Fed Chair calls out Congress for fiscal policy frustrating recovery

FED Chair Ben Bernanke is widely believed to be stepping down at the end of his second term in January. Today he appeared before Congress to give his last biannual update on the economy to the House Financial Services Committee, reaffirming the Fed’s monetary policies but warning that federal fiscal policy remains the single largest obstacle to revitalized growth.

He noted that federal spending cuts of the kind supported by the GOP are reducing growth this year by about 1.5 percentage points.

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery.”

Read his remarks to Congress here.

Discord on the Fed over stimulus signals lack of direction for recovery

Recent public disclosures of the minutes from the Federal Reserve’s board meetings indicate a growing rift between proponents of a gradual withdrawal of the Fed’s stimulus policy of “quantitative easing” with opponents who want to end the policy by the close of the fiscal year.

Ben Bernanke, the Chair of the Fed, recently announced that it would wrap up its monthly bond-buying program as the unemployment rate continues decline. His public disclosure on June 21 led to a steep downturn of stocks as investors worried about the future of an economy without government backed securities to buoy its lackluster performance. The Fed’s announcement also sent 10-Year Treasury notes into a downward spiral, helping to push interest rates to their highest rate since March 2012.

The stimulus campaign has received mixed reviews to be sure. The Fed has been adding bonds at the rate of $85 million per month since 2009, but last month took the unusual step of announcing it would end this program when the unemployment rate reached 6.5 percent. However, the current rate of unemployment at 7.6 percent has declined by only .06 since June 2012. If that rate of decline remains constant, it means another 2 years of stimulus before the intended target is reached.

The Fed currently has 19 sitting officials but only 12 of them are voting members. According to recent disclosures about half the Fed’s members oppose continuation of quantitative easing, even though more than half of voting members support a later withdrawal.

Much of this disagreement stems from the lack of evidence about whether the Fed’s policy is doing any good. One argument that it has made for its modest stimulus policy is that there are uncertain benefits and even more uncertain consequences. One way for investors to look at the issue is that Fed stimulus money signals a weak economy:  if the Fed continues the policy, or pursues more a aggressive strategy, it appears to be keeping the economy from tanking again. Another way of looking at it is that withdrawal of stimulus signals an improving economy to investors. Of course, that turned out not to be the case in the short term when the Fed’s announcement sent the DOW into a tailspin last month, resulting in the single largest sell-off of stocks this year. Numerous speeches by Fed officials and a highly publicized spin campaign by the Obama Administration helped restore investor confidence over the last few weeks, although this did not lead to a subsequent decline in the spike on interest rates.

John Williams, who is the president of Federal Reserve Bank of San Francisco, urged caution:  “The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy. Nothing could be further from the truth. Once one recognizes uncertainty, some moderation in monetary policy may well be optimal.” (Read his paper on moderation in monetary policy here.)

The bottom line is murky. The fact remains that the economic recovery has not been driven much by private firms who are more interested in short term profiteering, dodging taxes, and hiding money overseas in tax havens. Neither has the recovery been driven by the Fed and other government programs, in part, because there has been little to no effort to get people back to work.

With the unemployment rate at 7.6 percent and barely shrinking from last year, perhaps other measures are needed such as President Obama’s Jobs Bill or other serious efforts to improve the dismal labor market. Since Congressional Republicans have squashed any effort aimed at helping American workers by appealing to the bogus “big government, wasteful spending” straw-man argument, it appears that the real stumbling block to lasting economic recovery is the political gridlock in Congress that is bought and well paid for by the interests of big business.

Barclays scandal spreads to US banks, regulators, and politicians

As big banks face the fallout from a global investigation into interest rate manipulation, American and British lawmakers are scrutinizing regulators who failed to take action that might have prevented years of illegal activity

Political officials in London and Washington this week are questioning whether regulators allowed banks to report false interest rates that precipitated the 2008 financial collapse. On Monday, Congress requested information about the role of the Federal Reserve Bank of New York in failing to properly regulate bank interest rates. The Senate Banking Committee on Tuesday also announced it was looking into the issue.

The new focus on regulators, banks, and other financial institutions such as credit rating agencies has intensified in the last two weeks after the British bank Barclays agreed to pay $450 million to resolve a civil case after it was discovered it had been manipulating key interest rates. Regulators accused the bank of improperly influencing these rates to deflect concerns about its capital backing and financial viability.

The Barclays settlement is the first of its kind stemming from an ongoing investigation into the question whether banks set key benchmarks, including Libor, or the London interbank offered rate. Other countries are considering action against more than ten large banks, including JPMorgan and Citigroup. The banks also face civil litigation from cities, investors, and financial firms that contend they lost billions from the misreporting of these key interest rates. Such lawsuits could end up costing the banking industry tens of billions of dollars.

The House Financial Services Committee sent a letter to the New York Fed on Monday seeking transcripts from dozens of phone calls in 2007 and 2008 that took place between central bank officials and executives at Barclays. Among the officials that the Senate Banking Committee plans to question during hearings this month include Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner, who ran the New York Fed during the crisis. Geithner has long been criticized by opponents on both the left and right as an insider to the financial mess who has allowed key players off the hook.

The attempt by political officials to reign in financial manipulation by large firms and create more regulation has been hampered by political corruption during a presidential election year where multiple and conflicting constituencies must be satisfied. The Obama administration in particular has been lax to regulate the financial industry, in part, because Wall Street donors were one of President Obama’s largest contributors in the 2008 election.