In many ways, we’ve already fallen off the cliff. The focus by government and market analysts on the potential medium-term impact on GDP has obscured some themes that deserve far greater attention.
The Fed’s decision to begin open-ended purchases of Fannie Mae and Freddie Mac mortgage-backed securities comes on the heels of the European Central Bank’s decision to purchase unlimited quantities of short-duration government bonds across the euro zone.
Sandy Weill’s comments this week are just the latest dustup in the debate about the existence of financial institutions that are labeled by regulators and market participants as being too big to fail. Despite the criticisms leveled at these firms, the largest banks have only gotten bigger over the last few years – and U.S. regulators still appear underprepared to resolve a future failure of a systemically important financial institution without setting off broader market panic.
The policy response that perhaps best connects the U.S. financial crisis and the still brewing eurozone problem is that regulators have endeavored to make financial institutions more resilient. Policymakers on both sides of the Atlantic have focused on increasing financial institutions’ capital and liquidity positions to try to limit future bank failures and systemic risk. Both goals are served by increasing banks’ holdings of “safe assets” that are easily sold and retain value across different global economic environments.
There are about 1 billion cars on the world’s roads today. By mid-century, forecasts have that number climbing to 4 billion. Meanwhile, Congress is mired in a debate over whether to pass a new highway bill. Senator Barbara Boxer, a chief negotiator of the pending bill, lamented recently that she was “embarrassed for the people of this country” that this measure had not been enacted. After all, she said, passing highway bills used to be as popular and as important as “motherhood and apple pie.”
The recent jobs and GDP numbers released by the government were a broad disappointment, and plenty of analysts have discussed the implications of the data. Yet, most of the analysis has focused on two dimensions – whether it’s now more or less likely that Congress or the Fed will act on either the fiscal or monetary fronts to try to boost the economic recovery.
This post is adapted from the author’s testimony at a recent hearing before the U.S. Senate Banking, Housing, and Urban Affairs Committee.
In light of JPMorgan Chase’s bad derivatives trades, the media’s spotlight has appropriately turned to the pending Volcker Rule. That’s the moniker for the still-under-development regulation that might restrict big banks from pursuing hedging strategies across their entire portfolio, including their own bets. Proponents say banks shouldn’t be able to do this, since banks hold consumer deposits that are effectively guaranteed by taxpayers and since taxpayers could be forced to bail out a foundering bank if it’s deemed too big to fail. On the other hand, the underlying law for the Volcker Rule, the Dodd-Frank financial reform law, specifically exempts or allows hedging related to individual or “aggregated” positions, contracts or other holdings, which may very well have covered JPMorgan’s recent trade.