not uncommon to see 11-figure swings—that is, tens of billions of dollars—from positive to negative, or vice-versa, one week to the next.

Noise can increase near the start of a year. “The first quarter is always a wacky quarter,” Miller says. And January 2013 has seen an incredible amount of change. First, the fiscal cliff drama had companies shifting dividends and had bank clients guessing what their tax liabilities would be, which might explain the $60.4 billion pumped into the largest banks during the week ending Dec. 26. (Seasonally adjusted, it was the sixth-highest level on record.) Second, the payroll tax just went up, sticking most wage earners with paychecks that are 2 percent smaller.



Third, ordinary investors may be ready to move out of federally guaranteed accounts and into investments. Stocks did very well in 2012. As Bloomberg Businessweek’s Roben Farzad wrote on Jan. 16, equity mutual funds saw their second-highest inflows on record in the first week of the year. Economists are worrying that market exuberance is getting too high, with one measure of risk aversion at a three-decade low.

“If deposits are really trending down—and at the end of the month, we’ll be smarter than we are now—if that’s the case, it can tell us a few things,” says Dan Geller, executive vice president of Market Rates Insight. “And one thing that it could tell us is that the law of elasticity is finally catching up with deposits.” In other words, contrary to what economic theory predicts, deposits have been piling up at banks ever since the crisis, even though they offer pitiful yields. Geller says that may finally be ending—though like Miller, he says not to put too much stock in just one burst of Fed data.

“One week is just a very thin slice,” he says. Still, $114 billion is a big figure, and it’s one to keep an eye on in order to understand where the economy is headed in 2013.

http://www.businessweek.com/articles/2013-01-23/missing-114-billion-from-u-dot-s-dot-banks

[BullNBear52]

Coins Against Crazies

By PAUL KRUGMAN


So, have you heard the one about the trillion-dollar coin? It may sound like a joke. But if we aren’t ready to mint that coin or take some equivalent action, the joke will be on us — and a very sick joke it will be, too.

Let’s talk for a minute about the vile absurdity of the debt-ceiling confrontation.

Under the Constitution, fiscal decisions rest with Congress, which passes laws specifying tax rates and establishing spending programs. If the revenue brought in by those legally established tax rates falls short of the costs of those legally established programs, the Treasury Department normally borrows the difference.

Lately, revenue has fallen far short of spending, mainly because of the depressed state of the economy. If you don’t like this, there’s a simple remedy: demand that Congress raise taxes or cut back on spending. And if you’re frustrated by Congress’s failure to act, well, democracy means that you can’t always get what you want.

Where does the debt ceiling fit into all this? Actually, it doesn’t. Since Congress already determines revenue and spending, and hence the amount the Treasury needs to borrow, we shouldn’t need another vote empowering that borrowing. But for historical reasons any increase in federal debt must be approved by yet another vote. And now Republicans in the House are threatening to deny that approval unless President Obama makes major policy concessions.

It’s crucial to understand three things about this situation. First, raising the debt ceiling wouldn’t grant the president any new powers; every dollar he spent would still have to be approved by Congress. Second, if the debt ceiling isn’t raised, the president will be forced to break the law, one way or another; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.

Finally, just consider the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world. Yet Republicans are threatening to trigger this disaster unless they get spending cuts that they weren’t able to enact through normal, Constitutional means.

Republicans go wild at this analogy, but it’s unavoidable. This is exactly like someone walking into a crowded room, announcing that he has a bomb strapped to his chest, and threatening to set that bomb off unless his demands are met.

Which brings us to the coin.

As it happens, an obscure legal clause grants the secretary of the Treasury the right to mint and issue platinum coins in any quantity or denomination he chooses. Such coins were, of course, intended to be collectors’ items, struck to commemorate special occasions. But the law is the law — and it offers a simple if strange way out of the crisis.

Here’s how it would work: The Treasury would mint a platinum coin with a face value of $1 trillion (or many coins with smaller values; it doesn’t really matter). This coin would immediately be deposited at the Federal Reserve, which would credit the sum to the government’s account. And the government could then write checks against that account, continuing normal operations without issuing new debt.

In case you’re wondering, no, this wouldn’t be an inflationary exercise in printing money. Aside from the fact that printing money isn’t inflationary under current conditions, the Fed could and would offset the Treasury’s cash withdrawals by selling other assets or borrowing more from banks, so that in reality the U.S. government as a whole (which includes the Fed) would continue to engage in normal borrowing. Basically, this would just be an accounting trick, but that’s a good thing. The debt ceiling is a case of accounting nonsense gone malignant; using an accounting trick to negate it is entirely appropriate.

But wouldn’t the coin trick be undignified? Yes, it would — but better to look slightly silly than to let a financial and Constitutional crisis explode.

Now, the platinum coin may not be the only option. Maybe the president can simply declare that as he understands the Constitution, his duty to carry out Congressional mandates on taxes and spending takes priority over the debt ceiling. Or he might be able to finance government operations by issuing coupons that look like debt and act like debt but that, he insists, aren’t debt and, therefore, don’t count against the ceiling.

Or, best of all, there might be enough sane Republicans that the party will blink and stop making destructive threats.

Unless this last possibility materializes, however, it’s the president’s duty to do whatever it takes, no matter how offbeat or silly it may sound, to defuse this hostage situation. Mint that coin!


http://www.nytimes.com/2013/01/11/opinion/krugman-coins-against-crazies.html?partner=rssnyt&emc=rss&pagewanted=print

[BullNBear52]

JPMorgan turns in record profit, higher revenue
Higher revenue, lower reserves for losses push JPMorgan to record profit
By Christina Rexrode, AP Business Writer | Associated Press – 28 minutes ago.


NEW YORK (AP) -- JPMorgan Chase, the country's biggest bank by assets, reported a record quarterly profit Friday.

The bank said it made $5.3 billion in earnings for common shareholders, a widely used measurement, from July through September, up 36 percent from the same period a year ago.

Earnings for common shareholders includes expenses for making payments to preferred shareholders. Without those expenses, net income would have been even higher, at $5.7 billion.

