bernanke

Economix Blog: Politics and Personalities at the Central Banks

April 5, 2013 by NewsMaker Leave a Comment

Before Ben S. Bernanke became chairman of the Federal Reserve, he served on the school board in Montgomery Township, N.J., as it debated whether to raise taxes to build schools.

Book Chat

Talking with authors about their work.

Steve Goldenberg Neil Irwin, author of “The Alchemists: Three Central Bankers and a World on Fire.”

In “The Alchemists: Three Central Bankers and a World on Fire,” Neil Irwin, a columnist for The Washington Post, recounts that Mr. Bernanke, then a professor of economics at Princeton University, ultimately cast the tie-breaking vote in favor of raising taxes.

“Bernanke’s instincts were to side with the low tax group,” a former colleague, Dwight Jaffee, told The Washington Post, “but he would look at the numbers and make computations about whether it made sense to build new schools.”

“He really has faith in doing the numbers right and then living with them,” Mr. Jaffee said.

The book, a history of central bankers as firefighters, is sprinkled with similarly illuminating anecdotes about Mr. Bernanke and his crisis-years peers at the world’s major central banks, particularly Mervyn King of the Bank of England and Jean-Claude Trichet of the European Central Bank.

Mr. Irwin, a former colleague, breathes considerable life into the dry work of central banking. Indeed, the book is most convincing in making an argument that it does not quite make explicitly: that personalities and politics dictate central bank policy as much or more than economic theories.

Following is a condensed transcript of our recent e-mail exchange.

Americans generally view the financial crisis as a domestic event, and it’s already fading from memory. A central message of your book seems to be that it was primarily a European event, and it’s not over yet.

If history teaches one thing, it is that when a severe global financial panic sets in, it can easily bend and warp and metastasize. That’s how what we once quaintly called the subprime crisis came to have such varied effects as banking collapses in Iceland and Ireland and Cyprus, a lost decade for the British economy, and a series of events that nearly unraveled 60 years of progress toward a united and peaceful Europe. At its worst, those types of unpredictable domino effects can lead to some very bad places, of which the Great Depression and World War II are the prime examples. Fortunately nothing nearly that bad has happened this time. But as catastrophic as the 2008 experience was for the U.S. economy and millions of Americans, it was closer to the start of the crisis than the end.

You illustrate in striking detail that the Fed’s efforts during the crisis often were focused on Europe — a point that was little understood at the time in part because of the Fed’s intentional obfuscation. The efforts were necessary because the world runs on dollars. The obfuscation was necessary because the Fed has no mandate to help other countries. Do we need a different system to fight global crises?

On paper, the system of national central banks would seem to be ill-suited for addressing the crisis we faced, and have continued to face, for the last half-decade. In theory, Ben Bernanke is charged with maintaining stability for the U.S. economy, full stop, and what happens beyond our borders is only his concern if it redounds to affect the U.S. economy. But in practice, I found that the global central bankers have an extraordinary ability to think of themselves as part of the same team.

The most concrete example of that is the international swap lines that were first used on large scale in the fall of 2008 and repeatedly extended during acute phases of the European crisis. In simple terms, the Fed would give dollars to the E.C.B. or Swiss National Bank or Swedish Riksbank, and get euros or Swiss francs or Swedish kronor in return, with the transactions to be reversed at a fixed date. Those international central banks would then lend the dollars to banks in their countries, helping to prevent their financial systems from freezing up. At the peak these swap lines totaled $583 billion.

So why was the Fed so comfortable making such vast U.S. taxpayer resources available to the rest of the world? It is deeper than just the various legal guarantees that ensured the swap lines were virtually risk free for the Fed. It also has to do with the bonds formed over years of meals and seminars in Basel, Switzerland, and at various international gatherings. There is a deep-seated attitude of mutual trust.

Central bankers repeatedly underestimated the real-world impact of allowing financial firms to fail during the recent crisis. Mr. King let Northern Rock hit bottom; Mr. Bernanke threw up his hands as Lehman Brothers collapsed; Mr. Trichet made the same mistake several times over. Why was it so hard for central bankers to anticipate a lesson that seems so terribly obvious in retrospect?

After all the activism we’ve seen from the central banks these last few years, it’s easy to forget that these are economists schooled in how the free market ought to work. In most cases, the idea of using central bank resources to rescue banks that are failing due to their own errors violates their basic understanding of how things should be. Sometimes it has been that pro-market ideology that has driven their reluctance to act. Other times it is political constraints; central banks may be designed to be independent from politics, but that doesn’t mean politics don’t matter. For Mr. Bernanke, in the case of Lehman, the reality is that political will for bailouts had worn thin within the Bush administration (and there were no obvious policy tools to rescue Lehman). A central banker is always going to be more comfortable taking action at the outer limits of his authority if he knows political authorities have his back.

Which of the three men would make the best dinner companion?

No question: Mervyn King, the governor of the Bank of England. I am told he is a marvelous dinner companion, charming and erudite, with a twinkle in his eye and a dry wit.

You’ve written that you do not expect Mr. Bernanke to serve a third term as Fed chairman. Do you think he deserves one?

