Fed Faces New Scrutiny for Trillions in Assistance to Banks After Crisis | PBS NewsHour | Nov. 29, 2011 | PBS

Just shaking my head....we have so little idea of what goes on. Think that Enron or Adelphia etc were bad when they hid billions? Try trillions!


Fed Faces New Scrutiny for Trillions in Assistance to Banks After Crisis | PBS NewsHour | Nov. 29, 2011 | PBS:

"JUDY WOODRUFF: What did you learn about the scope of what the Fed did and who the recipients were?

BOB IVRY: It was a lot bigger than we thought, Judy, compared to TARP. TARP was the Treasury program that helped the banks get through a tough time in 2008.

And that was lending up to $700 billion. In one day, the Fed had loans out totaling $1.2 trillion. So, that one day in December of 2008 just completely dwarfs the much better known TARP program."

Now clearly it is not all bad. For instance, the Fed (in its role as lender of last resort) should be making these loans to the firms that needed it, but what about those that didn't need it but wanted a nice handout?


Also there is a debate as to how much of this was previously disclosed:

"JUDY WOODRUFF: Now, we know that you and Bloomberg News went to great lengths to get this information. There was a FOIA, a Freedom of Information, request that went all the way, I gather, to the Supreme Court.
But we did at the NewsHour talk to Fed officials today. And they say the extent to which this was hidden, was secret is being overstated here to some extent. They're saying that they made weekly reports about the amount of lending; then, ultimately, the information came out after the Dodd-Frank bill was passed into law.
BOB IVRY: They did disclose the information in aggregate form, meaning that you just got a lump: This particular program, for instance, lent this week this amount of money.
What we didn't know before very recently was that a bank like Morgan Stanley took $107 billion in one day or that Bank of America or Citigroup were borrowing on a single day at their peak almost $100 billion.
So, all that is now public. And that's because Bloomberg and Bloomberg News sued the Federal Reserve to get this money and to get this"

Related articles

• Fed Loaned Banks Trillions in Bailout, Bloomberg Reports - ABC News (blog) (abcnews.go.com)
• The Federal Reserve's 'breathtaking' $7.7 trillion bank bailout (kaystreet.wordpress.com)

FRB: FOMC Minutes, November 2-3, 2010

By now you probably have seen the news story on the Fed lowering their growth forecasts for the coming year. For instance here is how it was reported by the Washington Post:

"Federal Reserve officials expect the unemployment rate to remain around nine percent at the end of next year and eight percent at the end of 2012, according to internal forecasts that drove the central bank to take new efforts to boost the economy three weeks ago.
The 18 top leaders of the central bank expect the U.S. economy to grow at a 3 to 3.6 percent pace next year, which by their calculations will be enough to bring joblessness, currently at 9.6 percent, down to the 8.9 to 9.1 percent range in late 2011."

While the news gets it right, you really only get the headlines.  Therefore I would encourage all of you (especially any students who are in Money and Banking or Financial Institutions), to take a few extra minutes and actually read the minutes from the meeting.

FRB: FOMC Minutes, November 2-3, 2010:

"...information reviewed at the November 2-3 meeting indicated that the economic recovery proceeded at a modest rate in recent months, with only a gradual improvement in labor market conditions, and was accompanied by a continued low rate of inflation. Consumer spending, business investment in equipment and software, and exports posted further gains in the third quarter, and nonfarm inventory investment stepped up. But construction activity in both the residential and nonresidential sectors remained depressed, and a significant portion of the rise in domestic demand was again met by imports. U.S. industrial production slowed noticeably in August and September, hiring at private businesses remained modest, and the unemployment rate stayed elevated. Headline consumer price inflation was subdued in recent months, despite a rise in energy prices, as core consumer price inflation trended lower..."

And later a discussion of why unemployment is recovering slowly:

"Participants agreed that progress in reducing unemployment was disappointing; indeed, several noted that the recent rate of output growth, if continued, would more likely be associated with an increase than a decrease in the unemployment rate. Participants again discussed the extent to which employment was being held down, and the unemployment rate boosted, by structural factors such as mismatches between the skills of the workers who had lost their jobs and the skills needed in the sectors of the economy with vacancies, the inability of the unemployed to relocate because their homes were worth less than the principal they owed on their mortgages, and the effects of extended unemployment benefits on the duration of unemployed workers' search for a new job. Participants agreed that such factors were contributing to continued high unemployment but differed in their assessments of the magnitude of such effects."

