Thomas M. Hoenig is vice chairman of the Federal Deposit Insurance Corp.
Imagine if the United States had an airline industry in which the biggest carriers that fly both domestically and internationally received a larger government fuel subsidy than those flying only domestic routes. Unfair? Yes — and that’s exactly how the U.S. financial system works.
The fuel of the largest firms in our financial services industry is subsidized, and the public bears the cost.
Financial firms can borrow money — their equivalent of fuel — more cheaply and with less market scrutiny when they have access to government guarantees of deposit insurance, loans from the Federal Reserve and, ultimately, taxpayer support such as we saw with the Troubled Assets Relief Program in 2008. This safety net was intended to stabilize the financial system by protecting the payments system that transfers money around the country and the world as well as the essential lending that commercial banks provide. But these protections also assure those who lend to banks that they will be repaid regardless of the condition of the bank. Under such circumstances, creditors give the firms a discount on the cost of the funds they borrow.
Things are made more difficult by the fact that the largest financial companies now combine traditional commercial banking with higher-risk activities such as trading so that both their banking and betting activities get access to these government protections and the multibillion-dollar subsidy that comes with them. Using subsidized money to finance the conglomerates’ bets encourages ever-higher levels of debt, risk and interconnectedness not attainable or sustainable in a truly free market.
Chairman Ben S. Bernanke will probably start reducing the Federal Reserve’s $85 billion in monthly bond buying no earlier than the fourth quarter of 2013, economists said in a Bloomberg survey.
The Fed chief will probably halt the unprecedented easing in the first half of next year after expanding central bank assets to a record of about $4 trillion, according to median estimates by 46 economists surveyed March 13-18 before a two-day meeting of policy makers ending today. Unemployment will have fallen to 7.3 percent from its current 7.7 percent when the Fed starts to pull back on its buying, the economists said.
By slowly trimming purchases, Bernanke will retain the flexibility to ramp up the accommodation again if needed and avoid jolting the weak economic expansion with a sudden cutoff in stimulus, said Roberto Perli, a former economist for the Fed’s Division of Monetary Affairs.
“They will want to be gradual” in reducing accommodation, said Perli, managing director at International Strategy & Investment Group Inc. in Washington. Fed officials will probably proceed “on a meeting-to-meeting basis and say, ‘conditions have improved, we’ve seen progress, we can slow the pace,’ then reconvene at the next meeting and see what happened.”
The irony is that clinging to delusion rather than face the necessity of deep cuts in borrow-and-squander budgets will lead to the involuntary reset of the entire system, depriving every vested interest of their share of the swag.
We are living in the United States of Delusion. The delusion has four key sources:
1. We can borrow-print-and-spend our way to prosperity when debt and fiscal/monetary stimulus are yielding ever more marginal returns:
The Dangerous Blindspots of Clueless Keynesians (January 2, 2013) The Keynesian model is a Cargo Cult, mired in a distant, romanticized past where Central Planning, intervention and manipulation were solutions rather than the root of the economy’s fatal disease.
2. The risks of this fatal fiscal delusion are masked by a complicit Mainstream Media and a perception-management, manipulation-dependent Central State and Federal Reserve.
Spoiled Teenager Syndrome (January 3, 2013) Masking risk, cost and consequence creates an illusory world that eventually crashes on the unforgiving rocks of reality.
Is masking risk, cost and consequence a strategy that leads to success? No; it is a pathway to repeated catastrophic failure. What is the Central Planning strategy being pursued by our Central State and the Federal Reserve? Masking risk, cost and consequence.
What Foreign Terrorism?
Kudos again to the FBI.
A Bangladeshi man who allegedly told a government informant that he sought to wage ‘jihad’ was indicted on two charges related to a plot to bomb the New York Federal Reserve in lower Manhattan.
Quazi Mohammad Rezwanul Ahsan Nafis, 21, is charged with attempting to use a weapon of mass destruction and attempting to provide material support to a foreign terrorist organization, according to the indictment unsealed today in Brooklyn, New York, federal court.
He was arrested in October as part of a sting operation in which government agents helped him plot the would-be attack by supplying him with fake explosives, according to court papers.
Authorities took Nafis into custody after he allegedly attempted to detonate what he believed to be a 1,000-pound bomb at the bank, located at 33 Liberty Street, just a few blocks from the site of the former twin towers at the World Trade Center, which were destroyed in the terrorist attacks of Sept. 11, 2001.
For decades, almost half of Germany’s gold has been stored deep below the Federal Reserve Bank of New York. Now, with the euro crisis swirling, German politicians are asking their central bankers to take stock of the reserves. Some even say that the gold should be shipped home.
Bundesbank President Jens Weidmann wanted to personally convince Peter Gauweiler that the German gold was still where it should be. Early this summer, the head of Germany’s central bank took the obstinate politician from the conservative Christian Social Union (CSU), a party that is a member of the government coalition in Berlin, and a number of his colleagues into the Bundesbank’s inner sanctum: the gold vault.
There, 6,000 gold bars are stacked on industrial-strength shelves in a purpose-built building in Frankfurt. An additional 76,000 bars of bullion are stored in four safe boxes, in sealed containers.