On merit, he has absolutely earned another four years; he has kept the U.S. and world economies from coming unglued. But I also think that central bankers or any high government officials serving for too long can be dangerous. I wonder how much of the Fed’s failure in the period before the crisis can be attributed to the sense that Alan Greenspan, who served for 17 years, was an all-powerful demigod who had mastered the art of managing the U.S. economy. We limit the president to eight years, the F.B.I. director (in theory) to 10 years, and the E.C.B. limits its president to eight years. Eight years for a Fed chairman seems about right to me.

You describe the efforts the financial industry made to secure a second term for Mr. Bernanke, including bank executives like Lloyd Blankfein and Jamie Dimon lobbying senators on his behalf. What should the public make of this relationship between banks and their primary regulator?

It is troubling. I have often found while reporting on financial regulatory issues that many of the strongest defenders of the Fed as an institution also happen to be the people who are paid to lobby for the banking sector. A variation of this seems to exist in many arenas where there is a deeply technical industry that requires intensive regulation, in areas like mining safety and regulation of nuclear plants. One way to make sure regulators are acting in the public’s interest rather than the interest of the regulated industry is to create a strong esprit de corps at the regulator, and the Fed is better at that than most agencies, with a high-functioning environment and maybe less of a revolving door than some places. But it’s far from ideal.

There is a powerful scene near the end of your book: people drinking on an Athens rooftop while neo-Nazis march through the streets below. Contrasting those two sides of Europe, you write that it is the work of central bankers “to bring back a world of economic possibility that would again suppress the ugliest instincts that lurk in the hearts of men.” In your view, where does that work now stand?

We’ve moved past the most intense phase of the crisis. The United States is not going to fall into depression. Europe will probably remain peaceful and united, though the human tragedy in Greece and Spain is already immense and I am less confident of its continued unity than I was before Cyprus flared up. The central bankers have succeeded at getting us past a set of profound threats to human well-being, for now at least. New ones will emerge, and they will be different from those of the past. How should the financial sector be regulated to restore prosperity without pumping up a series of bubbles? How should governments adjust to an epic demographic shift that will stress fiscal policy? How do the central banks disentangle themselves from years of intense activism to prop up economies and rescue banks and restore their place as behind-the-scenes technocrats rather than first responders? The crisis is over in a narrow sense, but the challenges for the central bankers are as great as they have ever been.

Article source: http://economix.blogs.nytimes.com/2013/04/04/politics-and-personalities-at-the-central-banks/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: bernanke, economic theories, panic sets

Federal Reserve, Expected to Continue Stimulus, Tries to Reassure Investors

March 17, 2013 by NewsMaker Leave a Comment

When the Fed’s policy-making committee meets on Tuesday and Wednesday, its members are likely to spend a lot of time talking about the potential costs of the current stimulus campaign. Then the Fed’s chairman, Ben S. Bernanke, will probably seek to reassure investors that the Fed plans to press on.

The central bank is buying $85 billion a month in Treasury and mortgage-backed securities because it wants unemployment to fall more quickly. While recent economic data suggests that growth is quickening, Mr. Bernanke has said that the situation remains unacceptable and that the pace of progress is uncertain.

Mr. Bernanke and the Fed’s vice chairwoman, Janet L. Yellen, “have been abundantly clear in recent commentary that the improvement in the labor market to date falls far short of what they will need to see before reducing monetary policy accommodation,” Joseph LaVorgna, chief United States economist at Deutsche Bank, wrote last week in a note to clients.

Also, the federal government has just embarked on another round of spending cuts, known as sequestration, and the extent of the resulting drag on the economy may not be evident for several months.

“The Fed will not take overt steps to scale back its asset purchases any time soon,” Lou Crandall, chief economist at Wrightson ICAP, a New York-based financial research firm, wrote last week. “The Fed is not going to take any chances until it is sure that we have avoided another spring/summer swoon.”

The central bank has said that it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. It was 7.7 percent in February. The asset purchases are intended to hasten the arrival of that moment by further reducing long-term borrowing costs for businesses and consumers.

Mr. Bernanke built a broad consensus among Fed officials last year in favor of taking both steps, and analysts say that supporters of the policy remain firmly in the majority of the Fed’s 12-member Federal Open Market Committee. Only one official dissented at the most recent meeting in January.

But Fed officials who disagree with the policy, including some who do not hold votes on the committee this year, have become increasingly vocal in their criticisms. And among officials who support the purchases, there is disagreement about how much longer the Fed should keep its foot on the gas.

The focus of those concerns has shifted from the remote threat of inflation to the possibility that low interest rates could destabilize financial markets, in part by encouraging investors to take outsize risks.

Such concerns can dilute the impact of the Fed’s efforts by causing investors to doubt how much longer rates will remain low. In response, Mr. Bernanke and other supporters of the current policies have tried in recent weeks to persuade markets that the purchases will continue because the benefits far outweigh the potential costs. Indeed, Mr. Bernanke argued recently that pulling back could pose even larger risks to stability by weakening the economy.

“In light of the moderate pace of the recovery and the continued high level of economic slack, dialing back accommodation with the goal of deterring excessive risk-taking in some areas poses its own risks to growth, price stability and, ultimately, financial stability,” he said this month. “Indeed, as I noted, a premature removal of accommodation could, by slowing the economy, perversely serve to extend the period of low long-term rates.”

