January 16, 2021

Wall Street Slips Amid Fed Policy Jitters

Stocks on Wall Street slipped on Monday as upbeat economic data from Germany and China was countered by a Federal Reserve official’s remarks that the Fed could begin to scale back its stimulus measures this year.

In late morning trading, the Standard Poor’s 500-stock index was down 0.7 percent, while the Dow Jones industrial average fell 0.4 percent and the Nasdaq composite was off 0.7 percent.

Germany’s private sector grew in September at its fastest rate since January, and a survey showed Chinese manufacturing activity accelerated to a six-month high in September, giving equities relative support.

Referring to the timeline that the Fed chairman, Ben S. Bernanke, articulated in June, William C. Dudley, the president of the Federal Reserve Bank of New York, said the framework is “still very much intact.”

Investors were surprised last week when the Fed decided not to reduce the asset purchases from the current $85 billion monthly pace after many expected a change in policy would come in September.

Other Fed officials will be on the speakers’ circuit on Monday. Investors will be paying close attention after James B. Bullard, chief of the St. Louis Fed, said on Friday that policy makers could still decide to start trimming the central bank’s stimulus in October if inflation and unemployment data warrant it.

“We had some good news out of China and Europe and the elections in Germany are favorable for the euro zone, but focus remains on the Fed,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. “Fed speakers are going to keep this market on edge, will continue to keep it guessing when they will begin to taper.”

The S. P. 500 and Dow industrials hit record highs last week after the Fed ignored investor expectations by postponing the start of the wind down of its massive monetary stimulus, saying it wanted to wait for more evidence of solid economic growth.

The prospect of a government shutdown or even a default in the coming weeks could keep markets jittery even as Wall Street analysts sense the current drama is likely to feature more bluster than bravado.

Apple shares gained 4.1 percent, building on momentum from last week, after it said it sold nine million iPhone 5s and iPhone 5c models over the weekend since their launch on Friday.

Citigroup led the S. P.’s financial sector lower a day after The Financial Times reported that Citi had a significant drop in trading revenue during the third quarter, which could hurt the bank’s earnings. Shares in Citigroup fell 3 percent.

United States-traded shares of BlackBerry fell 5.8 percent after the Canadian smartphone maker announced on Friday a change in focus away from the consumer in favor of businesses and governments. The move has fueled fears about BlackBerry’s long-term viability.

German shares closed lower though they remained near last week’s record high a day after Chancellor Angela Merkel won a landslide victory in the general election. Her conservatives may need center-left rivals to form a coalition government.

European stocks hit a five-year high last week, and Nick Beecroft, chairman and senior market analyst for Saxo Bank capital markets, said Ms. Merkel’s election win was “a ringing endorsement” to ensure the euro survives.

Ms. Merkel’s victory gave the euro only the briefest of lifts, however, because she still needs a new coalition partner to rule.

Having initially gained a quarter of an American cent, to $1.3555, the euro faded to $1.3492.

In Asia, shares in Shanghai gained 1 percent while Hong Kong’s Hang Seng index slipped 0.6 percent. Australian shares were down 0.5 percent, and Japanese markets were closed for a holiday.

Benchmark crude oil continued its slide, reflecting increasing confidence over supplies, down $1.43 a barrel, at $103.32.

Article source: http://www.nytimes.com/2013/09/24/business/daily-stock-market-activity.html?partner=rss&emc=rss

Political Memo: Fed Chairman Change Casts New Light on Bush Era

Although President Obama has been Mr. Bernanke’s partner in an effort to steer the economy through a financial crisis, deep recession and recovery, so was the man who put Mr. Bernanke in the job in the first place: Mr. Bush.

“Ben Bernanke, along with George Bush and Barack Obama, saved us from another Great Depression,” said Senator Charles E. Schumer, Democrat of New York, echoing the views of others in his party. “Twenty years from now, that’s what history will say about all three of them.”

That’s the same Mr. Schumer who in 2008 ripped Mr. Bush’s “disastrous course.”

