June 18, 2018

Stocks Soar on Summers Withdrawal

Stock and bond markets around the world jumped on Monday, after Lawrence H. Summers withdrew from consideration as chairman of the Federal Reserve.

The equity surge began in Asia a few hours after Mr. Summers wrote President Obama that “any possible confirmation process for me would be acrimonious” and thus not in the nation’s best interests.

The rally rolled across Europe and gained steam on Wall Street, where the Dow Jones industrial average surged by 1 percent, before pulling back modestly. It closed at 15,495, up nearly 0.8 percent, or about 119 points. The broad-based Standard Poor’s 500-stock index was up 0.6 percent for the day.

Mr. Summers’s unexpected move on Sunday came shortly before the American central bank meets to decide whether to scale back its bond purchases, or quantitative easing, from the current pace of $85 billion a month.

The decision left many analysts’ short list for leading candidates for the Fed leadership down to just Janet L. Yellen, the current No. 2 under the chairman, Ben S. Bernanke, whose term expires in January.

Ms. Yellen was perceived by some in the financial markets as likely to maintain the current course, rather than move quickly to scale back the Fed’s years-long economic stimulus efforts.

Christian Schulz, an economist in London with Berenberg Bank, said investors’ concerns about Mr. Summers stemmed from the fact that he had not spoken much on the topic of monetary policy, while Ms. Yellen had a long track record of supporting Mr. Bernanke’s policies.

Mr. Summers “seemed less convinced that such a blunt instrument as quantitative easing was the right tool,” Mr. Schulz said. “It was clear he wasn’t as big a fan.”

“It seems likely that President Obama will choose Yellen, which is good in terms of the prospects of the Fed staying on hold for some time,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York, according to Reuters.

“Of course, there are always chances that the Fed may begin to announce the trimming on Wednesday, but that’s already been baked in the market,” Mr. Cardillo said.

Mohamed El-Erian, the chief executive of the investment firm Pimco, said in a blog post that the Summers move would be seen “as bullish for U.S. interest rate curve trades, duration more generally, and risk assets (including credit and equities).”

The main Hong Kong stock index pushed ahead 1.5 percent, while Germany’s DAX reached a new high, gaining 1.1 percent.

But emerging markets were the most relieved by Mr. Summers’s retreat. Equity indexes in Indonesia (up 3.4 percent), the Philippines (2.8 percent), Argentina (2.1 percent) and Singapore (1.9 percent) were among the sharpest gainers.

Their rallies underscored the widespread belief that the “Bernanke bubbles” have helped bolster the emerging markets. Fears that the cheap money would dry up have prompted turmoil in recent weeks.

Still, many Fed watchers believed the policy differences between Ms. Yellen and Mr. Summers were not substantive. Both would be concerned about the sustained levels of high unemployment and likely to tap the brakes on stimulus slowly. In that sense, the market euphoria Monday was surprising to some.

The United States currency fell marginally against other major currencies, with the euro gaining 0.33 percent against the dollar, to $1.3338, and the dollar falling against its Japanese counterpart to 99.10 yen.

Analysts at BNP Paribas wrote that there had been a “knee-jerk sell-off” of the dollar on the Summers news, but that it would not last. By far, they said, the most important factor in the currency market was the Fed’s policy announcement on Wednesday.

David Jolly contributed reporting from Paris.

Article source: http://www.nytimes.com/2013/09/17/business/daily-stock-market-activity.html?partner=rss&emc=rss

Rally Continues, Fanned by the Fed

The stock market, which has been marching higher for a week, got extra fuel on Thursday after the chairman of the Federal Reserve said the central bank would keep supporting the economy.

The Dow Jones industrial average and Standard Poor’s 500-stock index surged to nominal highs, and the yield on the 10-year Treasury note continued to decline.

Stocks from companies that benefit most from a continuation of low interest rates, like home builders, recorded some of the biggest gains.

The Fed chairman, Ben S. Bernanke, made the comments in a speech late Wednesday after American markets had closed, saying the economy needed the Fed’s easy-money policy “for the foreseeable future.”