In seeking to persuade markets that it plans to press forward, the Fed must also contend with evidence that the economy is gaining strength. Fed officials projected in December that the economy would expand 2.8 percent to 3.2 percent this year, the fastest growth since the recession. Analysts expect an updated forecast on Wednesday to be modestly more optimistic.

The Fed has said that it will continue to stimulate the economy for an unusually extended period, even as the recovery gains strength. Since the benefits of that policy depend on its credibility, it is searching for ways to communicate more clearly with investors so that expectations of its eventual retreat do not become a premature drag on growth.

“At this stage in the business cycle, central bankers obsess that market participants will expect policy tightening to come sooner and more sharply than is consistent with sustained economic expansion,” said Vincent R. Reinhart, chief United States economist at Morgan Stanley.

Article source: http://www.nytimes.com/2013/03/18/business/economy/federal-reserve-expected-to-continue-stimulus-tries-to-reassure-investors.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: bernanke, mortgage backed securities, stimulus

Economix Blog: Bernanke Defends Stimulus as Necessary and Effective

March 2, 2013 by NewsMaker Leave a Comment

The Federal Reserve’s chairman, Ben S. Bernanke, picked an unusual time to offer his most recent defense of the Fed’s campaign to stimulate the economy: 7 p.m. on a Friday night in San Francisco, 10 p.m. back home on the East Coast.

The basic message was the same as Mr. Bernanke delivered to Congress earlier this week: The Fed regards its current efforts as necessary and effective, and the risks, while real, are under control.

“Commentators have raised two broad concerns surrounding the outlook for long-term rates,” Mr. Bernanke told a conference at the Federal Reserve Bank of San Francisco. “To oversimplify, the first risk is that rates will remain low, and the second is that they will not.”

If rates remain low, it may drive investors to take excessive risks. If rates jump, investors could lose money – not least the Fed.

Regarding the first possibility, Mr. Bernanke said that the Fed was keeping a careful eye on financial markets. But he noted that rates were low in large part because the economy was weak, and that keeping rates low was the best way to encourage stronger growth. “Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading — ironically enough — to an even longer period of low long- term rates,” he said.

At the other extreme, Mr. Bernanke said the Fed could “mitigate” any jump in rates by prolonging its efforts to hold rates down, for example by keeping some of its investments in Treasury and mortgage-backed securities.

Three more highlights from the question-and-answer session after the speech.

1. Mr. Bernanke, asked about the outlook for the Washington Nationals, responded by accurately quoting the “Las Vegas odds” of a World Series appearance: 8/1.

2. Although the decision may be made under a future chairman, Mr. Bernanke said the Fed should continue to offer “forward guidance” — predicting its policies — even after it concludes its long effort to revive the economy.

“Providing information about the future path of policy could be useful, probably would be useful, under even normal circumstances,” he said in response to a question. “I think we need to keep providing information.”

3. Not surprisingly, Mr. Bernanke often is asked to reflect on the financial crisis. He offered something a little different than his normal response on Friday night.

“In many ways, in retrospect, the crisis was a normal crisis,” he said. “It’s just that the intuitional framework in which it occurred was much more complex.”

In other words, there was a panic, and a run, and a collapse – but rather than a run on bank deposits, the run was in the money markets. Improving the stability of those markets is something regulators have yet to accomplish.

Article source: http://economix.blogs.nytimes.com/2013/03/02/different-time-zone-same-defense-for-bernanke/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: bernanke, federal reserve bank, world series

U.S. Signals Support for Japan’s Yen Policy

February 15, 2013 by NewsMaker Leave a Comment

MOSCOW — Ben S. Bernanke, the Federal Reserve chairman, strongly indicated on Friday that the United States did not intend to censure Japan for weakening its currency over the last several months, something that has aided Japanese exporters and angered its competitors.

Mr. Bernanke spoke in brief introductory remarks at a conference in Moscow of the Group of 20, a club of the world’s largest industrial and emerging economies.

At issue are stimulus programs backed by Prime Minister Shinzo Abe, who is also maintaining pressure on the Bank of Japan to keep interest rates near zero and flood the economy with money to support Japanese manufacturers. As a result, the yen has lost about 15 percent of its value against the dollar over the last three months, meaning products produced in Japan, like some Sony electronics or models of Toyota cars, are relatively cheaper.

Japan’s maneuver touched off fears that other countries and the European Union might follow suit in a so-called currency war, which has been the main topic of the Group of 20 meeting here, which runs through Saturday.

Initially, it seemed the world’s largest economies might agree on a firm statement at the end of the meeting to condemn a currency war, or competitive devaluations. This tactic is now widely seen as a beggar-thy-neighbor approach to creating growth that would ultimately harm a global recovery and is understood to be a cause of the lingering nature of the depression in the 1930s.

Mr. Bernanke, an advocate of the loose monetary policy in the United States known as quantitative easing, but also a student of the Great Depression, suggested a distinction should be drawn based on the intention of the monetary easing.

“The United States is using domestic policies to advance domestic agendas,” Mr. Bernanke said, speaking in a gilded and colonnaded chamber in the Kremlin to a round table of the world’s leading central bankers and finance ministers, in addition to President Vladimir V. Putin of Russia.

“We believe that by strengthening the U.S. economy, we are helping to strengthen the global economy as well,” Mr. Bernanke said. “We welcome similar approaches by other countries.” He said he endorsed an earlier statement at the meeting from Christine Lagarde, the director of the International Monetary Fund, who had said the risk of a currency war was “overblown.”

