Inflation Warning
In the last few days, we have witnessed an almost unprecedented chorus of warnings about inflation prospects by senior Fed officials. Dallas Fed President Richard Fisher said the Fed must be prepared to tighten monetary policy by raising short-term interest rates with “alacrity.” President Charles Plosser of Philadelphia had spoken of the need to raise interest rates before unemployment returns to normal in order “to prevent the Second Great Inflation.” The comments of the two Reserve Bank presidents reinforce those made by Fed Governor Kevin Warsh.
Financial markets are confused because the Fed’s policy-making committee (the Federal Open Market Committee) had just indicated its intention to keep interest rates low for an extended period. The inflation warnings represent an internal debate that has gone public. Formal dissents from the FOMCs policy directive have reportedly been discouraged. So Fed officials are in effect offering up virtual dissents in public speeches. Confidence in Chairman Bernanke’s policy is waning.
Most economic forecasters profess to see little inflation risk. They need to reconsider their forecasts in light of the inflation warnings from within the central bank.
Filed under: Finance, Banking & Monetary Policy; General
Why Wall Street Loves Obama
Was it just me, or did there seem to be a whole lot of applause during Obama’s Wall Street speech? Remember this was a room full of Wall Street executives. The President even started by thanking the Wall Street execs for their “warm welcome.”
While of course, there was the obligatory slap on the wrist, that “we will not go back to the days of reckless behavior and unchecked excess,” but there was no mention that the bailouts were a thing of the past. Indeed, there is nothing in Obama’s financial plan that would prevent future bailouts, which is why I believe there was such applause. The message to the Goldman’s of the world, was, you better behave, but even if you don’t, you, and your debtholders will be bailed out.
The president also repeatedly called for “clear rules” and “transparency” – but where exactly in his plan is the clear line dividing who will or will not be bailed out? That’s the part Wall Street loves the most; they can all say we’ve “learned the lesson of Lehman: Wall Street firms cannot be allowed to fail.” At least that’s the lesson that Obama, Geithner and Bernanke have taken away. The truth is we’ve been down this road before with Fannie and Freddie. Politicians always called for them to do their part, and that their misdeeds would not be tolerated. Remember all the tough talk after the 2003 and 2004 accounting scandals at Freddie and Fannie? But still they got bailed out, and what new regulations were imposed were weak and ineffective.
As if the applause wasn’t enough, as Charles Gaspario points out, financial stocks rallied after the president’s speech. Clearly the markets don’t see his plan as bad for the financial industry.
It would seem the best investment Goldman has made in recent years was in its employees deciding to become the largest single corporate contributor to the Obama Presidential campaign. That’s an investment that continues to yield massive dividends.
Embracing Bushonomics, Obama Re-appoints Bernanke
In re-appointing Bernanke to another four year term as Fed chairman, President Obama completes his embrace of bailouts, easy money and deficits as the defining characteristics of his economic agenda.
Bernanke, along with Secretary Geithner (then New York Fed president) were the prime movers behind the bailouts of AIG and Bear Stearns. Rather than “saving capitalism,” these bailouts only spread panic at considerable cost to the taxpayer. As evidenced in his “financial reform” proposal, Obama does not see bailouts as the problem, but instead believes an expanded Fed is the solution to all that is wrong with the financial sector. Bernanke also played a central role as the Fed governor most in favor of easy money in the aftermath of the dot-com bubble — a policy that directly contributed to the housing bubble. And rather than take steps to offset the “global savings glut” forcing down rates, Bernanke used it as a rationale for inaction.
Perhaps worse than Bush and Obama’s rewarding of failure in the private sector via bailouts is the continued rewarding of failure in the public sector. The actors at institutions such as the Federal Reserve bear considerable responsibility for the current state of the economy. Re-appointing Bernanke sends the worst possible message to both the American public and to government in general: not only will failure be tolerated, it will be rewarded.
Gallup Poll: Federal Reserve Makes the IRS Look Good
A recent Gallup Poll surveyed the public’s impression of how various federal agencies were doing their job. Of the agencies evaluated, on the bottom was the Federal Reserve Board. Only 30 percent of the respondents rated the Fed’s performance as either excellent or good. I can understand now why Chairman Bernanke felt the need to take his act on the road. Even the IRS managed to get 40 percent of respondents to see its job performance as excellent or good. A majority of the public, 57 percent, sees the Fed’s current performance as either poor or fair.
The result is not just driven by a general public disdain for federal agencies; over a majority of respondents thought such agencies as the Center for Disease Control, NASA and the FBI were doing an excellent or good job.
Nor is the result driven by public ignorance or indifference to the Fed; only a few years ago, back in 2003, 53 percent of Americans said the Federal Reserve was doing an excellent or good job and only 5% called its job performance poor. But then, the Fed was also giving us negative real interest rates at that time as well. Perhaps there’s a good reason to insulate the Fed from short-term public and political pressures. Let’s hope Chairman Bernanke does not read these results as an excuse for repeating the Fed’s 2003 monetary policies.
