Randomly Noted

If the goal of Congressional debate about the structure and status of the U.S. Federal Reserve is mainly about the desire for more transparency and accountability from the central bank, an idea championed by Fed Chairman Ben Bernanke should be revived.

Bernanke came into office as an advocate of publicly disclosed inflation targets. This was a big issue when Bernanke was first confirmed by the Senate. Some in Congress worried that approval of inflation targets would make the Fed focus too heavily on its mandate to control inflation and neglect its second purpose, maxium sustainable economic growth.

One major financial crisis later, the inflation target debate seems a bit besides the point. This blogger always objected because it would hem in Fed flexibility to some extent. If you address this issue by building in enough escape clauses based on cicrumstances, then what’s the point of having targets?

Current proposals flying around Capitol Hill would do significantly more hemming in, so maybe inflation targets would be a lesser evil if any of the other ideas get close to passage.

Also, as noted previously, if transparency is your goal, you could move up the release of Fed rate-setting meeting minutes and transcripts by reasonable amounts of time without causing much damage.

Federal Reserve Chairman Ben Bernanke took to a newspaper opinion page this past weekend to make the case for continued central bank independence and bank regulatory power.

He’s in a dogfight with Congress about basic tenets: monetary policy autonomy, the right to oversee large financial institutions and even the decentralized structure of the Fed.

So it was disappointing that Bernanke in his Sunday Washington Post piece stuck to a staid, dignified and reasonable approach. 

After all, this is about Congress presumably channeling populist anger  about the credit crisis, the ensuing recession and the government bailouts that led to a recovering Wall Street and a still very wounded Main Street.

The Wall Street Journal noted today the Bernanke article “was unusual because nominees typically maintain a low profile before confirmation hearings.” The Senate Banking Committee takes up on Thursday Bernanke’s nomination to continue to lead the Fed.

The Journal said Bernanke was willing to break with convention by writing. Good, he should have broken with it in a more powerful way. Fight fire with fire.

How about this as a suggested alternative start to a follow-up opinion piece from Bernanke?

‘Have we lost our bearings, people?

‘An indpendent central bank (as far as that is actually feasible) is an essential, non-negotiable prerequisite to a modern, open economy. Look around you at which countries have autonomous central banks and which do not. 

‘It is crazy  to even be seriously discussing crimping our independence. 

‘We,  like other government entities, screwed up royally in our oversight of the crazy risks investment and commercial banks were piling on before it all came apart. We can even (under a prior Fed regime) be second-guessed on monetary policy decisions.

“But we’ve had our successes, too. There would have been figurative blood in the streets if we at the Fed didn’t step in to the abyss in the fall of 2008 and a 10.2% unemployment rate would now look like an unreachable aspiration rather than a near-peak in a terrible recession. If you take the longer view, we’ve done okay on monetary policy in the past 30 years or so.

‘Most important, what’s the alternative? A central bank to a significant degree run by Congress? Congress. Think about that. I believe I can rest my case.’

Instead of tough, tough talk to meet the indpendenced threat, we got a mostly well-reasoned essay from Bernanke. He did a better case defending independent monetary policy than he did justifying continued or increased bank regulation. Thta’s because the case for the former is indeed the much stronger one.

This reader only inferred his dander rising once, when Bernanke cited the Fed’s role in keeping the credit crisis from ending up as a reasonable facsimile of the Great Depression. “I know something about this,” he wrote in parentheses,  “having spent my career prior to public service studying these issues.”   

Even if Bernanke doesn’t pick up pen again on this, he will surely get a chance to be direct and forceful on Thursday in defense of the very good cause of Fed independence. You know the Senators will have their best populist outrage working.

Anecdotally, it appears Americans are out shopping today, grabbing flat-screen TVs and other electronic items they probably don’t need more of. Early evidence suggests the likes of Wal-Mart, Best Buy and Target are faring well this Black Friday while higher-end stores are seeing lackluster shopper interest. The prevailing consumer psychology seems to be: Grab discounted electronic goods now before already-slim inventories evaporate – then worry about the smaller gifts and stocking stuffers in the days and weeks before Christmas. Consumers seem to have digested news reports that retailers, hungry for profit margins, avoided stocking up before the holidays because they didn’t want to get stuck with excess inventory they’d ultimately have to offer at massive, profit-eroding discounts. Given this reality, it makes all the sense in the world to buy splashy, big-ticket presents early – if, that is, there’s a compelling reason to have yet another television. Which isn’t at all evident to me. One family interviewed by my DJN colleagues bought three TVs this morning, and a disc player. A family needs no more than one television in robust economic times  much less in an era of 10.2% unemployment.