The global recovery has become unbalanced, Mr. Lagarde said in her statement to the group. Developed countries are swooning, while the emerging markets bounced back quickly, and yet such countries, including Russia, have been critical of the stimulus efforts of the developed nations. Japan’s devaluation of the yen is “sound policy,” she said.

“The international monetary system can function effectively if each country follows the right policies for their domestic economies,” she said, ultimately lifting the tide of the global marketplace, she said.

Ms. Lagarde did caution that too bald a ploy to prop up exports would not count as a justified weakening of a currency.

Because loose monetary policy encourages economic growth while also helping exports, critics of such tactics say these are distinctions without a difference.

Germany’s finance minister offered a contrarian view, saying that countries should not use easy money to avoid reducing their deficits over the long term, with measures like reducing government waste.

The Russian finance minister, Anton Siluanov, the host of the meeting, has also been pushing for a strong statement against competitive devaluations in the final communiqué from the forum, expected Saturday. Mr. Siluanov said in his opening remarks that a statement endorsing market mechanisms to set exchange rates would “find a place in the communiqué.”

That reiterated the position of a statement issued by the Group of 7 earlier this week. But it now seems a watered-down version is more likely.

Article source: http://www.nytimes.com/2013/02/16/business/global/g20-forum-moscow.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bank of japan, bernanke, toyota cars

High-Speed Traders Profit at Expense of Ordinary Investors, a Study Says

December 4, 2012 by NewsMaker Leave a Comment

The chief economist at the Commodity Futures Trading Commission, Andrei Kirilenko, reports in a coming study that high-frequency traders make an average profit of as much as $5.05 each time they go up against small traders buying and selling one of the most widely used financial contracts.

The agency has not endorsed Mr. Kirilenko’s findings, which are still being reviewed by peers, and they are already encountering some resistance from academics. But Bart Chilton, one of five C.F.T.C. commissioners, said on Monday that “what the study shows is that high-frequency traders are really the new middleman in exchange trading, and they’re taking some of the cream off the top.”

Mr. Kirilenko’s work stands in contrast to several statements from government officials who have expressed uncertainty about whether high-speed traders are earning profits at the expense of ordinary investors.

The study comes as a council of the nation’s top financial regulators is showing increasing concern that the accelerating automation and speed of the financial markets may represent a threat both to other investors and to the stability of the financial system.

The Financial Stability Oversight Council, an organization formed after the recent financial crisis to deal with systemic risks, took up the issue at a meeting in November that was closed to the public, according to minutes that were released Monday.

The gathering of top regulators, including Treasury Secretary Timothy F. Geithner and Ben S. Bernanke, the Federal Reserve chairman, said in its annual report this summer that recent developments “could lead to unintended errors cascading through the financial system.” The C.F.T.C. is a member of the oversight council.

The issue of high-frequency trading has generated anxiety among investors in the stock market, where computerized trading first took hold. But the minutes from the oversight council, and the council’s annual report released this year, indicate that top regulators are viewing the automation of trading as a broader concern as high-speed traders move into an array of financial markets, including bond and foreign currency trading.

Mr. Kirilenko’s study focused on one corner of the financial markets that the C.F.T.C. oversees, contracts that are settled based on the future value of the Standard Poor’s 500-stock index. He and his co-authors, professors at Princeton and the University of Washington, chose the contract because it is one of the most heavily traded financial assets in any market and is popular with a broad array of investors.

Using previously private data, Mr. Kirilenko’s team found that from August 2010 to August 2012, high-frequency trading firms were able to reliably capture profits by buying and selling futures contracts from several types of traditional investors.

The study notes that there are different types of high-frequency traders, some of which are more aggressive in initiating trades and some of which are passive, simply taking the other side of existing offers in the market.

The researchers found that more aggressive traders accounted for the largest share of trading volume and made the biggest profits. The most aggressive scored an average profit of $1.92 for every futures contract they traded with big institutional investors, and made an average $3.49 with a smaller, retail investor. Passive traders, on the other hand, saw a small loss on each contract traded with institutional investors, but they made a bigger profit against retail investors, of $5.05 a contract.

Large investors can trade thousands of contracts at once to bet on future shifts in the S. P. 500 index. The average aggressive high-speed trader made a daily profit of $45,267 in a month in 2010 analyzed by the study.

Industry profits have been falling, however, as overall stock trading volume has dropped and the race for the latest technological advances has increased costs.

Ben Protess contributed reporting.

Article source: http://www.nytimes.com/2012/12/04/business/high-speed-trades-hurt-investors-a-study-says.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bernanke, oversight council, small traders

DealBook: After Barclays Scandal, Regulators Say Rates Remain Flawed

July 18, 2012 by NewsMaker Leave a Comment

Stephen Crowley/The New York TimesBen S. Bernanke, the chairman of the Federal Reserve, testified before the Senate Banking Committee on Tuesday.

9:06 p.m. | Updated

Federal authorities cast further doubt on Tuesday about the integrity of a key interest rate that is the subject of a growing investigation into wrongdoing at big banks around the globe.

In Congressional testimony, the chairman of the Federal Reserve and the head of the Commodity Futures Trading Commission expressed concern that banks had manipulated interest rates for their own gain. They also indicated that flaws in the system — which were highlighted in a recent enforcement case against Barclays — persist.