The economy needs help because unemployment is high, Mr. Bernanke said. His remarks seemed to ease investors’ fears that the central bank would pull back on its economic stimulus too quickly.

The Fed is buying $85 billion a month in bonds to keep interest rates low and to encourage spending and hiring.

Stock index futures rose overnight. Stocks surged when the market opened on Thursday and stayed high for the rest of the day.

“It’s back to the old accommodative Fed, so the markets are happy again,” said Randy Frederick, managing director of Active Trading and Derivatives at the Schwab Center for Financial Research.

The market pulled back last month after Mr. Bernanke laid out a timetable for the Fed to wind down its bond-buying program. He said the central bank would most likely ease back on its monthly purchases if the economy strengthened sufficiently.

On Thursday, the S. P. 500 index jumped 22.40 points, or, 1.4 percent, to 1,675.02, surpassing its previous high close of 1,669 from May 21. The index rose for a sixth consecutive day, its longest streak in four months.

The Dow rose 169.26 points, or 1.1 percent, to 15,460.92, above its own previous high of 15,409, set May 28.

The Nasdaq composite rose 57.55 points, or 1.6 percent, to 3,578.30.

In government bond trading, the benchmark 10-year Treasury note increased 27/32 to 92 29/32; its yield fell to 2.57 percent, from 2.67 percent on Wednesday. The yield was as high as 2.74 percent on Friday after the government reported strong hiring in June. Many traders took that report as a signal that the Fed would be more likely to slow its bond purchases sooner rather than later.

The Fed has also said it plans to keep short-term rates at record lows, at least until unemployment falls to 6.5 percent. Mr. Bernanke emphasized on Wednesday that the level of unemployment was a threshold, not a trigger. The central bank might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.

Corporations began reporting earnings this week for the second quarter, which ended 11 days ago. SP Capital IQ forecast that companies in the S. P. 500 would report average earnings growth of 3 percent compared with the second quarter last year.

The price of gold gained for a fourth straight day, climbing $32.70, or 2.6 percent, to $1,280.10 an ounce, after falling close to a three-year low. Gold is rising because the prospect of continued stimulus from the Fed could weaken the dollar and increase the risk of inflation. That, in turn, increases the appeal of gold as an alternative investment.

Article source: http://www.nytimes.com/2013/07/12/business/daily-stock-market-activity.html?partner=rss&emc=rss

Stocks End Higher

Wall Street stocks rose in a volatile session on Monday as investors were reluctant to make large bets going into an earnings season that is expected to be lackluster.

The Standard Poor’s 500-stock index ended 0.6 percent higher, while the Dow Jones industrial average rose 0.3 percent and the Nasdaq composite index added 0.6 percent.

Earnings forecasts have been scaled back heading into first-quarter reports. Profits from companies in the S.P. 500 are expected to have risen just 1.6 percent from a year ago, according to Thomson Reuters data, down from a 4.3 percent forecast in January.

A weaker-than-expected jobs report on Friday prompted concern that the American economy is in a slow patch.

Despite those headwinds, the loose monetary policy from central banks around the world continues to attract investors to equities, said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

“It’s all about easy money, and it’s lifting equities around the globe at this time,” Mr. Cardillo said.

The Bank of Japan started its bond purchases after it announced last week that it would inject about $1.4 trillion into the economy in less than two years.

In the United States, the Federal Reserve’s bond-buying program has been a significant catalyst of the recent rally that has sent major indexes to record levels.

Still, markets in the United States could see a technical correction of about 6 to 8 percent in the latter part of the month as the focus turns to corporate results, Mr. Cardillo said.

Alcoa, JPMorgan Chase and Bed Bath Beyond are among the first major companies set to announce results this week.

Ben S. Bernanke, chairman of the Federal Reserve, will give a speech after markets close on Monday. Investors have been watching for any insight into the Fed’s thinking on how long the central bank will keep its asset purchase program in place as it tries to bolster the economic recovery.