Either way, the bank blew away analysts' expectations. Earnings were $1.40 per share, far exceeding the $1.21 predicted by analysts polled by FactSet, a provider of financial data.

Revenue rose 6 percent to $25.1 billion, beating expectations of $24.4 billion. Earnings were helped because the bank set aside less money for bad loans. It set aside $1.8 billion for potential loan losses, down 26 percent from $2.4 billion a year ago.

Revenue from mortgage loans shot up 29 percent. Low interest rates, as well as a government program called Home Affordable Refinance Programs, encouraged homeowners to refinance.

In a statement, CEO Jamie Dimon said he believed the housing market "has turned a corner."

He noted, however, that the bank was still seeing a high level of souring mortgage loans, and said he expects high default-related expenses "for a while longer." And he noted the homeowners still struggling under mortgages they can't afford, saying the bank was working to modify such loans.

The bank gave few details on the surprise $6 billion trading loss that dominated its previous earnings report. It did mention that a credit portfolio moved to the investment bank from the chief investment office, which was responsible for bad trade, "experienced a modest loss.

JPMorgan's investment banking unit earned more in fees for underwriting stock offerings and debt offerings, which could signal that wary companies and investors are more willing to get back into the market.

Debit card revenue fell, which the bank blamed on new rules crimping the fees that banks charge stores whenever customers pay via debit card.

JPMorgan stock was up 58 cents at $42.68 in premarket trading. The stock was as low as $31 in early June, after the bank announced a surprise trading loss that ballooned to $6 billion.

http://finance.yahoo.com/news/jpmorgan-turns-record-profit-higher-111027074.html?l=1

[NYBob]

Bilderberg wants Ron Paul Dead

http://doreenellenbelldotan.info/AdolfRothschildHitler.htm

Iceland forgives mortgage debt of its population.

The People owns now their homes debt free -

NO more foreclosures, executive 666 banksters auctioneers etc. -
(May 8, 2012) Total 666 Media Blackout copycatz of
the iron ussr red curtains -

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=76778539
God Bless

Ps. btw....
compare to the PEOPLE in USA been robbed of
the money by 666 bailouts, tarp etc. -
would have payed for next 5 generation of PEOPLES houses -

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=70774248

soon most houses robbed by forclosuers etc. to rob
more money to 666 banksters khazarian gypses cult -
http://doreenellenbelldotan.info/AdolfRothschildHitler.htm

http://teaparty.org/noteligible.php
http://iseedeadpeople.co.cc/?p=1033

Iceland Dismantles Corrupt Gov't

[NYBob]

Dr. Ron Paul on 'Audit the Fed' - Then EndTheFed Ponzi Scheme!

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=77250727

Ps.
http://teaparty.org/noteligible.php
http://iseedeadpeople.co.cc/?p=1033
use smart PR - ex....
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=39097864

[NYBob]

Illuminati new world order 666 elite death conspiracy 2012 cult...

watch the above 2 links for more understanding on the spiritual old age deception...

New York Times Concealed Ukrainian Genocide

The Origins of Communism in Russia

http://doreenellenbelldotan.info/AdolfRothschildHitler.htm

history often repeatitself

Ron Paul Predicted 9/11 a Decade Ago!!!!!!!!!!!!

http://www.newsfollowup.com/bushfortune.htm

They' Killed Three Kennedys, MLK, Sen. Paul Wellstone.. Is Ron Paul next?

http://www.newsfollowup.com/bushfortune.htm

"U"nited "S" tates "S" upreme Court "R"uled =
USSR super red 666 elites copycats -
today that You can be Taxed on anything,
and there is no more
"check and balance" -

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=77044777

BIX WEIR Q's Answered: The Crash & Reset -- Good Guys & Bad Guys

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=77021864

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=77018155

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=77000593
God Bless

Ps.
http://teaparty.org/noteligible.php
http://iseedeadpeople.co.cc/?p=1033

We are being hypnotized by this oblong box in the corner of
the room called TV, its constantly telling us what to do.
People must realize that the major media companies are owned and
controlled by Zionists (another word for filthy satanic liars),
and they are feeding you and most significantly your children
pure garbage, and the sad thing is, you are accepting it,
I might even say youre happy about it.
So take a step back, take a deep breath, and see the big picture,
then you'll realize how you are being manipulated by The Elite
copycats of ussr sovjet murder of 100s of million PEOPLE -

watch the 2 part documentary i have uploaded about the ocultists
and how satan has manipulated every religion that has ever
existed from the very beggining.
Bellow is link to the first and second part, dont let it shake
your faith, as it most obviously will shake the faith of those
who have abandoned GOD

http://www.youtube.com/user/veritas77axiom

[BullNBear52]

Number of Ailing Banks Falls as Earnings Reach 5-Year High, F.D.I.C. Says

By THE ASSOCIATED PRESS


Bank earnings rose in the first quarter to the highest level in nearly five years, and the number of troubled banks fell for the fourth consecutive quarter, the Federal Deposit Insurance Corporation said on Thursday.

The mostly positive report illustrated how far the banking industry had come since the 2008 financial crisis. Still, the report noted that many banks remained cautious about lending, a necessary driver of economic growth.

The report is “broadly in line with what we’ve seen in the economy as a whole,” said Bert Ely, an independent banking analyst based in Alexandria, Va. “Sluggish improvement, but nonetheless improvement.”

The F.D.I.C. said the banking industry earned $35.3 billion in the quarter, compared with $28.7 billion in the period a year earlier. It was the highest level since the second quarter of 2007.

About 67 percent of banks reported improved earnings. Overall revenue increased from the first quarter of 2011, bolstered by higher profits from loans and fees on customers’ bank accounts.

The news was not all good. Bank loans to consumers fell in most categories. Credit card loans and home mortgages were among those showing lower balances.

The agency’s acting chairman, Martin J. Gruenberg, called the decrease in lending “disappointing, after we saw three quarters of growth last year.”

Weakness in the housing market has weighed on broader lending, said James Chessen, chief economist of the American Bankers Association, the industry’s biggest trade group.

“The overall lending volume for banks will continue to grow at a gradual pace until the housing market improves,” Mr. Chessen said in a statement.

