I’m attending a hearing of the House Financial Services Committee today.
Ben Bernake and Paul Volcker will testify to the House of Representatives on “Examining the Link Between Fed Bank Supervision and Monetary Policy.”
I have a fundamental question about how the Federal Reserve separates it’s oversight and dealings with Wall Street from it’s public stewardship of the nations economy.
This is the heart of the matter.
For example, the Federal Reserve swelled it’s balance sheet by over a trillion dollars through the purchase of mortgage backed securities from it’s primary dealers, the largest Wall Street firms.
It’s been widely reported that Wall Street profited on these transactions. (Financial Times story $$)
~~~”… ”Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.
The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.
However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.
The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.
“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”
A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”~~~
How does the Fed balance the issue of executing trading activity with a firm and then regulating the safety and soundness of the firm?
Conceivably it could get much more complicated if the Fed gained authority over Blackrock, Pimco and other systemically important institutions.
Former Fed Chairman Paul Volcker will be appearing today and his written testimony includes the following:
~~~”…I do believe the Federal Reserve, our central bank, with the broadest economic responsibilities, with a perceived mandate for maintaining financial stability, with the strongest insulation against special political or industry pressures, must maintain a significant presence with real authority in regulatory and supervisory matters…”~~~
I’m sure that he honestly believes this but how are we assured that the future will be any different? If the Fed gains more authority and less transparency in it’s oversight and dealings?
What we have now is a nation mired in deep resession with double digit unemployment for the near term future… and Wall Street has rebounded wonderfully… a few rough quarters of sledding and then all back to business as usual.
America deserves better than business as usual. We deserve a vibrant financial sector that is smaller in size and mediates credit to households, small and large businesses and governmental units at the lowest cost.
Enshrining the central bank as the central and dominant regulator is not likely to move us there. Placing the Fed as the center of our financial universe will codify the dominance of a handful of giant firms and likely reduce the transparency.
Move slowly Congress… this is a dangerous path for our nation…
The hearing can be seen live at 2 PM eastern at the following link.
Witness List & Prepared Testimony:
Panel One:
- The Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve
- The Honorable Paul Volcker, Chairman of the President’s Economic Recovery Advisory Board, Former Chairman of the Federal Reserve
Panel Two:
- Mr. Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance and Richard N. Rosett Faculty Fellow, Booth School of Business, University of Chicago
- Mr. Allan Meltzer, The Allan H. Meltzer University Professor of Political Economy, Tepper School of Business, Carnegie Mellon University
- Mr. Rob Nichols, President and Chief Operating Officer, Financial Services Forum
- Mr. Jeffrey L. Gerhart, President, Bank of Newman Grove, on behalf of Independent Community Bankers of America (ICBA)
Official prepared remarks can be found here as soon as it is released.