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…”
Selective transparency at the Fed
It’s something of a dissonant communications strategy: Fed officials are willing to tell us what they think will happen three years from now, but not what they discussed three years ago.
The Federal Reserve’s public relations arm holds up the chairmanship of Ben Bernanke as a model of transparency. And it’s true. Press conferences and federal funds rate forecasts are major steps forward for a central bank that until the mid-1990s didn’t even tell the markets what it was doing with interest rates.
Still, the old habits of secrecy die hard. Monetary policy transparency aside, the Fed has remained adamantly opaque in other ways – to the point that it took a Bloomberg News lawsuit for it to name the recipients of emergency era loans.
Similarly, it took a Freedom of Information Act request from MSNBC and The Huffington Post to obtain a mostly blacked out version of transcripts for Fed meetings during the worst of the U.S. financial crisis. The Fed only releases full transcripts of its meetings with a five year lag, arguing that this allows policymakers to conduct their discussions more freely.
New research from economists Xavier Freixa and Christian Laux examining the nature of regulatory failures during the crisis makes an interesting distinction between mere disclosure, the raw release of data, and transparency, which is a more directed effort to communicate that information to the public.
We interpret disclosure as providing information, while transparency arises when the information is effective in reaching the market, being adequately interpreted and used.
“We interpret disclosure as providing information, while transparency arises when the information is effective in reaching the market, being adequately interpreted and used.”
In other words, transparency only happens when you agree with the Fed’s all-knowing interpretation. If we give you the data before you would be likely to agree with us, that would be opaque disclosure.
The Fed’s befuddling transparency
The Fed is being more transparent. Any questions? Lots, apparently. Wall Street economists have published a flurry of research notes speculating about just how much new information the U.S. central bank will release along with its federal funds forecasts on Wednesday, and what form it will be presented in.
Even Vincent Reinhart, a former Fed economist now at Morgan Stanley, doesn’t know what to make of it:
Many market participants admit to being somewhat confused about the new disclosure policy. The exercise should be viewed as incremental in nature, limited by design flaws, and as likely to cloud as to clarify the public’s understanding of policy intent, at least at the outset. And the mission statement, if one appears, may amount to little more than a strong commitment to motherhood and apple pie among central bankers – i.e., the importance of price stability in the long run – but provide no practical guidance as to near-term policy choices.
Why does the Fed have such a hard time communicating its communications? It’s still not clear what exactly is being released, or when. Another example, from Mike Feroli, economist at JP Morgan and also a former Fed staffer:
As of now our understanding about the release of information is that at 12:30 we get the usual FOMC statement, then at 2:00 we’ll receive the economic forecasts, expanded now to include the above-mentioned forecast for the funds rate, followed immediately thereafter by the Chairman’s press conference. The narrative regarding the prospects for the balance sheet — which was mentioned as a communication enhancement in the last minutes — will apparently not be released until the next FOMC minutes, three weeks after the meeting.
Dana Saporta, a veteran Fed watcher at Credit Suisse, also has some unanswered questions:
It is unclear whether the “accompanying narrative” the Fed has advertised will be released on January 25, as well, or whether we need to wait for the full Summary of Economic Projections to be released along with the meeting minutes on February 15.
We need a full audit of the fed, and full disclosure of the ownership and exactly how much money was given to other central banks, as well as how much money it makes overall. Google money as debt or moneychangers and learn about this organization and why Ron Paul wants to get us away from it’s caustic grip.
Fed rate forecasts as a micro QE3
The Fed’s decision to begin publishing policymakers’ own forecasts for the path of policy may effectively constitute a minor easing of the central bank’s already ultra-loose monetary policy at its Jan. 24-25 meeting, according to Harm Bandholz of UniCredit. That’s because in doing so, officials will likely show that they expect the benchmark federal funds rate to remain near rock bottom levels until later than mid-2013 – the Fed’s current guidance on policy.
While the minutes do not say in which direction the forward guidance should be adjusted, we assume that mid-2013 is seen by many FOMC officials as too early. In that context, the decision for Fed officials to publish their projections of the target fed funds rate could provide an opportunity for a back door policy easing in January. If e.g. most participants would not pencil in any rate hike until the end of 2014, the market would certainly take this as a strong signal.
Along the same lines, David Hensley at JP Morgan says:
All else constant, these projections would further flatten the yield curve if the FOMC signals a later start to rate hikes than currently is discounted in markets.
Which is just as well if the Fed’s intention is to keep policy constant, since, as my colleague Mark Felsenthal aptly points out, a stated end-date for exceptionally low rates effectively means that policy is susceptible to a passive tightening with every day that passes.
Investors remain split on the prospects of another round of bond buys, particularly given a better round of U.S. economy data. But for Bandholz, the odds are still in favor of a QE3:
Despite the latest round of better economic numbers, the chances for even further monetary policy accommodation still seem to be quite high.
Love, dissent and transparency at the Fed
All four Federal Reserve policymakers who dissented on U.S. central bank policy this year will lose their votes next year. That could make the New Year full of love, but not necessary free from dissent, Dallas Fed President Richard Fisher joked on Friday.
