MacroScope

Fed’s Tarullo not making any promises

We’re pretty sure that Daniel Tarullo, the Federal Reserve’s point person on regulation, expects the United States will finally understand exactly what financial reforms are coming “some time next year.” But the Fed governor made doubly sure to qualify that statement lest anyone – especially any press “in the back” – take it as gospel.

At a conference in New York Wednesday morning, Tarullo was asked how long it would take for the various regulatory agencies to give final details on the raft of financial crisis-inspired reforms, everything from Basel III capital standards to the Volcker ban on proprietary trading. Here’s what he said:

“I know it’s frustrating for people not to have the proposed rules out. On the other hand, doing them simultaneously does allow us to see whether something in one of the proposed capital rules will affect something in another proposed capital rule, so that we end up, when we publish the final rules, with fewer anomalies, questions and the like, which will undermine the ability of a firm or academic or just anyone in the public to see and understand how these things are going to function. I hesitate to give a time line on exactly when we’ll get there. But I think…it seems to be reasonable to expect that some time next year the basic outlines – and I don’t just mean the ideas, I mean the details associated with the major reform elements – should be reasonably clear to people even though questions will inevitably rise in implementation. (You) don’t want to take that as a promise. But as I think about these various streams, that is my expectation… To have gotten it done this year would have meant the sheer magnitude of the task would have lead to a lot of inconsistencies or open questions, which then would have just produced another round of change. So you’ve got me on the record saying some time next year, but I tried to qualify it as much as possible – that’s for all you people in the back…”

Too big to fail banks? Break ‘em up, Fisher says

Dallas Federal Reserve Bank President Richard Fisher wants the biggest U.S. banks broken up, calling them a danger to financial system stability and their perpetuation a drag on the economy.  It’s an argument he’s made before – in full-length speeches, asides to reporters, parries to audience questions. (For the latest iteration, see Dallas Fed bank’s annual report published Wednesday.)

Indeed, Fisher is among the most consistent of Fed policymakers. He’s against further quantitative easing – has been ever since QE2, back in 2010. (By contrast, Minneapolis Fed President Narayana Kocherlakota supported QE2, before reversing course and opposing new rounds of monetary easing in 2011 and 2012). He’s against big banks, of course. He says repeatedly that uncertainty over taxes and regulation, not too-high borrowing costs, is what is holding back businesses from investing and hiring.

He’s even consistent with his jokes: several times last year Fisher lampooned the Fed’s increasing emphasis on transparency, quipping that no one wants to see a “full frontal” view of a 100-year-old institution. That particular joke dates back to at least 2006, according to a transcript of a Fed policy-setting meeting from October of that year. “Uncertainty is the enemy of decisionmaking,” Fisher said then, lambasting market participants eager for the Fed to provide more clarity on its views. “Of course they want more frequent forecasts. Governor Kohn and I talked about this before. They want a full frontal view. I find a full frontal view most unbecoming.”

from The Great Debate:

Why the bank dividends are a bad idea

On the basis of "stress tests" it ran, the Federal Reserve has given permission to most of the largest U.S. banks to "return capital" to their shareholders. JPMorgan Chase announced that it would buy back as much as $15 billion of its stock and raise its quarterly dividend to 30 cents a share, up from 25 cents a share.

Allowing the payouts to equity is misguided. It exposes the economy to unnecessary risks without valid justification.

Money paid to shareholders (or managers) is no longer available to pay creditors. Share buybacks and dividend payments reduce the banks’ ability to absorb losses without becoming distressed. When a large “systemic” bank is distressed, the ripple effects are felt throughout the economy. We may all feel the consequences.

New ethics standards for economists

It seems sensible for most professions but in economics it’s nothing short of a revolution: The 17,000-strong American Economics Association has adopted a stringent new code for disclosures meant to prevent or at least highlight possible conflicts of interest.

The unexpected move is the result of pressure on the profession about dubious ethical practices and a pay-to-play culture, including  a Reuters story that dug into conflicts relating to testimony on financial reform – and found that about one in three who addressed Congress on the subject of Dodd-Frank failed to come clean on some type of relevant financial interest. The issue of conflicts among academic economists was first brought to light by the movie Inside Job, in which former Fed governor Frederic Mishkin is questioned sharply about having been paid over $100,000 to write a glowing review of Iceland’s financial system not long before it imploded.

Here is what the new AEA code will require academics to do:

1) Every submitted article should state the sources of financial support for the particular research it describes. If none, that fact should be stated.