An exception is loans to commercial and industrial borrowers. Those rose about 14 percent from a year earlier, which suggests that businesses were expanding.

Banks with assets exceeding $10 billion accounted for most of the earnings growth in the January to March period. While they make up just 1.4 percent of banks, they accounted for 81 percent of the earnings.

They include Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. Most of them have recovered with help from federal bailout money and record-low borrowing rates.

The number of banks on the F.D.I.C.’s confidential “problem” list fell in the first quarter to 772, or about 9.5 percent of all federally insured banks. That compares with 813 troubled banks in the fourth quarter.

The surge in first-quarter earnings came after the industry’s most profitable year since 2006, a sign that many banks have put the 2008 financial crisis behind them. Still, last year’s increase came largely because banks suffered fewer losses — not because they took in more money.

The slow recovery, record-low interest rates and weak demand for loans left bank revenue mostly flat for the year.

Banks are starting to take in more money this year. The industry posted a 3 percent increase in revenue from a year earlier. It was only the second time in the last five quarters that revenue rose, the F.D.I.C. said.

Bank losses on loans declined in the January to March period to $21.8 billion — the lowest level in four years.

http://www.nytimes.com/2012/05/25/business/economy/fewer-ailing-banks-as-earnings-rise-fdic-says.html?ref=business&pagewanted=print

[BullNBear52]

Parsons Blames Glass-Steagall Repeal for Crisis

By Kim Chipman and Christine Harper - Apr 19, 2012 8:48 PM ET

Richard Parsons, speaking two days after ending his 16-year tenure on the board of Citigroup Inc. (C) and a predecessor, said the financial crisis was partly caused by a regulatory change that permitted the company’s creation.

The 1999 repeal of the Glass-Steagall law that separated banks from investment banks and insurers made the business more complicated, Parsons said yesterday at a Rockefeller Foundation event in Washington. He served as chairman of Citigroup, the third-biggest U.S. bank by assets, from 2009 until handing off the role to Michael O’Neill at the April 17 annual meeting.

“To some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall,” Parsons, 64, said during a question-and-answer session. “Have we gotten our arms around it yet? I don’t think so because the financial- services sector moves so fast.”

The 1998 merger of Citicorp and Sanford I. Weill’s Travelers Group Inc. depended on the U.S. government overturning the portion of the Depression-era act that required banks to be separate from capital-markets businesses like Travelers’ Salomon Smith Barney Holdings Inc. Parsons, who was president of Time Warner Inc. (TWX) at the time, had been a member of the Citicorp board before joining the board of the newly created Citigroup.

“Why didn’t he do something about it when he had a chance to?” Mike Mayo, an analyst at CLSA in New York who rates Citigroup shares “underperform,” said in a phone interview. “He’s a couple days out the door and he’s publicly criticizing the ability to manage the company.”

‘Dynamic World’

Unlike John S. Reed, the former Citicorp CEO who said in 2009 that he regretted working to overturn Glass-Steagall, Parsons said he didn’t think that the barriers can be rebuilt.

“We are going to have to figure out how to manage in this new and dynamic world because there are good and sufficient business reasons for putting these things together,” Parsons said. “It’s just that the ability to manage what we have built isn’t up to our capacity to do it yet.”

Parsons didn’t refer to Citigroup specifically during his comments and Shannon Bell, a spokeswoman for the bank in New York, declined to comment. Mayo said Parsons’ comments show he views the New York-based bank as “too big to manage.”

“This gives more support to the new chairman to take more radical action,” said Mayo, whose book “Exile on Wall Street” was critical of Parsons and the management of banks including Citigroup. “Citigroup needs to be reduced in size whether that’s breaking up or additional asset sales or whatever it takes.”

‘Separate Houses’

Parsons said in a phone interview after the event that it was difficult to find executives who could run retail banks and investment banks in the U.S. because the two businesses had been separated by Glass-Steagall for about 60 years.

“One of the things we faced when we tried to find new leadership for Citi, there wasn’t anybody who had deep employment experience in both sides of what theretofore had been separate houses,” he said. Chief Executive Officer Vikram Pandit is trying to change that, Parsons said. “I think if you ask Vikram he’d say probably his biggest challenge long-term is developing the management.”

Banks are growing because corporations and other clients want them to, and management must meet the challenge, he said.

U.S. Bailout

“People have a sort of a notion that ‘well, we can decide that’s too big to manage,’” he said. “But it got that way because there was a market need and institutions find and follow the needs of the marketplace. So what we have to do is we have to learn how to improve our ability to manage it and manage it more effectively.”

Citigroup, which took the most government aid of any U.S. bank during the financial crisis, has lost 86 percent of its value in the past four years, twice as much as the 24-company KBW Bank Index. (BKX) Most shareholders voted this week against the bank’s compensation plan, which awarded Pandit about $15 million in total pay for 2011, when the shares fell 44 percent.

Shareholders’ views shouldn’t be “given the same level of weight” as those of the board and management, Parsons said. Companies “shouldn’t make the mistake of putting them in the driver’s seat.”

To contact the reporters on this story: Kim Chipman in Washington at [e-mail]; Christine Harper in New York at [e-mail].

http://www.bloomberg.com/news/2012-04-19/parsons-blames-glass-steagall-repeal-for-crisis.html

[BullNBear52]

New York Fed May Sell More of Its A.I.G. Assets

By MICHAEL J. DE LA MERCED


The Federal Reserve Bank of New York said on Wednesday that it was considering selling pieces of a final special entity created to hold assets once owned by the American International Group. If it is carried out, the move would further unwind the insurer’s government bailout.

The financial vehicle, Maiden Lane III, was created in 2008 to hold $24.3 billion worth of credit-default swaps that A.I.G. once owned. Those swaps were among the instruments that nearly brought the insurer to its knees, leading to the government’s huge $182 billion lifeline.

The New York Fed’s new plan is to sell off assets in that portfolio if a particular offer represents a good value and does not disrupt the financial markets, a spokesman for the regulator said in a statement.

It follows the disposal of a similar entity, Maiden Lane II, earlier this year through asset sales. A.I.G. has also taken additional steps to pay off its government obligations, including sales of $6 billion worth of stock and the paying down of an additional $1.5 billion.