It is a reminder that the administrations of all presidents, sometimes unpredictably, have tails that extend long past their terms in office. And it provides some encouragement for Mr. Obama as he seeks to leave a mark on the 21st century economic debate — even if he cannot fulfill his agenda before leaving office.

The catalog of Mr. Bush’s economic sins has long been an article of faith among Democrats: tax cuts for the rich that turned budget surpluses into deficits, widening income inequality, slow wage growth, a hands-off approach to regulation that ended with the crash of the housing market and Wall Street. And not just among Democrats: Mr. Bush limped out of office with only about one-third of Americans approving of his performance.

But the momentary snapshot that political rhetoric encapsulates is only part of any president’s story. Because of the Fed’s vast influence over the economy — rivaling or exceeding that of presidents — selecting a chairman may be the single most consequential economic decision a chief executive can make.

On the day in 2005 that he appointed Mr. Bernanke, an academic expert on the Depression, Mr. Bush noted the Fed chairman’s responsibility “for containing the risk that can arise in financial markets.”

Today, few question Mr. Bernanke’s success in helping contain the risks he confronted.

“On economic issues, Bush was not an ideologue,” said Mr. Schumer, who in 2006 led Senate Democrats to recapture the majority and roadblock the Republican president’s domestic agenda. “On his most important economic appointment, he showed who he was.”

Henry Paulson, Mr. Bush’s last Treasury secretary, praised Mr. Bernanke — reappointed by Mr. Obama in 2009 — for helping produce the “enormous accomplishment” of slow but steady economic growth for the last few years even as American consumers were “de-levering” themselves of debt. As the country nears the fifth anniversary of the financial crisis, Mr. Paulson said that Mr. Bush’s critics ignored the reality that the underlying causes of the crisis were decades in the making. He said that Mr. Bush deserved more credit than he has received for Mr. Bernanke and for resisting the partisan and ideological polarization of Washington when the two stared into the economic abyss.

“It’s a big part of his legacy,” Mr. Paulson said.

Over conservative resistance, Mr. Bush backed the bailout mechanisms for Wall Street and the auto industry that Mr. Obama later would put into effect. “He put the political considerations aside and approved taking actions that he knew would be very unpopular with his base,” Mr. Paulson said.

Still, there is no guarantee that Mr. Bush’s appointment of Mr. Bernanke will burnish the former president’s historical reputation, as veterans of President Jimmy Carter’s administration can ruefully attest. The former domestic policy adviser Stuart E. Eizenstat recalls that Mr. Carter appointed Paul Volcker as chairman of the Fed in 1979, knowing full well that the interest rate increases he planned to tame inflation would harm Mr. Carter’s re-election bid.

Article source: http://www.nytimes.com/2013/07/27/us/politics/fed-chairman-change-casts-new-light-on-bush-era.html?partner=rss&emc=rss

Fed Chief Again Declines to Set Timetable for Stimulus End

Mr. Bernanke, appearing before the Senate a day after he testified before the House, largely repeated the themes and often the words of Wednesday’s testimony.

He said that the Fed had not slackened in its commitment to stimulate the economy and that it would cut back only if the economy was making progress. He also chastised Congress, saying it was impeding economic growth. And he demurred from talking about his own future, choosing instead to listen quietly as senator after senator spoke about him as one speaks of the departed.

This may have been Mr. Bernanke’s final appearance before Congress as Fed chairman. He is widely expected to step down in January.

The expected departure is beginning to erode Mr. Bernanke’s status as a spokesman for the Fed, particularly regarding decisions that most likely will be made without him.

Senator Charles E. Schumer, Democrat of New York, asked Mr. Bernanke about the apparent fragmentation among Fed officials over the question of how much longer the Fed should continue its current bond-buying campaign.

The central bank is adding $85 billion a month to its holdings of Treasury securities and mortgage-backed securities to encourage job creation.

Mr. Bernanke has said that the Fed expects to reduce the volume of its bond-buying later this year, and to end purchases by the middle of next year, as long as economic growth remains “broadly” in line with the Fed’s expectations.