“If these key benchmarks are not based on honest submissions, we all lose,”
Gary Gensler, head of the trading commission, which led the investigation into Barclays, said in testimony before the Senate Agriculture Committee.

In separate testimony before the Senate Banking Committee,
Ben S. Bernanke, the Federal Reserve chairman, said he lacked “full confidence” in the accuracy of the rate-setting process.

The Fed faces questions itself over whether it should have reined in the rate-manipulation scheme, which took place from at least 2005 to 2010.

Documents released last week show that the New York Fed was well aware of potential problems at Barclays in 2008. At a hearing in London on Tuesday, British authorities said the New York Fed never told them Barclays was breaking the law.

Mark Wilson/Getty ImagesGary Gensler, the head of the Commodity Futures Trading Commission, testified before the Senate Agriculture Committee on Tuesday.
ReutersMervyn A. King, governor of the Bank of England, addressed a parliamentary committee on Tuesday.

The scrutiny intensified on Tuesday as Representative Randy Neugebauer, chairman of the House subcommittee investigating the Libor scandal, announced plans to seek additional documents from the New York Fed about JPMorgan Chase, Citigroup and Bank of America, the three American banks involved in setting interest rates.

The concerns center on the London interbank offered rate, or Libor, an essential benchmark that affects the cost of borrowing for consumers and corporations. Trillions of dollars in mortgages and other financial products are tied to Libor, which is set daily based on reports from a panel of large banks.

Several government agencies, including authorities in the United States, Canada, Britain and Japan, are examining whether the banks made bogus reports.

Last month, Barclays agreed to settle with the Commodity Futures Trading Commission, the Justice Department and the Financial Services Authority of Britain for $450 million. The British bank was accused of reporting false rates that both bolstered its profits and projected an overly rosy image of its health during the financial crisis.

“The conduct occurred regularly and was pervasive,” Mr. Gensler said on Tuesday.

The actions also happened in plain view of regulators.

In 2008, Barclays informed the New York Fed that it was submitting artificially low rates. The concerns were passed on to
Timothy F. Geithner, then the chief executive of the regulatory body.

But the New York Fed did not tell other authorities in the United States or Europe about the specific problems at Barclays. Instead, it proposed changes to the rate-setting process. At the time, Mr. Geithner recommended in an e-mail that British officials “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport,” according to documents released last week.

“At no stage did he or anyone else at the New York Fed raise any concerns with the bank that they had seen any wrongdoing,” Mervyn A. King, governor of the Bank of England, told a British parliamentary committee on Tuesday, referring to Mr. Geithner.

Mr. King said his discussion with Mr. Geithner did not represent a warning sign about potential illegal activity.

“There was no suggestion of fraudulent behavior,” the British central bank official told Parliament. His colleague Paul Tucker, who also received the e-mail from Mr. Geithner, echoed his statements, saying in testimony that the recommendations “didn’t set off alarm bells.”

Rather, the British central bank passed along the proposed changes to the British Bankers’ Association, a trade group that oversees the rate.

In his testimony on Tuesday, Mr. King said that some of the New York Fed’s recommendations were included in a Libor review conducted by the trade group.

The British Bankers’ Association also sought feedback from the CME Group, the Chicago-based exchange, according to documents provided to The New York Times. In a July 2008 letter, the exchange argued that the plan “must have teeth” and “credibility.”

In late 2008, the British Bankers’ Association adopted changes to the Libor process. But neither the regulators nor the trade group put a stop to Barclays’ illegal activities, which continued through 2009.

On Tuesday, Mr. Bernanke issued a broad defense of the Fed’s actions in 2008 after it learned that banks were misrepresenting interest rates.

“Isn’t there a responsibility to alert the customers?” Senator
Jeff Merkley, Democrat of Oregon and a member of the Banking Committee, asked Mr. Bernanke. “If you had it to do over again, would you also be alerting the customers?”

Mr. Bernanke said it was hardly a secret that Libor was losing credibility. During the financial crisis, the media and the markets were swirling with speculation about problems with the rate-setting process. At the time, the Fed was primarily focused on saving Wall Street from collapse.

“The responsibility of the New York Fed was to make sure that the appropriate authorities had the information, which they did,” Mr. Bernanke said.

The Barclays case was the first to stem from the broader global investigation, which involves more than 10 other banks, including UBS and the Royal Bank of Scotland. While much scrutiny has focused on European banks, authorities are also investigating big Wall Street companies like Citigroup and JPMorgan.

Mr. Gensler on Tuesday said his agency “has and will continue vigorously to use our enforcement and regulatory authorities to protect the public, promote market integrity, and ensure that these benchmarks and other indices are free of manipulative conduct and false information.”

Banks, Mr. Gensler said, “must not attempt to influence” Libor. “It’s just wrong and against the law.”

But the problems may remain, say regulators. On Tuesday, Mr. Bernanke said the benchmark still lacked credibility.

“It’s clear beyond these disclosures that the Libor system is structurally flawed,” he told lawmakers.

Binyamin Appelbaum contibuted reporting.