General Electric said it will buy oil field services provider Lufkin Industries for about $3.3 billion, sending Lufkin shares up 38 percent. G.E. slipped 0.2 percent.

Investors will be keeping an eye on the latest developments out of the euro zone after a constitutional court in Portugal overturned key austerity measures in the government’s latest budget. Portugal’s prime minister said the government would cut spending to meet targets agreed with its lenders. European stock markets ended largely unchanged.

Article source: http://www.nytimes.com/2013/04/09/business/daily-stock-market-activity.html?partner=rss&emc=rss

DealBook: Banks Pass Fed’s Tests; Critics Say It Was Easy

Ben Bernanke, chairman of the Federal Reserve, at a House panel last month.Carolyn Kaster/Associated PressBen Bernanke, chairman of the Federal Reserve, at a House panel last month.

9:00 p.m. | Updated

Four years after the financial crisis, federal regulators said that many of the nation’s largest banks were better prepared to sustain future market shocks, paving the way for the healthiest institutions to increase their dividends and buy back shares.

The results of so-called stress tests, released on Thursday by the Federal Reserve, indicate that most large banks would survive a severe recession and a crash in the markets. The tests, which measured a bank’s capital levels during adverse conditions, help validate the government’s efforts to shore up the financial systems.

But some analysts contend that the Fed was still too lenient with the banks. The stress tests, they argue, underestimate potential losses and the effects of several major financial firms collapsing, which can paralyze the entire system.

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“The stress tests were just not very stressful,” said Rebel A. Cole, a professor of finance at DePaul University.

With the industry’s health improving, analysts predict that most big banks will now secure the Fed’s blessing to return money to shareholders, including some unexpected candidates. Citigroup, for example, outperformed its rivals in the test just one year after a poor performance embarrassed the bank and thwarted its plans to distribute capital to shareholders.

This year, Citigroup did not wait long to celebrate. Minutes after the results were released, the bank announced that it asked the Fed’s permission to carry out $1.2 billion in stock buybacks through the first quarter of 2014.

Other banks did not fare as well. Ally Financial, which is majority-owned by the taxpayers since the crisis, burned through nearly all its buffer under the test, which assessed how much capital would remain at the end of 2014 once banks were subjected to hefty losses.

Morgan Stanley and JPMorgan Chase also produced some of the lowest capital results among large Wall Street firms. Goldman Sachs would suffer $25 billion in trading losses under the test. The results were not unexpected; all three firms have significant trading operations that can rack up big losses in turbulent times.

The test results provided an important snapshot of the financial system more than four years after the banking industry was on the brink of collapse. Regulators hailed the industrywide improvements, underscoring what they portend for consumers and the economy.

“The stress tests are a tool to gauge the resiliency of the financial sector,” a Federal Reserve governor, Daniel K. Tarullo, said in a statement. “Significant increases in both the quality and quantity of bank capital,” he said, helps “ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”

Investors will pore over the results, scanning for hints about how much money banks can return to shareholders. After the crisis, regulators prevented lenders like Citigroup and Bank of America from increasing their dividends or repurchasing shares, forcing them instead to hoard capital to absorb losses.

Behind the scenes, the Fed will now signal to each bank whether it can proceed with new payout plans, potentially creating a tense face-off with regulators. If the Fed objects, a bank will have an opportunity to temper its proposals for dividend payments and share buybacks before the plans are released publicly next Thursday.

The stress tests have already caused tension between regulators and banks. The results, which reveal in some detail the losses that banks will suffer under times of stress, prompted wrangling with the Fed over how to conduct the tests and how much data to release.

In another sign of friction, the banks had to run the same test as the Fed — and in some cases produced rosier results. Wells Fargo reported a projected 9.2 percent Tier 1 common ratio, the primary measure of financial strength tracked by regulators, by the end of 2014. That was far higher than the 7 percent calculated by the Fed.

Bank of America’s outlook also trumped regulators’ findings, while Citigroup’s forecast hewed closely to the Fed. Those sorts of discrepancies may feed suspicions that financial firms are overly optimistic about their businesses.