“We have given some fairly specific qualitative guidance about what we’re looking for,” he said on Thursday. Specifically, the Fed wants the unemployment rate to decline from the current rate of 7.6 percent to a rate “in the general vicinity of 7 percent with inflation moving back toward its 2 percent objective.”

The Fed, however, has not included that guidance in its policy statements, and an account of the most recent meeting of the Federal Open Market Committee noted that “about half” of the 19 officials who participated said before the meeting that they expected to end asset purchases by the end of this year.

“There seems to be some disparity between the other members and you,” Mr. Schumer said. “Do they think unemployment will be 7 percent this year?”

Mr. Bernanke responded that officials had various reasons for their views. Some regard asset purchases as ineffective, while others may be more optimistic about the economy. Some have cited concern about the consequences.

But Mr. Bernanke added that the committee had “a very careful discussion” that led to his public statement about the probable timetable for curtailing the purchases. He said on Wednesday that the timetable enjoyed “good support.”

When Mr. Schumer asked if the Fed intended to curtail purchases at its September meeting, Mr. Bernanke responded, “I think it’s way too early to make any judgment.”

Article source: http://www.nytimes.com/2013/07/19/business/fed-chief-again-declines-to-set-timetable-for-stimulus-end.html?partner=rss&emc=rss

Economix Blog: The Gorilla and the Maginot Line

Janet Yellen, vice chairwoman of the Federal Reserve, shown at a conference in March, knows her way around a metaphor.Gary Cameron/Reuters Janet Yellen, vice chairwoman of the Federal Reserve, shown at a conference in March, knows her way around a metaphor.

Janet Yellen likes metaphors. This is a common trait among central bankers, at least the ones who see value in trying to explain their work.

In 2007, she compared problems in the housing market to a 600-pound gorilla lurking in the corner of the Federal Reserve’s meeting room.

In 2010, she described the state of financial regulation before the crisis as “a financial Maginot Line that we believed couldn’t be breached.”

We all know what happened next: The gorilla broke through the Maginot Line.

She is not the most colorful of the current crop of Fed officials. That honor surely belongs to Richard Fisher, president of the Federal Reserve Bank of Dallas, whose most recent speech was titled “Oil and Gas, Blondes and Over-Accessorized Brunettes, and Ruthless, Hard-Drinking Cowboys.”

Nor has she ever produced anything quite as enduringly memorable as former Fed chairman William McChesney Martin’s famous description of central banking. The job, he said, is “to take away the punch bowl just as the party gets going.”

But Ms. Yellen, whom I profiled Thursday as a logical successor to Ben S. Bernanke, the Fed chairman, can paint a picture. Consider her description at the September 2007 meeting of the Fed’s policy-making group, the Federal Open Market Committee, of “the earthquake that began roiling financial markets in mid-July.  Our contacts located at the epicenter — those, for example, in the private equity and mortgage markets — report utter devastation.  Anecdotal reports from those nearby — for example, our contacts in banking, housing construction, and housing-related businesses — suggest significant damage from the temblor.”

In 1995, concerned that the Fed was keeping interest rates too high, she compared the effects to “a termites in the basement problem,” suggesting that the high rates would gradually weaken and undermine the vitality of the economy.

“A ‘termites in the basement’ problem is a nagging, chronic little problem that can eventually cause a lot of grief if it is not attended to,” Ms. Yellen said at the Fed’s September meeting, according to the Fed’s transcript. “Termites nibble away slowly so the problem just creeps up and there is no great sense of urgency that one absolutely has to deal with it on one day as opposed to the next.”

Other members of the committee then picked up on the metaphor, invoking termites to make their own case for lower interest rates.

And then there is my personal favorite. Earlier in 1995, the Fed was debating whether to endorse Congressional legislation directing the Fed to make price stability its sole objective, replacing the “dual mandate” that instructs the central bank to minimize both unemployment and inflation.