Article source: http://dealbook.nytimes.com/2012/07/17/after-barclays-scandal-regulators-say-rates-remain-flawed/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bernanke, commodity futures trading commission, gensler

Fed Set to Introduce Communications Policies This Week

January 23, 2012 by NewsMaker Leave a Comment

While the changes could make it easier for the Fed to move ahead with another round of asset purchases later this year, by helping to explain why the economy needs additional stimulus, officials have indicated that any such plans remain on the back burner, and may stay there so long as the economy continues to recover.

Indeed, the Fed is able to focus on communication in part because it is no longer devoting all of its energies to crisis management. These are improvements that the Fed’s chairman, Ben S. Bernanke, has waited five years to make, reflecting his vision for how the Fed should operate in periods of calm, too.

The centerpiece of the new policies is a plan to publish the predictions of senior Fed officials about the level at which they intend to set short-term interest rates over the next three years — including when they expect to end their three-year-old commitment to keep rates near zero. The Fed also will describe the expectations of those officials for the management of the central bank’s vast investment portfolio.

The first forecast will be published after a two-day meeting, starting on Tuesday, of the Federal Open Market Committee, which sets policy for the central bank. The committee also is considering the publication of a statement describing the Fed’s goals for the pace of inflation and level of unemployment, which it has never formalized.

“Our moves toward greater openness in recent years have made our policies more effective and helped the public understand the Fed’s actions better,” John C. Williams, president of the Federal Reserve Bank of San Francisco, said in a recent speech.

Any bolder steps, he said, “will depend on how economic conditions develop.”

This is not the first time the Fed has tried to get past crisis management. And after several false starts in which it overestimated the strength of the recovery, officials have been careful to insist that they still stand ready to do more if necessary.

The economy, after all, is merely muddling along. While economists calculate that fourth-quarter growth was relatively strong, most forecasters expect a much slower pace of growth in the new year. The Fed’s own forecast, which will be updated Wednesday, anticipates growth of up to 2.9 percent. Most other guesses are lower.

Unemployment also remains a deep and prevalent affliction. Almost 24 million Americans could not find full-time work in December; the unemployment rate has ticked downward in part because many people have stopped looking for work.

Senior Fed officials have also sought to focus attention in recent months on the depressed condition of the housing market, arguing that other parts of the government can and should do more to help homeowners and revive sales. Some Fed officials have advocated that the Fed buy large quantities of mortgage-backed securities, which could further reduce interest rates on mortgage loans.

But several Fed officials have said in recent speeches that they are hesitant to support new efforts to improve growth, because they think monetary policy has exhausted most of its power, and because they are worried about inflation.

“Steady even if unspectacular growth accompanied by inflation in the neighborhood of 2 percent justifies some reluctance to change, in either direction, the F.O.M.C.’s accommodative policy,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech this month.

Mr. Lockhart added a standard caveat for Fed officials, that the persistence of high unemployment required the Fed to keep thinking about doing more.

“Now is not a time to lock into a rigid position,” he said.

But Fed officials have made clear that high unemployment is an insufficient cause for additional action, at least as long as inflation remains near 2 percent.

Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in a recent speech that the economy would not create enough jobs to return unemployment to normal levels for “perhaps even four or five years.”

“Sooner, of course, would be better for everyone,” she said. “But I want to be on a path toward full employment that
doesn’t create an inflation problem down the road.”

The communications changes that the Fed plans to announce Wednesday mark the furthest advance in a 20-year-old campaign to increase the transparency of its decision-making as a means to increase the impact of its policies. As recently as the early 1990s, the Fed still did not regularly announce the decisions reached at its policy meetings. Now it plans to start publishing predictions about the outcomes of future meetings to guide investor expectations.

The Fed disclosed its plans this month when it released a description of the committee’s most recent meeting, in December. On Friday it followed up by releasing the templates that will be used to publish the predictions.

The predictions themselves could have a mild effect on markets. The Fed said this summer that it would maintain short-term rates near zero through middle of 2013, at least. Mr. Bernanke has since underscored the words “at least,” and analysts expect the forecast will show that most members of the committee intend to hold rates near zero into 2014.

Pushing back that timetable will tend to reduce interest rates, but the impact is likely to be minor, as asset prices already reflect an expectation that rates will not rise before 2014.

“In policy terms, this is a historic change,” Paul Ashworth, chief North American economist at Capital Economics, wrote in a note to clients. “In practical terms, however, the change isn’t going to have any major impact.”

Article source: http://feeds.nytimes.com/click.phdo?i=26cb1f7aa08ec27f1f256f311fb2e63e

Filed Under: Business News Tagged With: bernanke, fed officials, federal reserve

Economic View: From 6 Economists, 6 Ways to Face 2012 — Economic View

December 31, 2011 by NewsMaker Leave a Comment

At least that’s what the dry statistics keep telling us. Industrial production, G.D.P. — the kind of figures that Washington and Wall Street sweat over — suggest that the economy is on the mend.

Yet if we go beyond the Beltway and the Battery, to where most of American life is lived, the numbers don’t always add up. Yes, the Great Recession officially ended in 2009. But many millions of Americans are out of work or cannot find full-time jobs. Home prices are wobbly. The foreclosure crisis drags on. And the Occupy movement’s campaign against “the 1 percent” has underscored the ravages of income inequality.