In its overhaul of the regulatory system after the crisis, Congress mandated stress tests to provide an annual health check for the same banks that brought the economy to its knees. The Fed’s tests take banks through a series of adverse conditions, not unlike the last crisis. The tests estimated that 18 banks sustain combined losses of $462 billion, in a period of considerable financial and economic stress in which unemployment soars, stock prices halve and house prices plummet more than 20 percent.

But, to some banking analysts, the tests did not fully capture some forces and events that occur during economic and market shocks. For instance, Wall Street firms may lose access to short-term loans critical to their survival. It is almost impossible to project the impact of the rapid collapse of one or two large financial firms, as in 2008, when Lehman Brothers and American International Group imploded.

Mr. Cole of DePaul said the projected losses on loans appeared too low for the severity of the imagined cases. “If we really had an economic crisis of this magnitude, the loss rates would be at least double on the real estate loans,” he said.

The numbers also show that, over the last year, the Fed has cut its loss projections for certain types of loans. Last year, it projected a 9.5 percent loss rate on Wells Fargo’s mortgages, but this year that dropped to 7.1 percent. The Fed declined to comment on specific banks, but a senior official said lower loss rates were the result of an improvement in the overall quality of the banks’ loan portfolios.

Still, some analysts cheered the results, saying they confirmed the increasing optimism among investors. Bank stocks have risen sharply in recent months, gains that could continue on the heels of the stress tests.

“It’s a very good exercise to do, showing everyone that the U.S. banking system is well capitalized,” said Gerard Cassidy, a banking analyst at RBC Capital Markets.

In a surprise, Citigroup had a projected capital equivalent to 8.9 percent of its assets at the end of 2014, well above last year’s showing. Bank of America’s so-called Tier 1 common capital ratio registered at 6.9 percent, also an improvement.

But Morgan Stanley’s ratio came in at 6.4 percent, temporarily restrained by its purchase of the remaining stake in the Smith Barney retail brokerage joint venture. JPMorgan’s capital levels stood at 6.8 percent. While those banks’ stress test results are lower than rivals, they are still strong capital numbers amid a crisis.

On one important alternative measure of capital, Goldman Sachs had a poor showing compared with its peers. Under the stressed case, the bank’s Tier 1 leverage ratio — another measure of capital strength that treats assets more conservatively — would fall to a low of 3.9 percent.

This could become an issue in any discussions between Goldman and the Fed about the bank’s capital plan. When regulators assess whether a bank can proceed with its capital plan, the Tier 1 leverage ratio cannot fall below 3 percent. Goldman’s own test showed the ratio falling to only 5.1 percent.

Article source: http://dealbook.nytimes.com/2013/03/07/feds-stress-tests-point-to-banks-improving-health/?partner=rss&emc=rss

Home Sales and Bernanke Calm Market

The stock market rebounded on Tuesday from its worst decline since November after the chairman of the Federal Reserve, Ben S. Bernanke, defended the Fed’s bond-buying stimulus and sales of new homes hit a four-and-a-half-year high.

The Standard Poor’s 500-stock index had climbed 6 percent for the year and came within reach of its highs before the minutes from the Fed’s January meeting were released last Wednesday. Since then, the S. P. 500 has fallen 1 percent.

Mr. Bernanke, in testimony on Tuesday before the Senate Banking Committee, strongly defended the Fed’s bond-buying stimulus program and quieted rumblings that the central bank may pull back from its stimulative policy measures, which were set off by the release of the Fed minutes last week.

Mr. Bernanke’s comments helped ease investors’ concerns about a stalemate in Italy after a general election failed to give any party a parliamentary majority. Concern about the threat of prolonged instability and financial crisis in Europe sent the S. P. 500 to its worst decline since Nov. 7 in Monday’s session.

Mr. Bernanke “certainly said everything the market needed to feel in order to get comfortable again,” said Peter Kenny, managing director at Knight Capital.