Ms. Yellen was one of the strongest voices in opposition, arguing repeatedly that the people wanted the central bank to mitigate economic downturns in addition to minimizing inflation, and that the central bank had the ability and therefore the responsibility to do so.

Even the German central bank, famous for its commitment to suppress inflation, sought to mitigate economic downturns, she said.

“Who would be prepared to believe that the F.O.M.C. is single-mindedly going to pursue an inflation target regardless of real economic performance, if not even the Bundesbank is prepared to go that far?” she said. “So, that means that the targets are going to be perceived as a hoax.”

And then, to drive the point home, she added, “They are not going to be any more believable than I would be if I told my child that I was going to cut off his hand if he put it in the candy drawer.”

Article source: http://economix.blogs.nytimes.com/2013/04/25/the-gorilla-and-the-maginot-line/?partner=rss&emc=rss

As Growth Lags, Some Press the Fed to Do Still More

The Labor Department said on Friday that the jobless rate rose to 7.9 percent last month, up from 7.8 percent in December, in the latest evidence that the economy still is not growing fast enough to repair the damage of a recession that ended in 2009.

Some economists found the disappointing data an indication the Fed had reached the limit of its powers, or at least of prudent action. But there is evidence that the Fed is not trying as hard as it could to stimulate growth: it is allowing inflation to fall well below the 2 percent pace it considers most healthy.

Inflation, unlike job creation, is something the Fed can control with some precision. Higher inflation could accelerate economic growth and job creation by encouraging people to spend more and make riskier investments.

Yet annualized inflation fell to 1.3 percent in December, and asset prices reflect an expectation that the pace will remain well below 2 percent in the next decade.

“By their own framework, they’re not doing enough,” said Justin Wolfers, an economist at the University of Michigan. “They said that they were going to expand the economy and keep inflation around 2 percent, and they just haven’t done it.”

The rest of the government is making that task more difficult. Federal spending cuts, tax increases and the prospect of further cuts March 1 are hurting growth. The Fed chairman, Ben S. Bernanke, has warned repeatedly that monetary policy cannot offset such fiscal austerity.

And it is likely that the latest economic data does not reflect the full impact of the Fed’s efforts. Despite the rise in unemployment, job creation has increased in recent months, consumer spending has strengthened and the housing market is healing. Partly because monetary policy is slow-acting, most forecasters expect modest growth this year.

But the Fed also is acting with a clear measure of restraint. Mr. Bernanke and other officials have made clear that they believe the central bank could do more to increase the pace of inflation and bolster growth and job creation. They simply are not persuaded that the benefits outweigh the potential costs — in particular, the risk that their efforts will distort asset prices and seed future financial crises.

The Fed is constrained in part because it already has done so much. The central bank has held short-term interest rates near zero since December 2008, and it has accumulated almost $3 trillion in Treasury securities and mortgage-backed securities to push down long-term rates and encourage riskier investments.

Under its newest effort, announced in September and extended in December, it will increase its holdings of Treasuries and mortgage bonds by $85 billion a month until the job market improves. The Fed also said that it planned to hold short-term rates near zero even longer, at least until the unemployment rate fell below 6.5 percent.

In normal times, the Fed would respond to flagging inflation and growth by cutting interest rates. At present, it could still increase the scale of its asset purchases. The two policies work in a similar way, stimulating economic activity by reducing borrowing costs and encouraging risk-taking. But asset purchases are a less direct method to reduce rates, and the available evidence suggests that the effect is less powerful.

The Fed’s holdings of mortgage bonds and Treasuries also are growing so large that it could begin to distort pricing in those markets, and some transactions could be disrupted by a dearth of safe assets. Some Fed officials are concerned that asset prices for farmland, junk bonds and other risky assets are being pushed to unsustainable levels. As a result, Mr. Bernanke has said, the Fed is doing less than it otherwise would.

“We have to pay very close attention to the costs and the risks and the efficacy of these nonstandard policies as well as the potential economic benefits,” Mr. Bernanke said last month, in response to a question about the low pace of inflation. “Economics tells you when something is more costly, you do a little bit less of it.”

