Pauly Speaks

Discussion in 'Economics' started by ljyoung, May 14, 2008.

  1. The man has a problem with the Benster.


    Fed Balance Sheet Worries Volcker
    Ex-Chairman Sees
    Fed's Independence
    Hurt by Credit Steps
    By GREG IP

    Former Federal Reserve Chairman Paul Volcker said the Fed's independence could be hurt by the wide variety of assets it has taken onto its balance sheet to combat the credit crunch.

    Since the credit crisis began last August, the Fed has expanded the volume and types of loans it is willing to make to banks and securities dealers -- loans that are backed by a wide variety of collateral from subprime mortgages to student loans. It has so far not directly purchased such debt. It did, however, make an unprecedented loan of $29 billion to facilitate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co.

    Mr. Volcker, testifying on responses to the credit crisis at the Joint Economic Committee of Congress Wednesday, said such activity "has not been the tradition of the central bank and I think that is an issue for the long run for the independence of the central bank. If it is going to be looked to as the rescuer or supporter of a particular section of the market, that is not strictly a monetary function in the way it's been interpreted in the past."

    Mr. Volcker is credited with reining in surging inflation while Fed chairman from 1979 to 1987. He has since held a variety of private-sector and nonprofit posts and in recent months has been vocal about the need to re-examine the system of financial regulation in the wake of the credit crisis.

    • The News: Former Fed Chairman Paul Volcker warns that the Fed's actions to ease the credit crunch could affect the bank's independence.
    • The Background: The Fed has added a wider variety of loans to its balance sheet, and its supervisory powers are under review.In a blueprint on financial regulatory overhaul, Treasury Secretary Henry Paulson has proposed transferring responsibility for supervision of banks from the Fed and other regulators to a single prudential regulator, while giving the Fed more amorphous responsibility for keeping the entire financial system stable.

    Mr. Volcker said giving the Fed sweeping powers to oversee financial markets doesn't obviously justify its high degree of political independence. The Fed was given that independence based on the view that politicians shouldn't have the power to print money.

    The former Fed chairman said Congress should consider creating a new position within the Fed, requiring Senate confirmation, "that is the chief supervisory regulator. It could be the vice chairman." He also said the Fed needs more and better paid staff to supervise banks.

    Mr. Volcker laid part of the blame for the current crisis at the feet of banking regulators, including the Fed. "Why were [the banks] permitted to set up those off-balance-sheet entities that may or may not have had some formal relationship with the bank? They were not regulated and [banks] didn't hold an adequate amount of capital against them. Why did that happen after the experience of Enron?"

    After Enron's use of off-balance-sheet entities to obscure its debt load led to the firm's collapse in 2001, accounting standards were toughened to require companies to consolidate more such entities onto their balance sheet. Banks used such entities to hold assets backed by loans and securities such as mortgages. The entities financed themselves by issuing short-term IOUs called commercial paper.

    In 2003 and 2004, the Fed and other regulators ruled that the new accounting standards wouldn't compel banks to hold additional capital for such entities. But when investors refused to refinance the entities' commercial paper last year, some banks were forced to take the entities back onto their own balance sheets.

    Mr. Volcker was more conciliatory on the wisdom of the Fed's decision to lend money to keep Bear Stearns from failing than he was in a speech last month when he said the Fed went to the "very edge of its lawful and implied powers." On Wednesday, he said, "I can understand why they felt they had to act. I can imagine they were faced with a problem and a very short time frame and worried about the contagion and loss of Bear Stearns."
  2. His testimony in front of Congress spells out the big problems. They "financially engineered" a way for everyone to borrow to consume instead of producing, but eventually that has to end, and someone is going to get stuck with the tab.
  3. Bernake=Moron