There is much much more detail and breadth in the minutes. Well worth the read. 

Bernanke Feared a Second Great Depression - WSJ.com

Bernanke Feared a Second Great Depression - WSJ.com:

"Federal Reserve Chairman Ben Bernanke on Sunday said he engineered the central bank's controversial actions over the past year because 'I was not going to be the Federal Reserve chairman who presided over the second Great Depression.....

And later:

"Mr. Bernanke responded that "nothing made me more frustrated, more angry, than having to intervene" when firms were "taking wild bets that had forced these companies close to bankruptcy."

More than 20 people asked questions...on topics ranging from bailouts to mortgage-regulation practices to the Fed's independence....Mr. Bernanke suggested that a movement by lawmakers to open the Fed's monetary-policy operations to audits by the Government Accountability Office is misunderstood by the public....

"I don't think that's consistent with independence," he said. "I don't think people want Congress making monetary policy."

FT.com | Willem Buiter's Maverecon | What to do with the Fed

Phenomenal piece. Great work by Willem Buiter for the Financial Times.

The article is on the problems the Fed has had, but stressed that that while flawed, it is still important not to let it lose its independence.

Read it all. It is long, but very well done.

I will give a few tidbits to tempt you to read the whole thing. It really is worth it.

FT.com | Willem Buiter's Maverecon | What to do with the Fed:

"It is a mainstream view that the Fed has failed to foresee and prevent the crisis, that it has managed it ineffectively since it started, and that it has allowed itself to be used as a quasi-fiscal instrument of the US Treasury, by-passing Congressional control. Are any or all of these criticisms justified? Let’s ponder a few of them."

He then goes on to show that the Fed and many others missed the crisis until it was too late. SO sure the Fed deserves some of the blame but so too do others.

On regulation's failure:

"...the whole mishmash of US financial regulation and supervision has long been viewed as a school book example of how not to structure such activities. Fragmentation, balkanisation, overlap, turf battles and unproductive inter-agency rivalry and jealousy are the name of the game. With federal commercial banking supervision split between the Fed, the FDIC and the Controller of the Currency (not counting the Office of Thrift Supervision for federal savings banks) and investment banks (not) supervised and regulated by the SEC, the US regulatory framework was an accident waiting to happen. Federal securities markets regulation and supervision is, for no good reason, split between the SEC and the Commodity Futures Trading Commission. The SEC - discredited and without its investment bank constituency - is an organisation begging to be put out of its misery."

and on the Fed now:
"

"The Fed has been actively contributing to the next crisis

Here indeed the Fed stands guilty as charged, although it is in good company. The Fed, through its lender of last resort and market maker of last resort actions and through a wide range of quasi-fiscal support operations it has undertaken on behalf of Wall Street and other segments of the US financial establishment (Fannie & Freddie, AIG), has made a major contribution to the creation of the biggest moral hazard machine ever seen in human history."

There are many other great points left out here, but the conclusion is worth pointing out for those of you who do not click through:.

"If the same institution, the central bank, has to be in charge of both normal monetary policy and systemic risk regulation (albeit jointly with the Treasury for the systemic risk role), there is no elegant, first-best solution. Either monetary policy will be driven by politicians whose macroeconomics is limited to a partial understanding of the Keynesian cross and whose monetary policy views can be summarised by the proposition that the have never seen an official policy rate so low they would not want it even lower, or the central bank continues to act as an off-budget, off-balance sheet special purpose vehicle of the Treasury."

Cutting through all of the very important stuff before (who is to blame, what went wrong, etc etc etc), the whole article is worth it if you only read and understand that conclusion.

Bernanke's and Fed's hardest task: Taking back $1 trillion - Jul. 6, 2009

Bernanke's and Fed's hardest task: Taking back $1 trillion - Jul. 6, 2009:

"'Your timing has to be perfect,' says David Jones, former Fed economist and president and CEO of DMJ Advisors LLC in Denver. 'If you do it too soon, you keep us in a deep recession. And if you do it too late, you get inflation.'"

Fed independence

Central Bank independence is important for the long term health of any economy. That has been fairly well established. Indeed, in the early 1990s Laurance Summers (and others) argued the importance of Fed independence for keeping inflation in check.