It was, as always, a year of ups and downs in business. Washington said the nation’s AAA rating was safe, but Standard Poor’s concluded that it wasn’t. Europe insisted that its currency was sound, but investors worry that it isn’t. Wall Street seemed perpetually on edge. After so many wild days, the American stock market ended 2011 about where it began.

On this side of the Atlantic, aftershocks of the financial crisis of 2008-9 are still reverberating, though the worst has passed. Now, how Europe’s economic troubles play out may determine whether job growth here finally picks up enough to make up for all the lost ground — and whether that 401(k) is richer or poorer next Jan. 1.

Where to go from here? And how to face the challenges ahead? Sunday Business asked the six economists who write the Economic View column to do a little blue-sky thinking on issues as varied as the Fed, Europe and housing. You won’t find stock tips. But if 2011 was any guide, the best advice for 2012 may be this: Hold tight.

Dear Mr. Bernanke:

Please Tell Us More

N. GREGORY MANKIW A professor of economics at Harvard, he is advising Mitt Romney in the campaign for the Republican presidential nomination.

WHAT can we do to get this economy going?

That’s the question Ben Bernanke and his colleagues at the Federal Reserve must be asking. Officially, the recession ended a while ago. But with unemployment lingering above 8 percent, it still feels as if we’re mired in a slump.

The Fed’s typical response to lackluster growth is to reduce short-term interest rates. To its credit, it did that — quickly and drastically — as the recession unfolded in 2007 and 2008. Then it took various unconventional steps to push down long-term rates, including those on mortgages. Mr. Bernanke deserves more credit than anyone for preventing the financial crisis from turning into a second Great Depression.

Now, the key will be managing expectations. Financial markets always look ahead, albeit imperfectly. They not only care what the Fed does today but also about what it will do tomorrow. With official short-term rates already near zero, what the Fed does this year will be less important than what policy makers say they will do next year — or the year after that.

A crucial question is how quickly the Fed will raise interest rates as the economy recovers. So far, Fed policy makers have said they expect to keep rates “exceptionally low” at least until mid-2013. There has even been talk about extending that time frame by a year, to mid-2014.

But Charles I. Plosser, the president of the Federal Reserve Bank of Philadelphia, was right when he said recently that “policy needs to be contingent on the economy, not the calendar.” The key to managing expectations will be spelling out this contingency plan in more detail. That is, what does the Fed need to see before it starts raising rates again?

Unfortunately, economists don’t offer simple and unequivocal advice. Some suggest watching the overall inflation rate. Others say to watch inflation, but to exclude volatile food and energy prices. And still others advise targeting nominal gross domestic product, which weights inflation and economic growth equally.

Forging a consensus among members of Federal Open Market Committee, which sets monetary policy, won’t be easy. In fact, it may well be impossible. But the more clarity the Fed offers about its contingency plans, the better off we’ll all be in the years ahead.

Two Big Problems,

Two Ready Solutions

CHRISTINA D. ROMER An economics professor at the University of California, Berkeley, she was chairwoman of President Obama’s Council of Economic Advisers.

THE United States faces two daunting economic problems: an unsustainable long-run budget deficit and persistent high unemployment. Both demand aggressive action in the form of fiscal policy.

Waiting until after the November elections, as seems likely, would be irresponsible. It is also unnecessary, since there are plans to address both problems that should command bipartisan support.

On the deficit, the big worry isn’t the current shortfall, which is projected to decline sharply as the economy recovers. Rather, it’s the long-run outlook. Over the next 20 to 30 years, rising health care costs and the retirement of the baby boomers are projected to cause deficits that make the current one look puny. At the rate we’re going, the United States would almost surely default on its debt one day. And like the costs of maintaining a home, the costs of dealing with our budget problems will only grow if we wait.

We already have a blueprint for a bipartisan solution. The Bowles-Simpson Commission hashed out a sensible plan of spending cuts, entitlement program reforms and revenue increases that would shave $4 trillion off the deficit over the next decade. It shares the pain of needed deficit reduction, while protecting the most vulnerable and maintaining investments in our future productivity. Congress should take up the commission’s recommendation the first day it returns in January.

But we can’t focus on the deficit alone. Persistent unemployment is destroying the lives and wasting the talents of more than 13 million Americans. Worse, the longer that people remain out of work, the more likely they are to suffer a permanent loss of skills and withdraw from the labor force.

Article source: http://feeds.nytimes.com/click.phdo?i=9a328f6d952748bcfedd47d67e540dc4

Filed Under: Economy News Tagged With: bernanke, dry statistics, economic troubles

Markets Rebound but Remain on Edge

November 2, 2011 by NewsMaker Leave a Comment

Stocks pushed higher in the United States and Europe on Wednesday, as investors weathered some of the uncertainty over developments in the euro zone.

While stocks closed more than 1 percent higher in Europe and were up somewhat less on Wall Street, analysts said it was too early to declare a recovery in store for global financial markets, which had plummeted on Tuesday after the surprise announcement that Greece was planning a referendum on its latest bailout package.

The gains took place even as the tremors from Europe continued.

On Wednesday, “market conditions” caused a $3 billion bond offering by Europe’s bailout fund to be delayed, according to a spokesman quoted by news agencies. That delay caused an early rally in European stocks to fizzle and kept up pressure on debt of some countries with weaker economies, according to strategists at Brown Brothers Harriman.

Italian 10-year yields were stuck above 6 percent, for example.

