Five Notes: What Can the Fed Do?
1) There have been a number of recent articles questioning/explaining what the Fed can do in this present environment. Here are some examples:
- What Could the Fed Do?
- “What Could the Fed Do?”
- The size of the Fed’s balance sheet limits the scale of the public’s losses
- Fed Looking at How to Beef Up Lending Power: WSJ
My own view is that the Fed has used up a lot of firepower on the asset side, but still has a lot to work with. That said, the Fed should be careful not to complicate its balance sheet with a lot of off-balance-sheet agreements. Policy flexibility for a central bank is a real plus, so complicated agreements that make formerly liquid assets illiquid are to be avoided, particularly in a crisis.
Regarding Fed funds, it looks like they will cut 25 basis points on 4/30, but make noises that they are getting close to being done. Perhaps 1.75% will be the low for the cycle.
2) I already miss Alea. Before jck went on hiatus, he commented that the TAF was not effective at lowering rates, and that the TSLF was a success, though by success, he means that it’s not in hot demand. Tony Crescenzi speaks similarly. Perhaps the existence of the PDCF reduces the need.
3) Perhaps Lehman is an example of that, moving buyout loans off of their books, and getting financing for the AAA portion from the PDCF. Given the imitative culture of Wall Street, I would expect to see this repeated by other investment banks.
4) Volcker-mania. In one sense, it’s weird to see him speaking out now, given that he was silent for Greenspan, save for a little at the end. I agree with almost all of what he has been saying; it reads like my writings over the past five years. For a sampling of opinion:
- Volcker’s Demarche
- Volcker Says Fed’s Bear Loan Stretches Legal Power
- Volcker Stands Tall, Greenspan Keeps Shrinking: Caroline Baum
- It’s a Crisis, and Ideas Are Scarce
Greenspan ate sour grapes, and Bernanke’s teeth have been set on edge. Bernanke inherited Greenspan’s ignored problems. At this point he and the Fed are puzzled — seeing rising inflation, but fearing what higher rates could do to the banking system. With a similar view that the Fed has few good options, consult Tim Duy.
5) Finally, if we turn off the microphones, and shut down the cameras, will Alan Greenspan cease to exist? His defensiveness toward his record undermines his record. Better he should stop talking publicly, particularly if he follish enough to suggest that the housing market will bottom in 2008.
April 16th, 20082:50 pm at
Currently, bank supervision reflects the cumulative results of legislation, to meet specific situtations, emergencies, and competitive conditions. Much of the legislation and administrative practices which have grown up, are piecemeal in character, inadequate, incomplete, and redundant. Also, there are overlapping jurisdictions and inforcement between federal & state authorities, resulting in conflicts and duplication of efforts.
The 1961 commission on Money & Credit recommended increased coordination of examining and supervisory authorities. At the federal level, it was recommended that there should be only one examining authority for commercial banks. The COMPTROLLER OF THE CURRENCY and his functions and the FEDERAL DEPOSIT INSURANCE CORPORATION should be TRANSFERRED TO THE FEDERAL RESERVE SYSTEM. The Commission on Money & Credit would leave the state supervisory agencies intact, but would coordinate their to a greater extent with the Federal Reserve in banks all federal regulation and supervision would be concentrated. I’m still waiting.
After 47 years, Paulson is still talking the same talk, mergers, – eliminate the overlap.
April 16th, 20083:00 pm at
Paulson acts like a empire builder. The Fed, not the Treasury, should have oversight of most thrift & banking agencies.