Why? Governments (read politicians) have an incentive to grow the money supply very quickly for short term gains at the expense of longer term inflation. Without the independence it is generally the case that

By Scott Beaulier and William Mounts in the WSJ: Obama Should Reaffirm Fed Independence - WSJ.com:

"While understanding the Great Depression is crucial, there is another event in America's monetary history that must be remembered: The 'Accord' of 1951. In this case, Mr. Bernanke should aim to repeat the past.

The accord struck between the Fed and the Treasury in March 1951 fundamentally changed the relationship between the two bodies that had developed during World War II."

and later

"Without a firm commitment by the Obama administration to maintain central-bank independence at all costs, the Fed may become subordinate to the Treasury as it institutes the president's expansive plans to inject government into the economy. If this is the case (to paraphrase Milton Friedman) fiscal deficits will always and everywhere mean inflation."

It should also be noted however that Summers also later wrote that there seemed to be less relationship between Central Bank independence and unemployment rates and other real economic data.

Bear Stearns: The Fed's Original 'Systemic Risk' Sin - WSJ.com

One year ago.

Bear Stearns: The Fed's Original 'Systemic Risk' Sin - WSJ.com:

"...the Federal Reserve saved Bear Stearns from bankruptcy. The central bank's agreement to invest $30 billion (later reduced to $29 billion) in Bear's opaque securities greased a sale of the firm to J.P. Morgan Chase. For the first time since the 1930s, the federal government was putting taxpayers at risk to rescue a Wall Street investment bank. To this day, the government has not explained precisely why....

Was there a formula that regulators used to measure systemic risk? .... Still, more data might help explain how the also-ran among Wall Street's major banks could possibly have dictated the fate of the American economy.

Oddly, given that this is a question of finance, government explanations following the Bear deal involved lots of adjectives and very little math....Fed Chairman Ben Bernanke described "fragile" financial conditions. Timothy Geithner, New York Fed president at the time, also saw "fragile" conditions, as well as a "fragile" economic situation and a "fragile time in global financial markets." Mr. Bernanke, when describing the "interconnectedness" of Bear Stearns, said that regulators decided to act "given the weakness and the fragility of many markets."

Alan Greenspan defending, well, Alan Greenspan and more

Alan Greenspan defends his reputation in the Wall Street Journal. The defense is largely that sure long term-rates were too low, but that was because long term rates (which people used to make real estate decision on) quit moving with short-term rates (which the Fed had some control over).

In his words:

"There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. "

and

"The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier -- in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments."

and

"U.S. mortgage rates' linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance."

Which is no doubt true, but the Fed must still bear some of the fault as had it seen the dangers more clearly, the warning could have been sounded to the banks to tighten credit standards. ANd to further defend the Fed, at least as early as May of 2005, Fed governor Roger Ferguson commented on (and in hindsight looks remarkably clairvoyant) the potential impact of Real Estate prices on the overall economy:

"Clearly central bankers would benefit from a better understanding of asset price movements--particularly more extreme movements--so that we do not mistakenly facilitate in some way potentially harmful outcomes.....The past decade has been marked by episodes of financial volatility that have had the potential for trouble at a systemic level. Linkages between financial markets and real economic outcomes have become more complex, periodically presenting policymakers with surprises and puzzles.... A particular phenomenon that touches on all these issues is the movement of asset prices, especially the prices of equities and residential real estate. Because these assets are the most widely held by the general public, price changes, even when not exceptional, can significantly affect the macroeconomy. Rising asset prices support household consumption, whereas falling asset prices damp consumption. In a scenario of collapse, the damage to balance sheets and private wealth could go as far as undermining the soundness of the financial system and threatening stability of the real economy. Apart from such outcomes, policymakers might also take special interest in asset price movements because it has been alleged that badly designed or poorly implemented policy (even if well intended) sometimes has helped feed unsustainable movements in asset prices...."

It is noteworthy that he was speaking on the impact of the money supply and not interest rates and that he also mentioned that in a global economy, the central bank of any country is limited:

"Among other complications is the possibility that financial globalization may be changing the links between liquidity and asset prices. Movements in asset prices across countries now appear to be more synchronized. This synchronization could arise in a number of ways.... it also is quite possible that greater international diversification of portfolios now allows developments affecting assets in one country to spill over into markets of others--both at the level of particular industries and more broadly. If synchronization of asset price movements comes about mainly in this way, the suggestion is that excess liquidity in one country could move asset prices in another, perhaps significantly, even if liquidity was well contained in the latter."