“The fear is we were going to see a rollover, and the first shot over the bow was what we saw out of Italy yesterday with the elections,” Mr. Kenny said. “When it came to U.S. markets, we saw some of that bleeding stop because our focus shifted from the Italian political circus to Ben Bernanke.”

Gains in homebuilders and other consumer stocks, after strong economic data, lifted the S. P. 500, and a 5.7 percent jump in Home Depot to $67.56 pushed up the Dow Jones industrial average. The PHLX housing sector index rose 3.2 percent.

Economic reports that showed strength in housing and consumer confidence also supported stocks. Home prices rose more than expected in December, according to the S. P./Case-Shiller index. Consumer confidence rebounded in February, jumping more than expected, and new-home sales rose to their highest in four and a half years in January.

But Mr. Bernanke also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a “significant headwind” for the economic recovery.

The Dow Jones industrial average gained 115.96 points, or 0.84 percent, to 13,900.13. The Nasdaq composite index advanced 13.40 points, or 0.43 percent, to close at 3,129.65.

The S. P. 500 rose 9.09 points, or 0.61 percent, to 1,496.94.

Despite the bounce, the S. P. 500 was unable to move back above 1,500, a closely watched level.

The CBOE Volatility Index, or the VIX, a barometer of investor anxiety, dropped 11.2 percent, a day after surging 34 percent, its biggest percentage jump since Aug. 18, 2011.

The uncertainty caused by the Italian elections continued to weigh on stocks in Europe. The FTSEurofirst-300 index of top European shares closed down 1.36 percent. The benchmark Italian index tumbled 4.9 percent.

Home Depot gave the biggest boost to the Dow and provided one of the biggest lifts to the S. P. 500 after the home improvement chain reported adjusted earnings and sales that beat expectations.

Shares of Macy’s gained 2.78 percent, or $1.07, to $39.59, after the department store chain stated it expected full-year earnings to be above analysts’ forecasts because of strong holiday sales.

In the bond market, interest rates inched higher. The price of the Treasury’s 10-year note slipped 6/32, to 101 1/32, while its yield rose to 1.89 percent, from 1.87 percent late Monday.

This article has been revised to reflect the following correction:

Correction: February 26, 2013

Because of an editing error, an earlier version of this article misidentified the Senate panel before which Ben S. Bernanke, the Federal Reserve chairman, was testifying Tuesday. It was the Banking Committee, not the Finance Committee.


Article source: http://www.nytimes.com/2013/02/27/business/daily-stock-market-activity.html?partner=rss&emc=rss

Economix Blog: Live Blog: Inside the Fed’s 2007 Deliberations

Ben S. Bernanke, chairman of the Federal Reserve.Karen Bleier/Agence France-Presse — Getty Images Ben S. Bernanke, chairman of the Federal Reserve.

On Friday the Federal Reserve released the transcripts of its discussions in 2007, the year the housing market, the financial markets, and the broader economy began to unravel. Reporters from The Times are sharing their findings on what the transcripts reveal in the blog entries and tweets below.

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Article source: http://economix.blogs.nytimes.com/2013/01/18/inside-the-feds-2007-deliberations/?partner=rss&emc=rss

Economic View: Financial Lessons From Four Nations

The recent economic histories of four nations are noteworthy: France, Greece, Japan and Zimbabwe. Each illustrates a kind of policy mistake that could, if we are not careful, presage the future of the United States economy. Think of them as the four horsemen of the economic apocalypse.

Let’s start with Zimbabwe. If there were an award for the world’s worst economic policy, it might well have won it several times over the past decade. In particular, in 2008 and 2009, it experienced truly spectacular hyperinflation. Prices rose so fast that the central bank eventually printed 100 trillion-dollar notes for people to carry. The nation has since abandoned using its own currency, but you can still buy one of those notes as a novelty item for about $5 (American, that is).

Some may find it hard to imagine that the United States would ever go down this route. But reckless money creation is apparently a concern of Gov. Rick Perry of Texas, who is seeking the Republican nomination for president. He suggested in August that it would be “almost treasonous” if Ben S. Bernanke, chairman of the Federal Reserve, were to print too much money before the election. Mr. Perry is not alone in his concerns. Many on the right fear that the Fed’s recent policies aimed at fighting high unemployment will mainly serve to ignite excessive inflation.