The Fed to some extent may be a prisoner of its own success in persuading investors over the last three decades that it was determined to keep inflation below 2 percent. It said in December that it would let expected inflation in the next two to three years rise as high as 2.5 percent. But expectations have not budged.

The Federal Reserve Bank of Cleveland calculated in a January report that average expected inflation over the next decade was just 1.48 percent per year.

Fed officials themselves generally expect somewhat higher inflation, but their most recent predictions, published in January, still show that none of the 19 policy makers expected inflation to exceed 2 percent over the next two years.

Article source: http://www.nytimes.com/2013/02/02/business/economy/as-growth-lags-some-press-the-fed-to-do-still-more.html?partner=rss&emc=rss

Economix Blog: Lifting the Veil on the Fed’s 2007 Discussions

The Federal Reserve building in Washington.Matthew Cavanaugh/European Pressphoto Agency The Federal Reserve building in Washington.

11:46 a.m. | Updated

The Federal Reserve has released the transcripts of its meetings in the pivotal year of 2007, when the housing bubble started to burst and the global financial crisis began.

The transcripts shed light on the decisions that Ben S. Bernanke, the Fed chairman, and other top officials — including Timothy F. Geithner, the current Treasury secretary, who was then president of the New York Fed — were making as the crisis began. They spent much of 2006 underestimating the risks facing the economy before changing tack in 2007 and undertaking the beginnings of an aggressive response.

The transcripts are being issued as part of the Fed’s normal schedule of releasing them publicly five years later.

Over the course of the day, four reporters for The Times — Binyamin Appelbaum, Peter Eavis, Annie Lowrey and Nelson D. Schwartz — will be reading and analyzing the hundreds of pages of documents. Mr. Appelbaum’s article is now online, and will continue to be updated through the day. Mr. Appelbaum, Ms. Lowrey and Mr. Eavis are also tweeting about the transcripts.

Here is a brief look at how that crucial year unfolded, from Mr. Appelbaum:

As the housing market, and then financial markets, and then the broader economy began to unravel, the Federal Reserve in the final months of 2007 moved from complacency to action, not in one smooth motion but in a series of herky-jerky steps. Fed officials struggled to understand what was happening and argued among themselves about how the central bank should respond.

In August, the Fed took the first steps to broaden the availability of funding for financial transactions, perhaps the most important role that it would play during the coming crisis. In September, the Fed lowered benchmark interest rates for the first time in four years, opening the second front in its economic stimulus campaign. And by the end of the year, the Fed had begun the first of what would become a host of new programs intended to pump money into financial markets.

Article source: http://economix.blogs.nytimes.com/2013/01/18/lifting-the-veil-on-the-feds-2007-discussions/?partner=rss&emc=rss

Economix Blog: Bernanke’s Lessons From the Financial Crisis

Ben S. Bernanke at a Boston Fed conference on Tuesday.Scott Eisen/Bloomberg NewsBen S. Bernanke at a Boston Fed conference on Tuesday.

What did the financial crisis teach central bankers?

The Federal Reserve chairman, Ben S. Bernanke, said Tuesday that the great lesson was the need to juggle two jobs: the traditional work of managing the pace of inflation and the forgotten job of maintaining financial stability.

Mr. Bernanke’s speech largely amounted to a defense and explanation of the Fed’s conduct during the crisis. The lessons he described included the propriety of the Fed’s existing approach to monetary policy and the necessity of its various innovations, including lending dollars to other countries.

But the Fed chairman acknowledged, as he has before, that the Fed and other central banks had neglected the work of financial supervision.

“The crisis has forcefully reminded us that the responsibility of central banks to protect financial stability is at least as important as the responsibility to use monetary policy effectively,” Mr. Bernanke said at an annual policy conference hosted by the Federal Reserve Bank of Boston.