“The change in the investment objective for Maiden Lane III reflects a strategic decision to explore possible sales of some of the assets in the portfolio in light of improving market conditions and the success of the Maiden Lane II sales,” the New York Fed spokesman, Jack Gutt, wrote in an e-mail to DealBook.

Previously, the New York Fed had sought to unwind the portfolio over time, rather than selling off pieces of it. To begin sales of Maiden Lane III securities, however, the regulator needed to change the financial entity’s investment objective to one that allowed for sales.

Mr. Gutt declined to comment on whether the New York Fed had received any offers for Maiden Lane III’s assets.

[BullNBear52]

Banking Regulator Calls for End of ‘Too Big to Fail’
By JESSE EISINGER

An annual report from a regional Federal Reserve bank is typically a collection of banalities and clichés with some pictures of local worthies who serve on the board.

And so it is with this year’s annual report from the Federal Reserve Bank of Dallas, whose pages are graced by the smiling, stolid portraits of board members who run local companies like Whataburger Restaurants.

But the text is something else entirely. It’s a radical indictment of the nation’s financial system. The lead essay, which is endorsed by the president of the Dallas Fed, contends that despite the great crisis of 2008, a cartel of megabanks is still hindering the economic recovery and the institutions remain too big to fail.


The country’s biggest banks look much as they did before the 2008 financial crisis — only bigger. They have “increased oligopoly power” and “remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation,” Harvey Rosenblum, the head of the Dallas Fed’s research department, wrote in the essay.

Having seen the biggest banks make risky bets, crush the economy and get rewarded leaves “a residue of distrust for the government, the banking system, the Fed and capitalism itself,” Mr. Rosenblum wrote.

It’s one thing for the Occupy movement to point out how bailing out the biggest banks — with little cost to their executives or shareholders and creditors — has demolished credibility. It’s quite another for top officials in the Federal Reserve system to put it in an annual report.

As for Dodd-Frank’s “resolution authority” — the power to dissolve big financial institutions that Barney Frank famously hailed as a death panel for banks — well, not so much. “For all its bluster, Dodd-Frank leaves TBTF entrenched,” Mr. Rosenblum wrote, using the acronym for “too big to fail.”

Yes, Dodd Frank has mechanisms in place to prevent taxpayer bailouts of the largest banks, he concedes. Banks are supposed to have “living wills” that explain how they could be seized and wound down while minimizing the use of taxpayer money.

But the Dallas Fed is deeply skeptical that this would work in real life.

“We know under the current structure that the government would be called on once again,” the president of the Dallas Fed, Richard W. Fisher, told me. He has been giving a series of speeches about the continuing problem of “too big to fail.”

The biggest banks are like aspen trees (to borrow a famous, but incorrect, metaphor made by Scooter Libby in a different context): their roots are intertwined and they turn color at the same time. “If you believe the next time the problem will center on one institution and one only, I cross my fingers and am reasonably confident” that regulators will be able to liquidate it in an orderly fashion, Mr. Rosenblum told me. But that one institution would have to be largely in one market, with few lines of business and few connections to other institutions.

Obviously, there’s almost no giant financial institution that fits that description. It’s more likely that the next crisis will be similar to this one, one with “too many to fail,” Mr. Rosenblum contends.

Another problem, the report points out, is that the decision now doesn’t rest with the Fed or some institution that has some slight hope of being neutral, but with the Treasury secretary and the president. In other words, saving a big bank now will be even more political than before. Sure, some future president could act courageously, but the Federal Reserve bankers in Texas aren’t so naïve as to see that as likely.

Crucially, the Dallas Fed argues that these problems are making the system vulnerable to a future crisis and that the financial oligopoly is undermining the economic recovery and the Fed’s efforts to revive growth.

“Monetary policy cannot be effective when a major portion of the banking system is undercapitalized,” Mr. Rosenblum wrote in the report. “Many of the biggest banks have sputtered, their balance sheets still clogged with toxic assets accumulated in the boom years.”

Unfortunately for our banking regulation system, critics in the regional Federal Reserve banks haven’t had much influence on regulatory policy.

One reason is that the regional Fed officials seem to be talking their own book, or can be dismissed as doing so. Outside of New York, San Francisco and Richmond, Va., the regional Feds oversee only the small and midsize banks that compete with the “too big to fail” banks. The small guys suffer when the big banks are unfairly subsidized by the government, so the regional Feds can be brushed off as merely cheerleading for their team.

Mr. Fisher explained to me that, on the contrary, the Dallas Fed should be heeded because it has experience with “too big to fail”: During the savings-and-loan crisis of the late 1980s and early ’90s, some of the biggest banks to fail were from Texas.

But another major reason that they are disregarded may be that the rebel regional Fed presidents have been skeptical about the Fed’s aggressive and successful monetary policy and overly worried about inflation and the vulnerability of the dollar. That may have undermined their solid case on bank regulation.

Mr. Fisher, the Dallas Fed president, has been one of the fiercest inflation hawks. He has dissented against the Fed’s efforts to buy longer-term assets, known as quantitative easing, which was an effort to stimulate the economy. (He has been less worried about inflation more recently, arguing that unemployment is the top problem for the economy.)

“Sound money and sound structure go hand in glove,” Mr. Fisher said.

Thomas M. Hoenig, the former president of the Kansas City Fed, also articulated strong, compelling views on bank regulation coupled with a hard-money fever that is discredited in most economic circles. (Mr. Hoenig has been nominated to be vice chairman of the Federal Deposit Insurance Corporation, which — an economist might say — is his highest and best use.)

The top bank regulators at the Fed have embraced unorthodox monetary policies, but have also had scant courage and originality in challenging the current structure of the country’s financial system.

Not so with the Dallas Fed. Its report champions “the ultimate solution for TBTF — breaking up the nation’s biggest banks into smaller units.”

Hear, hear.

http://dealbook.nytimes.com/2012/03/28/banking-regulator-calls-for-end-of-too-big-to-fail/?pagemode=print

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Fed Acknowledges Error in Citi’s Stress Test

By PETER EAVIS


The Federal Reserve made an error in its stress test of Citigroup that led it to overstate a crucial measurement of losses on the bank’s mortgages, the central bank acknowledged on Friday.

