Posted on 05/04/2009 8:06:51 AM PDT by dennisw
The Federal Reserve Bank of New York shaped Washington's response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.
During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had a large holding in Goldman stock, which because of Goldman's new status as a bank holding company was a violation of Federal Reserve policy.
The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They've since risen $1.7 million in value.
Mr. Friedman also was overseeing the search for a new president of the New York Fed, an officer who has a critical role in setting monetary policy at the Federal Reserve. The choice was a former Goldman executive.
The case illustrates what a tangle of overlapping interests can arise at a hybrid institution like the New York Federal Reserve Bank, especially as the U.S. government, in addressing the financial and economic turmoil, grows ever more deeply enmeshed in American business and banking.
Mr. Friedman, who once ran Goldman, says none of these events involved any conflicts. He says his job as chairman of the New York Fed isn't a policy-making one, that he didn't consider his purchases of more Goldman shares to conflict with Fed policy, and bought shares because they were very cheap.
Last week, following questions from The Wall Street Journal, Mr. Friedman, 71 years old, disclosed he would step down from the New York Fed at year end. He added: "I see no conflict whatsoever in owning shares."
(Excerpt) Read more at news.google.com ...
~~William Cohan, "Does Goldman Sachs Really Rule the World?" October 2008
“The Fed is the problem, not some Chariman’s ties to some banker.”
I agree. Maybe a first step (maybe a “populist” and possible step at this time) would be to cut 1/2 of the Fed’s mission out - “insuring economic growth”.
Left to insuring a stable currency, period, stability, predictability and soundness of long-term conditions, instead of volatility, will have greater play in the less artificial, more natural market place.
It is my view that the Fed’s mission vis-a-vis “economic growth” as made the major-event swings in the economy larger and more systemic, not less; than would have been seen without that mandate on the Fed.
What is the “growth” since 1995 mean, when the inflation that created it (the Fed, cheap money, resulting “leverage”) must now be rung out of the system? Not much.
“The Fed is the problem, not some Chariman’s ties to some banker.”
I agree. Maybe a first step (maybe a “populist” and possible step at this time) would be to cut 1/2 of the Fed’s mission out - “insuring economic growth”.
Left to insuring a stable currency, period, stability, predictability and soundness of long-term conditions, instead of volatility, will have greater play in a less artificial, more natural investment market place.
It is my view that the Fed’s mission vis-a-vis “economic growth” has made the major-event swings in the economy larger and more systemic, not less; than would have been seen without that mandate on the Fed.
What is the “growth” since 1995 mean, when the inflation that created it (the Fed, cheap money, resulting “leverage”) must now be rung out of the system? Not much.
“The Feds justification for being brought into existence was to stabilize an anarchic banking system and prevent panics and depressions. It did a piss poor job this time around”
Frankly, from some economists I have read, the Fed, created a decade before the 1929 stock market crash, helped, with its policies, to contribute to the conditions that led to that crash and the depression. The depression was not CAUSED by “Wall Street”, stocks were simply on the “early warning end”, an early casualty of factors and forces that included Fed policy as well as trade protectionism. Wall Street did not create the bubble, it reflected, in stocks, a financial bubble that had been introduced into the system. If there had not been a “Wall Street”, that financial excess would have found some other outlet and eventually “crashed” as well. Media driven ignorance and politically biased non-wisdom has focused the public psyche on the “1929 crash”, as “leading” to the depression. It was a leading indicator of an inflated financial system, not the cause of it.
“as it let banks and Wall Street run wild with bundled mortgages and credit default swaps.”
That’s the SEC’s job, not the Fed’s.
SMEs (bundled mortgages) were around for more 20 years and not a problem. The problem they represented this time was not their nature but the massive, unhistorical, unprecedented portion of the total ($amount and $volume) of sub-primes contained within them, together (at the same time) as the total pool (good and bad) represented a giant real estate bubble. They represented a tipping point.
CDOs were no different. They represent “financial insurance”, in a manner not much different than you insure things. You don’t pay the full market value of what you insure, you pay a % that represents the calculated risk your insurer thinks they are taking. Again, remove the massive sub-prime bubble from within the overall mortgage bubble and you have a more normal housing downturn with a more normal default rate, and neither SMEs or CDOs are undermined.
