Oodles and oodles of data… now what?

Posted: December 1, 2010 | Author: | Filed under: Bailout Blues, Global Financial Crisis, U.S. Economy | Tags: , , , | 56 Comments

So, Bernie Sanders, Ron Paul, and Alan Grayson finally got the FED to drop some documents that show all the things it was up to during the financial crisis that dated to around 2007.  I actually have no problem with that.  That kind of information is useful and I think it’s good to have it after the fact.

If you’d like to know how much data and what it’s about,  FT Alphaville has a pretty good site up that explains the types of data that have shown up. It’s an amazing amount of detail on $ 3.3 trillion worth of bailout funding.  What’s really interesting is the list of collateral.  The actual names of organizations running to the window during the time period is there, but really not all that surprising.  You can find the details on that at another post on FT Alphaville.  As was expected, BOA is most definitely the top hog.

If you read the link to the WSJ above, you can see what both Bernie Sanders and the FED think about all of this.

“After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed’s multitrillion-dollar bailout of Wall Street and corporate America,” Mr. Sanders said in a statement Wednesday afternoon. “As a result of this disclosure, other members of Congress and I will be taking a very extensive look at all aspects of how the Federal Reserve functions.”

The Fed has kept key deliberations closely guarded. It has taken steps to boost transparency, but has kept certain details secret, such as the names of banks that borrow at its discount window. Federal Reserve Chairman Ben Bernanke strongly objected to efforts to subject monetary-policy decisions to audits, saying it would “seriously threaten monetary-policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation.”

Matt Stoller (Policy Adviser to the now gone-pecan Congressman Grayson) has an incredibly long winded, hyperbole-ridden, populist rant against the FED that’s been published by Yves at Naked Capitalism and by New Deal 2.0.  He must’ve just popped out of cartoon bunny land because there’s a lot of cyber ink over there “full of sound and fury, signifying nothing”. It’s attracting the usual attention of economic dilettantes and Paultards.  It also has a bunch of paragraphs somewhat deferential to the P woman to whom he  just about throws the title of  “The Great Commoner”.  (Isn’t that a somewhat surprising action for some one who advises a Democratic Congressman?)  The bases of Matt Stoller’s arguments are not economics, data or theory because he dismisses all of that as being captured by the FED.  Instead, he holds up a pop culture book on the subject.

In 1989, Bill Greider published a remarkable book called “The Secrets of the Temple: How the Federal Reserve Runs the Country” in which he described how Fed officials were the real decision makers in the American political order. Shielded by the argument of ‘political independence’, most politicians wouldn’t and still won’t dare interfere with the workings of our economic structure, even though the Constitution clearly mandates that the monetary system is the province of Congress. The dramatic and overt coordination of this ‘independent’ central bank with the executive branch and the banking sector, and its flouting of Congressional and public scrutiny, have removed its institutional legitimacy.

To dismiss academic research in area is simply self-serving.  Every economist of every flavor comes up with data from all over the world that demonstrates a chaotic economy results from a central bank that is overtly influenced by politics and not independent.

The FED is simply a central bank which is the bank of bankers. It’s not supposed to be some arm of the political parties.   It doesn’t clear as many checks as it used to, but it’s FED WIRE is still the major financial transaction wire system for banks.  It gets coin and currency from the Treasury and it fills orders for them from banks.  It also ensures that banks meet the regulatory obligations.  It’s part of the trade off of getting insured by the FDIC.  They have capital requirements, they have requirements on their organizational structure and investments, and they do truth-in-lending.  Most of what the FED does outside of this is audit banks.

It’s really not some mysterious fraternity that they can’t get into.  My work with the FED was very mundane.  My staff gathered up orders for Treasury bills and bonds each Tuesday and sent them and tax payments where they would be applied.  My other staff paid the electric bills and watched to make certain our branch budget was in line with other branches.    I have never worked for a bunch of stuffier people than when I worked for the FED.  I was even told to wear nude hosiery, short heels, and a suited skirt.  Granted, I was not in NY where all the action is, but really, even bank visitations and teaching bankers how to watch their reserve accounts and use FED WIRE is not a glamor profession.  It also pays diddly.

Monetary Policy is done by the Open Market Committee and carried out by the NY FED.  No one any place else knows remotely what is done.  That’s because if any one in the market or near the market knew, it would be like the ultimate insider trading.  Would you really want YOUR congressman or Senator trusted with the ultimate INSIDER trading?  When the FED buys and sells bonds and bills, it does it through a number of brokers who get the job through a bidding process. None of them can see the bigger picture.  None of them can discern patterns any more than I could by transmitting bond and bill sales of the public every Tuesday.  It’s that way because you don’t want any one making big time money knowing which way the market moves.

So, almost every country has designed their central bank to look like our FED; that includes the Europeans.  Independence is valued above just about everything because as I’ve said, all the research shows that if you have a politically managed FED, you get a really bad economy.  Here’s an example from South Africa today of worries about central bank independence.

“During the year there has been a focus on issues relating to monetary policy independence in response to the letter from the Minister of Finance clarifying the mandate of the Bank, as well as the recent New Growth Path document, in which reference was made to a looser monetary policy stance,” Gill Marcus said.

There were perceptions that these documents had undermined the independence of the SARB, and there had been a tendency to over-interpret monetary policy actions in terms of these discussions.

“For example, when the repo rate was reduced at the previous meeting, some analysts argued that because there was no economic rationale for this move, it therefore must have been politically inspired.

“A few days later, when the disappointing growth figures were announced, these analysts conceded that our decision was vindicated on economic grounds,” Marcus said.

There is plenty of information about the FED should you want to delve into it. It produces a lot of research and a lot of information.  It just doesn’t share its immediate monetary policy targets, goals and actions with any one because that’s basically enabling insider trading.  It also doesn’t let congress tell it how to run things, but it follows the laws set forth by Congress to achieve the goals it was given. That would be:

Monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.

The FED has no role in the stock markets and could not do anything to prevent or cause bubbles there. So, any one that tries to say the FED caused any stock market bubble is out there in la la land.  The FED can provide liquidity to credit markets through its open market activities and its activities to influence the FED FUNDS rate.  It only directly controls the rate at which it lends to financial institutions; the discount rate.  The FED FUNDS rate is a market established rate and reflects the price of loans between financial institutions. In some cases, it is a substitute for loans from the FED.

Even if the Fed suspected that a bubble had developed, it’s not clear how monetary policy should respond. Raising the funds rate by a quarter, a half, or even a full percentage point probably wouldn’t make people slow down their investments in the stock market when individual stock prices are doubling or tripling and even broad stock market indexes are going up by 20% or 30% a year. It’s likely that raising the funds rate enough to burst the bubble would do significant harm to the economy. For instance, some have argued that the Fed may have worsened he Great Depression by trying to deflate the stock market bubble of the late 1920s.

I’m beginning to think I should do more pieces on what the FED is and what the FED is not because of the disturbingly ignorant comments on that thread at Naked Capitalism.  Part of the Fed’s problem is that it puts out a lot of information but it really doesn’t do much in terms of prime time explanations.  Well,  unless you watch the twice a year briefing by the Chair on CSPAN, then you may get an idea of it.   However, that speech almost puts me to sleep and the stupid Congress questions just make me made.

So, any way, I just wanted to give you some information on this drop of data and let you know that most of the economists who know things are still pouring over it.  I’m going to be pouring over it too, so I’ll try to keep you informed.  All these discussions that are early to the media don’t appear to be coming from Financial Economists.  They appear to be all politically motivated.  Wait until some one who knows speaks up before you start forming any opinions.