James Pethokoukis

Politics and policy from inside Washington

John Taylor on the Lehman anniversary

Oct 1, 2009 18:15 UTC

From his blog:

Two weekends ago the big news was the one-year anniversary of the Lehman Brothers bankruptcy and the ensuing panic. But when you look at the data, the real one-year anniversary of the panic is closer to now.

In the four weeks from Friday September 12, 2008, just before the Lehman bankruptcy, through Friday October 10, the S&P 500 fell by a huge 28 percent. But the decline was relatively modest (3 percent) in the first two weeks of that period, from September 12 to September 26, a year ago today. It is not unusual to see that size of change in a one or two week period. The real panic (the remaining 25 percent of that 28 percent decline in the S&P 500) occurred later, from September 26 to October 10. If you look at interest rate spreads or stock prices in other countries you see the same timing. Such facts have led me and others to be skeptical about the commonplace claim that it was simply the decision not to intervene and bail out Lehman’s creditors that triggered the panic. Rather I focus on the chaotic rollout of the TARP which began later and continued through October 13 when its ultimate use was finally defined.

M2M and the financial sector rebound

Sep 29, 2009 18:47 UTC

Ed Yardeni and mark-to-market accounting:

Do you recall “Time of the Season” sung by The Zombies in 1968? The Q3 earnings season is about to start. For the third quarter in a row, there will be fewer zombies in the S&P 500. These were the living dead companies that finally died during 2008, or they survived and are mostly coming back from the dead. Many of them are in the Financials sector. They could deliver some big positive earnings surprises during Q3 thanks to the suspension of mark-to-market accounting on April 2. … The Doomsters were quick to add up all the write-offs they projected as the financial crisis intensified largely as a result of the death spiral attributable to marking the value of assets into the oblivion of extremely illiquid or nonexistent markets. It was insane that the MTM rule wasn’t suspended sooner. Yet both Ben Bernanke and Hank Paulson insisted that it would be unwise to change the rule in the midst of a crisis. They were dead wrong as evidenced by the extraordinary rebound in the stock market ever since March 12, when Rep. Gary Ackerman, my Congressman, leaned on Robert Herz, the head of FASB, to suspend the rule, which is what he did on April 2. The grand total of all the write-offs attributable to the financial crisis is now likely to fall quickly.

Hey, Ron Paul, end the Fed … as financial regulator

Sep 28, 2009 16:38 UTC

If not for unprecedented actions by the Ben Bernanke-led Federal Reserve, the United States economy might be mired in a depression.

Yet the Fed finds itself on the defensive on Capitol Hill. There was its general counsel, Scott Alvarez, pleading last week to the House Financial Services Committee to reject attempts to expand Government Accountability Office audits of the Fed. Already, the GAO reviews the central bank’s supervisory and regulatory functions. But a bill introduced by Representative Ron “End the Fed” Paul, a Texas Republican, would also subject monetary policy and discount window operation to GAO audits. The bill has nearly 300 co-sponsors and as well as conceptual approval by Barney Frank, chairman of the committee.

The Fed views these expanded audits as threats to its independence from political pressure. As Alvarez put it, “These concerns likely would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation.”

For instance, when it comes time for the Fed to start withdrawing monetary stimulus from the economy despite continuing high unemployment, the last thing it will need is haranguing from Capitol Hill that it’s moving too fast, too soon.

And if the Fed becomes the regulator of systemically important financially institutions, as the White House advocates, it’s easy to imagine how the central bank would be subject to even more intense and frequent grilling from an emboldened Congress.

Now the move for expanded Fed audits results from both the Fed’s unprecedented efforts to end the financial crisis and its regulatory failures that contributed the financial crisis. The audit bill should be a wakeup call to the central bank that the more it gets involved in the regulatory process, the great future scrutiny from a skeptical Capitol Hill.

And it’s not just Congress. World Bank President Robert Zoellick says that after reviewing the Fed’s regulatory performance, he’s concluded that it’s a bad idea to “vest the independent and powerful technocrats at the Federal Reserve with more authority.”

Past regulatory failures have already undercut confidence in the Fed – “technocrats” is hardly a compliment — and breaking new regulatory ground in the field of systemic risk increases the chances for further erosion. As it is, the Fed is already buckling to congressional pressure. Alvarez told the committee that the Fed would be “happy to work” with lawmakers on ways to release names of companies that borrow from the central bank, perhaps after a period of time.

