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Sunday, November 27, 2022


Turf Wars

Excellent article by Mish on the tensions between gov’t entities and quasi-gov’t entities in attempting to address the mess they’ve created in the economy.  One point I might add to Mish’s commentary is that I don’t think "regulation" per se is the problem.  I’d qualify that term, since regulation can be necessary and justified, or misguided, self-interested and harmful.  No comment on the Fed, but in my (admittedly limited) interaction with the SEC, the regulation seemed pretty well warranted. – Ilene

Turf Wars: Fed, SEC vs. Congress, Treasury

The infighting between Fed governors as noted in Fed Governors Openly Question Bernanke’s Competence, has now become a major turf war involving the Fed, Congress, the treasury department, and the SEC.

Senators Dodd, Shelby Warn Fed, SEC on Rushing Securities Deal.

Federal Reserve Chairman Ben S. Bernanke and Securities and Exchange Commission Chairman Christopher Cox were ordered by two top senators not to proceed with a deal overseeing Wall Street until consulting with Congress.

"We ask that no action" be taken before legislators can decide it’s in the economy’s "best interests," Connecticut Democrat Christopher Dodd and Alabama Republican Richard Shelby, the Senate Banking Committee’s top lawmakers, said in a letter to Bernanke, Cox and Treasury Secretary Henry Paulson.

The senators delivered their warning as Bernanke and Cox met at the Fed today to hammer out final details of a memorandum of understanding.

Cox offered to brief Dodd and Shelby on the SEC’s talks with the Fed. The memorandum doesn’t "create new legal authorities or responsibilities," he said in a letter responding to the two. "It is intended to facilitate our agencies’ ongoing, day-to-day cooperation. It is the role of Congress to decide whether, and if so how, to alter the existing regulatory structure."

"We don’t want to encourage dependence upon the Federal Reserve as a backstop," Assistant U.S. Treasury Secretary Anthony Ryan said in a June 24 interview with Bloomberg Television. "As a policy matter, we must be in a place where firms are allowed to fail," he added in a London speech the same day.

No Authority

Dodd and Shelby flagged in their letter that Congress hasn’t given the Fed permanent authority to open the so-called discount window to securities dealers.

"We look forward to continuing to work with Congress on these important issues," said Fed spokeswoman Michelle Smith in Washington.

Cox urged his staff June 23 to not "engage in turf wars among federal regulators," according to an e-mail the SEC provided to Bloomberg News. He added that it’s "inconceivable to me, in any financial-services regulatory modernization that Congress might in future years undertake, that the role of the SEC will not be strengthened and expanded."

Fed Vice Chairman Donald Kohn told lawmakers June 19 that policy makers are "studying a range of options" for the PDCF. Fed governors and district-bank presidents June 25 heard from the supervisors dispatched to investment banks.

Philadelphia Fed President Charles Plosser and Richmond Fed chief Jeffrey Lacker have urged setting clear ground rules for access to central bank funds. They also warned this month that the lending risks provoking future crises by causing moral hazard, or encouraging firms to take on more risk in the anticipation of Fed aid in case their bets go wrong.

Sign, Sign, Everywhere A Sign

In Things That Have Not Yet Happened I mocked Bernanke for suggesting Danger of downturn appears to have faded. Some wanted signs. I would have thought that Fed infighting alone was enough but those wanting more signs need only consider Fed Looking To Bend Rules To Aid Banks.

Would Bernanke be openly soliciting private equity firms to invest in banks if there was not a serious problem?

Now, open warfare involving the Fed, the SEC, Congress, and the Treasury department should be enough to convince everyone.

Congress is upset about the Primary Dealer Credit Facility (PDCF), and there is even disagreement at the Fed over its use. Philadelphia Fed President Charles Plosser told reporters "we run the risk of sowing the seeds of the next crisis."

Fed Governor Lacker warned on the TAF (Term Auction Facility) with these statements: "It isn’t clear what kind of market failure is being addressed" with the TAF. Central bankers should be wary "that they can substitute their own judgment about the fundamental value of financial instruments."

This open warfare lets everyone know just how serious things are. It does one other thing too: As long as everyone is fighting, nothing will get done. That’s probably the best we can hope for. Look out if a deal is reached.

The Fed, the Sec, and Congress each had a big role in this mess. The role was not lack of regulation. The role was too much regulation!

  • The Fed: Micromanaging interest rates, holding interest rates too low too long, opening praising ARMs and derivatives.
  • The SEC: Creating government sponsorship of the rating agencies.
  • Congress: Creating government sponsorship of the GSEs, HUD, FHA, countless affordable housing programs everyone one of which failed, etc., etc.

Now, in strict accordance with the Fed Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Since the Fed, Congress, and the SEC are all guilty, it is only fitting they should all be fighting over ways to make the problem worse.

Mike "Mish" Shedlock

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