Is regulation really impeding employment?

It has become a common refrain in both politics and finance: intrusive regulations, an overreaction to Wall Street’s 2008 crisis, are generating uncertainty and preventing employment from bouncing back. Some top Federal Reserve officials have joined the chorus. Dallas Fed President Richard Fisher made the argument to business executives in Austin, Texas last month to justify his lack of support for additional monetary stimulus.

I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; until you know the cost of employee health insurance; until you are reassured that regulations that affect your business will be structured so as to incentivize rather than discourage expansion; until you have concrete assurance that the fiscal “fix” the nation so desperately needs will be crafted to stimulate the economy rather than depress it and incentivize job creation rather than discourage it.

Jeffrey Lacker, head of the Richmond Fed, also gives credence to the view that regulations are a burden on hiring:

Why banks need (way) more capital

The mantra that regulation is holding back the U.S. economic recovery is playing into Wall Street’s efforts to prevent significant reforms of the financial industry in the wake two major crises – one of which continues to rage in the heart of Europe. The sector’s staunch opposition to reform was captured in JP Morgan’s CEO Jamie Dimon’s claim that new bank rules are “anti-American.”

A new report from the Organization for Economic Cooperation and Development (OECD) suggests the opposition to substantially higher capital requirements is misguided. In particular, economist Patrick Slovik argues that a move away from the Basel accords’ “risk-weighted” approach to capital rules toward a hard-and-fast leverage ratio is the only way to prevent banks from finding creative ways to hide their true risk levels.

When the Basel accords first introduced the calculation of regulatory capital requirements based on risk-weighted assets, it was not expected that for systemically important banks the share of risk-weighted assets in total assets would consequently drop from 70% to 35%. Nor was it expected at the time that the financial system would transform high-risk subprime loans into seemingly low-risk securities on a scale that would spark a global financial crisis.  […] Tighter capital requirements based on risk-weighted assets aim to increase the loss-absorption capacity of the banking system, but also increase the incentives of banks to bypass the regulatory framework. New liquidity regulation, notwithstanding its good intentions, is another likely candidate to increase bank incentives to exploit regulation.

Gensler’s grilling

Dave Clarke also contributed to this post.

Inside the Beltway, the ability to stay on message is a coveted trait. Politicians hate letting tough questions sidetrack them from their talking points. But it turns out they don’t particularly like it when others use the same tactic on them.

On Tuesday, Republicans blistered Commodity Futures Trading Commission Chairman Gary Gensler at a Senate Banking Committee hearing, expressing frustration with his answers – or lack thereof.

In particular they  focused on why in early November Gensler opted to recuse himself from participating in all matters related to the collapse and investigation of brokerage firm MF Global. Gensler once worked under MF Global CEO Jon Corzine while the two were at Goldman Sachs, and he worked on the Sarbanes-Oxley Act while Corzine served on the Senate Banking Committee.

Who are hedge funds dating?

The world of hedge funds is as mysterious as it is profitable, and remains highly opaque even after a raft of new reforms aimed at strengthening financial stability. While there is general agreement among policymakers that the the so-called shadow banking system was at the epicenter of the financial crisis of 2008, hedge funds still face little or no regulatory scrutiny, despite their size and importance in financial markets.

That worries Andrew Lo, a professor at MIT’s Sloan School of Management. For him, the basic registration requirements for hedge funds are not nearly sufficient to give regulators a broad sense of the potential risks present in the markets. On the sidelines of an International Monetary Fund meeting, Lo compared the relationship to that of a parent keeping tabs on a growing teenage child.

Let’s say you’re a parent and your child has started dating. You don’t necessarily need to know everything they are doing, but you’d at least like to know who they are going out with.

Bernanke and bank rules: lessons sort of learned

Fed Chairman Ben Bernanke on Wednesday gave a speech on the lessons about sustained growth that can be gleaned from the experience of emerging markets. Bernanke said not all of the “Washington consensus” policies pushed by multilateral lenders in the 1990s had proven fruitful. In particular, he said the Asian financial crisis showed the risks of opening up financial markets to foreign capital flows until a country has implemented measures to strengthen banks and regulation.

Yet Bernanke missed an opportunity to link his speech back to the recent experience of the United States. For while his message was tailored for the developing world, he may as well have been describing the U.S. banking sector in the run-up to the 2008-2009 financial crisis:

Dismantling controls on the domestic financial industry has proven counterproductive when important complementary factors — such as effective bank supervision … were absent.