Receiving Wide Coverage ...
Bernanke in No-Man's Land: When the history of the financial crisis is written, Federal Reserve Chairman Ben Bernanke will no doubt take flak for many things but timidity about stimulating the economy is unlikely to be among them. A half decade after the crisis, and with the labor market on the mend, the Fed is still buying $85 billion of mortgage-backed securities and Treasuries each month. It's financing the expansion of its portfolio by creating bank reserves. That means banks will be at ground zero regardless of whether the Fed's eventual unwind of its record-setting $3 trillion balance sheet goes smoothly or sparks the next crisis. Fretting over how it will play out has gained renewed urgency in the past week amid new signs of economic strength and the Fed chairman's appearance before the House Financial Services Committee. Even Bernanke admitted he's in uncharted territory, telling lawmakers that no country has ever had a comparable increase in the size of its portfolio and unwound it "in the precisely analogous way." (Ah, to live in a world of Fed-speak!) Bernanke & Co. are now reconsidering bond sales in response to criticism that their third round of purchases is exacerbating the potential for the central bank to, "in a robotic fashion, dump assets" on the market, causing interest rates to climb rapidly, Ethan Harris, co-head of global economics research at Bank of America (BAC) in New York, told Bloomberg. There is growing chatter that the Fed might try to restrain inflation through the rates it pays on bank deposits or by hanging on to its bond holdings until maturity—prospects Bernanke discussed with a scholarly sense of confidence that left some observers unconvinced the Fed knows what it's doing. "Their [Federal Reserve officials'] models are one thing, but the real world is another," says Robert Eisenbeis, an economist at Cumberland Advisors and former research director at the Atlanta Fed. (Eisenbeis and others may be getting the heebie-jeebies recalling the confidence with which Bernanke assured the world shortly before the financial crisis that bad subprime mortgages posed no threat to the broader economy.) Money managers who play with their own and clients' money are voting with their wallets on the prospect that when all talk is over (or, more likely, as it blathers on) interest rates will start rising. "Figuring that the Federal Reserve won't be able to keep a lid on interest rates forever, large money managers such as BlackRock (BLK), TCW Group Inc. and Pacific Investment Management Co. are getting ready for the day when rates take their first turn higher," reports the Wall Street Journal. "It isn't coming anytime soon, these investors say. But when it does, they worry, the ascent will be swift and steep." The moves include: buying floating rate debt, interest-rate swaps and inflation-protected bonds that will increase in value; and shorting U.S. Treasuries. "We don't subscribe to the view that once the fire starts, we'll be able to outrun everybody through the door," Stephen Kane, managing director for U.S. fixed income at TCW in Los Angeles told the Journal. "Rates could be up 50 basis points before your traders can get all the sell orders through." Bloomberg, Wall Street Journal
Just Plain Too Big: One of the greatest absurdities of the post-crisis world is that, in an era when policymakers jawbone about eliminating "too big to fail" banks, those at the top of the financial food chain are bigger (70% of all banking assets are concentrated in a mere dozen institutions) and more unassailable than ever. That's the conclusion of Richard Fisher and Harvey Rosenblum, the president/CEO and executive vice president/director of research, respectively, at the Federal Reserve Bank of Dallas. Writing in this morning's Wall Street Journal, they declare the Dodd-Frank Act a "well-intentioned response" to the problem of ending TBTF that "rings hollow." The immunity of big banks is also the theme of Gretchen Morgenson's weekend New York Times column. In it, she makes the case that Securities and Exchange Commission chairman nominee Mary Jo White found it easier during her years as a federal prosecutor to bring mobsters than big U.S. banks to justice. The Dallas Fed duo's strategy for ending the cycle of welfare bankers includes: limiting their access to deposit insurance at the Federal Reserve's discount window; requiring borrowers to acknowledge in writing that there are never, ever any government guarantees; and restructuring the largest financial holding companies so every one of their corporate entities is subject to a speedy bankruptcy process. Journal Heard on the Street columnist David Reilly offers one other TBTF antidote: As banks grow in size, require them to and hold an increasing percentage of costly long-term debt as a percentage of total liabilities, countering the subsidy of their implied TBTF government guarantee. Wall Street Journal, New York Times
