Britain is doing it, France is doing it. Should the US impose a windfall tax on bankers’ bonuses too? Let me set out what I understand to be the case for the prosecution. I invite readers to comment on whether you think it stacks up or not.
1. People on Main Street are furious about Wall Street bonuses.
2. This anger is justified because the bonuses are based in large part on windfall profits. These profits derive from taxpayer-backed interventions that stabilised the financial system, paving the way for a recovery in financial markets and collapse of risk spreads. Read more
Krishna Guha of the Financial Times asks has a discussion of oversight regulation silenced the Fed hawks? Read more
Did you spot the big hole in the Obama speech on job creation today? Nothing new on small business access to credit – possibly the single biggest obstacle to job creation in the US. This is a huge issue for the economy, the White House and the Fed.
With the Fed rightly withdrawing from sectoral intervention via financial markets now the financial system has normalised, supporting small business access to finance is properly a job for the government.
On paper this is not difficult. The government could provide guarantees to limit losses on small business loans or create a funding vehicle to coinvest in such loans alongside banks (I prefer this route as the taxpayer and the bank would have the same economic interests). Read more
Bernanke’s remarks today suggest that Friday’s better-than-expected jobs report has not changed the stance of Fed policy too much.
That is not a great surprise. The Fed was not expecting the Friday numbers. They were materially better than expected and might shave a quarter point off policymakers year-end 2010 unemployment forecasts. But one month’s data is just one month’s data. And even confirmation that labour market stabilisation is coming a bit sooner than recently expected does not change the basic calculus as far as policy is concerned.
In basic macro terms, the battle between Fed hawks and doves will be joined in earnest only after we get two or three months of 200,000-plus job creation with an accompanying decline in unemployment. At that point hawks can say Read more
The Fed will take asset prices into account when setting monetary policy, writes Krishna Guha of the Financial Times Read more
Congress may not share Bernanke’s vision of what the Fed should look like, writes Krishna Guha of the Financial Times
Ben Bernanke today warned lawmakers not to strip the US Federal Reserve of the powers and independence it needs to promote growth and price stability at the start of what promised to be a contentious confirmation hearing in the Senate.
His comments came as Chris Dodd, chairman of the Senate banking committee, praised Mr Bernanke as “the right leader for this moment in our nation’s economic history” – but said he intended to pare back the Fed’s role to focus it more narrowly on monetary policy. Read more on ft.com.
Bernie Sanders, the independent senator from Vermont, has put a “hold” on Bernanke’s reconfirmation as Fed chairman. This procedural device prevents a vote of the full Senate on his nomination and can be overcome by a 60 vote supermajority.
The move is no great surprise. Holds are a common feature of life in the Senate. Sanders, a lone socialist, does not represent a larger faction in the legislature. Read more
I’ve been talking to some longtime Fed watchers ahead of Bernanke’s re-confirmation hearing on Thursday and I’m struck by how bad Fed-Congress relations are. Meltzer – the unofficial historian of the US central bank – tells me the situation is worse than at any point in the Fed’s history. There is real concern that some of the proposals before Congress to curtail the power of the Fed and curtail its independence will end up becoming law.
This is a tragedy not just because some of these proposals (not all) could do real harm, but because the desire to cut the Fed down to size is forestalling discussion of issues I think should be high on the post-crisis agenda for the institution. Read more
Krishna Guha of the financial times on the differences between Bernanke’s remarks today and in 2008 Read more
The Fed will not just ignore commodity price movements, write Krishna Guha of the Financial Times Read more
The news from Bernanke’s speech today seems to me that the Fed is looking to the dollar and commodity prices as influencing inflation and inflation expectations. This confirms similar themes I had picked up from private discussions with policymakers. Most people seem to think the Fed has to adopt one of two extreme positions on the currency: (1) policy should be completely indifferent to the dollar, or (2) policy should be based entirely on a currency objective. This is silly. Bernanke seems to me to be articulating a more middle-of-the-road position: the Fed regards the dollar as one of a number of material factors that influence the outlook and the stance of policy.
Liu Mingkang – the Chinese bank regulator who attacked Fed monetary policy over the weekend for fuelling the carry trade – is a sharp guy and worth taking seriously. But China would do well to acknowledge that it shares some responsibility for preventing a new wave of asset price bubbles across the emerging world. The best way to deal with capital inflows is to allow your currency to appreciate – but other emerging economies cannot do this, at least to the extent necessary, because China is not allowing its currency to appreciate. Not yet, anyway.
Krishna Guha of the Financial Times discusses the hawks and doves of the FOMC Read more
Chris Dodd‘s financial regulatory reform plan goes too far in my view in stripping away powers from the Fed. It makes sense to take away the Fed’s ability to bail out individual companies under 13.3 once there is a special resolution entity in place to manage financial failures. But taking away the Fed’s banking supervision role risks robbing it of an information flow vital to deal with financial stability threats. And giving systemic risk powers to a new agency is a recipe for confusion or worse.
Why? Because an economy with a systemic risk or macroprudential regulator and a separate central bank would be like a car with two drivers. Read more
Janet Yellen is still focused on deflation risk (or excess disinflation risk) and the need to bring down unemployment. In her analysis today, spare capacity and the decline in unit labour costs are exerting a strong downdraft on the overall inflation rate and the risk is that core inflation - which is already below target – will decline further from here.
No great surprise, coming from the committee’s leading dove. But no vote here for early tightening!
Dennis Lockhart meanwhile sees a “relatively subdued pace of growth… Read more
I ran an interview with St Louis Fed president Jim Bullard in today’s FT. Here are a few of my takeaways from that discussion, in no particular order.
1. Bullard has an above-consensus forecast for growth in 2010 and sees unemployment as likely to come down by roughly a point and a half from its peak over the rest of the year - putting it in the 8.5 per cent to 9 per cent range at year end.
2. He thinks the Fed should wait for solid monthly job gains and a decline in the unemployment rate before starting to tighten policy – but that it need not wait for unemployment forecasts to converge to their natural rate. Read more
“Low rates of resource utilisation.” That was one of the three factors the Fed has identified as preventing a rate rise for at least six months. With unemployment now at 10.2 per cent, and probably peaking nearer 10.5 per cent, “resource utilisation” is unlikely to be the trigger for an early rate increase. Indeed, if unemployment alone decided interest rate policy, we could see near-zero rates for a very long time: Fed unemployment forecasts are about 8 per cent two years from now. Read more
Krishna Guha of the Financial times on whether to classify the Fed’s statement as hawkish or dovish Read more
The Fed also shaved $25bn off its planned agency debt purchases, writes Krishna Guha of the Financial Times Read more