One of the great questions left by the housing crash is whether the Fed could have popped the bubble at an earlier stage, limiting the damage. Mr. Bernanke said Tuesday that the Fed does have a responsibility to address emerging problems, something that central bankers long described as impossible or inappropriate.

Mr. Bernanke said, however, that he agreed with “an evolving consensus” that this work required different tools than those for monetary policy.

“In my view, the issue is not whether central bankers should ignore possible financial imbalances — they should not — but, rather, what ‘the right tool for the job’ is to respond to such imbalances,” he said.

The Fed, by adjusting interest rates, can deflate the economy, but there is no obvious mechanism for focusing the impact on a specific asset class, like housing.

Instead, Mr. Bernanke said that the tools of financial regulation were the best means for maintaining financial stability, through limits and requirements on the ways financial institutions lend and borrow.

Mr. Bernanke said that the crisis had tested what he described as the consensus model of monetary policy but that in his view it had emerged largely unscathed.

He described this model as “flexible inflation targeting,” meaning that the Fed seeks to maintain a steady rate of increase in prices and wages of about 2 percent a year, with a willingness to make short-term adjustments to encourage employment growth, and an emphasis on communication and transparency.

He closed with a reminder that it would take some time to fully understand the lessons of the crisis. Perhaps he was thinking of his own academic career, devoted to the mechanics of the Great Depression, 80 years ago. Or perhaps it was a recognition that this crisis remains very much in progress.

Article source: http://feeds.nytimes.com/click.phdo?i=ea0a491e99f73c7effd1ea2992d6f9d0

Wall Street Recovers After Slipping on Fed Remarks

The absence of an announcement on any new economic stimulus by the Federal Reserve chairman appeared to briefly disappoint investors on Friday, sending Wall Street indexes down by more than 1 percent, but they more than made up the decline by afternoon.

The financial markets had pinned their hopes early this week on some new announcement by the Fed chairman, Ben S. Bernanke, of aid to the economy at a symposium in Jackson Hole, Wyo., on Friday. But expectations began to wane by Thursday, when indexes closed more than 1 percent lower.

On Friday, shortly after Mr. Bernanke started to deliver his speech, investors generally got what they had been expecting. Mr. Bernanke said the economy was recovering and the nation’s long-term prospects remained strong, but he offered little indication of any plans for additional measures to bolster short-term growth.

The Standard Poor’s 500-stock index promptly slipped 2 percent. The Dow Jones industrial average lost 1.8 percent, and the Nasdaq composite index slipped 1.3 percent. But within a half-hour, there was some recovery, and by afternoon, the S. P. was up 1.5 percent, the Dow was up 1.3 percent and the Nasdaq rose more than 2 percent.

“It was a bit of a nonevent,” said Schwab’s chief investment strategist, Liz Ann Sonders, referring to the impact of the speech.

While Mr. Bernanke “did not close the door to anything,” she said, it appeared that the Fed wanted to give itself more time to assess the economy. “They continue to say they expect growth to pick up in the second half of the year. At least that is a non-negative.”

Mr. Bernanke made his standard announcement that the Fed would take any steps necessary to help the economy, and he said the issue would be discussed at the next meeting of the Fed’s policy-making board, in late September. But he made no mention of the measures the Fed might take, something he has provided on several occasions earlier this year.

Nigel Gault, the chief United States economist for IHS Global Insight, said the initial equity market reaction to the Fed statement was negative since there was no mention of new action, but the market probably turned around in the hope that action would still come in September. “Unfortunately, the Fed doesn’t have any rabbits to pull out of the hat to magically re-ignite economic growth,” said Mr. Gault.

Still, there were other factors at work on the markets on Friday. Technology shares pulled up the broader market, and on the Nasdaq, Aruba Network rose more than 20 percent. It reported on Thursday that fiscal fourth-quarter revenue was up 47 percent year over year, and the company said it was confident it would increase market share in the 2012 fiscal year.