Not only should Congress reject the idea of expanded Fed audits, it should reject the idea of expanding the Fed’s role as regulator. If need be, create a new regulatory agency or council. Let Team Bernanke focus on executing its stimulus exit strategy and strengthening its reputation as an inflation fighter.


For those of you who want to end the FED, lets end the defense depart. The state dept. and Pentagon and our standing army as well. That would save an abundance of our tax money. We shouldn’t be in foreign countries anyway.And we should be promoting peace not war. Oh I forgot peace is not profitable, so that won’t happen. But don’t forget that we the people will have to join militias to protect our country since we won’t have an army anymore. I don’t know about you but I don’t think I would have the time or energy to join, I am too old. :)

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Is system risk regulation even possible?

Sep 24, 2009 16:24 UTC

Arthur Levitt, former chairman of the SEC, wants a systemic risk regulator who can serve as an “early warning system” and “director appropriate regulatory agencies to implement action.” (This is his House Fin Serv testimony.) I am not sure, ultimately, even the WH thinks this kind of prescience is possible. Anyone who could do that should be running money rather than serving in government. Better to tweak capital and leverage rules and force the big banks to show how they could be unwound — the “living will” idea.

The Fed as systemic risk regulator

Sep 24, 2009 16:00 UTC

In his testimony before the House Financial  Services Committee, economist Mark Zandi draws light to a problem I have been talking about and then offers a solution:

The principal worry in making the Federal Reserve the systemic risk regulator is that its conduct of monetary policy may come under overly onerous oversight. Arguably one of the most important strengths of our financial system is the Federal Reserve’s independence in setting monetary policy; it would be counterproductive if regulatory reform were to diminish even the appearance of this independence. This will become even more important in coming years, given prospects for large federal budget deficits and rising debt loads. Global investors will want to know that the Fed will do what is necessary to ensure inflation remains low and stable. To this end, it would be helpful if oversight of the Fed’s regulatory functions were separated from oversight of its monetary policy responsibilities. One suggestion would be to establish semiannual reporting by the Fed to Congress on its regulatory activities, much like its current reporting to Congress on monetary policy.

And here is how Paul Volcker sees all this working:

I am not alone in suggesting that a Fed governor should be nominated by the President and confirmed by the Senate as a second Vice Chairman of the Board with particular responsibility for overseeing Regulation and Supervision. The point is to pinpoint responsibility, including relevant reporting to the Congress, for a review of market developments and regulatory and supervisory practices. Staff authority, independence, professionalism, experience, and size should be reinforced.

Me:  I don’t see how Zandi’s solution would solve anything. Maybe the new vice-chairman would do most of the testifying about regulation rather than Bernanke? I think the true answer is that a lessening of independence is just a risk Zandi and Volcker are willing to take.

White House taking a flexible approach to financial reform

Sep 24, 2009 13:55 UTC

It was a revealing performance that Treasury Secretary Timothy Geithner gave on Wednesday before the House Financial Services Committee. and an important one. While Geithner frequently journeys to Capitol Hill, his latest appearance comes as the administration begins a new renews a push for passage of sweeping financial regulatory reform.

Maybe “push” is the wrong word. “Scramble” might be better since Geithner stressed that time is of the essence. “We can’t let momentum for reform fade as memory of the crisis recedes,” he said. Indeed, Tthe same dynamic is at play with financial reform as it is with healthcare reform: Get a reasonable bill passed this year or, ideally, before the November gubernatorial elections in New Jersey or Virginia, where Republicans are leading.

While Geithner said the uber-practical administration favors what will work, the reality might be closer to what will pass. Take the White House proposals for various consumer reforms, including the establishment of a Consumer Financial Protection Agency. Chairman Barney Frank wants to tweak the White House proposal, eliminating a provision that would force financial companies to offer “plain vanilla” versions of financial products. Frank would also exempt a range of businesses from CFPA oversight such as accountants and lawyers.

Geithner’s response: “There’s nothing in there, at first glance, that troubles me significantly in terms of its practical value.” This is good news. Rather than having a new agency attempt to determine what plain-vanilla mortgages and credit cards are and then mandate them, better to merely improve disclosure of fees and requirements for consumers.

Here is hoping that Geithner and President Barack Obama show a similar flexibility on the issue of a super-regulator and systemic risk. The White House continues to push for an expanded Federal Reserve regulatory role despite the potential risks to its independence. The idea of a SuperFed is also likely to meet stiff congressional opposition given the Fed’s role in creating the financial bubble through errors in monetary policy and lapses in regulatory judgment. Creation of a SuperFed might also have to accompany passage of a bill to audit the central bank, another threat to its independence.