Imagine yourself nestled into a movie theatre seat, popcorn in hand, ready for the feature film, or at least a stream of coming attractions. Surprise. First, here comes the Federal Reserve.

The U.S. central bank announced that it is sponsoring 45-second advertisements in movie theatres designed to help people use their credit cards more wisely.

Capitol Hill is locked in debate about possible reform of the financial services industry. Part of the tension centers around whether a new agency is needed that would specifically focus on consumer protection. The Fed now has some of that authority.

The Fed said the ads will appear before movie previews at 12 highly attended venues in big metropolitan areas from Nov. 27 through Dec. 3.

The Fed message is straightforward. Pay on time; stay below your credit limit; avoid unnecessary fees; pay more than the minimum; and watch for changes in the terms of your account.

Earlier this month, the House Financial Services Committee approved making permanent the exemption for smaller companies for complying with a key aspect of the Sarbanes-Oxley Act.

The provision, commonly called Section 404, requires public companies’ internal controls and financial reporting systems to undergo periodic reviews that are approved by outside auditors.

As argued here previously, this permanent exemption – if it becomes law – is unfair to investors and sets up a two-tier system of accounting standards among public companies.

This is no small deal, as made clear in the text of a Nov. 6 speech by Securities and Exchange Commission Commissioner Luis A. Aguilar. Noting the current plan as currently constituted would exempt companies with a market capitalization under $75 million, Aguilar said the SEC staff estimates that more than 6,000 public companies may fall under that threshhold. That’s a big number.

“Some are describing this repeal of Sarbanes-Oxley as relief for ‘small businesses,’” he said. “I think people are confused when they hear the words ‘small business.’ The companies that would be exempted are not mom and pop neighborhood stores. These are publicly traded companies that offer their shares to all types of investors.”

Aguilar noted a lot of work has been done over the years to make complying with Section 404 more rational and therefore cheaper than some companies experienced at the start. The Sarbanes-Oxley bill was approved early in this decade after big accounting scandals at Enron, WorldCom and other companies.

“It is clear that repealing 404(b) as to the majority of public companies would be a mistake, and inconsistent with the objectives of reform that strengthens investor protecion,” the commissioner said.

Being Internet cutting edge doesn’t equate to caring overly much about shareholder rights.  

So just a short while ago, Jessica E. Vascellaro of The Wall Street Journal reported Facebook Inc. is establishing two classes of stock. Class B shares will be the favored class, going to all current holders of the still-private company. The B shares will have 10 times the voting power of Class A shares.

This follows the pattern of the other Internet icon, Google Inc., when it went public five or so years ago. The dual class reserves the controlling interest of the principals, in Google’s case its two founders. In Facebook’s case, this “will vastly enhance the voting power” of Chief Executive Mark Zuckerberg, the Journal reported. He’s already the company’s largest holder.

But just like the case of Google, it is unlikely potential shareholders are going to fuss too much about arcane subjects such as corporate governance when it comes to the right to buy a piece of the equity of Facebook Inc.

These companies don’t have to be shareholder friendly, since their share price is likely to be.

Facebook did warn that the change in the stock structure “should not be construed as a signal the company is planning to go public,” the Journal reported. “Facebook has no plans to go public at this time.”

Australia has everything going for it: abundant natural resources coveted by the world’s foremost industrial powers; banks that didn’t take stupid risks with customers’ money; a front-loaded stimulus-spending scheme that appears to have worked; a robust economy recovering so decisively that the central bank is well into a rate-hike cycle; and a decent pension and healthcare system. All this is demonstrably true (with the usual caveats) and it’s also the script to which Chris Bowen, the country’s financial services minister, is hewing to on a trip to New York City and London this week. What’s more, Australia has a refreshing, pragmatic and probably wise attitude toward foreign investment. One hears not a peep of protectionist rhetoric out of the lefty government  - which stands in contrast to their American counterparts. Chinese money has flowed into Australia in recent years as government regulators okayed the lion’s share of acquisitions of resources firms, notes Bowen, whose boss is the Mandarin-speaking Prime Minister Kevin Rudd.  Stern Hu (no relation), the Australian citizen and employee of Aussie-based mining giant Rio Tinto, languishes in a Chinese prison with three Chinese colleagues under the murkiest of circumstances. But Bowen is adamant the case won’t weaken Australia’s approach to China as a foremost trading partner. No doubt the Rio Tinto 4 is “a sensitive issue” in Australia, and Bowen says the Rudd administration “made our views very clear that the Chinese government needs to consider this is not good for their reputation in terms of doing business in China.” Chinese government officials continue visiting Australia, he adds, and “we make the point about Stern Hu on those visits. But you can’t let that downgrade the importance of the relationship.” Asked about foreign money flowing into Australia’s already frothy property market – and the sense one has that some of that money is coming from China – Bowen says, “That’s something we’re relaxed about.” Continue reading…

Some policymakers at the U.S. Federal Reserve apparently are worried about a quite unpleasant possibility, a slow-growth economy that still potentially kicks up inflation over the longer term.