Which is consistent with Temple University's Ken Koplesky in The Economic Policy Examiner:

"We need to understand the implications of the high savings rates in Japan and China. The opposite side of the US deficit on current account is savings exceeding domestic investment in countries like China and Japan. How did this influence the onset of the world-wide recession? Are they the principal cause in the sense that very high savings in China and Japan were responsible for very low long-term interest rates, which in turn induced very risky lending/borrowing behavior?”"


Which I guess is my defense of Greenspan as well. There was a real estate bubble. Should the Fed have done more to prevent it? Definitely. But its options were not without costs and even when tried (raising short term rates) of little success.

If it were 2004 all over again, what would you do if you were the Fed?

(Gee wouldn't that make a great essay question?!)

THE FED: Big Banks Will Not Be Allowed To Fail, Bernanke Says

From CNN/Money: THE FED: Big Banks Will Not Be Allowed To Fail, Bernanke Says:

"Federal Reserve Board Chairman Ben Bernanke stressed Tuesday that major financial institutions would not be allowed to fail given the fragile state of financial markets and the global economy.

In a speech in Washington, Bernanke repeated that a sustainable economic recovery will 'remain out of reach' until the banking sector is stabilized....Bernanke said he hopes the view that the market can handle the failure of a systemically important firm is "no longer seriously maintained" given the power of the financial crisis in the wake of the collapse of Lehman Brothers and the government takeover of Fannie Mae and Freddie Mac last September. "It was the...collapse of banks and other institutions in late 1930 and early 1931 that made the Great Depression great...."

From the actual speech: FRB: Speech--Bernanke, Financial Reform to Address Systemic Risk--March 10, 2009:

"In a crisis, the authorities have strong incentives to prevent the failure of a large, highly interconnected financial firm, because of the risks such a failure would pose to the financial system and the broader economy. However, the belief of market participants that a particular firm is considered too big to fail has many undesirable effects. For instance, it reduces market discipline and encourages excessive risk-taking by the firm. It also provides an artificial incentive for firms to grow, in order to be perceived as too big to fail. And it creates an unlevel playing field with smaller firms, which may not be regarded as having implicit government support. Moreover, government rescues of too-big-to-fail firms can be costly to taxpayers, as we have seen recently. Indeed, in the present crisis, the too-big-to-fail issue has emerged as an enormous problem....

And later:

"In light of the importance of money market mutual funds--and, in particular, the crucial role they play in the commercial paper market, a key source of funding for many businesses--policymakers should consider how to increase the resiliency of those funds that are susceptible to runs. One approach would be to impose tighter restrictions on the instruments in which money market mutual funds can invest, potentially requiring shorter maturities and increased liquidity. A second approach would be to develop a limited system of insurance for money market mutual funds that seek to maintain a stable net asset value. For either of these approaches or others, it would be important to consider the implications not only for the money market mutual fund industry itself, but also for the distribution of liquidity and risk in the financial system as a whole.""

So much for transparency

Shh. Don't tell them the bad news.

I guess we should have expected it. Government agencies are not known for being the most open of groups, but you'd think that in the case of making loans the Fed of all people would be a bit forthcoming. But to date that is not the case, which is a bit disturbing.

From Bloomberg.com: Exclusive: Fed Refuses to Disclose Recipients of $2 Trillion in Lending "

"The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral."

In a way, this smells of the Japanese response during their bear market collapse when banks were urged to keep bad debts on the books. But not telling bad news is rarely an optimal solution.

More from the article:

"“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, who oversees about $14 billion at New York-based ICP Capital LLC....The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP....Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA. "

What really is troubling is this quote, which seemingly is saying, "we have more bad news, but if we tell you, you might panic."

"In its response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” when the “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”"

While the incentive to not disclose is understandable, it is also probably wrong: by not saying who is in trouble, investors will fear the worse for all institutions.

Fed and tresury officials on why they did what they did

I am a "glass is half full" person who on top of that thinks that we will probably find more water before even that is gone. But I do get a tad concerned when smart people who have informational advanatges get worried. We had two examples of this today.