Aside from corporate results, there were economic data points to contend with. After taking in disappointing jobs data on Thursday, the markets heard that gross domestic product for the second quarter rose at annual rate of 1.0 percent, the Commerce Department said, a downward revision of its prior estimate of 1.3 percent. Economists had expected growth to be revised down to 1.1 percent. In the first quarter, the economy advanced just 0.4 percent.

Clark Yingst, the chief market analyst at Joseph Gunnar, said the markets had already sent out signals before the speech that investors did not appear to be expecting anything new, but he also said they could be reacting to the new G.D.P. number. Stocks and the dollar were lower, and gold firmed slightly.

“The slight weakness in the dollar might be a knee-jerk reaction to that,” Mr. Yingst said of the new data. “The market is still anticipating certainly no official announcement of any change in monetary policy.”

Gold, which is typically a safe-haven asset, has been declining in recent days as many analysts said it was overpriced. On Friday Comex futures showed a slight increase, rising to $1,785.30 an ounce.

“Gold and the dollar are inversely related, so I think on the headline G.D.P. report, gold is higher,” Mr. Yingst said. “It may be nothing more than a bit of a bounce. I don’t think the action in gold and the dollar is anticipating something” from Mr. Bernanke.

The benchmark 10-year Treasury bond yield was lower at 2.185 percent.

Stock markets in Europe also fell for a second day, and markets in Asia were mixed on Friday.

Markets continued downward Friday in Hong Kong, where the Hang Seng index was 0.86 percent lower by midafternoon, and in India, where the Sensex was down 1.1 percent by the afternoon. The Nikkei 225-stock index rose 0.3 percent after Prime Minister Naoto Kan announced his resignation.

Binyamin Appelbaum contributed reporting from Jackson Hole, Wyo., and Julia Werdigier contributed from London.

Article source: http://www.nytimes.com/2011/08/27/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

Why We Deregulated the Banks

Jeff Madrick’s “Age of Greed” almost seems to have set out to be the economic equivalent of Mann’s history. Writing against the backdrop of the 2007-9 financial crisis, Madrick, the author of “The End of Affluence,” also starts his story in the 1970s, tracing the regulatory and cultural changes that led to our current trouble. In Madrick’s telling, a cabal of conservatives, driven first by greed and second by “extreme free-market ideology,” gradually seized power. The result, as proclaimed in his bold subtitle, was “the triumph of finance and the decline of America.”

It’s clear from the outset that Madrick has his work cut out for him. Where Mann’s story concentrated on six individuals who held office through successive Republican administrations, Madrick draws in a far wider cast of characters: thinkers like Milton Friedman; business leaders like Jack Welch; presidents like Richard Nixon and Ronald Reagan. It’s not always obvious what connects these disparate figures, so the book jumps from pen portrait to pen portrait without always advancing its main theme.

And the theme itself is slippery. A history of neoconservatism can home in on self-professed neocons, whose actions are clearly informed by a defined body of beliefs. But it’s harder to identify a cabal that self-consciously embraced greed as a guiding philosophy. To be sure, the insider trader Ivan Boesky once defended greed at a forum in Berkeley, Calif. But an undertow of avarice is surely a human constant. Was Sandy Weill, the Wall Street executive who retained a corporate jet while slashing retired employees’ health insurance, really so very different from a 19th-century Rockefeller or Vanderbilt?

If the greed of Boesky or Weill is unsurprising, the lack of greed evinced by some of Madrick’s characters is striking. Paul Volcker, the Fed chairman whom Madrick eccentrically berates for his determined fight against inflation, was known to be frugal; John Reed, Citigroup’s boss during the 1990s, was by Madrick’s own account “thoughtful and unflashy.” Reagan himself was more enthusiastic about self-reliance and hard work than about material advancement, remarking that “free enterprise is not a hunting license.” Early in his career, Walter Wriston, Reed’s predecessor at Citi and perhaps the character whom Madrick conjures most successfully, was offered a salary of $1 million to move to Monaco and work for Aristotle Onassis. He chose to remain in a middle-income housing project in Stuyvesant Village.

