Randomly Noted

There’s no reason yet for the Federal Reserve to accelerate unconventional measures to spur U.S. economic growth.

Indeed, to soon adopt what The Wall Street Journal today called a “modest but symbolically important change” in its quantitative easing might be counter-productive in that it spooks the market into thinking The Fed has lost all confidence in the recovery.

The correlated fear to that is to enlarge in investors’ minds the possibility of deflation.

And the maneuver itself, using money from maturing Fed-owned mortgage-backed securities to buy new securities, probably U.S. Treasurys, has no guarantee of making any measurable difference in the minimalist recovery under way.

Indeed, if the Fed winds up ‘pushing on a string’ with any sort of near-term additional quantitative easing measures, meaning they just won’t work because credit liquidity is not the problem, it could damage the Fed’s credibility.

The Journal’s Jon Hilsenrath reported today  that Fed policymakers are considering the move, not that it has already been adopted. A debate about what if anything to do likely will be continued at the Fed’s regularly scheduled monetary policy meeting later this month.

It’s also a bad idea to ease further when there’s still some debate about how strong the economy is right now. Though he has political reasons to want a rosy view, Treasury Secretary Timothy Geithner today laid out the pluses of the recovery that can’t fully be dismissed.

“Business investment and consumption – the two keys to private demand – are gettings tronger, better than last year and better than last quarter,” Geithner wrote in an op-ed piece in today’s New York Times. 

A more subtle argument also urges against further imminent action by the Fed. Call it fix-it fatigue. We’ve now lived through a couple of years of extraordinary actions by the government and central bank to end a credit crisis and cushion the impact of severe recession.

The great middle would agree that it was necessary, did some real good and kept things from being much worse. On the fiscal side, perhaps it even winds up costing the taxpayers a lot less than originally feared.

Still, that same middle group hasn’t given up on capitalism and realizes that too many short-cuts to avoid any economic downturn might well have helped get us into this mess.

That view argues that minimalist growth is all you can expect in the slow, painful process of deleveraging needed to clear the overextended decks for healthier, more sustainable economic growth.

In short, things need to be worse than they are for the Fed to decide it has to try anew to make things better.

“This is not Bolivia,” U.S. Treasury Secretary Timothy Geithner is quoted by The Wall Street Journal as having said when pushed by others to not honor contractually mandated bonuses to certain employees of American International Group.

It’s a good quote and a better policy. Give Geithner credit for a willingness not to bend to populist demands. In the end, upholding contracts and reinforcing that the U.S. is  a place where legal agreements are honored even when they become wildly unpopular and perhaps even grossly unfair is much more important than scoring an immediate political point or two.

The profile today of Geithner in The Wall Street Journal by Deborah Solomon is well worth reading. One interesting point: despite the criticism he’s endured in the role, largely on Capitol Hill, a significant part of the U.S. population doesn’t know who Geithner is.

The U.S. Treasury just pumped another $3.79 billion into GMAC Financial, the struggling finance company that is now majority owned by you and me. GMAC got itself into a financial pickle by getting too heavily involved in the mortgage business and in particular, the subprime mortgage business.

As part of the cash infusion today, the company also reclassified some mortgage assets it hopes to sell. And to pretty those assets up for sale, GMAC took additional write offs on some of those assets. But a rough, back-of-the-envelope calculation makes one wonder if these assets have been written down enough.

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James Bullard comes across like the guy-next-door, saying things like, “That sounds kinda funny,” when he catches himself talking about “a normal response to a crisis situation,” and saying, “Okay, I have a new line on this” when asked about Congress’s efforts to rein in the Fed.  But of course he’s anything but ordinary: The 48-year-old Bullard is president and CEO of the Federal Reserve Bank of St. Louis, and as such has been involved in the Fed’s extraordinary crisis-era activities. At the moment, he’s out and about, talking publicly about what he thinks the Fed board should do next – which is why he visited our newsroom today. One thing Bullard believes the Fed should NOT do is succumb to conventional wisdom. For example, he notes, we’re all obsessed with jobs, and that’s natural because the unemployment rate stands at an ugly 10.2% and could creep higher. But we should remember that the last couple of post-recession recoveries were “jobless” – and it’s likely this one will be, too. Bullard argues that employers’ recent modus operandi is to emerge from recessions with cautious hiring plans. Therefore, as the Fed mulls when to boost the funds rate rates from zero, it need not hold off until unemployment begins to come down, he maintains. That said, Bullard believes the Fed board will, in fact, wait for unemployment to ease – because that’s what politics, and conventional wisdom, dictate. And this waiting game means the funds rate may not be changed until 2012 – even though pent-up inflationary pressures mean the central bank should actually hike rates much earlier. Continue reading…