The Fed also issued corrections for Bank of America, Ally Financial, MetLife and Wells Fargo. It said the corrections did not change the capital ratios projected by the stress tests, which estimated the losses that a bank could bear amid situations that include a severe recession and a market meltdown.

The tests, published on Tuesday, calculated how much a bank’s capital would be affected assuming losses on a range of loans and securities over a 27-month period that concludes at the end of 2013.

Still, Citigroup did not do as well as its big-bank peers in some tests. The revisions at Citigroup were for the most part bigger than the amendments at the other financial firms.

In the original test results, the Fed projected losses on Citigroup’s first-lien home loans that would be equivalent to 9.7 percent of its total mortgages. But the Fed now says that the loss rate is 9.3 percent. The change occurred after the Fed moved projected losses on Citigroup’s foreign mortgages to another category. As a result, the 9.3 percent loss rate is just for mortgages in the United States.

The change seems small but it signals that the Fed failed to include nearly $40 billion of foreign mortgages in its loss-rate calculation for Citigroup’s mortgage.

Initially, the Fed projected $9.3 billion of losses on what looked like all of Citigroup’s mortgages, producing the 9.7 percent loss-rate. The Fed appeared to be assuming that Citigroup had around $96 billion of mortgages, since $9.3 billion is 9.7 percent of $96 billion.

But securities filings show that Citigroup had $133 billion of mortgages at the end of September 2011, which was when the Fed started the test. That total combined $95 billion of American mortgages and $38 billion of international mortgages.

And something else didn’t appear to add up: Applying the Fed’s dollar losses of $9.3 billion to Citigroup’s actual mortgage total of $133 billion produces a loss rate of 7 percent, far lower than the 9.7 percent in the original test.

That would put Citigroup more in line with the Fed-forecast mortgage loss rates of 6.7 percent for Bank of America, and 6.3 percent for JPMorgan Chase. Dropping the loss rate to 7 percent would have made Citigroup’s mortgages look healthier.

Now that the Fed has corrected its results, why didn’t the mortgage loss rate fall to 7 percent, instead of falling to only 9.3 percent on domestic mortgages? That seems to be because the Fed is not including foreign mortgages in that loss-rate calculation. The low projected loss rates for those loans are now counted in a category called “other loans.”

“We will continue to work with the Federal Reserve regarding these numbers,” a Citigroup spokesman said on Friday.

http://dealbook.nytimes.com/2012/03/16/fed-acknowledges-error-in-citis-stress-test/?pagemode=print

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Federal Reserve Chairman Sees Modest Growth

By BINYAMIN APPELBAUM


WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the central bank retained its modest expectations for the American economy this year, despite some recent signs of stronger growth.

Mr. Bernanke said the recent rise in oil prices also had not shifted the Fed’s view that the economy would expand 2.2 to 2.7 percent this year, about the same pace as during the second half of last year.

He acknowledged that rising oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.” But the Fed expects the overall pace of increases in prices and wages to remain “subdued,” Mr. Bernanke said in testimony before the House Committee on Financial Services.

Some economists see evidence that the pace of growth is increasing. The Bureau of Economic Analysis, an arm of the federal government, said on Wednesday that the economy grew at an annual rate of 3 percent in the last three months of 2011, somewhat higher than its initial estimate of 2.8 percent. The unemployment rate has declined to 8.3 percent in January from 9.1 percent last July.

But the Fed has remained cautious, and Mr. Bernanke repeated a familiar list of reasons for that stance, including the depressed housing market and turbulence in Europe. The Fed also has overestimated the pace of recovery several times in recent years.

“The recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards,” Mr. Bernanke said. He noted that the Fed did not expect “further substantial declines” in the unemployment rate this year.

As a result, he said the Fed remained committed to continuing its economic stimulus efforts, keeping short-term interest rates near zero and maintaining a large portfolio of Treasuries and mortgage bonds to further reduce long-term rates, holding down borrowing costs for businesses and consumers.

Mr. Bernanke gave no indication that the Fed was considering new efforts, like increasing its holdings of mortgage-backed securities to bolster the housing market. Indeed, his remarks suggested that the Fed’s attention was shifting to the possibility that the recovery is outpacing its expectations.

Ian Shepherdson, chief United States economist at High Frequency Economics, a forecasting firm in Valhalla, N.Y., said in a note to clients that Mr. Bernanke was more upbeat than he had expected.

“Mr. Bernanke did not make a clean break from his previous, glum view of the economy, but his position has shifted a bit,” he wrote. “This sounds like the start of the beginning of a process.”

Mr. Bernanke appears twice each year before the House committee and its counterpart, the Senate Banking Committee, for a formal review of the Fed’s management of the nation’s monetary policy. The Senate hearing is planned for Thursday.

Wednesday’s House hearing unfurled along familiar lines, with Democrats applauding the central bank’s efforts to spur the economy, while Republicans expressed concern that the Fed’s actions would send inflation soaring out of control.

“I’d like to praise Chairman Bernanke for doing his job and really not bowing to the political pressure,” said Representative Melvin Watt, a North Carolina Democrat. “I just think he has done a magnificent job and the Fed has done a magnificent job of navigating us through some very, very difficult times.”

The sharpest counterpoint came from Representative Ron Paul, Republican of Texas and a candidate for president, who flourished an actual, shiny ounce of silver as he lectured Mr. Bernanke on the declining value of the dollar.

Mr. Paul, has long argued that people should be able to exchange dollars for precious metals.

“You love paper money,” he said. “I think money should be honest.”

Mr. Bernanke was deadpan in his response.

“First of all,” he said, “good to see you again.”

Much of the hearing focused on fiscal rather than monetary policy. Mr. Bernanke has become an outspoken advocate for Congress to adopt a long-term plan for reducing the government’s annual deficits and growing debt. He warned Wednesday that the government faced a “fiscal cliff” at the end of the year, when a number of major policy changes are set to occur simultaneously, including the expiration of the Bush tax cuts and across-the-board reductions in government spending passed last year as part of a deal to raise the debt ceiling.

