James Pethokoukis

Politics and policy from inside Washington

The Bernanke Dilemma

Dec 3, 2009 18:45 UTC

BB’s effort to be the charming professor has failed. Only a  fifth of the public supports his renomination. It’s now almost gospel in the GOP (at least outside DC) that the Fed should be abolished. And Democrats are picking their spots for attacks, such as Dodd’s idea for a single regulator and Frank’s idea to neuter the regional bank presidents.

Certainly more transparency is needed. Among other things, Federal Open Market Committee minutes could be released days after a meeting rather than weeks. Like Jean-Claude Trichet, his European Central Bank counterpart, Bernanke could even hold press conferences right after FOMC meetings.Bernanke should also consider backing off the idea that the Fed should be the U.S.’s systemic risk über-regulator. He might win the case on the Fed’s credentials, but accumulating power while resisting accountability is a political loser. For Bernanke, a bit less authority might mean a lot more support in Washington and on Main Street.

If not, then expect a continued push for an audit bill along with other efforts to increase congressional influence.

COMMENT

Here is Ron Paul and Jim DeMint in the WSJ:”The Fed has also, for the past three decades, been required to engage in monetary policy with the goal of maintaining stable prices and full employment. Since the natural trend over time is for prices to decrease, a mandate to maintain stable prices is a mandate to pursue an expansionary monetary policy and inflate the money supply to counteract the lower prices we would expect from increased productivity.”http://online.wsj.com/arti cle/SB1000142405274870478230457454228097 1009044.htmlCentral banking is inherently unstable and supremely complex. It fails for the same reason as central planning failed in the Soviet Union. Abolish it and bring back free-market capitalism.

Posted by Austrian School | Report as abusive

Bernanke goes to Capitol Hill

Dec 2, 2009 20:19 UTC

The Bernanke confirmation hearing should be a great show, especially after BB’s “speaking truth to power” WaPo op-ed where he went all Michale Corleone on Fed critics: “Senator? You can have my answer now, if you like. My final offer is this: nothing. Not even the Fed audit bill, which I would appreciate if you would kill personally.”  Former Feddies are split on whether that was the right move or if he should have been more conciliatory ….

COMMENT

15 must-ask questions for Bernanke:http://cunningrealist.blogspot. com/2009/11/rewarding-failure.htmlhow about reading these verbatim in the hearing??

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Corker: Bernanke confirmation may not be a done deal

Dec 1, 2009 20:44 UTC

From The Hill:

Sen. Bob Corker (Tenn.), a GOP member of the banking committee holding hearing on Bernanke’s nomination to a second term in charge of the Fed, said he wasn’t sure yet whether the chairman had the votes on the Banking committee or in the Senate as a whole.

“I don’t know where that sits,” Corker told reporters when asked if Bernanke would have the votes to get a second term, adding he wasn’t sure whether Bernanke would have the votes in the 23-member Senate Banking Committee, either.

Fight for the Fed: Ben Bernanke vs. Nancy Pelosi and Harry Reid

Nov 23, 2009 19:26 UTC

Ron “End the Fed” Paul:

If you want to be a strict constitutionalist, there’s a lot more defense of having Congress involved with defending the value of the currency than delivering this responsibility over to the Fed.

Me: Keep in mind that there are in folks in Congress, such as Barney Frank, who would like to depower the Fed bank presidents because they worry too much about inflation.  Mend it, don’t end it!

COMMENT

James,

How can you mend central planning? The Fed is socialist and needs to be abolished. Interest rates need to be set by the free market — people’s time preferences of money.

A restoration of Hendricks vs. Griswold and hard money is also needed to kill inflation and budget deficits once and for all.

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The Fed’s ‘crystal meth’ monetary policy

Nov 20, 2009 18:50 UTC

A classic from David Goldman:

The crystal-meth monetary policy at the Fed makes everyone feel better, until they don’t. The nonstop rise in the price of dollar hedges tells us that it can’t last forever. Large balance sheets attached to the Fed’s money pump can show profits, and the price of spread assets (as PIMCO’s Bill Gross keeps emphasizing) is stupid rich. But at the capillary level, through, the economy is dying and gangrene is setting in. … It isn’t just the 17.5% broad-measure unemployment number that we should worry about, but the massacre of smaller businesses, who are concentrated in the most vulnerable sectors: real estate, construction, and retail. Retail sales may get a temporary shot in the arm from cash for clunkers, and a combination of tax credits and (de facto) subsidized mortgage rates may hold up the bottom of the housing market for a short time. But today’s data show how fragile these matters are.

