Now raising intellectual capital

from Rolfe Winkler:

Does Volcker give the Fed too much credit?

Paul Volcker's speech to the Economic Club of NY last week (pdf) was generally reported as the latest example of the former Fed Chairman calling for more substantive financial system reform. He did repeat those points, but the focus of his speech was about the importance of the Fed maintaining its regulatory and supervisory authority over the banking system. At a certain point, this seems the stuff of absurdist theater. If the Fed never intends to use its regulatory authority, why insist the authority be maintained?

The problem with his speech is that while he acknowledges the Fed is badly staffed -- mostly with economists/mathematicians, few from business/banking -- he doesn't address the clear failure on the part of the FOMC to 1) grapple with bubbles nor 2) to get serious about sensible reforms. He bemoans "reform light," but that is precisely what the Fed is delivering.

Volcker wants tougher rules for derivatives trading, yet Pat Parkinson -- the man Bernanke appointed as the Fed's top bank regulator -- has long favored a hands-off approach to derivatives. Volcker argues proprietary trading and other risky activities should be spun-off from commercial banks. It makes no sense for such risky activities to be backstopped by the financial system safety net -- deposit insurance and last resort lending from the Fed. Yet Bernanke has done nothing to indicate he'll separate the two.

Volcker is correct that the Fed should play a vital role in regulating the banking system. But this assumes the guys in charge actually use their regulatory power. Bernanke hasn't done so. Instead he adopted his predecessor's deregulatory zeal and penchant for bailing out the system.

from Rolfe Winkler:

Sprott: Is it all a Ponzi?

In his latest missive to investors (pdf link here), Eric Sprott asks if our Ponzi economy is at risk of collapse. In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion. So who bought all the rest? According to Treasury, "other investors" bought $510 billion, up from just $90 billion in 2008. With the Fed's printing press turned off, the question for next year is whether "other investors" can buy more Treasuries than they did this year...

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

from Rolfe Winkler:

Evening Links 12-16

Fed repeats "exceptionally low" for "an extended period" (Fed statement) The Fed maintains that it isn't raising rates for the foreseeable future, but repeated that it plans to end MBS asset purchases by April next year. Too bad we can't get a surprise rate hike in order to chase risk back out of credit markets...

Wells' CLO deal called "landmark" (Paulden, Bloomberg) The return of CLOs would be the latest sign that Wall Street is dancing again.

Bernanke’s Hester Street home

The Federal Reserve may not want to crow about the half-empty giant shopping mall it now owns in Oklahoma City by virture of its hastily-arranged rescue of Bear Stearns. But at least one other commercial real estate deal that the Fed picked up from Bear appears to be in better shape.

One loan now in the Fed’s portfolio is a mortgage Bear made to the developer of an upscale condominium building in lower Manhattan called The Machinery Exchange. The 14-unit complex at the corner of Hester and Baxter streets is located on the edge of Chinatown and got a favorable write-up from The New York Times in 2007 because of its architectural style.

from Rolfe Winkler:

Talking Bernanke

The title of the video is a little unfortunate. I don't think Volcker would be a realistic option, I just wish we could find someone like him.

Correcting a brain-fart: Ben Bernanke is Chairman -- not President -- of the Fed.

Time for the Fed to stand up to its critics

John M. Berry is a guest columnist who has covered the economy for four decades for the Washington Post and other publications.

By John M. Berry

Financial crises and the policies to deal with them top the agenda at the Kansas City Fed’s Jackson Hole conference. But what is actually going to be on everyone’s mind at the august gathering is the uncertain future of the Federal Reserve itself.

Bernanke: Back to Clark Kent

Having averted a disaster, cartoon superheroes typically revert to their bland civilian identities. With the recession loosening its grip, Ben Bernanke is trying a similar trick.

After a period of heroic boldness and creativity, the Fed is determined to be dull. Wednesday’s statement from the Federal Open Market Committee may well be calculated to bore.

Easy does it on the exuberance

If it keeps going like this, Ben Bernanke will have to give an irrational exuberance speech.

Today, stocks jumped to fresh multi-month highs and Treasury yields climbed after a report on July manufacturing activity made investors feel even more optimistic about the future. Sure, manufacturing is still contracting, but that’s only a minor detail for those convinced that a burgeoning economic recovery is the real deal.

Bubble, bubble toil and trouble

NEW YORK, July 29 (Reuters) – The Federal Reserve seems to be volunteering to be top bubble burster. In a recent speech, Bill Dudley, the president of the Federal Reserve Bank of New York, overturned more than a decade of Fed orthodoxy by claiming it was the central bank’s duty to defuse asset price bombs before they detonate.

As the United States struggles with the fallout from the bursting of the housing and credit bubbles, the Fed may win applause for being proactive. By the time the next one starts to inflate, however, Fed officials may regret they raised their hand. Doing the job properly will certainly make them unpopular and there is no guarantee that it will even work.

Federal Reserve – The long way home

– Christopher Swann is a Reuters columnist. The views expressed are his own —

NEW YORK, July 21 (Reuters) – Seldom in its history has the Federal Reserve faced the challenge of articulating how it might conduct monetary policy a year or more ahead. But with the Fed balance sheet at an unprecedented 14 percent of GDP, markets and lawmakers are demanding assurances that the central bank will be able to slim down quickly when the time comes.