Day: July 16, 2009

Central Bank Independence is Overrated

Central Bank Independence is Overrated

Central Banks, should they exist, should be able to do what is right for monetary policy, which includes regulation of credit.? In a fiat money world, where credit exists as electronic entries, credit is money.

But wait, what if central bank independence is compromised from within?? What if voluntarily becomes the lap dog of the President, Treasury, or Congress?

It takes a bold man to stand up to the powers that be, and the Fed has had its share of them.? Marriner Eccles opposed Truman.? William McChesney Martin, Jr. stood up to Presidents and Congress for his long term as Chairman.? Paul Volcker blew cigar smoke at representatives and Senators as he restored sound money to the US amid screams of pain in the economy.

Central bank independence doesn’t mean squat unless the central bank uses it!

In the name of independence, for fear that the President or Congress would restrict the central bank, many Fed Chairmen have given in to the powers that be:

  • Ben Bernanke, rescued entities that he should not have rescued, and established lending programs that use the national credit to benefit a minority of participants.? These actions should have been taken by Congress, if done at all, so that the voters could decide whether it was right to do it or not.? Bernanke validates the idea that the government keeps the Fed around to do what it cannot do constitutionally.
  • Alan Greenspan threw liquidity at every little and big problem, and was slow to withdraw liquidity, pushing the US slowly but surely into a liquidity trap, which Ben Bernanke was saddled with.
  • G. William Miller and Arthur F. Burns, who facilitated the inflation of the ’70s, at the behest of Nixon and Carter.
  • Daniel R. Crissinger and Roy A. Young, who facilitated the loose monetary policy of the ’20s.

Central bank independence means risking your own tenure for the good of the institution.? Marriner Eccles and Paul Volcker did not get reappointed because they offended the President.??? Central bank independence does not mean compromising in order to protect against micromanagement.? Independence means being a man, and telling the President and congressmen that you will do what is right to preserve sound money, regardless of the consequences.

The Fed as Systemic Risk Regulator

I have suggested in the past that the Fed should regulate systemic risk as an aspect of its mandate only because they are the biggest creator of systemic risk through loose monetary policy.? I am not suggesting this on the basis of competence — that is ridiculous.? But on the basis of modifying the behavior of the Fed to make it more resistant to loosening rates early because of systemic risk concerns — that makes sense, because it will increase the emphasis on a sound currency.

Now, many economists are pleading with Congress to be gentle on the Fed because an independent Fed is critical to sound economic policy.? That would be true if the Fed were willing to take politically unpopular actions that were in the best interests of the economy.? Sadly, that is not true of the present Fed.? They do what the politicians want, and give the politicians cover, because the politicians can point at the Fed as the actor, via the rubric of “Central Bank independence.”

I say that the Fed needs more accountability and transparency to Congress, and ultimately to the American.? The quasi-public, quasi-private nature of the Fed needs to be changed to public or private.? Section 13.3 of the Federal Reserve Act, which allowed for the most egregious bailout actions, should be repealed. If bailouts need to be done, let Congress do them, and let them take the heat for their actions.

Not only should the Fed be audited as any large public or private organization, but if they are a public organization they should respond to the FOIA requests from major news organizations (Bloomberg, Fox Business, etc.) without hiding behind technicalities of protecting business secrets.? The insurance industry regularly reveals detailed data on their operating companies, with little seeming harm.? The banks can afford to do the same.

Power without accountability should be foreign to our republican form of government.? Control of our currency rightfully belongs to Congress, and Congress should tighten controls on the Fed so that its degree of independence is limited to the ordinary matters pertaining to a central bank — preserving the soundness of the currency.? Its competence there has been limited; but hey, at least focus on the basics would restore confidence in an institution that no longer has the confidence of the American people.

“Central Bank independence” is a nice phrase, but to the economists who petitioned Congress to preserve the status quo, I would simply ask this: How and from what should the central bank be independent?? To whom and in what ways should it be accountable?

Morning Financials

Morning Financials

I put out a short report each morning on financial stocks, giving a quick summary of the big movers, market tone, and what sub-industries are moving.? I am publishing a copy of it today here as a bonus for Aleph Blog readers.? Enjoy.? Comments welcome.