What Fed Independence?
More than 250 economists have signed an “Open Letter to Congress and the Executive Branch” calling upon them to “defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.”
Allan Meltzer is not a signatory to the petition and he has explained why not. The Fed has frequently not shown independence in the past, and there is no reason to expect it to do so reliably in the future. Professor Meltzer has just completed a multi-volume history of the Fed and knows all-too-well of the Fed’s willingness to accommodate the policies of administrations from FDRs to Lyndon Johnson’s.
I would add that the Fed’s behavior under Chairman Bernanke breaks new ground in aligning the central bank’s policy with Treasury’s. Much of what the Fed has done, first under Bush/Paulson, and now under Obama/Geithner, involves credit allocation. Since that ultimately involves the provision of public money for private purpose, it is pre-eminently fiscal policy. Central bank independence is a fuzzy concept. If it means anything, however, it is that monetary policy is conducted independently of Treasury’s fiscal policy.
In short, it is not the critics of the Fed who threaten its independence, but the Fed’s own actions. Its intervention in the economy is unprecedented in size and scope. It is inevitable that those actions would lead to calls for further Congressional oversight and control. The Fed is a creature of Congress and ultimately answerable to that body.
The petition raises legitimate concerns about whether the Fed will be able to tighten monetary policy when the time comes, and exit from its interventions in credit markets. But it is precisely the Fed’s own recent actions that raise those problems. Critics of recent Fed policy actions have for some time complained that the Fed has no exit strategy. Apparently the critics are now going to be blamed for the Fed’s inability to extricate itself from its interventions.
Cross-posted at ThinkMarkets
Beginning of the End for Bernanke
Fed Chairman Bernanke’s term as Chair ends in January 2010. So far President Obama has offered Bernanke praise for his performance, but little else. After last week’s House Oversight Committee hearing focusing on Bernanke’s role in Bank of America’s purchase of Merrill Lynch, it is now readily apparent that the Chairman has few supporters on Capitol Hill. While his nomination will not be subject to the approval of the House of Representatives, or any of its Committees, the Senate Banking Committee’s reaction to Treasury Secretary Geithner’s plan to extend the Fed’s power serves as a useful proxy in gauging that Committee’s view of the Fed’s recent performance.
Several recent polls show President Obama to be broadly popular with the American public, while the public holds some concern over the scope and cost of his policies. His policy that garners the least support has been his bailout and support for the auto industry. It is no secret that the American public was not enthusiastic about the bailouts at the time, and is even less so now. With Hank Paulson having left the stage, Bernanke is now the public face of corporate bailouts. While having Bernanke around may offer President Obama a convenient target for the public’s anger over bailouts, re-appointing Bernanke would finally force Obama’s hand — so far he’s managed to support the bailouts with little fallout, as Bush and others have taken the blame. Re-appointing Bernanke makes him Obama’s pick.
In addition to political risk to President Obama, one can assume that many Senate Democrats are not looking forward to having to vote for the man who bailed out AIG. It is a fair bet that many Republican Senators would not vote for Bernanke’s re-appointment, leaving it up to the Democrats to secure his re-appointment.
Whatever the merits, or flaws, in his performance as Federal Reserve Chair, support for Bernanke’s re-appointment is becoming a proxy for one’s support, or opposition, to corporate bailouts.
Fed to BoA: ‘We Will Not Leave You in the Lurch’
Thursday, the House Committee on Oversight and Government Reform questioned Ken Lewis about Bank of America’s purchase of Merrill Lynch and the subsequent injection of tens of billions of taxpayer funds into Bank of America.
While much of the hearing focused on Lewis’ leadership of Bank of America, the hearing also touched upon the more important questions of government regulators pressuring BoA to purchase Merrill even after BoA realized that Merrill’s losses were greater than expected.
One of the basic tenets of sound regulation, exercised in the public interest, is that regulators remain at “arm’s length” from the entities they regulate. As defined by Black’s Law Dictionary, “arm’s length” relates to “dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.”
If anything, it appears that BoA and the federal government were in a bear hug, rather than at arm’s length. As described in Lewis’ notes on one of his many conversations about the Merrill deal with Fed Chairman Ben Bernanke, Bernanke told Lewis, “We will not leave you in the lurch.” Given the funds subsequently injected into BoA, one can say that Chairman Bernanke is at least a man of his word.
One of the significant problems arising from extensive government ownership of private entities is that in regulating those entities, the government no longer has the ability to be a neutral, objective arbitrator. Whether it is BoA or GM, government officials will come under increasing pressure to see a positive return on the taxpayer’s investment. One should not be surprised if that pressure manifests itself by government officials favoring the very companies they have invested in.
While BoA has been saved, it appears that the rule of law has been “left in the lurch.”
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