Oh to be a Fly on those Fabled Marble Walls

The Federal Open Market Committee (FOMC) meets today. Those folks are the ‘deciders’ when it comes to monetary policy. This should be an interesting meeting for a number of reasons. First, new regulations proposed by the Obama administration definitely put the Fed in the catbird seat. Second, Bernanke is coming close to his expiration date. Third, a number of prominent economists are wondering about the Fed’s exist strategy from the current wide open floodgates and the pressure is on not to enable another bubble. Fourth, we find that three banks have suspended their Tarp Dividends meaning that all is not happiness and light in bank balance sheet land. The intrigue of all this pulls this financial economist away from her research agenda which is not good for my CV but very good for turning the dismal science into a Walter Winchellesque moment. Now, just where to begin …

‘Good Morning, Mr. and Mrs. North and South America and all the ships at sea…let’s go to press!’

Let’s go to Banking. Headline: The Scam Continues on you, Mr and Mrs. North and South America. Let’s dish the dirt on those banks that are behind in their loan payments to the U.S. taxpayer as reported today by the WSJ who keeps track of that sort’ve thing. It seems three banks have suspended their TARP ‘dividends’. They can miss six before they technically default. (Ask yourselves, if I missed five housepayments would I still be IN my house or out in the street by number six?) The banks are: Pacific Capital Bancorp (CA), Seacost Banking Corp of Florida (FL), and Midwest Bank Holdings Inc (IL).

Treasury spokeswoman Meg Reilly said Monday that “a number of banks” that got taxpayer-funded capital under TARP are no longer paying dividends to the government. “Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base.”

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week. The halted dividends also raise questions about the Treasury’s assertions that the capital infusions represented sound taxpayer investments because they were only going to healthy institutions.

“Here the government has given the banks money at great terms, but the fact that they can’t keep up with it is worrisome,” said Michael Shemi, an investor at New York hedge-fund firm Christofferson, Robb & Co. “It tells you of the deep problems of community and regional banks.”

New York. The Halls of Columbia Business School. Dr. Frederic Mishkin renowned financial economist and himself, a former member of the FOMC and Fed BOG starts publishing tell alls on Bernanke in both the WSJ and the FT. In the WSJ, Mishkin tells the Fed it has to Get out of Its “Box”. Is he squeezing and squeezing until the Eagle grins?

When the Federal Open Market Committee meets this Tuesday and Wednesday, the Federal Reserve will face a serious dilemma.

Since the last committee meeting six weeks ago, the 10-year U.S. Treasury yield has risen by around 70 basis points (0.70%), with the result that the interest rate on 30-year mortgages has risen by a similar amount. The rise in long-term interest rates is particularly worrisome, because it has the potential to choke off economic recovery and lead to further deterioration in the housing market. That would put an already weakened financial system under stress. Does the situation call for the Fed to expand its purchases of Treasury bonds to lower long-term interest rates?

To answer this question, we need to look at why long-term interest rates have risen. Here, there is good news and bad news. One cause of the rise in long-term rates is the more positive economic news of the past couple of months, particularly in financial markets. The bad news is that long-term interest rates are higher because of concerns about the deteriorating fiscal situation, with massive budget deficits expected for the indefinite future. To fund these budget deficits, the Treasury has to sell large quantities of bonds both now and in the future, causing bond prices to fall and interest rates to rise. The increased supply of Treasury debt puts pressure on the Fed to buy it up.

Don’t you just love it when one of the premier financial economists in the world says we’re in a ‘deteriorating fiscal situation’? Evidently, Dr. Mishkin isn’t the only one that gets it. WAPO reports Mr. and Mrs North America and all the ships at sea are also worried about the burgeoning deficit and the lack of results from the stimulus bill. The poll also shows continued disastisfaction with the direction of the country, despite the election of the lightbringer.

Mishkin also published an Opinion piece in the FT outlining what he thought about the proposed regulation that puts the FED into the role of systemic regulator. He weighs in with resounding support of the need for the systemic regulation as well as supporting the FED as the sheriff promoted to marshall.

The need for a systemic regulator to oversee the health and stability of the overall financial system has never been greater. Its role should include gathering, analysing and reporting information about significant interactions and risks among financial institutions; deciding on which institutions expose the financial system to systemic risk; designing and implementing regulations such as higher and countercyclical capital requirements for systemically important institutions; and co-ordinating with other regulatory agencies and the fiscal authorities to manage systemic crises.

Dateline Washington, DC. Will the new found power of the FED translate in to a reappointment of Bernanke or will we see Summers (shudder) put up in his stead? This from Bloomberg.

Federal Reserve Chairman Ben S. Bernanke will defend his unprecedented actions to prevent a financial collapse as debate on whether he should be reappointed begins.

Bernanke, whose term expires Jan. 31, faces lawmakers at a hearing this week on steps to aid Bank of America Corp.’s takeover of Merrill Lynch & Co. as Congress increasingly questions the Fed’s interventions. The session comes after a two-day meeting on monetary policy that starts today.

President Barack Obama has said the Fed chief has done an “extraordinary job” without committing to reappoint him. Treasury Secretary Timothy Geithner, in reference to a possible candidacy for Obama economic official Lawrence Summers, told a lawmaker last week it wasn’t “appropriate” to pledge that top advisers weren’t in the running for the job.

“The vultures are circling,” said David M. Jones, a former Fed economist who is president of DMJ Advisors LLC in Denver. Bernanke is “going to be on the defensive,” even after “turning confidence around” since the depths of the crisis, he predicted.

Frankly, I have only one thing to say. NEVER has so much been at stake with the qualification that yes, I’ve studied the Great Depression.

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