The information herein and the data underlying it has been obtained from sources that we believe are reliable, but no assurance can be given that this information , the
underlying data or the computations based thereon are accurate or complete or that the returns or yields described can be obtained. Neither the information nor any opinion
expressed constitutes a solicitation by us for the purchase or sale of any security. All prices are indications only.
David Merkel, CFA, FSA 16 July 2009
Morning Financials Update ? Big Movers
Top 20 Financial Stock Movers
Company [ticker]
News
Price Move
MGIC Investment Corp [MTG]
Adj. Loss/Shr $2.86 vs $1.04 Loss Est. Injecting $1 billion into in inactive subsidiary, allowing it to write new business. Wisconsin DOI goes along with it. Fitch Downgrades on Announced Restructuring Plan
12%
Pacific Capital Bancorp NA [PCBC]
No news materially driving the stock price
12%
CVB Financial Corp [CVBF]
Beats estimates. Adjusted EPS 19c vs 10c Estimate
11%
East West Bancorp Inc [EWBC]
Misses estimates. -1.83A v -0.42E. Aggressive credit management being employed — if true, problems may be smaller in the future.
11%
Umpqua Holdings Corp [UMPQ]
Beats estimates. Adjusted EPS 15c vs 9c Loss/Shr Loss Estimate
7%
Commerce Bancshares Inc/Kansas [CBSH]
Beats estimates. Adjusted EPS 49c vs 38c Estimate
7%
MB Financial Inc [MBFI]
Beats estimates. Adjusted EPS 16c vs 26c Loss/Shr Loss Estimate
6%
Charles Schwab Corp/The [SCHW]
Beats estimates 0.20A v 0.18E. Client assets down, which may push future earnings down.
-3%
Developers Diversified Realty [DDR]
No news materially driving the stock price
-5%
Host Hotels & Resorts Inc [HST]
Rated New `Underperform’ At Wedbush. Perhaps some sympathy from Marriott’s bad profit report.
-5%
Federal National Mortgage Asso [FNM]
Allison Says Housing Program Showing Signs of Success. Uh, really?
-5%
MBIA Inc [MBI]
No news materially driving the stock price
-6%
Cousins Properties Inc [CUZ]
Slashes 3Q dividend by 40 percent.
-6%
Stewart Information Services C [STC]
No news materially driving the stock price
-6%
Federal Home Loan Mortgage Cor [FRE]
Allison Says Housing Program Showing Signs of Success. I don’t see that at all.
-6%
First Commonwealth Financial C [FCF]
No news materially driving the stock price
-7%
CapitalSource Inc [CSE]
No news materially driving the stock price
-7%
American International Group I [AIG]
Prudential Said to Resume Talks Over AIG Japan Units. AIG Said to Ask Buyout Funds to Ally With Taiwan Firms on Taiwanese Life Unit.
-9%
Boston Private Financial Holdi [BPFH]
No news materially driving the stock price
-10%
CIT Group Inc [CIT]
US unlikely to aid CIT, which faces a likely bankruptcy. Can an independent commercial finance company survive tough times without a deposit franchise? I don’t think so.
-70%
The information herein and the data underlying it has been obtained from sources that we believe are reliable, but no assurance can be given that this information , the
underlying data or the computations based thereon are accurate or complete or that the returns or yields described can be obtained. Neither the information nor any opinion
expressed constitutes a solicitation by us for the purchase or sale of any security. All prices are indications only.
Thoughts:
? If CIT can?t get help, that means all entities seeking help should expect less help at the margin, or at least more sturm und drang.
? Banks and thrifts are leading and Commercial finance and GSEs are trailing.
? Speculative names doing badly today.
? Survivors in investment banking are picking up more business and profits.
? Rising unemployment is the biggest hidden risk to the financial economy at present. As jobs are lost, people default on more debts.
? Commercial and high-end residential real estate still under pressure.
? The short-term performance model for financial stocks recommends only Reinsurers here. They face lower risk on the asset side of the balance sheet.
? Whether insurers or banks, avoid equity-sensitive names here ? aim at companies that don?t have a high degree of sensitivity to stock market performance.
? The market in the short run is driven off of government policy, which is uncertain.
? Better to play it safe at this point. We have just experienced a very sharp bear market rally. Remember, sharp moves tend to reverse, slow moves tend to persist.
Group Price Movements for this Morning
Commercial Serv-Finance
1.3%
Other
-0.8%
REITS-Regional Malls
-1.3%
Commer Banks-Western US
0.6%
Property/Casualty Ins
-0.8%
Finance-Credit Card
-1.4%
Commer Banks Non-US
0.3%
Finance-Auto Loans
-0.8%
Diversified Banking Inst
-1.5%
S&L/Thrifts-Central US
0.3%
S&L/Thrifts-Eastern US
-0.9%
Commer Banks-Eastern US
-1.5%
Financial Guarantee Ins
0.1%
REITS-Forestry
-1.0%
Multi-line Insurance
-1.5%
Finance-Consumer Loans
-0.1%
REITS-Diversified
-1.0%
REITS-Shopping Centers
-1.5%
Fiduciary Banks
-0.2%
REITS-Health Care
-1.0%
REITS-Warehouse/Industr
-1.9%
Reinsurance
-0.3%
Real Estate Oper/Develop
-1.0%
Life/Health Insurance
-1.9%
REITS-Mortgage
-0.3%
REITS-Office Property
-1.0%
REITS-Apartments
-2.0%
Commer Banks-Central US
-0.5%
Grand Total
-1.1%
Finance-Invest Bnkr/Brkr
-2.5%
Insurance Brokers
-0.5%
REITS-Storage
-1.1%
Exchanges
-2.7%
Retail-Pawn Shops
-0.6%
Commer Banks-Southern US
-1.1%
REITS-Hotels
-3.9%
Real Estate Mgmnt/Servic
-0.6%
Invest Mgmnt/Advis Serv
-1.2%
Finance-Mtge Loan/Banker
-5.7%
REITS-Single Tenant
-0.6%
Super-Regional Banks-US
-1.3%
Finance-Other
-17.4%
I look at these companies for big news events that have occurred since the last close. Often there isn?t any, but big changes here can be an indication that someone knows something, or there is trading noise. After that, it is up to the analyst to dig. Often, the dog that does not bark is the clue, as stocks move up or down on no news, as well as unexplained large spikes in volume, CDS spreads, and implied volatility of options.
Disclosure: long ALL NWLI SAFT RGA AIZ PRE
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