If “Age of Greed” is an unhelpful label, what of Madrick’s secondary contention — that the era was defined by extreme free-market ideology? Well, the extreme was pretty mainstream. Free-market ideas were embraced by Democrats almost as much as by Republicans. Jimmy Carter initiated the big push toward deregulation, generally with the support of his party in Congress. Bill Clinton presided over the growth of the loosely supervised shadow financial system and the repeal of Depression-era restrictions on commercial banks. Centrist intellectuals like Lawrence Summers, who was fully aware of market failures — indeed, who had emphasized them in his academic writings — nonetheless embraced pro-market public policies because, he thought, they were more right than not.

Besides, free-market policies were never embraced with the unqualified enthusiasm that some imagine. Throughout Madrick’s period, entitlement spending grew and armies of supervisors at multiple agencies tried to keep the financial sector in check. Contrary to Madrick’s view that the regulators were always retreating, the 1980s saw the imposition of new capital-adequacy rules on banks, and the 2000s brought the passage of the ambitious ­Sarbanes-Oxley accounting reforms. These regulatory efforts proved hard to enforce, but the record hardly supports Madrick’s argument that policy was captured by free-market extremists.

Sebastian Mallaby, the Paul A. Volcker senior fellow at the Council on Foreign Relations, is the author of “More Money Than God: Hedge Funds and the Making of a New Elite.”

Article source: http://feeds.nytimes.com/click.phdo?i=c72dca4c3b03e5708ee1838ff39551a2

Stimulus by Fed Is Disappointing, Economists Say

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.

“It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power,” said Mark Thoma, a professor of economics at the University of Oregon, referring specifically to the bond-buying program.

Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.

“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.

But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.

The Fed generally encourages growth by pushing down interest rates. In normal times, it reduces short-term interest rates, and the effects spread to other kinds of borrowing like corporate bonds and mortgage loans. But with short-term rates hovering near zero since December 2008, the Fed has tried to attack long-term rates directly by entering the market and offering to accept lower returns.

The Fed limited the program to $600 billion under considerable political pressure. While that sounds like a lot of money, the purchases have not even kept pace with the government’s issuance of new debt, so in a sense the effort has amounted to treading water. And a growing body of research suggests that the Fed could have had a larger impact by spending more money on a broader range of debt, like mortgage bonds, as it did initially.

A vocal group of critics, meanwhile, argues that the Fed has already done far too much, amassing a portfolio of more than $2 trillion that may impede the central bank’s ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases.

“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”

The Fed’s decision to buy bonds, known as quantitative easing, emulated Japan’s central bank, which started buying bonds in 2001 to break a deflationary cycle.

The American version worked well at first. From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed.

As the economy sputtered last summer, Mr. Bernanke indicated in an August speech that the Fed would start a second round of quantitative easing, soon nicknamed QE 2. The initial response was the same: Asset prices rose, interest rates fell, and the dollar declined in value.

But in addition to being smaller, and solely focused on Treasuries, there also was a problem of diminishing returns. The first round of purchases reduced the cost of borrowing by persuading skittish investors to accept lower risk premiums. With markets closer to normalcy, Mr. Bernanke warned in his August speech that it was not clear that the Fed would have comparable success in persuading investors to accept even lower rates of return.

“Such purchases seem likely to have their largest effects during periods of economic and financial stress,” he said.

The Fed says that its expectations were tempered by these realities, but that the program nonetheless has lowered yields on long-term Treasury bonds by about 0.2 percentage point relative to the rates investors would have demanded in the Fed’s absence. That is about the same impact the central bank might have achieved by lowering its benchmark rate 0.75 percentage point, which in normal times would be an aggressive move.

But some economists say the new program has had a more limited impact on the broader economy than would a traditional cut in short-term interest rates. The Fed predicted that investors would be forced to buy other kinds of debt, reducing rates for other borrowers. But the supply of Treasuries available to investors has grown since November, as issuance of new government debt outpaced the Fed’s purchases.

A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.

Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”

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