FromTreasury Secretary Henry Paulson as quoted at Bloomberg.com: Worldwide:

"Treasury Secretary Henry Paulson said his actions bailing out some U.S. companies to help strengthen capital markets, while “objectionable,” were necessary to prevent a deeper collapse of the global economy.

“Some of the things that I’ve been part of have been very, very objectionable decisions, but they haven’t been difficult decisions” because the alternative would be “much worse,” Paulson said, responding to questions after a speech in Washington. “I’ve looked at some of the things I’ve done as being essential to preserve the free market system.”"

And from Ben Bernanke the Fed chairman in a speech in Texas:

"..this extraordinary period of financial turbulence is now well into its second year. Triggered by the contraction of the U.S. housing market that began in 2006 and the associated rise in delinquencies on subprime mortgages, the crisis has become global and is now affecting a wide range of financial institutions, asset classes, and markets. Constraints on credit availability and slumping asset values have in turn helped to generate a substantial slowing in economic activity.

The Federal Reserve's strategy for dealing with the financial crisis and its economic consequences has had three components. [1]First, to offset to the extent possible the effects of the crisis on credit conditions and the broader economy, the Federal Open Market Committee (FOMC) has aggressively eased monetary policy. ...The Committee's rapid monetary easing was not without risks. Some observers expressed concern at the time that these policies would stoke inflation, and, indeed, inflation reached high levels earlier this year....[but] As you know, commodity prices peaked during the summer and, rather than leveling out, have actually fallen dramatically with the weakening in global economic activity. As a consequence, overall inflation appears set to decline significantly over the next year toward levels consistent with price stability.

[2]... the second component of the Federal Reserve's strategy has been to support the functioning of credit markets and to reduce financial strains by providing liquidity to the private sector--that is, by lending cash or its equivalent secured with relatively illiquid assets.

To ensure that adequate liquidity is available, consistent with the central bank's traditional role as the liquidity provider of last resort, the Federal Reserve has taken a number of extraordinary steps. For instance, to provide banks and other depositories easier access to liquidity...Judging the effectiveness of the Federal Reserve's liquidity programs is difficult. Obviously, they have not yet returned private credit markets to normal functioning. But I am confident that market functioning would have been more seriously impaired in the absence of our actions.

and finally:

"...the third component of our policy response has been to use all our available tools to promote financial stability, which is essential for healthy economic growth. At times, this has required working to preserve the stability of systemically critical financial institutions, so as to avoid further costly disruptions to both the financial system and the broader economy during this extraordinary period. In particular, the Federal Reserve collaborated with the Treasury to facilitate the acquisition of the investment bank Bear Stearns by JPMorgan Chase and to stabilize the large insurer, American International Group (AIG). We worked with the Treasury and the Federal Deposit Insurance Corporation (FDIC) to put together a package of guarantees, liquidity access, and capital for Citigroup. Other efforts include our support of the actions by the Federal Housing Finance Agency and the Treasury to place the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac into conservatorship and our work with the FDIC and other bank regulators to assist in the resolution of troubled depositories, such as Wachovia. In each case, we judged that the failure of the institution in question would have posed substantial risks to the financial system and thus to the economy."

As CNN points out, these programs do come with big downsides:

"...there is a downside to all of the Fed's programs. Fed lending has ballooned. Bernanke said that the central bank's balance sheet will need to be brought back to a sustainable level in the future. The government does not want financial institutions to become reliant on the Fed for liquidity, and an enormous balance sheet could result in high inflation down the road.

"That is an issue for the future," Bernanke said. "For now, the goal of policy must be to support financial markets and the economy.""

A Reporter at Large: Anatomy of a Meltdown: Reporting & Essays: The New Yorker

A Reporter at Large: Anatomy of a Meltdown: Reporting & Essays: The New Yorker:

"For more than a year after he was appointed by President George W. Bush to chair the Fed, in February, 2006, he faithfully upheld the policies of his immediate predecessor, the charismatic free-market conservative Alan Greenspan, and he adhered to the central bank’s formal mandates: controlling inflation and maintaining employment. But since the market for subprime mortgages collapsed, in the summer of 2007, the growing financial crisis has forced Bernanke to intervene on Wall Street in ways never before contemplated by the Fed....These moves hardly amount to a Marxist revolution, but, in the eyes of many economists, including supporters and opponents of the measures, they represent a watershed in American economic and political history."

