Saturday, November 17, 2012

FOMC Mulls Change of Tactics to Fed Funds Rate Changes

Author: David Schwartz J.D. CPA
The latest Federal Reserve Open Market Committee ("FOMC") minutes reveal serious consideration of an approach to monetary policy whereby the Fed uses quantitative triggers based on unemployment rates and inflation, as opposed to date-based thresholds, to guide its changes in the federal funds rate.  This is an approach championed by Charles Evans, President of the Federal Reserve Bank of Chicago.  Under Evans's approach to monetary policy, the Federal Reserve would promise to keep rates at zero until unemployment drops to a certain level unless inflation reaches a particular ceiling. The October 23-24, 2012 minutes show that the Evans approach may be gaining some support among the FOMC, although some participants urged caution.
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Monday, November 12, 2012

Paul Volcker Shines Light Through Cracks in the Ring-Fence

Author: David Schwartz J.D. CPA
Paul Volcker, former Federal Reserve Chairman and architect of the Volcker Rule, testified On October 17, 2012 before a joint British Parliamentary Commission on banking standards. He answered questions on the differences between the US and UK banking systems along with questions that focused specifically on America’s recent experiences with regulatory reform. Notably, Volcker criticized the UK's proposed "ring fencing" approach to separating banking firms' retail commercial, deposit-taking banking from their investment banking businesses.  Though Mr. Volcker did say that ring fencing could be quite effective in the short run, the exceptions to the ring fencing rules may doom the concept's effectiveness in the long run.  He drew a parallel with the US's experience with the Glass-Steagall wall of separation between commercial and investment banking. Financial firms began chipping away at the exceptions in Glass-Steagall almost immediately with the creation of subsidiaries and adding more of what was possible for a subsidiary to do in the securities area, eventually all but blunting the effect of Glass-Steagall restrictions.  In his opinion, said Volker, the only truly effective tactic is  institutional separation of retail banking, proprietary trading, and sponsoring of hedge funds.
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Saturday, November 10, 2012

Novel Monetary Policy Has Its Risks, But Also Its Rewards

Author: David Schwartz J.D. CPA
In an October 14, 2012 address in Tokyo, Fed Chairman Ben Bernanke outlined the Fed's near term economic outlook, and discussed in an international context the basic rationale underlying the Federal Reserve's recent policy decisions.  According to Bernanke, the outlook is for the economic recovery to proceed at a moderate pace in coming quarters, with the unemployment rate declining only gradually and inflation running less than 2%.  These expectations, however, are colored with significant downside risks including the potential for intensified strains on the economies of EU members, potentially further slowing growth.   The Federal Open Market Committee (FOMC) expects to continue  to employ some creative monetary policy to promote some easing in financial conditions, instill greater public confidence, and promote more rapid economic growth and faster job gains over coming quarters.  Bernanke stressed, however, that monetary policy is not a cure-all.  Unconventional monetary policies have risks, and the Fed has approached novel applications of monetary policies with great caution, weighing both domestic and international effects in the long term.
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Friday, November 9, 2012

SEC Chief Sees Reg Reform and Consumer Protection as One Goal

Author: David Schwartz J.D. CPA
Despite the legislation's two-part name, "The Wall Street Reform and Consumer Protection Act," SEC Chairman Mary L. Schapiro understands financial regulatory reform and consumer protection to be one thing, not two separate goals.  In her October 26, 2012 remarks at George Washington University, Chairman Schapiro states that she sees Dodd-Frank, though still a work in a progress, as founded on some very simple guiding principles that benefit all market participants in the long run and are the basis for both sound regulation and consumer protection.  According to Schapiro, these principles are:

  • Markets should be transparent. 
  • Regulation should be consistent, without gaps that can be exploited by those who wish to indulge in risky, destabilizing or illegal behavior. 
  • Market participants, not taxpayers, should bear the risks of their market activities. 
  • And regulators should have the willingness and the tools they need to apply these principles to the day-to-day workings of the financial markets. 
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Sunday, November 4, 2012

Fed Governor Calls Dodd-Frank Flawed. Suggests Limits on Bank Size.

Author: David Schwartz J.D. CPA

In his October 10, 2012 remarks at the University of Pennsylvania Law School, Federal Reserve Board Governor, Daniel K Tarullo, criticized Dodd-Frank sharply for missing the mark in a number of vital ways in its framework for ensuring financial stability.  Tarullo called Dodd-Frank a sweeping piece of legislation pieced together in a crisis, based on some theories of financial stability that are in many respects undeveloped or uncontested, and incomplete in a number of systematically important risk areas.   According to Tarullo, this lack of an overarching unifying concept of financial stability or an officially embraced consensus theory of how financial stability is undermined presents a major weakness in the reform effort and is a significant hurdle for regulators in implementing and enforcing the legislation.  This poor theoretical foundation for financial stability leaves major gaps in the handling of the moral hazard associated with too-big-to-fail institutions, as well as other areas like shadow banking.  Consequently, Tarullo believes that these gaps in Dodd-Frank leave room for further Congressional action, including imposing caps on the size of banks.

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