Fisher, like Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser, lobbied and lost against Fed easing earlier this year; all three dissented twice. Chicago Fed President Charles Evans dissented twice from the other side of the aisle, arguing for further easing at the most recent two meetings against the majority’s decision to stand pat.
None will have votes next year. Not, of course, because they voiced their opposition to the majority, but simply because votes rotate among regional Fed presidents according to a set schedule, and it just so happened that all four regional Fed presidents with votes this year used those votes to dissent.
“We still love each other — in fact we’ll love each other more because we are not going to be voters next year – we’ll have to hug each other and have solidarity,” Fisher told reporters after a speech in Austin on Friday. But Fisher for his part vowed that even without a vote he will “not be quiet,” and said that whether colleagues will cast dissents will depend on what proposals are put on the table.
Fisher also suggested that he may balk at new efforts – now under consideration at the Fed – to boost transparency at the nearly 100-year-old central bank.
“We are so transparent, you can put your hands through us,” he quipped. “Name another business, let alone a government agency, any private business in the world, that puts their balance sheet on the Net every two weeks. Do you realize how much work that takes? Anyway we do that, all of us speak, we are publishing our economic forecasts, which can or cannot be of useful efficacy — they are only forecasts and they are all based on the predicament, the assumption rather, of appropriate monetary policy which we determine at the table. We are laying everything on the table…We are about to turn 100, and nothing that’s 100 years old should be providing a full frontal view. It’s unbecoming.”
Fisher sees folly in Fed’s “full frontal”
Dallas Federal Reserve President Richard Fisher is not one to pull his punches. He was one of three dissenters on the Fed’s most recent move to ease policy, and has argued the move will not only be ineffective but also potentially harmful to jobs. Speaking with reporters after his refreshingly frank defense of his dissent this week, Fisher – an architect of the Fed’s new communications policy aimed at more transparency – suggested there are times when he would prefer to be a bit more demure.
Asked if the Federal Open Market Committee’s gloomy economic outlook in its post-meeting statement last week matched his own, he said: “I think the FOMC does its job to honestly state how it views things. We are in an age of enhanced transparency.”
But that’s not always a good thing, he suggested, especially when the market is not used to getting an unvarnished view. Warning that he was about to make a “bad joke” – and then proceeding with it – Fisher said:
We are an almost 100 year old institution … I don’t think that anything that’s 100 years old should give a full frontal view. We do reveal most fully what we discuss, and the markets are going to have to get used to that. It may not be a pretty view, but its a full frontal view.
I agree completely with Mr Fisher.
More jobs would definitely increase borrowing. Easing causing inflation, would hurt jobs. Easing isn’t the only, or even the best solution, obviously. However, with unemp at 9%, the other 91% potentially can borrow.
I humbly submit my proposal:
-The Feds 2011 Economic Solution-
The aim of Bernanke’s efforts seems to be to induce growth in borrowing even if only by a little, which is better than slowing it down altogether, hypotheta-theoretically. A brief examination of the Fed’s actions just before and during the Housing collapse, which caused the global crisis in the first place, affords us a window into the light at the end of the tunnel. The solution is simple and bi-fold. Firstly, a realization that both printing money thus inducing inflation and/or further flattening the near-zero interest yield curve by buying longer maturing Treasury notes only prolongs and exacerbates the problem. The problem being that there isn’t enough Consumer Borrowing . Lowering banks and lenders interest rates doesn’t do anything significantly to make banks actually lend and borrowers actually borrow any more than they already do when rates are already low enough. (The issue of the ethics of usury in general is an entirely other subject.) Our aim should be, together with the Fed, to induce and somehow make borrowers come out in droves, to take the risks associated with borrowing and actually to make the leap of faith and borrow.
Herein lays the second part of the solution: Realization that it’s the banks, and not the Fed, that actually control the attractiveness of their products, especially when the yield curve has flat-lined and there is little to no interest to charge. The banks are the ones doing the advertising and actually reaching the borrowers. The problem is, the banks don’t make substantial revenue from the interest when the rates are so low to offer any real incentives. Hence, the solution is to raise the rates. I know, you’re thinking, he’s nuts. How can we possibly get more borrowers to borrow by offering loans at higher rates? With a higher rate alone, we can’t. However, with banks charging a higher rate per note, lenders stand to make more from each note and, subsequently, with those extra funds, offer less traditional, more progressive incentives for higher rates in the form of products and services not available to a low-interest note. Some of the product and service incentives could be, but aren’t limited, to something like borrower’s insurance; offsets to costs of moving; private low and middle income down-payment assistance programs; property upgrades and upgrade allowances, especially for distressed properties; vehicles; vehicle, home and/or property service warranties; buyer’s point-of-sale independent negotiation liaison/concierge to streamline the purchase and advocate for the borrower; cash; gift-cards; steep discounts on furniture; short term 90, 120 and 180 day move-in bill pay programs; offsets in energy; landscaping and education expense incentives. The possibilities are endless.
