Topic: Finance, Banking & Monetary Policy

Support for Federal Reserve Audit Increasing

Last week Cato hosted a policy forum on “Bringing Transparency to the Federal Reserve,” featuring Congressman Ron Paul. As mentioned in CQ Politics, Rep. Paul’s bill, HR 1207, has been gaining considerable momentum in the House, with currently 244 co-sponsors, ranging from John Boehner to John Conyers Jr. In fact, the Senate companion bill was introduced by Senator Bernie Sanders.

Fed Chairman Ben Bernanke discussed the very topic of Federal Reserve Transparency at Cato’s annual monetary conference in the Fall of 2007.

After praising moves toward greater transparency at the Fed, Bernanke argued that “monetary policy makers are public servants whose decisions affect the life of every citizen; consequently, in a democratic society, they have a responsibility to give the people and their elected representatives a full and compelling rationale for the decisions they make.”

Chairman Bernanke also goes on to argue that “improving the public’s understanding of the central bank’s objectives and policy strategies reduces economic and financial uncertainty and thereby allows businesses and households to make more-informed decisions.” Bernanke’s full remarks can be found in the Spring 2008 issue of the Cato Journal.

Over the last two years, we have seen an almost tripling of the Federal Reserve’s balance sheet to $2.3 trillion, resulting from the bailouts of AIG and Bear Stearns and the creation of 14 new lending programs.

Our recent forum, and Rep. Paul’s bill, bring much needed debate and focus to the issue of Fed’s inner-workings.

Gift Cards: What Congress Gives, the States Take Away

Little noticed in the recently enacted credit card bill was a provision prohibiting retailers and financial institutions from issuing gift cards that expired with a set time, except under certain circumstances.  While card issuers had been using expiration dates to estimate and manage their liabilities, many States had been “collecting” the value of these unused cards as “abandoned property”, as discussed in today’s Wall Street Journal.

Some states have even been going after cards with no expiration date, arguing that if you leave that gift card sitting around your house or in your wallet for too long, then you’ve abandoned.  What’s next, funds sitting unused in your bank account will next be considered abandoned.  The States that require unused gift cards, or unused portions, to be turned over require retailer and card processors to maintain databases tracking card amounts and usage.

There is some comfort, however, in knowing that some States do allow you to re-claim your “abandoned gift dollars,” for instance of the $9.6 million collected by New York State last year in unused gift cards, rightful owners were able to recover $2,150.

Consumer Financial Product Commission Distracts from Real Reform

Today the Obama Administration released a 152-page draft bill to create a new Consumer Financial Product Commission. While intended to protect against consumer confusion and reduce the likelihood of future financial crises, the proposed agency will at best have little impact and at worst contribute to the next financial crisis, with the added effect of decreased homeownership and increased litigation.

The president promises that “those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past,” The president ignores that those “ridiculous contracts” and “fine print” are the result of previous rounds of so-called consumer protections. The disclosures one receives with a mortgage or a credit card are those mandated by some level of government. They don’t call those credit card disclosures a “Schumer Box” because they were invented by a baron of industry. In addition to the government-mandated disclosures that have failed, are the endless amount of fine print added to protect companies from frivolous litigation. The Obama approach to that problem is to increase the amount of litigation.

If the president were serious about avoiding the next housing bubble and financial crisis, he would propose eliminating some of the various federal policies that contributed to the housing bubble. For instance, how about requiring real down payments when the taxpayer is on the hook – as with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Talk about bad incentives; under FHA, a borrower can put almost nothing down and if the loan goes bad, the government covers the lender for 100 percent of their losses.  No wonder we had a housing bubble. In addition, the proposed agency does nothing to address the underlying causes of any type of credit default: unemployment, unexpected health care costs or divorce.

Once again, when given the opportunity to address the real flaws in our financial system, the administration chooses to appease the special interests and provide a distraction from the underlying causes of our current financial crisis.

Don’t Count on Getting Your “Investment” Back from Government Motors

The president and his appointees have expressed their hope that Government Motors will eventually pay back taxpayers for their “forced investment” in the company.  But there aren’t many cases of this sort of lemon socialism actually paying off.

Now most everyone connected with GM is admitting the same thing.  Reports the Washington Post:

If a new General Motors emerges from bankruptcy as planned, U.S. financial aid for the company will expand to nearly $50 billion, but neither the government nor the company is forecasting how much of the public money will be repaid.

It’s sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.

“I’m not going to predict it – that’s not my job today,” GM chief executive Fritz Henderson said in a recent interview.

“I don’t know how much we’re going to recover,” a senior Obama administration official said as the company headed into bankruptcy last month.

This uncertainty stems from the difficulty in valuing the 60 percent GM stake that the United States will receive in exchange for the public investment. The government also gets preferred shares and other compensation.

