Archive for March 2010
Inflation figures fuel a debate over when the Fed should tighten
Mar 18th 2010 | WASHINGTON, DC | From The Economist print edition
[Greg Ip] TRACKING American interest rates is like watching paint dry. At its meeting on March 16th the Federal Reserve left its short-term rate target between zero and 0.25% for the tenth consecutive time, and, given “subdued inflation trends”, said it would probably leave it there for an “extended period”.
But just how subdued is inflation really? Frustratingly, the latest data provide ammunition for both the hawks, who question the need for extended low rates, and the doves, who don’t. Read the rest of this entry »
At last a decent effort to tackle the problem of “too big to fail”
Mar 18th 2010 | From The Economist print edition
[Greg Ip] IN LATE 2008 the American government threw its weight behind its biggest financial institutions to avert a systemic meltdown. It worked. The banking crisis has largely passed, but the guarantees (many of them implicit ones) remain—and therein may lie the seeds of another crisis. America’s financial system is now dominated by a few dozen firms that are assumed to be too big to fail. The danger is that they will in the coming years exploit that assumption to add leverage, girth and risk, leading to another collapse and more bail-outs.
The Senate bill is finally published
Mar 18th 2010 | WASHINGTON, DC | From The Economist print edition
Dodd bandages things up
[Greg Ip] CHRIS DODD, the soon-to-retire chairman of the Senate Banking Committee, has staked his legacy on overhauling America’s financial regulations. If he fails, it won’t be for lack of trying.
On March 15th Mr Dodd unveiled a sweeping proposal to rearrange the duties of America’s financial regulators while creating new powers and authorities to sniff out and squelch the risks that brought on the financial crisis. This is not the first reform blueprint: the House of Representatives has passed its own bill, the Treasury issued proposals last year, and Mr Dodd himself had already unveiled one, aborted draft of the Senate bill. This version, however, is the first to reflect substantial input from Republicans, whose support is necessary to reach the 60-vote margin needed in the Senate for the bill to become law.
The causes of the financial crisis are countless, and the 1,336-page bill takes aim at most of them, from credit-rating agencies to derivatives. But the two most sensitive proposals are its plans to deal with big, risky firms, and the creation of a new body to protect consumers.
To curb risks to the financial system, Mr Dodd would create a Financial Stability Oversight Council composed of regulatory chiefs who can designate any big financial firm as systemically important. That would put it under the eye of the Federal Reserve. Republicans have justifiably worried that designating any firm as systemically important would encourage markets to assume it is too big to fail, making it cheaper for the firm to borrow.
Mr Dodd’s bill seeks to make size unappealing by requiring firms with more than $50 billion in assets to fund a resolution kitty to deal with failing firms, also worth $50 billion. And it opens the door to the adoption of Barack Obama’s “Volcker rule”, which would restrict banks and other Fed-regulated financial companies from proprietary trading and sponsorship of hedge funds and private equity.
More importantly, Mr Dodd has also made the resolution process deeply unpleasant. If a failing firm were deemed a threat to the system, the Fed, the Federal Deposit Insurance Corporation and the Treasury, with the agreement of three bankruptcy judges, could impose an “orderly liquidation” on the firm, forcing shareholders and unsecured creditors to take losses. Such a resolution mechanism has long existed for banks but not for other big financial companies or for bank-holding companies.
It may prove unworkable, of course. The threat of being wiped out in bankruptcy could cause creditors to flee both the troubled firm and any firms like it, precisely the sort of panic the resolution regime is meant to avoid. “In a severe financial crisis it will be too terrifying for politicians and bureaucrats to use” the new process, predicts Douglas Elliott of the Brookings Institution. Instead, he says, they will resort to ad hoc measures as they did in 2008.
Less important but much more controversial is the issue of consumer protection. Democrats want to take that job away from bank regulators and give it to an independent agency. Republicans fear such an agency would kill off legitimate products and circumscribe banks’ financial health. Mr Dodd’s clunking compromise is to place a Consumer Financial Protection Bureau inside the Fed (where it gets a chunk of the Fed’s budget), make its director a presidential appointee and allow the oversight council to overrule its decisions.
There are other compromises, too. Mr Dodd had originally planned to merge America’s four overlapping bank regulators into one. He has given up that laudable fight. Just the hapless Office of Thrift Supervision will disappear. The Fed will lose authority over smaller banks—a move it opposes—while retaining it over large bank-holding companies. The bill also includes politically motivated loopholes: banks with less than $10 billion in assets will be spared the attention of the new consumer-protection bureau, though they are hardly paragons of virtue. They have some of the highest overdraft fees, says Michael Calhoun of the Centre for Responsible Lending, a consumer-advocacy group.
Despite Mr Dodd’s contortions, no Republicans have yet said they will support the bill. Modest concessions may entice Bob Corker of Tennessee and Judd Gregg of New Hampshire to vote for it. But the final product could then be unacceptable to liberal Democrats. And if Mr Dodd shifts left to bridge the gaps between his bill and the House’s, any Republican support could quickly melt away. With time running out before attention turns to mid-term elections in November, Mr Dodd’s place in history is still in the balance.
As Barack Obama embraces exports, trade friction looms
Mar 11th 2010 | CHICAGO AND WASHINGTON, DC | From The Economist print edition
[Greg Ip and The Economist’s midwest correspondent] A GLOOMY office park in suburban Chicago is the home of NewMedical Technology. At the moment the young company has only one main product, silicone strips to reduce scarring after surgery. But in its tiny warehouse, employees busily pack boxes to be shipped to Brussels. In the past year the firm’s business has expanded quickly; NewMedical now exports to South America, Europe and Asia.
It is the type of growth Barack Obama dreams of. Consumers are nursing battered balance sheets and the government is wallowing in debt. That puts the burden on exports to carry the recovery; Mr Obama wants them to double over the next five years.
On March 11th, as The Economist went to press, the president was rolling out a batch of initiatives to help the process along. Read the rest of this entry »
The central bank loses a vice-chairman but starts to regain its standing
Mar 4th 2010 | WASHINGTON, DC | From The Economist print edition
Kohn and Bernanke, no mugs
[Greg Ip] THE Federal Reserve, accused by critics of monetary and regulatory malpractice, has seen its standing plummet. The House of Representatives has passed one bill to audit its monetary decisions and proposed others to strip it of regulatory duties. Almost a third of the Senate voted against confirming Ben Bernanke to a second term as chairman.
It appears, however, that its rehabilitation has begun. As part of negotiations on a financial-reform bill, Chris Dodd, chairman of the Senate Banking Committee, is considering a proposal that would let the Fed retain most of its regulatory duties. Mr Dodd originally wanted to take oversight of banks away from the Fed and other regulators and give it to a new body. He wanted to hand oversight of consumer protection to another new creation, the Consumer Financial Protection Agency. Read the rest of this entry »