Christopher Dodd, Frank’s opposite in the U.S. Senate, favors a single regulator to oversee banks. Ideally, the Fed would then be free to focus on its core mission of conducting monetary policy, while, as an American Enterprise Institute analysis put it, a separate super-regulator could enjoy supervisory economies of scale and achieve consistency. This easily passes the Geithner “what will work” standard.

Geithner on the Hill (live blogging)

Sep 23, 2009 14:34 UTC

Treasury Secretary Timothy Geithner speaks before the House Financial Services Committee on financial regulatory reform this morning and I am there.

9:33 It begins

9:35 Barney Frank says financial regulatory reform is not dead for 2009.

9:37 Frank says a busy schedule, including working on Fridays.

9:38 Frank says Senate counterparts tell him its full-speed ahead for them, too.

9:39 Frank talks about TBTF and how America hates it, doesn’t like that incompetence is “immunized.” “There will be death panels enacted by this Congress.”

9:41 Says Bush White House felt it had no options other than pay all creditors or none of the creditors. This will change.

9:42 Is against a “pre-ordained” list fo systemically important institutions. Like porno, “You’ll know it when you see it.”

9:44 Sees a future regulator who would tell an AIG to get out of CDS business and unwind portfolio

9:45 Ranking GOPer Spencer Bachus starts to speak. Doesn’t want to rescue firms but liquidate and resolve them. Bad mouths the Fed’s ability to identify systemic risk. Also rips into consumer finance piece.

9:46 Now we are going around the horn as other committee members give their two (minute) cents.

9:50 Jeb Hensarling (R) is going after bailouts and saying they are making economy worse, mentions jobsless recovery. He seems unaware that Frank is already going to tone down some Obama proposals like consumer finance.

9:51 Luis Guitierrez (D) dismissed the regulatory abilities of Fed and FDIC, talks up consumer finance. More capital, less leverage to stop TBTF. “Only government can stop” another Lehman.

9:55 Republicans say things need to slow down.

9:56 Geithner speaks. Says WH is only focused on “what will work.”

9:57 Hits on consumer finance first. Failures were “extensive and costly.” And to fix this we need to have national standards on credit providers.

9:58 TG: We need fundamental overhaul without hurting consumer choice.

10:00 TG: We need tools to resolve TBTF firms.  We need a way to allow failure to happen with huge collateral damage to economy. “Can’t let momentum for reform fade as memory of crisis recedes.”

10:02 TG asked about BF changes to plain vanilla aspect of consumer finance proposal. TG says he is supportive of BF changes!

10:04 Doesn’t Tier One designation create a subsidy? TG says he is worried about that issue but that they will be subject to leverage limits and keep more capital and more conservative restraints on risk taking. But we need tools to intervene to be dismantled and restructured without taxpayer bearing burden. Our jobs is to make sure”system is less vulnerable.”  Can’t let financial crisis “burn itself out.” Can’t “abolish the fire station.”

10:07 Maxine Waters says she is very worried about speculative use of CDS. Also seems to want to completely ban them. No just naked CDS.

10:11 TG gives a “how did that work out for you” kind of answer to the idea of keeping consumer finance authority dispersed.

10:13 TG: Don’t want to see “a bunch of bureaucrats” limit consumer choice.

10:15 Hensarling do you favor Frank death panel for troubled companies.

10:16 TG: It could be receivership or conservatorship for TBTF companies.

10:17 Mandatory standardized products for consumers not off the table but looking at other approaches, too.

10:18 JH: Wouldnt retailers like Walmart fall under new consumer authority.

10:19 Seems to say if you offer consumer credit, you play by same rules. “It’s black and white.” If you compete with banks, you fall under new agency, he seems to say. (Hensarling sees it as a new reg regime for US retailers.)

10:21 TG: Leverage is a biggie, especially for systemically important firms. Adds that “I have not had the privilege” of working on Wall Street.

10:24: TG: How best to prevent moral hazard. Cant expect the market to constrain excess leverage or wait for crisis to burn itself out.

10:35 What about proprietary trading/ toxic assets? TG:  Won’t guarantee those activities. Also,new capital is coming into the system because of disclosure. More liquidity toxic assets markets. Govt. capital just  now being allocated.

10:37 GOP presses TG on consumer reg consolidation. TG: Other regulators are not incompetent or unprincipled but also are protecting turf. More importantly, status quo did not work.