COMMENT

Monetary policy is one of the tools that a national Government uses to influence its economy. It is mainly used to low unemployment, low inflation, economic growth, and a balance of external payments.
http://www.mikeastrachan.com/

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On gold and asset bubbles and inflation

Nov 17, 2009 18:56 UTC

The great David Goldman. First on the US asset bubble:

BOTH bond and stock prices are driven by the dollar. 17.5% unemployment by the broad measure keeps wages down and keeps the CPI low, despite the surge in commodity prices, while the cheap dollar makes US assets a bargain. Well, not exactly: the enormous reserve growth on the part of Asian central banks means that the Treasury’s debt-buying program has been outsourced to America’s Asian trading partners! No-one dares pop the bubble. It’s like what Woody Allen said about death. He wasn’t afraid of it; he just didn’t want to be there when it happened.

Now on gold:

What’s the price of the last ticket on last train out of Paris on the night the Germans march in? Whoever is carrying the most cash will get it, and that will be the price.  … As I have tried to show in several recent articles, most recently this Sept. 15 essay at Asia Times, gold is a hedge against the collapse of America’s central role in world affairs.

What is the correct price? Central banks alone own about 4.8 million tons of gold. The world produces about 2,200 tons. Suppose that central banks wished to increase their gold holdings by 1 percent. That’s 48,000 tons or so, or more than 20 times annual mining production. What’s the price elasicity on that sort of thing?  How badly do you need that ticket out of Paris? … If the whole world, including the Asian central banks, man the bucket brigade–except with kerosene in the buckets rather water–the prices of real assets are going to rise. The best real assets to hold are the ones most sensitive to the degradation of the dollar.

Who stabilized the U.S. economy, Obama or Bernanke?

Nov 17, 2009 14:15 UTC

Ed Yardeni votes for The Chairman, but now he thinks the Federal Reserve need to change course:

I believe that the Fed did in fact avert a financial meltdown and an economic depression by flooding the financial system with liquidity, and by lowering the federal funds rate to zero. I believe that all the efforts to deal with the financial crisis by the White House and Congress–including TARP, PPIP, and ARRA-were counterproductive and offset some of the effectiveness of the Fed’s responses. On PBS NewsHour last Friday, Sheila Bair, the level-headed head of the FDIC, said that TARP was a huge mistake: “I think at the time it sounded like the right thing to do…but I just see all the problems it’s created.” She implied that had she been consulted by Hank Paulson and Ben Bernanke, she would have tried to dissuade them from pursuing this approach.

I think that the Fed should raise the federal funds rate to 1.0% to demonstrate some confidence in the economic recovery. A zero rate was justified by the effort to avert a financial meltdown and a depression. Now it may be doing more harm than good.

COMMENT

What are you smoking? Our Economy is tubed and Obama and his cronies are throwing it lead weights.. Everything Obama is doing despite what he says is to tank our economy to usher in George Soro’s plans for a new world economy…

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Henry Kaufman: Break up the banks

Nov 11, 2009 15:27 UTC

I think Henry Kaufman (in the WSJ) accurately outlines the public policy choice when it comes to financial reform: heavily regulated monster banks vs. a more decentralized, somewhat less regulated financial system TBTF creates a need for heavy regulation and less economic efficiency.

From what I could gather from a speech given by Fed Chairman Ben Bernanke at a conference sponsored by the Federal Reserve Bank of Boston a few weeks ago, the Fed favors constraining giant institutions to the point where they would become, in effect, financial public utilities. They might be required to increase equity capital and to limit their activities in proprietary trading and other risky activities.

But under this arrangement, these large institutions nevertheless would still command a vast amount of private-sector credit. And when markets became unstable in the future, other financial institutions would merge in order to come under the government’s protective too-big-to-fail umbrella.

If an overwhelming proportion of our financial institutions are deemed too big to fail, monetary restraint would fall heavily on institutions that are not. Pressure would sharply intensify on smaller institutions that mainly service local communities. Further consolidation would result, which in turn would reduce credit-market competition. At the same time, with increasing financial concentration, market volatility would increase.

All of this would narrow the gap between the Federal Reserve and the political arena. Taken to its logical conclusion, our market-based system of credit allocation would be replaced by a socialized financial system, and the Federal Reserve would become part of it.

A much better approach would be to prohibit any financial institution from remaining or becoming too big to fail. This would require that regulators downsize large financial conglomerates. In this process, the prime targets for divestiture should be financial activities that pose risk to the stability of the deposit function as well as operations that pose conflicts of interest.

Our financial system is at a crossroads. We can either succumb to the forces that are shifting markets toward greater government back-stopping and socialization. Or we can create a structure in which no institution is too big to fail, and a financial system that is supervised effectively by a modernized central bank.