“I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date,” Mr. Bernanke said.

He declined several times to endorse the particular fiscal proposals of Democrats and Republicans on the committee.

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Capital One’s Deal for ING Direct Still in Limbo

By BEN PROTESS


The Federal Reserve has again declined to announce a decision on the fate of Capital One’s $9 billion takeover of ING Direct USA, the second delay in the last week.

“The board considered the application at its meeting this afternoon and expects to issue a decision soon,” a Fed spokeswoman said in a statement. “No further announcement is expected today.”


The Fed was expected on Monday to vote on the deal, which has drawn criticism from community banks and consumer advocates for its potential impact on the economy. The mergers, critics say, would turn Capital One into the fifth- or sixth-largest bank by deposits. Currently, it does not rank in the top 10.

Last week, the Fed also postponed a closed-door meeting about the deal without explaining the cause of the delay. Capital One said that Fed officials attributed the switch to scheduling problems.

But it is unclear whether the repeated delays may also indicate dissent among the Fed’s governors. Capital One needs support from a majority of the five governors to obtain approval.

In June, Capital One agreed to pay $6.2 billion in cash for the American online banking business of the Dutch bank ING. Capital One would also issue $2.8 billion worth of new shares to ING, giving it a 9.9 percent stake.

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Fed Signals That a Full Recovery Is Years Away
By BINYAMIN APPELBAUM


WASHINGTON — The Federal Reserve said on Wednesday that it was likely to raise interest rates at the end of 2014, but not until then, adding another 18 months to the expected duration of its most basic and longest-running response to the financial crisis.

The announcement means that the Fed does not expect the economy to complete its recovery from the 2008 crisis over the next three years. By holding short-term rates near zero beyond mid-2013, its previous estimate, the Fed hopes to hasten that process somewhat by reducing the cost of borrowing.

The Fed said in a statement that the economy had expanded “moderately” in recent weeks, but that unemployment remained at a high level, the housing sector remained in a deep depression, and the possibility of a new financial crisis in Europe continued to threaten the domestic economy.

The statement, released after a two-day meeting of the Fed’s policy-making committee, said that the Fed intended to keep rates near zero until late 2014.

In a separate set of statements, the Fed said that 11 of the 17 members of the committee expected that the Fed would raise interest rates at the end of that period. It noted that the committee expects growth to accelerate over the next three years, from a maximum pace of 2.7 percent this year to a maximum pace of 3.2 percent next year and up to 4 percent in 2014.

This is the first time the Fed has published such detailed predictions by its senior officials about future policy decisions. The Fed’s chairman, Ben S. Bernanke, said Wednesday that he hoped the forecast would stimulate growth by convincing investors that interest rates will remain low for longer than previously expected.

The economic impact, however, is likely to be relatively modest. Investors already expected the Fed to keep rates near zero into 2014, a judgment reflected in the prices of various assets whose values depend on the movement of interest rates.

Moreover, interest rates on many kinds of borrowing already are hovering near historical lows, and pushing rates down gets harder as you approach zero. And tight lending standards make it impossible for many people and businesses to get loans.

“I wouldn’t overstate the Fed’s ability to massively change expectations through its statements,” Mr. Bernanke said at a press conference Wednesday. “It’s important for us to say what we think and it’s important for us to provide the right amount of stimulus to help the economy recover from its currently underutilized condition.”

The new forecast is part of an effort by the Fed to exert greater influence over the expectations of investors to increase the impact of its policies. The Fed can influence current interest rates directly, but its influence over future rates depends on what investors think the Fed will do in the future.

The Fed also issued Wednesday a statement elaborating on its legal mandate to maintain stable prices and to limit unemployment.

The statement said that the Fed aims to increase prices and wages by about 2 percent each year. It is the first time that the Fed has publicly described an inflation target, although its commitment to that goal has been widely understood for years. Mr. Bernanke has long supported a formal inflation target.

The Fed also said that it was equally committed to minimizing unemployment, but that its goal would vary based on economic circumstances. At present, the statement said, it would like the unemployment rate to drop below 6 percent.

The Fed said in a statement that “such clarity facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.”

The economic projections that the Fed released Wednesday show that the central bank expects to meet its inflation goal over the next three years, but that unemployment will remain significantly above its goal.

The Fed said that it expects the economy to expand between 2.2 percent and 2.7 percent this year, a slightly slower pace than its November forecast that growth could reach 2.9 percent. The Fed also reduced its forecast of growth in 2013. It now projects growth of up to 3.2 percent instead of 3.5 percent.

The projections show that most members of the committee expect the economy to gain steam over the next few years, but that the economy still will not be operating at full capacity, so that prices and wages will remain relatively unchanged.

The pace of growth is not fast enough to significantly reduce the number of people who need work. Almost 24 million Americans could not find full-time jobs in December. A major reason that the official unemployment rate has declined in recent months is that many people have stopped looking for work.

The Fed projects that unemployment will drop no lower than 8.2 percent this year, just slightly below the 8.5 percent rate in December, and no lower than 7.4 percent next year. By the end of 2014, the Fed still expects that at least 6.7 percent of people actively interested in working will not be able to find jobs.

And the housing market remains depressed. Construction of new homes fell to the lowest level on record in 2011, and sales of existing homes were equally scarce despite the availability of mortgage loans at the lowest interest rates in history. Millions of homeowners continue to face foreclosure.

Both the World Bank and the International Monetary Fund recently estimated that the United States will see growth of about 2 percent in 2012, well below the Fed’s estimate, but in line with those of many private forecasters.

Since the beginning of the financial crisis in 2007, the Fed has alternated bursts of activity with periods of rest, several times concluding that it had done enough only to find the economy still struggling to recover.

The Fed announced this summer that the central bank intended to keep interest rates near zero through at least the middle of 2013 and that it would seek to reduce long-term interest rates through changes in the kinds of investments that it holds in its nearly $3 trillion portfolio. Since then, two meetings have passed without the introduction of any new programs.