But the crisis continued to rotate around developments in Greece. On Wednesday, an emergency cabinet meeting convened by the Greek prime minister, George Papandreou, ended with unanimous support for the government, according to local news outlets. Still, the opposition and some members of Mr. Papandreou’s own party called for new elections immediately.

Euro zone officials, including Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, were holding talks on the eve of a Group of 20 nations summit meeting in Cannes, France.

Meanwhile, in the United States, policymakers from the Federal Reserve said “strains” in global financial markets were among the “significant downside” risks to the nation’s economic outlook, but they announced no new measures to stimulate growth.

Most analysts had expected the Fed chairman, Ben S. Bernanke, and his colleagues on the bank’s Federal Open Markets Committee to leave its main policies unchanged.

In early afternoon trading, the stock market eased back from earlier gains. TheStandard Poor’s 500 index was up 0.8 percent, after dropping 2.8 percent on Tuesday. The Dow Jones industrial average was up 0.8 percent and the Nasdaq composite index rose 0.4 percent.

The benchmark 10-year United States note yield was 2.00 percent, compared with 1.97 percent on Tuesday.

The Euro Stoxx 50 index, a barometer of euro zone blue chips, closed up 1.4 percent, while the FTSE 100 index in London rose 1.15 percent. The German Dax was up 2.25 percent and the CAC 40 in Paris rose almost 1.4 percent.

“Markets are seriously pondering a disorderly default in Greece and risk assets are tanking,” said analysts at Crédit Agricole CIB in a note to clients. “There is little prospect of any turnaround today unless officials can pull a rabbit out of the hat today, but even the rabbit is likely to remain elusive.”

The analysts said that investor sentiment was also hurt by weaker-than-expected Chinese manufacturing data released Tuesday.

Asian shares were mixed. The Tokyo benchmark Nikkei 225 stock average fell 2.2 percent. The Sydney market index S. P./ASX 200 fell 1.1 percent. In Shanghai the composite index rose 1.4 percent, while the Hang Seng index in Hong Kong closed 1.9 percent higher.

The currency market is likely to remain jumpy, the analysts at Crédit Agricole wrote, as worries over Mr. Papandreou’s proposed referendum will probably persist for some time.

“The fact that this referendum may not take place until January will bring about a prolonged period of uncertainty and further downside risks for the euro against the U.S. dollar,” they said.

In the early afternoon in New York, the euro was up to $1.3724 from $1.3703 late Tuesday.

United States crude oil futures for December delivery rose 0.2 percent to $92.42 a barrel. Comex gold futures rose 0.9 percent to $1,727.8 an ounce.

David Jolly contributed reporting from Paris and Kevin Drew from Hong Kong.

Article source: http://www.nytimes.com/2011/11/03/business/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bernanke, france, surprise announcement

Fed Committee Even More Divided, Minutes Show

October 12, 2011 by NewsMaker Leave a Comment

The Federal Open Market Committee voted at the end of a two-day meeting in September to begin a new effort to reduce long-term interest rates, allowing businesses and consumers to borrow more cheaply.

The Fed disclosed at the time that three members of the 10-person board had voted against the decision. The minutes released Wednesday record that on the other side, two members wanted the Fed to take even stronger action.

The internal divisions were partly the product of a lack of clarity about the health of the economy. In its predictions since the end of the recession, the Fed has repeatedly overestimated the pace of economic growth, and the minutes report that the board does not understand why it has been wrong.

“It was again noted that the cyclical impetus to economic expansion appeared to be weaker than in past recoveries, but that the reasons for the weakness were unclear,” the minutes said.

The Fed announced in August that it intended to maintain short-term interest rates near zero for at least two more years. In September, it announced an effort to further reduce long-term interest rates by moving $400 billion from investments in short-term Treasury securities to longer-term Treasury securities. Both policies aim to cut borrowing costs for businesses and consumers.

The Fed’s chairman, Ben S. Bernanke, has made clear that the central bank is willing to keep trying to bolster the economy if necessary, but also that there will be a high bar for further action. In particular, he has said that the Fed is most likely to act if the pace of inflation abates to the point where there is a risk of declining prices and wages. Such deflation would damage growth.

The minutes, which are normally released three weeks after a policy decision, made clear that the Fed had not changed its view that the pace of inflation was likely to remain at roughly 2 percent a year, the rate that the Fed considers most healthy.

“Participants generally judged that there was relatively little risk of deflation,” the minutes said.

In the absence of any fear of deflation, the minutes suggested that the Fed was unlikely to seriously consider another round of asset purchases, the most powerful arrow left in its quiver.

The minutes do note, however, that “a number of participants” said that they regarded such a plan as “a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”

The minutes do not disclose the names of the two members who favored stronger action, although one obvious candidate is Charles L. Evans, president of the Federal Reserve Bank of Chicago, who has argued publicly that the Fed should move more aggressively to stimulate the flagging economy.

The names of the three dissenters, however, are public: Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. They argued that the Fed’s actions were unlikely to help the economy and would increase the chances of a faster pace of inflation.

The committee next meets on Nov. 1 and 2.

Article source: http://feeds.nytimes.com/click.phdo?i=cd4336a7f4cf5bc36d0617c4bc782faa

Filed Under: Business News Tagged With: bernanke, deflation, recession