Dodd financial reform bill underestimates populist anger

Nov 11, 2009 15:20 UTC

The instant analysis on Senator Christopher Dodd’s aggressive financial reform plan is that it’s more about getting him re-elected than getting a bill through the Senate.

And there’s some truth there. Dodd is in the fight of his political life to keep his U.S. Senate seat. A tough bill plays on populist outrage against Wall Street and mitigates the damaging public perception that he was AIG’s man in Washington.

The bill is also more ambitious than its counterpart in the House, at least in how it deals with systemic risk. (The Dodd version of a Consumer Financial Protection Agency may be slightly less powerful.)

Unlike the White House-blessed plan of House Financial Services Chairman Barney Frank, Dodd’s plan would create an Agency for Financial Stability to deal with too-big-too-fail firms. This new entity could write new regulations or subject such firms to enhanced supervision. Dodd would also combine existing financial regulators into a Financial Institutions Regulatory Administration.

Accomplishing this vast reorganization means clashing with myriad committee chairs and industry lobbyists. And the Richard Shelby-led Republicans on the Banking committee, while favoring limiting the Fed, have no use for the consumer piece or new limits on Sheila Bair’s FDIC.

So the politics are dicey. But an even tougher package might actually be more of a potential political winner by gaining grassroots support across America. Consider that the public seems to believe two big things about financial reform: The Fed should not be given more power, and too-big-to-fail is terrible policy.

The Dodd plan makes progress on the first but could go much stronger on the second. It could have, for instance, embraced Paul Volcker’s argument that banks should be prohibited from owning and trading risky securities (though not necessarily from underwriting stock and bond offerings).

Or Dodd could have incorporated the 225-word amendment of Senator Bernie Sanders, a self-described ‘democratic socialist’, which would require the actual break-up of too-big-to-fail institutions.

Spend a few minutes at a ‘tea party’ or listening to conservative talk radio and you’ll find plenty of appetite for Sanders’ so-called left-wing reforms. Today’s right has about as much use for Big Money as it does for Big Government.

As it is, financial reform is a 2010 issue. Plenty of time to makes its teeth even sharper.

COMMENT

Dodd needs to start packing his bags and updating his resume.

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Barney Frank’s wrongheaded assault on the Fed

Nov 3, 2009 18:20 UTC

When you’re a nation getting ready to borrow $10 trillion or more over the next decade, you don’t want markets questioning your central bank’s commitment to controlling inflation.

But Congress continues to risk just such a scenario, whether through aggressively questioning Federal Reserve Chairman Ben Bernanke or pushing a bill to audit Fed monetary policy.

Now Representative Barney Frank, the chairman of the House Financial Services Committee, has suggested curbing the authority of the 12 Fed regional bank presidents.

As Frank sees things, monetary policy should not be influenced by “inappropriately placed private businessmen — or women, occasionally — picked by other private businessmen, and occasionally women.”

Drill down a bit and it’s clear that what really bugs Frank is not so much that regional bank presidents are selected by a nine-person panel, six of whom are elected by bankers. He just thinks they’re too hawkish.

Frank even commissioned and publicized a study that found that 97 percent of the hawkish dissents at Federal Open Market Committee meetings during the past decade were from the regional bank presidents.

Of course, higher rates would have been a good thing, given that the Fed’s extraordinarily easy monetary policy was a huge contributor to the financial crisis. And going forward, the Fed will face the economically and politically challenging task of withdrawing monetary stimulus when economic growth may well be sluggish and unemployment high.

But such medicine may be necessary to prevent an inflation outbreak. Congressional threats and bullying will make a hard job even more arduous.

Moreover, one reason the Fed has a decentralized structure is because of historic concerns about monetary policy serving only Washington and Wall Street.

Yet citizen concerns about the concentration of financial power are as alive today as they were in 1913 at the Fed’s creation. Monetary policy set solely by a presidentially-appointed and Senate-confirmed Board of Governors should certainly set off alarm bells with bond vigilantes concerned that Washington may try to inflate its way out of its debt problems.

If Congress wants to look at how the Fed conducts its  business, better to focus on better ways to make monetary policy reflect forward-looking market gauges such as commodity prices rather than the unemployment rate or output.

Ultimately, though, the Fed’s problem isn’t too much influence from bankers in Kansas City or Atlanta or Chicago. It’s too much influence from politicians in Washington.

COMMENT

The Federal Reserve & its system of usury is the greatest scam in world financial history & I can’t understand why highly educated people & economists fail to see the bare truth for what it is. As an irony, not too far into the future, the common masses may well become more aware of what the Fed truly stands for, while educated MBAs continue to argue in vain.

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