Mr. Bernanke, however, is less worried about the United States turning into Zimbabwe than he is about it turning into Japan.

Those old enough to remember the 1980s will recall that Japan used to be an up-and-coming economic superpower. Many people then worried (too much, in my view) that Japan’s rapid growth was a threat to prosperity in the United States, in much the same way that many people worry today (too much, in my view) about rapid growth in China.

The concerns about Japanese hegemony came to a quick end after bubbles in the real estate and stock markets burst in the early 1990s. Since then, Japan has struggled to regain its footing. Critics of the Bank of Japan say it has been too focused on quelling phantom inflationary threats and insufficiently concerned about restoring robust economic growth.

One of those critics was Mr. Bernanke, before he became Fed chairman. Watching Japanese timidity and failures has surely made him more willing to experiment with unconventional forms of monetary policy in the aftermath of our own financial crisis.

The economists in the Obama administration are also well aware of the Japanese experience. That is one reason they are pushing for more stimulus spending to prop up the aggregate demand for goods and services.

Yet this fiscal policy comes with its own risks. The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year. The Standard Poor’s downgrade of United States debt over the summer is a portent of what could lie ahead.  In the long run, we have to pay our debts — or face dire consequences.

To be sure, the bond market doesn’t seem particularly worried about the solvency of the federal government. It is still willing to lend to the United States at low rates of interest. But the same thing was true of Greece four years ago. Once the bond market starts changing its mind, the verdict can be swift, and can lead to a vicious circle of rising interest rates, increasing debt service and budget deficits, and falling confidence.

Bond markets are now giving the United States the benefit of the doubt, partly because other nations look even riskier, and partly in the belief that we will, in time, get our fiscal house in order. The big political question is how.

The nation faces a fundamental decision about priorities. To maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including Social Security, Medicare, Medicaid and the new health care program sometimes called Obamacare. Alternatively, we can preserve the current social safety net and raise taxes substantially to pay for it. Or we may choose a combination of spending cuts and tax increases. This brings us to the last of our cautionary tales: France.

Here are two facts about the French economy. First, gross domestic product per capita in France is 29 percent less than it is in the United States, in large part because the French work many fewer hours over their lifetimes than Americans do. Second, the French are taxed more than Americans. In 2009, taxes were 24 percent of G.D.P. in the United States but 42 percent in France.

Economists debate whether higher taxation in France and other European nations is the cause of the reduced work effort and incomes there. Perhaps it is something else entirely — a certain joie de vivre that escapes the nose-to-the-grindstone American culture.

We may soon be running a natural experiment to find out. If American policy makers don’t rein in entitlement spending over the next several decades, they will have little choice but to raise taxes close to European levels. We can then see whether the next generation of Americans spends less time at work earning a living and more time sipping espresso in outdoor cafes.

N. Gregory Mankiw is a professor of economics at Harvard. He is advising Mitt Romney, the former governor of Massachusetts, in the campaign for the Republican presidential nomination.

Article source: http://feeds.nytimes.com/click.phdo?i=0fd9eed334d7b86e011de0712c0d88f0

Fair Game: Volcker’s Advice for More Financial Reform

That’s why a recent speech by Paul A. Volcker, the former chairman of the Federal Reserve and a voice of reason on matters financial, is so timely and important. Presented last month to the Group of 30, an organization devoted to international economic issues, the speech outlined crucial work that still must be done to safeguard our financial future. “Three Years Later: Unfinished Business in Financial Reform” was the title.

“By now it is pretty clear that it was faith in the techniques of modern finance, stoked in part by the apparent huge financial rewards, that enabled the extremes of leverage, the economic imbalances and the pretenses of the credit rating agencies to persist so long,” Mr. Volcker said in this remarkably candid talk.