Thanks to MoneyScience for the link! VERY good stuff!

To Prevent Bubbles, Restrain the Fed - WSJ.com

In another article bemoaning the Fed, the WSJ reports some amazing statistics:

To Prevent Bubbles, Restrain the Fed - WSJ.com:

First on the performance of the stock market:

"On Nov. 14, 2008, the Dow Jones Industrial Average closed at 8497.31. On Nov. 13, 1998, the adjusted (for dividends and split) close was 8919.59. There has been great volatility, but no net capital accumulation as measured by the Dow in a decade. Other indexes, such as the Nasdaq, tell a similar story. Capital has been invested but as much value has been destroyed as created."

Then on the relative size of the subprime market:

"In 2001, there was $190 billion worth of subprime loan originations -- 8.6% of total mortgage originations. In 2005, there was $625 billion worth of subprime originations -- 20% of the total. In the same period, the percentage of subprime mortgages securitized -- loans that were packaged and sold to investors -- rose from just about 50% to a little more than 81%. (These numbers all trailed off slightly in 2006.) The great easing in monetary policy ended (with a lag) when the Fed began raising rates in June 2004.

The subprime saga follows a familiar pattern. Easy credit begets a boom and then the inevitable tightening of credit bursts the bubble. What is not familiar is the scale of the devastation wrought in this boom-bust cycle."

To prevent this boom-bust cycle,the author (Gerald P O'Driscoll Jr.) calls for a return to some commodity standard. A view that I do not really hold, but can see why there are more calling for it and given evidence, I may not disagree with it as much as I would have a few years ago.

"Mr. Obama needs to stop the next asset bubble from being inflated by imposing a commodity standard on the Fed. A commodity standard (such as a gold standard) imposes discipline on a central bank because it forces it to acquire commodity reserves in order to increase the money supply. Today the government can inflate asset bubbles without paying a cost for it because the currency isn't linked to the price of a commodity."

To Treat the Fed as Volcker Did - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

The NY Times points to an interesting BreakingViews article on the fed. Short version: The Fed is trying to do too much and some of the things (example maximum employment and stable prices) are seemingly at odds. A possible solution? Simplify it and have the Fed worry only about stable prices.

From the Fed's own website:

"...the Federal Reserve's duties fall into four general areas:

• conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
• supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system"

From the NY Times: To Treat the Fed as Volcker Did - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:

"The president-elect should change the Fed’s legal structure and mandate so that it will maintain monetary stability, even if a person of Mr. Volcker’s stature is not running it, Breakingviews says. The objective should be to force even the feeblest political appointee to keep broad monetary growth in line with the growth of the economy. That means raising interest rates as high as necessary to keep consumer and asset price inflation low, it says."

Coordinated rate cut plus In praise of Bernanke

Of course the Fed Cut rates early this AM. As part of a multi-central bank move to stem the spillover from the liquidity induced meltdown. Most would agree that such a cut was only a matter of time and definitely needed (I would have gone a full point at least), but

First the News: From NY Times.

"In an extraordinary move that reflects the gravity of the financial turmoil, the world’s central banks on Wednesday announced coordinated interest rate cuts as they try to restore confidence in the economy.

Included in the move to cut rates were the Federal Reserve, the Bank of England and the European Central Bank as well as those in Canada, Sweden and Switzerland."

Yesterday I was asked what I thought of Bernanke's handling of the situation. I said while I may disagree about some small items, the worst I can say about him is that he has done things largely as I would have done. Thus, I liked seeing others (yeah I am biased) agree with my assessment at a time when it is all too easy to criticize him. Again from the NY Times.

In Praise of Bernanke - Economix Blog - NYTimes.com:

"The Federal Reserve’s rate cut — part of a coordinated international effort — has put Ben Bernanke front and center for yet another day. Over the past couple of years, Mr. Bernanke, the Fed chairman, has come in for a fair bit of criticism. Some of it has been justified, I think.

But it’s also worth taking a moment to consider how well prepared he is for his current task. He spent his career studying the lessons of the Great Depression and, to a lesser extent, Japan’s 1990’s slump. (And his fellow economists have enormous regard for him and his work.) He now finds himself having to put those lessons into practice. His qualifications by no means guarantee that he’ll succeed. But it’s hard to imagine anyone who is more qualified to try to minimize the damage from the current crisis."