As long as a market for mortgage-backed securities is fueling a blood-lust to keep interest rates low so banks can warehouse, bundle and repackage loans as investments, we will remain addicted to the cycle that started it all in the first place. We must break the cycle of, and addiction to, mortgage-backed securities. We must take the baby steps and suffer the teething pains required to get ourselves back to a healthy economy. Back to an economy where banks actually lend at reasonable rates (8-12%), and can afford to hold and invest money for consumers. Where banks can also afford to offer new, neat and wonderful incentives products and services that are actually attractive to prospective borrowers and an occasional low rate in due season. We need, with the Feds help and leadership, to ween ourselves off of the lure of permanent low rates and the business model of our banks being loan-sharks with bait-and-switch ARMs, offering no other incentive to reluctant borrowers than just another low rate which borrowers can get anywhere, and making no real interest in seeing the notes they lend grow to any real maturity, pass the off as an investment with dozens of others, and sell it all off down the river.
It all starts with the Fed. Raise the rates, respectfully I submit, Mr. Bernanke, as you said you would do in October 2010 and then didn’t. Sure, it’ll be a little rough at first. What good, real recovery isn’t? Then we’ll be on the right track, and back to what the rates were before Mr. Greenspan felt he had to start lowering them. We will finally be getting back to when things were good and banks were primarily banks, not primarily investment brokers.
Chile, Singapore among most transparent SWFs
Chile, UAE, Singapore, Azerbaijan, Ireland and Norway claim top rankings on the latest transparency index, published by SWF Institute. At the bottom of the ranking is Venezuela, Oman, Nigeria, Mauritania, Kiribati, Iran, Brunei and Algeria.
The Linaburg-Maduell index is calculated with 10 principles — such as whether the fund provides up-to-date, independently audited annual reports, or whether it provides clear strategies and objectives. It also gives points on whether the fund gives ownership percentage of company hodlings, total market value, returns and management compensation.
Enhancing transparency is a key task for sovereign wealth funds, whose often opaque operations have come under heavy criticism by some Western politicians who suspect them of investing with political, rather than commercial, motives.
In fact in the recent meeting of the world’s leading sovereign wealth funds, only Norway, Chile, New Zealand agreed in advance to speak to Reuters on the sidelines; when contacted on the ground China also spoke. Others either declined to comment at all or did not return email.
(Source: SWF Institute; www.swfinstitute.org)
Australia’s SWF lags in returns
Australia’s Future Fund reveals that the fund’s mixed asset portfolio (excluding Telstra holding) returned 5.6 percent in the third quarter.
The fund has just over 10 percent in Australian equities, 22.8 percent in global equities. Safer instruments dominate, with debt holdings at 24 percent and cash at 31 percent.
The mixed-asset fund significantly underperforms an equity-only portfolio. For example, the MSCI world equity index has risen more than 17 percent in the Q3 alone.
The Future Fund is a rare SWF which reports results quarterly, like a public-listed firm. The underperformance might outrage the public though — so is this worth it?
Recall remarks last month by David Murray, the fund’s chairman of the board of guardians , which highlighted some downsides in reporting quarter after quarter.
“We are happy to report but it does create some significant difficulties. If forces the community to take very short term views in returns in the fund and causes management of the fund to be concerned about media and community responses,” he said at a SWF meeting in Azerbaijan earlier this month.
SWFs in Baku: Tables turning?
Sovereign wealth funds may have turned the tables on the rest of the world.
Wrapping up their inaugural meeting in the capital of Azerbaijan, 20 leading sovereign wealth funds urged host countries to make their investment regimes more transparent and discriminatory and keep investment borders and flows as open as possible. (For the story click here).
This comes after years of host countries — the West — asking them to open their books.
Much of the two-day meeting which ended on Friday was held behind closed doors, but the organisers — Azerbaijan’s state oil fund — let media in with cameras and video recorders to film the final 5 minutes of the meeting.
Watch what David Murray, chair of the International Forum of Sovereign Wealth Funds and also chairman of Australia’s Future Fund said at the end of the meeting (with some holiday advise) and at the start of the news conference.
Sovereign wealth and transparency
It was less than two years ago that French President Nicholas Sarkozy hit out at sovereign wealth funds, saying “We’ve decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes which do not meet the transparency criteria one is entitled to expect in a civilised world. It’s unacceptable and we have decided not to accept it.”
Now Western politicians have got what they wanted. SWFs have formed a working group, set out best practices under the Santiago Principles, started to meet regularly, and many of them are publishing performance reports (see examples of Mubadala, Temasek, and CIC) – all helping to enhance transparency in the often opaque industry.
But too much transparency might not be all good. As discussed here, pressure to open up and prove their performance to the general public might lead them to prefer instruments which are certain to give returns — such as fixed income securities, rather than equity stake building that may take years to yield fruit.
After all, SWFs are unique investors who can afford to take liquidity premium and invest in something which may only give returns in decades or even centuries. If wealth is for future generations, why not?