SMEs and CDOs do not represent PRIME causes. The creation of the leverage in the economy originated with Fed policy. That changed the valuation of interest rates and risk, which from about 2002 meant that you paid less in interest to borrow money than you could earn on it in the bank. Therefore - due to Fed policy - borrowing WAS induced.
Blaming SMEs and CDOs is simply blaming the mechanisms that financial people must use to try to deal with monetary, interest rate and risk scenarios that originate with conditions laid down in the economy by the Fed.
SMEs and CDOs do, and did, what is in fact neutral, to either ups or downs - they spread the risk. In general it is a benefit. When the sub-prime mess caused the tipping point, the benefit - the spreading of risk, also meant that more institutions had assumed some of that risk.
But, under it all, was not an error in the concept, but the negligence in permitting the real estate and subprime bubbles - they represent the virus, they undermined the valuations, not the general concept of SMEs or CDOs.
“Left to insuring a stable currency, period, stability, predictability and soundness of long-term conditions, instead of volatility, will have greater play in the less artificial, more natural market place.”
If you want currency to be stable, the first thing to do would be to get rid of fiat paper money. The best solution would be to have a free market in money (that means no fiat money, no central bank, no gold standard, just private banks and private mints). I don’t see as how the Fed could ever dedicate itself to stabilizing currency. Its job, its entire reason for being, is to expand (and contract, but mostly expand) credit.
I don’t know where this idea ever came from that we need a central bank to keep inflation/deflation in check. Why does the money supply have to expand when production expands? What’s the matter with prices falling? Of course, this is all just theoretical mumbo-jumbo. The Fed has no interest in keeping the money supply stable relative to GDP, or however it’s put. It exists to counterfeit money so rich people can steal from the rest of us (no, really).
I disagree. Wallt Street has proven it cannot be trusted with derivatives, CDOs and credit default swaps. They need to be limited and regulated and put on an open exchange. Not traded in the dark OTC style
I don’t believe in totally unregulated OTC markets in CDOs and CDS. We still have those markets by the way
Aside from all that, yes the Fed created a bubble via too low interest rates
“I disagree. Wallt Street has proven it cannot be trusted with derivatives, CDOs and credit default swaps. They need to be limited and regulated and put on an open exchange. Not traded in the dark OTC style.”
Opposing the manner of trading, is not the same as claiming that by nature a certain financial instrument is or was the problem.
Even many in the financial services industry have before and in larger numbers recently proposed the “clearing house” idea for trading CDOs and credit default swaps. It won’t change the basis of what they do (financial insurance) or how they do it (the risk calculations). It will help improve the “market” pricing of them, resulting, most likely, NOT in fewer of them but in buyers paying a possibly more realistic price for them. To the extent that more open pricing mechanism makes a better actual balance sheet for financial outfits, and others, that will be a good thing.
Regardless, even had that mechanism been in place, that transparency of trading CDOs and “swaps” WOULD NOT HAVE CHANGED THE DESTRUCTION IN THE UNDERLYING VALUES PRODUCED BY THE TIPPING POINT CREATED BY THE EXCESSIVE VOLUME OF SUB-PRIMES IN AN EXCESSIVE VOLUME OF MORTGAGES CREATED BY THE HOUSING MARKET BUBBLE.
SMEs were MADE attractive, and seemingly financially a good deal, by the Fed’s cheap money, low interest rate policies; NOT by the mere existence of the SME type of investment or the mere existence of CDOs.
The same Fed policy, running unchecked, destroyed the attractiveness of SMEs when the bubble the Fed created burst. None of which was due to the existence of CDOs and how they were traded. The inherent “leverage” in the system was made possible by the Fed’s policies, not by the use of CDOs. They simply put to use the inherent “leverage” (attractiveness of borrowing in dollar-denominated terms) that Fed policy created.
I blame Wall Street scum and government scum. Your problem is you let Wall St off the hook for their obviously thievery. You only have the Federal Reserve in your sights which is deficient
Funny thing is the Wall Street scum are mostly Democrats and contributed to Hillary and 0boma much more than John McCain
As far as raw numbers the CDS mess is much much larger than the CMO mess. And CDS triggered the insane level of greed where you make BULLSHIT insurance contracts with parties (AIG) you know cannot pay off (AIG) in case of default. But the short term profits and bonuses sure look great and made lost of people millionaires! You have me laughing as you try to lay it all off on easy money from the Fed. Which is only part of the story
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