Fed to buy massive amounts of short-term debts: Financial News - Yahoo! Finance

Fed to buy massive amounts of short-term debts: Financial News - Yahoo! Finance:

"The Federal Reserve, invoking Depression-era power under 'unusual and exigent circumstances,' will buy 'commercial paper,' a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls."

Bloomberg.com: Worldwide

Wow. This is about as interesting as Money and Banking can get! But fortunately this is really interesting! Stealth easing. Nice new term!

Bloomberg.com: Worldwide:

"The central bank used power granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.

``Absolutely, it's a stealth easing,'' said John Ryding, "

later:

"By paying interest on reserves, the Fed can pump more cash into the financial system without worrying the overnight lending rate will drop to zero at the end of each day as banks withdraw excess reserves. The move doesn't preclude a further reduction in the target rate by the Federal Open Market Committee."

Told you it was interesting! While we can argue about whether it is too little too late, any increase in liquidity that they can offer is definitely a step in the right direction!

Five Things You Must Know About the Fed - TheStreet.com University - The Finance Professor - BAC - C

Taking or teaching a Money and Banking course? Or just interested in learning more about how the Fed works, the Street.com's new site has a nice review of what the role of the Fed now is.

Five Things You Must Know About the Fed - TheStreet.com University:

"The Fed is responsible for much more than determining the fed funds rates. According to the Fed's own publication entitled The Federal Reserve System Purposes & Functions, 9th Edition (June 2005), the Fed 'is the central bank of the United States' and was started by Congress 'to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."

SSRN-A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best? by Ray Fair

SSRN-A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best? by Ray Fair:

"Abstract:
This paper examines the performance of the past five Federal Reserve chairmen using optimal control techniques and a macroeconometric model. Each chairman is judged by the actual performance of the economy under his term relative to what the performance would have been had he behaved optimally. Comparing chairmen only on the bases of actual performance of the economy is not appropriate because it does not control for different exogenous-variable values and shocks that the Fed has no control over. The results suggest that Greenspan was indeed the best, but followed closely by Martin. Volcker also does well, but probably not quite as well as Greenspan and Martin."

FRB: Speech, Bies--Sound Capital and Risk Management--March 29, 2006

If you are in a Money and Banking class, this one should not be missed! Today's speech by Fed Governor Susan Schmidt Bies.

FRB: Speech, Bies--Sound Capital and Risk Management--March 29, 2006

A few look-ins:

"...with the advent of very large banking organizations that engage in a wide variety of business activities--some of them quite complex--the Federal Reserve has become even more interested in ensuring that banking organizations understand the risks of these activities."

later:

"To conduct a credible internal analysis of relevant risks, institutions should identify which risks can generally be quantified and which ones cannot. When risk measurements are based on scarce or incomplete data, or on unproven quantitative tools, institutions might need to use sensitivity analyses, stress tests, or scenario analyses to a greater extent in order to develop meaningful risk measures."

Why Basel II matters:

"One of the most important sound practices for a banking organization is the tying of risk exposures to capital. Banks that use similar risk models can have very different risk exposures. That is why the Basel II approach to capital is so important. Basel II provides a framework in which the risk level banks choose to accept is reflected in their capital."

It is not just interest rate exposure!

"Focusing now on operational risk, one of the most substantial changes in the U.S. banking industry in recent years is the movement of the largest organizations toward fee-based revenue streams. These new activities include securitizing loan portfolios, with the bank retaining responsibility for loan servicing; buying and selling financial instruments for customers; and other business lines that generate revenue by charging customers transaction and account processing fees. These activities generate little balance-sheet exposure, but they present the potential for large losses if the complex systems and financial deals associated with them are not managed in a sound manner"

And finally, what is the current status:

"Now I would like to give a brief update on where we stand with implementing Basel II in the United States, as well as with amending the current Basel I regime. First of all, you may have heard that tomorrow the Federal Reserve Board plans to review a draft of the interagency Basel II notice of proposed rulemaking (NPR) at a public meeting, meaning that a draft NPR will also be made available to the public at that time. The final NPR is expected to be issued in the Federal Register after all of the U.S. banking agencies complete their review and approval processes, meaning it will then be "officially" out for comment."

It's almost like being there ;)