The real treasures were found in his to-do list for further reforms. That heavy lifting includes addressing capital requirements (make them tough and enforceable), derivatives (make them more standardized and transparent) and auditors (ensure that they are truly independent by rotating them periodically).

He also spoke of the perils of institutions that are too large or interconnected to be allowed to fail. Calling this the greatest structural challenge facing the financial system, he said we must shrink the risks these companies pose, “whether by reducing their size, curtailing their interconnections or limiting their activities.”

He also saw other economic fault lines, which are worth highlighting because few in Washington or on Wall Street seem willing to discuss them. I asked him last week to elaborate on these hazards.

One is the potential for problems in the huge industry of money market mutual funds, which operates “in the shadows of the banking system,” he said. Although these funds are typically managed conservatively, he said, they are vulnerable to runs, as occurred when Lehman Brothers collapsed.

“Because they are not subject to reserve requirements and capital requirements, they are a point of vulnerability in the system,” he said. “It is really interesting that they did so much lending to European banks. They had to pull back a lot, aggravating the pressures on the European banks.”

Money market funds held $2.63 trillion as of last Wednesday, and, Mr. Volcker said, many people mistakenly think that these funds are as safe as bank accounts. But the safeguards on bank deposits — strong bank capital requirements and federal deposit insurance, for example — do not exist for most money market funds. There is also little official surveillance of the funds’ investment practices.

The sellers of money funds, of course, do not want to face these kinds of regulations or requirements. In a recent letter to the Financial Stability Board, an international organization charged with developing strong regulatory and supervisory policies for financial institutions, the Investment Company Institute said: “We do not believe banklike regulation is appropriate, necessary or workable for funds registered under the Investment Company Act of 1940.”

An alternative, Mr. Volcker said, would be to require money market funds to value their assets every day to reflect market fluctuations. This would put an end to the idea that if you put $1 into a money market fund you will always get $1 out, no matter what.

“It seems to me if you are a mutual fund, you should act like a mutual fund instead of a pseudobank,” he said.

THE other area that cries out for change, Mr. Volcker said, is the nation’s mortgage market, now controlled by Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants.

“We simply should not countenance a residential mortgage market, the largest part of our capital market, dominated by so-called government-sponsored enterprises,” Mr. Volcker said in his speech. “The financial breakdown was in fact triggered by extremely lax, government-tolerated underwriting standards, an important ingredient in the housing bubble.”

While he acknowledges that we cannot eliminate Fannie and Freddie anytime soon, “it is important that planning proceed now on the assumption that government-sponsored enterprises will no longer be a part of the structure of the market,” he said.

Welcome to the kind of straight talk that few in Washington want to hear. “This is an opportunity to get rid of institutions that shouldn’t exist,” he told me. “You ought to be either public or private; don’t mix up private profit-making opportunities with an institution that is going to be protected by the government but not controlled by it.”

Mr. Volcker knows more than a little about Fannie and Freddie; in the late 1960s and early ’70s, when he was an under secretary of the Treasury, he was among the presidential appointees to Fannie Mae’s board, he said.

The government erred, he said, by not putting the operations of Fannie Mae and Freddie Mac on the balance sheet and income statement of the United States. “They didn’t want the mortgage to be a government expenditure,” he said. “It was a volatile thing to put on the budget. They made the wrong choice.”

This is precisely the discussion we should be having on the government’s approach to housing policy. That is, unless you are a fan of the status quo, as many in Washington are, and are comfortable leaving the risk of mortgage losses on taxpayers’ shoulders.

“If the government wants to guarantee mortgages for certain low-income people, O.K., but I wouldn’t do much of it,” Mr. Volcker said. “A public agency intervening in the mortgage market in a limited way doesn’t bother me. But if you want to subsidize the mortgage market, do it more directly than hiding it in a quasi-private institution.”

When a man with the credibility and stature of Mr. Volcker talks, people in positions of power ought to listen. We’ll see if they do.

Article source: http://feeds.nytimes.com/click.phdo?i=8977cb83476fe2ce558e636bfd22e1d4