But even this personal inspection wasn’t enough to reassure the visiting member of parliament — on the contrary: “The Bundesbank monitors its domestic gold in an exemplary fashion,” Gauweiler says, “and this makes it all the more incomprehensible that the bank doesn’t look after its reserves abroad.”
Americans have had four years to wrap their heads around the concept of the Fed “printing” money, which it does via a policy known as quantitative easing. But when the economy is humming again, the Fed will shut down its theoretical printing presses. Then, there will be another brain-buster to think about: Can we unprint all of that money?
Yes, but it can take some mental gymnastics to understand, especially for those of us who aren’t central bankers.
There are a number of ways to “unprint” money. One short answer to how this might happen is that the money will go back into the ether from whence it came.
“Just as they can create money by buying bonds, they can sell bonds and receive cash for those bonds and effectively extinguish that cash,” says Guy LeBas, chief fixed income strategist at financial services firm Janney Montgomery Scott.
Understanding how a dollar can be “extinguished” is easier with a recap of how all of that money was printed in the first place. In quantitative easing, the Federal Reserve buys assets—treasury bonds, for example, or bundles of mortgages known as mortgage-backed securities—from banks. The central bank recently announced that it would undertake a third round of easing, widely known as “QE3” for short, which involves buying $40 billion in those mortgage bundles each month.
If you are fifty three days out from election and still trying to stir up enthusiasm from your committed base it’s a bad sign for your chances to win.
Romney and — particularly — his running mate Rep. Paul Ryan, have spent a week road-testing alternatives, going positive and going negative, swinging at the president on everything from faith to foreign policy. The new efforts mark a shift from a summer of fruitless discipline and a convention in which attempts to present a friendly, moderate tone trumped any policy substance. And campaign planners said their moves mark a new campaign consensus.
“No one in Boston thinks this can only be about the economy anymore,” one top aide said last week. “The economy narrows the gap and puts us in contention, but we have to bring more to the table.”
The core factor in the search for a new message, aides say privately, was the August jobs report. The anemic job growth was widely viewed as bad news for Obama even as the unemployment rate dropped due to people leaving the workforce. But the national shrug confirmed Romney campaign concerns that the most visible economic indicator would remain muddled through Election Day.
Ryan himself has emerged as a central player in this calculation, making the case internally for a clearer conservative policy message. One high level Republican with ties to the campaign told BuzzFeed that Ryan was chaffing at Boston constraining him from talking about and defending his policy ideas from Democratic attacks. Ryan wanted to be “unleashed,” the Republican said.
And Ryan’s latest campaign swing offers the clearest indication that he’s gotten his wish. On Friday at the Values Voters Summit in Washington, D.C., Ryan offered a new gambit on offense, attacking Obama on social issues and income inequality in one fell swoop.“‘We’re all in this together’ - it has a nice ring,” Ryan said, quoting a frequent Obama line. “For everyone who loves this country, it is not only true but obvious,” he said. “Yet how hollow it sounds coming from a politician who has never once lifted a hand to defend the most helpless and innocent of all human beings, the child waiting to be born.”On Saturday at a rally at R.E. Olds Park Amphitheatre here, Ryan laid into the Federal Reserve for “undermining the credibility of our money” and “debasing our currency,” with the latest round of stimulative monetary policy.
Ben Bernanke’s announcement Thursday that the Fed would keep easing money sent the stock market soaring, but more important was his declaration that there is only so much the Federal Reserve can do.
The Fed’s latest move, approved by the policy-setting Open Market Committee, will buy a total of $85 billion in bonds every month, including $40 billion per month of mortgage-backed securities. This pumps vast sums into the economy. It is the equivalent of printing money. Bernanke’s hope is to drive down interest rates generally, especially on home mortgages.
The Fed will also extend its policy further into the future and keep interest rates close to zero through 2015. But as Bernanke himself put it, monetary policy alone can’t fix what’s broken. The more important tool in a severely depressed economy is fiscal policy. And here is where Bernanke is truly playing against type.
The usual script calls for a Fed chair to demand fiscal tightening in exchange for liberal interest-rate policy. It’s what Alan Greenspan did in his 1993 deal with Bill Clinton. But Bernanke refuses to play that role. At a high-profile speech at the Fed’s Jackson Hole conference August 31, the Fed chair warned against too much fiscal tightening. He has refused to be the instrument of the party of deficit hawks.
Bernanke has also irritated conservatives by calling for the Obama administration and Congress to do more to fix the mortgage mess. Very low interest-rate mortgages are great for those who can get them. But the tens of millions of American homeowners whose houses are worth less than the current mortgages on them can’t qualify. A proliferation of small-bore programs that are voluntary to bankers, such as HAMP and HARP, has made only a small dent in the problem because serious reduction of principal owed is mostly unavailable.
One common element to this year’s GOPteabag campaign has been its insistence that the Fed not do anything to help the economy, particularly anything to increase employment, even though full employment happens to be one of the Fed’s two goals (the other being to keep inflation low).
I look forward to more #Romneyshambles as teabaggers everywhere fume and threaten the Fed. Maybe the village media can ask team Romneybot why it doesn’t want the Fed to do its job.