That’s one interpretation of the minutes of the Fed’s most recent rate-setting meeting, held early this month. Those minutes were released today.

Those policymakers worried about inflation might be deemed the ‘sullen some,’ since Fed minutes characterize different Fed actors as all, many, most, some or few. In this case the word used was some.

“However, some participants noted that the recent rise in the prices of oil and other commodities, as well as increases in import prices stemming from the decline in the foreign exchange value of the dollar, could boost inflation pressures.”

Of course, there were ‘some’ on the other side, counting on significant economic slack among other factors to keep inflation and, very important, expectations about inflation, down.

But the ‘sullen some’ thought inflation risks tilted to the upside “over a long horizon,” because the huge government stimulus spending and resultant stratospheric federal budget deficits could unmoor the famously anchored inflation expectations of market participants and the broader citizenry.

The ‘sullen some’ added to their dark scenario the possibility that banks might try to cut reserves as the economy recovers by buying securities or lowering credit standards and pumping out loans.

Meanwhile, the spectre of a long-standing too-high jobless rate turning this into a truly long slog rather than a rapid recovery was apparent to all who attended the Federal Open Market Committee meeting.

The weakness in labor market conditions remained an important concern to meeting participants, with unemployment expected to remain elevated for some time, the minutes said.

When it came to their ‘central tendency’ economic forecasts, everyone remained sullen on the jobs outlook. The 2010 unemployment rate is seen at 9.3% to 9.7%. The outlying range prediction was for 10.2%.

“Participants discussed the possibility that this recovery could resemble the past two, which were characterized by a slow pace of hiring for a time even after aggregate demand picked up.” The Fed could have saved some words with the phrase ‘jobless recovery.’

Today comes news Swedish super-car maker Koenigsegg is walking away from its deal to buy Saab from General Motors. A few weeks ago, American super-entrepreneur Roger Penske said his partner, Renault, was pulling the plug on an agreement to buy GM’s Saturn. What’s next? I have a suggestion: GM should walk away from Buick. For many, many years GM maintained too many brands; it neglected the gems it had (such as Saturn, whose cachet it squandered); and it still has too many. A wise GM board would focus on two signature, global brands: Chevrolet and Cadillac. It would kill off Buick, except in China, where the marque doesn’t have the musty image it carries in America. It would fold GMC into Chevrolet as in “Chevy GMC” as a sub-brand. And that would be that – freeing the ex-bankruptcy auto maker to focus on building world-class cars while rebuilding its balance sheet. (To give GM some credit, it has killed off Oldsmobile and Pontiac in recent years and is selling Hummer; that’s still not enough.) As for Saab, a once-desirable European brand GM managed to bungle, WSJ colleague John Stoll reports GM is inclined to let it die. I do wonder about the Chinese firm that was going to partner with Koenigsegg: Might Beijing Automotive Industry Holdings attempt to buy Saab – the name and/or its assets – on its own?

We keep banging the drum about deteriorating commercial real estate being the spoiler for any economic recovery. But we also shouldn’t forget about credit card debt and rising delinquencies in that area. Earlier today, Moody’s said U.S. credit card delinquencies rose for a third consecutive month.

As Dow Jones Newswires reported earlier: “The delinquencies, which give a glimpse of credit-card issuers’ potential losses and how much they may need to set aside in reserves, rose to 6.12% in October from 5.97% in September and 5.79% in August, driven by increases in 60-day and 90-day delinquencies.

“So-called early stage delinquencies were little changed from September but up 11% from a year ago, Moody’s said. The credit rating company expects early stage delinquencies to creep up over the next several months.”

Going back a few years ago, when consumers were up to their eyeballs in mortgage debt, they made sure they could stay current or close to it on their credit cards because this little piece of plastic is what they were living off of – they chose to let mortgages default when the refinance game didn’t work anymore. The question is: how many of these people who are defaulting now on their credit cards already defaulted on their mortgages? A double whammy for the financial sector if that number is significant.