Some Fed officials have suggested that the Fed should buy mortgage-backed securities, as it did in 2009, to further reduce interest rates on mortgage loans, which already are at record lows. Such a program also could reduce interest rates on other kinds of loans, such as corporate borrowing.

Mr. Bernanke said Wednesday that such purchases remain under consideration, but only “if we see that the recovery is faltering or if we see that inflation is not moving towards target.”

Indeed, the forecasts released Wednesday show that most members of the committee expect to start tightening monetary policy at the end of 2014, even though unemployment will still be quite high.

Mr. Bernanke sought to dispel this implication, however, saying that the Fed would be inclined to increase its stimulus efforts if inflation remained low and unemployment remained high.

“We’re certainly willing to look for different ways to provide further support for the economy if in fact we have this unsatisfactory situation,” he said.

The forecast shows that 11 of the 17 governors and regional Fed presidents expect the Fed to end its policy of holding short-term interest rates near zero by the end of 2014.

The numbers increase steadily with each passing year. Three committee members expect the Fed to raise rates this year and six expect the central bank to do so next year. The median view of the 17 members of the committee is that rates will remain near zero at the end of 2012 and the end of 2013 and will rise to 0.5 percent by the end of 2014.

The forecast is an imperfect window, however, because only 10 members actually hold votes at any given time.

Moreover, the Fed’s chairman exercises outsized authority. The general view of the Fed’s intentions would be sharply altered if it were revealed, for example, that Mr. Bernanke was among the six members expecting rates to remain near zero at the end of 2014. Mr. Bernanke declined Wednesday to provide his own personal forecast.

The actions taken Wednesday were supported by nine members of the committee. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented.



http://www.nytimes.com/2012/01/26/business/economy/fed-to-maintain-rates-near-zero-through-late-2014.html?_r=1&hp=&pagewanted=print

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Fed to Publish a Forecast of Rate Moves, Guiding Investors

By BINYAMIN APPELBAUM


WASHINGTON — The Federal Reserve will begin later this month to publish the predictions of its senior officials about their own decisions, hoping to increase its influence over economic activity by guiding investor expectations.

The change was approved at the most recent meeting of the Fed’s policy-making committee, in December, but was kept secret until Tuesday afternoon, when the Fed released an account of the meeting after a standard three-week delay.

The inaugural forecast, set for Jan. 25, will show the range of predictions made by Fed officials about the level of short-term interest rates in the fourth quarter of 2012, 2013 and 2014, although it will not list individual predictions.

It also will summarize when they expect to start raising short-term rates, which they have held near zero since late 2008. And it will describe their plans for the Fed’s investment portfolio.

The forecast could reduce borrowing costs for businesses and consumers by convincing investors that the Fed intends to keep rates near zero for longer than expected. But the benefits most likely would be modest, as rates already are very low and already are widely expected to remain near zero into 2014.

A more significant possibility, is that the changes will set the stage for the Fed to announce an expansion of its existing economic aid campaign, for example, by once again increasing its purchases of Treasuries and mortgage-backed securities.

According to the meeting minutes, “a number of members” of the 10-person committee “indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication.”

This, however, is unlikely to have any broad impact on the economy, because the Fed lacks the power to address the most important issues weighing on growth, including a lack of demand from gloomy consumers, high levels of debt throughout the economy and the depressed condition of the housing market. Stock traders took the Fed’s announcement in stride as indexes continued their rise in the first day of trading in 2012.

The Standard & Poor’s 500-stock index closed up 1.6 percent. The Fed’s staff, which prepares an economic forecast noted for its unusual accuracy in an uncertain business, reduced its medium-term outlook for growth, citing the impact of events in Europe, according to the minutes.

“The Fed’s core problem right now is that the parts of the economy through which those interest rate effects would normally get traction are blocked,” said Vincent Reinhart, chief United States economist at Morgan Stanley and a former senior Fed staff official. “It is not clear how effective any of these policies will be.”

The change in communications policy is part of a broader effort by the Fed’s chairman, Ben S. Bernanke, to improve public understanding of the central bank’s goals and methodology. It formalizes a series of experiments with forecasting that the Fed has made in recent years, beginning with its statement in December 2008 that rates would remain near zero “for some time.”

Talking about future policy was a longstanding taboo among central bankers, who worried that investors would treat the predictions as promises and react badly when some predictions inevitably were off base. But the Fed now is casting its lot with the growing camp that regards shaping expectations as a primary tool for monetary policy, and is eager to seize any opportunity.

The forecast will summarize the predictions of the Fed’s five governors — two seats on the board are vacant — and the 12 presidents of its regional banks, only five of whom hold votes on the committee at a given time. It will be included in an existing forecast of economic conditions — the rates of growth, inflation and unemployment — that the Fed publishes four times a year.

In presenting those forecasts, the Fed excludes the three highest and the three lowest estimates submitted by the officials. It then reports the highest and lowest predictions among the remaining 11 forecasts, showing a range that it describes as the “central tendency.”

For example, the forecast published in November, showed the committee expected growth of 2.5 percent to 2.9 percent in 2012.

The Fed also will publish what it described as “qualitative information” regarding the committee’s expectations about the management of the Fed’s balance sheet.

The Fed’s plans for buying or selling assets are, at present, of even greater interest to most investors than the path of short-term interest rates.

Support for the changes was not unanimous, according to the minutes, which said that some “did not see providing policy projections as a useful step at this time.” But no formal vote was recorded. Instead, the minutes reflect that the participants — not just the 10 members with votes — reached a consensus.

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Stocks Surge After Central Banks’ Action on Debt Crisis
By CHRISTINE HAUSER

The move announced by central bankers on Wednesday to contain the European debt crisis led to euphoria in global stock markets, but it also prompted skeptics to wonder: Will this time be different?

As the crisis has worsened over the last 18 months, pronouncements of plans to fix the euro-zone debt problems have led to rallies on more than a half-dozen occasions that just as quickly withered as the proposals fell short of hopes.

Wednesday’s rally was among the biggest yet, with the three main indexes on Wall Street rising 4 percent or more, and the Dow Jones industrial average rising 490.05 points, its largest gain since March 23, 2009. Still, some analysts warned that the central banks move addressed only some symptoms of the euro financial crisis, so this rally, too, could evaporate.