10:42 On derivatives and hedging. TG: Some companies need to hedge risk and also need customized products.

10:44 On credit ratings agencies. TG: We need to decrease ratings dependence and a critical part of that is that people who sell securities retain some of the risk.

10:46  TG has seen Frank note on fin reform changes but only briefly “but broad thrust looks encouraging and promising” and “nothing troubles me.”

10:51 Sherman (D) and section 1204 (resolution authority) and SuperTARP.  Can we limit $ to $1 trillion in taxpayer dough or come to Congress.TG responds: I dont recognize most of your concerns and would be a mistake to harden or create an expectation that government will save you. You are fundamentally mischaracterizing the bill. (Sherman presses him on dollar limit.) I would not support proposals to put us in position we were in 2007 and 2008. Sherman: The problem with Wall Street is that Congress had to be involved.

10:57 Sherman: This creates moral hazard.

11:00 (From GOP)Will consumer energy push out smaller players, community banks and raise costs, creating bigger financial institutions. TG: This won’t increase costs for community banks. And we want to preserve capacity to use derivative markets to hedge.

11:09 Manzullo (R) Was root cause of collapse that subprime not regulated enough, people buying home they could not afford. TG: One of a number of factors.

TARP and the 2010 election

Sep 22, 2009 17:40 UTC

The following quote is from a Democrat, Rep. Peter DeFazio, but I would not be surprised to hear a lot of GOPers say a similar thing on the campaign trail (via The Hill):

The view of the Larry Summers crowd down at the White House that has the president’s ear is, ‘What a tremendous success — everyone at Goldman Sachs is getting a $700,000 bonus this year, so it’s working,’ ” said Rep. Peter DeFazio (D-Ore.), a consistent critic of the Wall Street bailouts. “If your total focus in life is enriching a few people on Wall Street and protecting their assets, it’s working. If your focus is jobs for Americans and their assets, this whole thing has been a disaster.


Would be curious to see how he voted, or if he even read it, as he was passing it into law…

This kind of political posturing is why there can never be any real debate in America, because it’s not what politicians think, it’s what they think they can win on.

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Dodd vs. the White House on financial reform

Sep 21, 2009 19:32 UTC

Well, this is going to  be fun. Chris Dodd is headed toward a tough reelection campaign. So he stays at the head of the Banking commitee instead of moving to Health since a) that is where the action will be in 2010 and b) it is a great place to raise tons of money. He wants a non-Fed superregulator while the WH wants the Fed in that role. And now the Blue Dogs are cooking up their own reform plan. The whole thing will be at the epicenter of a white-hot lobbying campaign. And then there are the personalities; Dodd, Frank, Bair, Bernanke, Geithner. The politics are every bit as treacherous  as those of healthcare.

Did Romney flip-flop on TARP?

Sep 21, 2009 14:43 UTC

OK, here is what the front runner (at least according to the online betting markets) for the 2012 GOP nomination said at the Value Voters summit over the weekend:

When government is trying to take over health care, buying car companies, bailing out banks, and giving half the White House staff the title of czar – we have every good reason to be alarmed and to speak our mind!

Now that does sounds like a repudiation of TARP. And here is what Mitt Romney told me in March:

The TARP program, while not transparent and not having been used as wisely it should have been, was nevertheless necessary to keep banks from collapsing in a cascade of failures. You cannot have a free economy and free market if there is not a financial system. … The TARP program was designed to keep the financial system going, to keep money circulating in the economy, without which the entire economy stops and you would really have an economic collapse.

Now that does sound like an endorsement of TARP.  If Romney liked it then and doesn’t like it now for policy reasons, I think that is OK. But if that is the case, he should explain is reasoning and change of mind.

Of course, the cynical explanation is that Romney now realizes that among many conservative GOPers, endorsement of TARP is almost a disqualifier for the 2012 nomination. So he is trying to muddy his support a bit. Probably the best way to approach it is to say that while TARP was better than doing nothing, there were better alternatives — asset auctions, debt swaps — that should have been planned for after Bear Stearns and executed. In any event, his criticism of TARP is fairly mild here — though it certainly does raise the issue of serial flip-floppery.


“When you think of Mitt Romney, you think of someone who is steady, focused and competent.”

I approve of that comment.

As for flip-flopping, this sounds like a case of headline-baiting. Are you a journalist or a seller of headlines?

Thanks for the contrast, however. In both cases, Mitt showed his intelligence and ability to communicate economic intricacies other candidates (and the President) can’t.

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