The stake will be worth enough to fully cover the government’s direct investment only if GM’s stock rises above $68 billion. Even at its recent 2000 peak, GM’s stock was worth only $56 billion.

“I don’t see GM hitting those benchmarks in a very long time,” said Maryann Keller, a veteran automotive analyst and author of “Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,” which was published in 1989.

She noted that global competition will continue to squeeze American automakers. Though the world’s factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.

“It’s very unlikely” that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. “GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM’s efforts more difficult.”

Oh, well.  As they say, it’s only money!

Beginning of the End for Bernanke

Fed Chairman Bernanke’s term as Chair ends in January 2010. So far President Obama has offered Bernanke praise for his performance, but little else. After last week’s House Oversight Committee hearing focusing on Bernanke’s role in Bank of America’s purchase of Merrill Lynch, it is now readily apparent that the Chairman has few supporters on Capitol Hill. While his nomination will not be subject to the approval of the House of Representatives, or any of its Committees, the Senate Banking Committee’s reaction to Treasury Secretary Geithner’s plan to extend the Fed’s power serves as a useful proxy in gauging that Committee’s view of the Fed’s recent performance.

Several recent polls show President Obama to be broadly popular with the American public, while the public holds some concern over the scope and cost of his policies. His policy that garners the least support has been his bailout and support for the auto industry. It is no secret that the American public was not enthusiastic about the bailouts at the time, and is even less so now. With Hank Paulson having left the stage, Bernanke is now the public face of corporate bailouts. While having Bernanke around may offer President Obama a convenient target for the public’s anger over bailouts, re-appointing Bernanke would finally force Obama’s hand – so far he’s managed to support the bailouts with little fallout, as Bush and others have taken the blame. Re-appointing Bernanke makes him Obama’s pick.

In addition to political risk to President Obama, one can assume that many Senate Democrats are not looking forward to having to vote for the man who bailed out AIG. It is a fair bet that many Republican Senators would not vote for Bernanke’s re-appointment, leaving it up to the Democrats to secure his re-appointment.

Whatever the merits, or flaws, in his performance as Federal Reserve Chair, support for Bernanke’s re-appointment is becoming a proxy for one’s support, or opposition, to corporate bailouts.

Ron Paul at Cato: ‘Audit the Fed’

When Texas Congressman and former Republican presidential candidate Ron Paul speaks about transparency in the Federal Reserve, he sums up his argument with one simple question. Why not?

“Why in the world should this much power be given to a Federal Reserve that has the authority to create $1 trillion secretly?” Ron Paul asked a standing room-only crowd today at the Cato Institute.

Paul was on a panel of speakers, including Gilbert Schwartz, former associate general counsel to the Federal Reserve, to discuss a new bill that will audit the Fed for the first time in its history. This comes at a time when the Fed’s balance sheet has almost tripled, from just over $800 billion before the financial crisis to almost $2.3 trillion now.

“We will only win when the people wake up and realize that transparency is what we need,” said Paul. “When we know exactly what’s happening, there will be monetary reform.”

Watch the rest of Paul’s comments below:

Going Bankrupt Double-Quick

George W. Bush and the Republicans worked hard to ruin the U.S. government’s finances.  The Obama administration and the Democrats are doing an even better job of wrecking the Treasury.

Reports Bloomberg:

Treasuries headed for their second monthly loss, pushing 10-year yields up the most in almost six years, as President Barack Obama’s record borrowing spree overwhelmed Federal Reserve efforts to cap interest rates.

Notes, little changed today, also tumbled this week on speculation the worst of the economic recession is over. A private report today will show confidence among U.S. consumers gained in May for a third month, economists said. South Korea’s National Pension Service, the nation’s largest investor, plans to reduce the weighting of U.S. bonds in its holdings, the government said in a statement.

“It’s a disastrous market,” said Hideo Shimomura, who oversees $4 billion in non-yen bonds as chief fund investor at Mitsubishi UFJ Asset Management Co. in Tokyo, a unit of Japan’s largest bank. “I expected yields to rise but not this fast. We will see new highs in yields.”

The benchmark 10-year note yielded 3.61 percent at 6:29 a.m. in London, according to BGCantor Market Data. The 3.125 percent security due in May 2019 traded at a price of 95 30/32.

Ten-year rates rose about half a percentage point in May, extending an increase of 46 basis points in April. The two-month climb was the most since July and August of 2003. A basis point is 0.01 percentage point.

As borrowing costs rise, so will future deficits, requiring more borrowing, which will push up interest rates, hiking future deficits, requiring…

Just how are we going to finance trillions of dollars for health care reform while wrecking the economy with cap and trade?  And then there’s the $107 trillion in unfunded liabilities for Social Security and Medicare.