“It helps to prop up the banks for a while which is going to buy time for Europe to fix the problem,” Burt White, the chief investment officer for LPL Financial, said. “This is basically a Band-Aid.”

Financial shares in particular were lifted by the news.

Bank of America shares, which on Tuesday to their lowest closing level since March 2009, were up 7.3 percent Wednesday, at $5.44. JPMorgan Chase rose more than 8 percent, to $30.97. Morgan Stanley was up more than 11 percent, at $14.79.

The market rally came after the Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank announced that they would reduce by about half the cost of a program under which banks in foreign countries can borrow dollars from their own central banks, which in turn get those dollars from the Fed. The banks also said that loans will be available until February 2013, extending a previous deadline of August 2012.

The move is intended to increase liquidity and ensure that European banks have funds. But some analysts saw it as a stopgap measure to head off the kind of financial implosion set off by the collapse of Lehman Brothers in 2008.

“What it does do is take off some of the pressure from this boiling pot,” Mr. White said.

As the exuberance set in and funding pressures appeared to ease, bond prices fell, commodity prices rallied and financial shares soared as investors bought shares on the hope that the central banks had smoothed the way for Europe to take more forceful action in advance of a European summit meeting on Dec. 9. The jump in stocks was also an extension of the turmoil and volatility that have weighed on global markets for more than a year.

It was unclear even after Wednesday’s move whether banks would loosen up lending or whether the market enthusiasm would stick. Some noted that sharp gains in equities in previous trading session have often failed to carry through, as European leaders had tried many times over the last two years to stem the debt crisis. A recent attempt came on Oct. 27, when the broader market as measured by the Standard & Poor’s 500-stock index rallied 4 percent on the hope that a new European plan could solve its problems, but then failed to sustain its gains.

That rally was one of eight times that the S.&P. had spiked up at least 4 percent since the end of 2008, while in the same period it experienced 10 such declines.

In addition, a summit meeting in July caused a global stock rally that collapsed in the subsequent days, with the S.&P. eventually sinking to its lowest level for the year.

As analysts were skeptical about whether Wednesday’s market enthusiasm would endure they also warned that the central banks’ move addressed only some symptoms of the euro zone financial crisis. Stanley A. Nabi, chief strategist for the Silvercrest Asset Management Group, said the coordinated action on Wednesday signaled that the problem had reached a crisis point, and that the central banks recognized there was a “lot of danger” in letting the current situation continue.

Steve Blitz, the senior economist for ITG Investment Research, said the central banks “are going to do what they can to ring fence the European financials’ problems and keep them inside Europe.”

“They are trying to prevent them from seizing up global liquidity and capital flows and impacting banks and financial institutions throughout the world,” he said.

The S.&P. 500-stock index closed up 51.77 points, or 4.33 percent, at 1,246.96. The Dow was up 490.05 points, or 4.24 percent, to 12,045.68, and pushed into positive territory for the year and for November. The Nasdaq composite index rose 104.83 points, or 4.17percent, to 2,620.34.

Interest rates were higher. The Treasury’s benchmark 10-year note fell 24/32, to 99 12/32, and the yield rose to 2.07 percent from 1.99 percent late Tuesday.

Ralph A. Fogel, head of investment strategy for Fogel Neale Wealth Management, said rates would probably remain low.

As for equities after the central bank announcement, Mr. Fogel added: “The fear is off that there is going to be any sort of tremendous move down like there was in 2008,” referring to the financial crisis.

Analysts said they believed the central banks’ action made as its target one of the symptoms, rather than the root or cause, of the euro zone problems.

Energy, materials and industrial sectors all powered ahead by more than 5 percent.

The dollar fell against an index of major currencies. The euro rose to $1.3443 from $1.3317.

The Euro Stoxx 50 closed up at 4.3 percent, and the CAC 40 in Paris ended up 4.2 percent, while the DAX index in Germany was up almost 5 percent. The FTSE 100 in London rose 3.16 percent.

http://www.nytimes.com/2011/12/01/business/daily-stock-market-activity.html?hp=&pagewanted=print

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Bank Chief Rejects Calls to Rescue Euro Zone
By JACK EWING

FRANKFURT — In his first speech as president of the European Central Bank, Mario Draghi complained Friday that Europe’s political leaders have been too slow to implement their own plan to address the sovereign debt crisis, and offered no hope he would come to their rescue by printing money.

Mr. Draghi, who took office at the beginning of the month, implicitly rejected calls for the E.C.B. to use its enormous financial resources to stop the upward creep of borrowing costs for Spain and Italy, which threaten their solvency and by extension the European and global economies.

On Thursday, José Luis Rodriguez Zapatero, Spain's prime minister, demanded that the E.C.B. find a solution to the euro crisis, saying that “this is what we transferred power for.”

But Mr. Draghi said the E.C.B. would not deviate from its focus on price stability and suggested that other measures could undercut the bank’s credibility.

“Gaining credibility is a long and laborious process,” Mr. Draghi said at a gathering of bankers in Frankfurt. “But losing credibility can happen quickly — and history shows that regaining it has huge economic and social costs.”

He criticized leaders for taking too long to act on decisions they have made at numerous European summits. “Where is the implementation of these longstanding decisions?” he asked. “We should not be waiting any longer.”

If collapse of the euro seemed imminent, the E.C.B. would become lender of last resort to countries like Italy, many analysts say. But the bank seems to be far from the point, instead insisting that countries take steps to cut budget deficits and improve their economic performance.

Jens Weidmann, president of the Bundesbank, the German central bank, was more blunt than Mr. Draghi in rejecting use of the E.C.B. to get governments out of financial trouble, reflecting the hard line that German policy makers have taken on the issue.

“The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way,” Mr. Weidmann said at the same event, the Frankfurt European Banking Congress.

He put the onus on governments to address deficiencies in their national economies. “These deficiencies include a lack of competitiveness, rigid labor markets and the failure to seize opportunities for growth,” he said.


http://www.nytimes.com/2011/11/19/business/global/bank-chief-rejects-calls-to-rescue-euro-zone.html?ref=business&pagewanted=print