In a way, it’s long overdue, given last autumn’s financial system trauma: A key Congressional committee has voted to rein in the Federal Reserve’s authority. The 43-26 vote by the House Financial Services Committee is historic, and it’s a stunner. The measure’s shock value isn’t because of intent – surely most of us shuddered as the men running the Fed and the U.S. Treasury made historic and often problematic decisions to bail out some huge financial entities and let others die while engaging in massive monetary engineering that boggled the mind. What’s shocking is that the Congress has actually done something sharp and sure at a time when it seems Washington, D.C., can’t seem to do much of anything. There will be much discussion now about whether the Fed should or shouldn’t retain its powers, and whether the proposed regulatory council comprises the right bureaucrats. But at least the issue’s on the table. Let’s hope an intelligent debate ensues.

Lael Brainard, the Obama administration’s nominee for Treasury undersecretary for international affairs, made some tax mistakes – and as a result, it seems, a Senate hearing on her nomination has been delayed for about six months. Brainard’s error: she paid property taxes late on a Virginia home for four consecutive years and was slapped with $1,401.09 in interest and penalties. Gasp! She was late on another $485 in personal property taxes on a pick-up truck, and may have erred on a home-office tax deduction. Horrors! All in all, it’s a fairly humdrum litany of tax mistakes that surely shouldn’t have held up an important government nomination. On these grounds, I will most certainly never ascend to Washington, D.C.,’s heights. My husband and I have had our shares of minor tax bloopers over the years, largely thanks to the fact that we lived overseas for nine years, making dealing with tax authorities that much more difficult (an understatement.) But even if you never leave this shores, it’s awfully easy to fumble a tax return as one’s personal finances grow more complex. I see the Brainard affair as just another example of how Washington doesn’t work. Somehow, the Senate pooh-bahs on the Finance Committee would rather have no undersecretary than one who, like you and I, isn’t all that good at dealing with the IRS on routine matters. My colleague, Martin Vaughan, reports that the Senate is now going to give Brainard a hearing. Long overdue.

It’s not yet officially proposed, but holes are apparent in the plan being hammered out by the Treasury Department and key Congressman Barney Frank, D-Mass., to better handle systemically important financial institutions on the brink of failure.

The key proposal: financial companies that have more than $10 billion in assets would have to pay the government back for breaking up one of their too-big-to-fail brethren.

That according to the reporting of Damian Paletta of  The Wall Street Journal.

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The report released today on last year’s emergency capital injections into nine major financial institutions doesn’t contain any barn burners but is an interesting read for what it confirms as well as the well-written time line of what happened to the financial world last year. (For full report, click here).

One of the interesting tidbits – the nine CEOs of these financial institutions were called one afternoon and told to be in Washington the next day for a 3 p.m. meeting at the Treasury. It was here that government officials would essentially give them an offer they couldn’t refuse – take the capital injections, you have no choice.

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In the avalanche of one-year-after coverage of the bankruptcy of Lehman Brothers and its manifold consequences, a standout op-ed piece appears in today’s Financial Times by the historian and FT contributing editor, Niall Ferguson.

In his entertaining style, Ferguson makes the case that the collapse of Lehman and the subsequent market free-fall and credit crunch changed the political landscape, allowing for the broad government bailout and aid packages needed. He also laments the lack of structural change since. Worth a read.

A wrongheaded effort to exert more Congressional authority over the Federal Reserve unfortunately has gained momentum with the apparent support of a key House Democrat.

The Wall Street Journal quotes Rep. Ron Paul, R-Texas, as saying he has a commitment from Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, to push ahead a bill that would subject the U.S. central bank to more audits.

Even if the emerging legislation specifically carves out the creation and implementation of monetary policy from Monday morning quarterbacking, otherwise known as Government Accountability Office audits, there likely will be enough left in the bill to make people around the world wonder about the Fed’s independence of action, especially in reaction to a crisis.

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