April 30, 2016

The Benefit Of The Doubt Has Been Lost

A weekend topic on the Federal Reserve starting with this MarketWatch interview, “The Fed does what it wants and plays favorites. And as a result it’s lost the trust of the American people. That is the stark view the central bank’s actions in the wake of the financial crisis by Lawrence Jacobs, a public policy expert at the University of Minnesota. In a new book, ‘Fed Power, How Finance Wins,’ Jacobs, and his co-author Desmond King from Oxford University, lay out their case that the Fed managed to overstep the U.S. constitution by taking giving trillions of dollars in loans to financial market participants.”

“These actions should have been reserved for Congress and offended Main Street, he said. ‘Elites’ in Washington and New York went along with the central bank’s actions believing basically the ends justified the means, they argue. In an interview with MarketWatch, Jacobs said reform of the Fed’s 100-year old structure is now inevitable, whoever wins the White House. The following interview has been edited lightly for clarity.”

“MarketWatch: You argue the Fed has lost some of its legitimacy and credibility. That’s a big deal for the Fed. Can you explain what you mean?”

“Jacobs: Everything that I’ve read and studied and analyzed leads me to believe that there is tremendous public doubt and that it has lingered past the initial skepticism about what the Federal Reserve has done [in the crisis.] The issues about the Fed and its credibility are no longer just being questioned by libertarian [Rep.] Ron Paul in the House. It enjoys much wider scrutiny throughout Congress and, among the attentive public. The benefit of the doubt has been lost.”

“MarketWatch: And that’s because the people view the Fed as not accountable?”

“Jacobs: I think there are two sources of this decline in the credibility of the Fed. One is a sense that the Fed is unmoored from our system of democratic accountability. It does what it wants. And the second corrosive perception that is now widespread is that the Fed plays favorites. The facilities that it created were tremendous in their scope and they selectively provided benefits of credit during a credit freeze to a small number of banks and non-banks. Meanwhile, Main Street and millions of homeowners were faced with real duress or bankruptcy or foreclosure.”

“MarketWatch: Congress and the White House could have done things to help homeowners and they didn’t, so why is it the Fed’s job?”

“Jacobs: It is certainly the case that Congress fell down on the job. But partly it is because the Fed has stepped into what used to be the normal arena of fiscal policy. The Fed has kind of crowded out the constitutional authority and responsibilities of Congress. If the Fed wasn’t doing this, and it fell to Congress, Congress would absolutely step up, because it would have had no choice. But when the Fed steps in, it kind of gives an out to Congress to do its job. I think, in general, the movement of the Fed into fiscal policy is unsustainable. It far exceeds the Fed’s constitutional responsibility and it has brought upon itself this kind of erosion in trust and legitimacy.”

From CBS News. “When the Federal Reserve triumphantly raised interest rates in December for the first time since 2006, it did so over the objections of America’s trading partners — especially China. The Fed moved amid proclamations that it was focused on setting policy for the U.S. based on a tightening job market and stabilizing inflation. Fast-forward a few months, and the drums are hammering out a different beat. A rising concern for Fed officials is the health of the Chinese economy, which, despite a headline growth rate of 6.7 percent for the first quarter, remains vulnerable.”

“The Fed mentioned downside risks to China six times in its Jan. 26-27 policy meeting, after citing them three times at the March 15-16 meeting. And Fed Chair Janet Yellen singled out China and the country’s currency in her March 29 speech before the Economic Club of New York, which in retrospect was a big catalyst for the recent stock market upswing: ‘One concern pertains to the pace of global growth, which is importantly influenced by developments in China. There is a consensus that China’s economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it. These uncertainties were heightened by market confusion earlier this year over China’s exchange rate policy.’”

“That’s a lot of focus on China for an official who’s supposed to be preoccupied, and setting policy, based on what’s happening in the U.S.”

From Yahoo Finance. “while you might think that the economy has pretty much recovered from the Great Recession of 2008, one prominent financier thinks the problems that caused that big meltdown have been papered over and will come back to hurt us again. And then there’s the little issue of China’s economy surpassing ours soon. John Thornton, the former president of Goldman Sachs (GS), who likes to take the long view, says he’s ‘feeling uneasy’ about the global economy right now and thinks we’re living on borrowed time.”

“‘After the events of 2008, really since then, the central banks either collectively or individually have tried to implement policies which would, in effect, buy time for individual governments to take the actions they should take to put their houses in order,’ Thornton says.”

“‘By and large, the governments have not done that. So I feel as though we’re sitting in 2016 with many of the same problems that we’ve had for the last eight or 10 years, they haven’t been addressed very forcefully, we’re living on borrowed time. And sooner or later, that ends in tears. I’m generally, sort of, uneasy with where things are. And I think by and large, if things don’t make common sense, sooner or later, they come home to roost,’ he says.”