CFIUS and Silicon Valley: We’re Still Trying to Find a Cure!

CFS senior advisor Charlie Schott writes on new twists to the Committee on Foreign Investment in the United States (CFIUS).  While in government, Charlie’s group oversaw the Treasury-chaired inter-agency Committee.

CFIUS is the place where the United State’s commitment to an Open Investment Policy meets our most important national security concerns.

Early last August Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA), making significant changes to CFIUS.  The following article covers (1) what changes have been made by the new law and (2) what to expect with CFIUS going forward.

Who should be interested in these changes?  The short answer is Silicon Valley and financial market participants!

For the paper
http://centerforfinancialstability.org/research/CFS_Schott_1_10_19.pdf

Congrats Randal Quarles on Financial Stability Board Appointment

Featured

Congratulations to Randy Quarles on his appointment to serve as Chair of the Financial Stability Board.

CFS is thankful for Randy’s early and constant support of our organization. As an Advisory Board Member and Trustee, he has been a source of wisdom on a wide range of topics. In particular, his involvement in “Bretton Woods: The Founders and Future” was especially productive and meaningful. The inspiration and encouragement from Randy will continue to guide CFS especially as we plan to honor the 75th anniversary of the birth of the international financial system and think strategically about the future.

See “Summary and Next Steps – Bretton Woods: The Founders and Future.”

Randy is uniquely experienced, remarkably learned, and thoughtful on virtually any monetary, regulatory, or related legal topic. Likewise, few to none are more honorable in character.

We wish him the best at the Financial Stability Board and continued success at the Fed.

Novick on Financial Industry Transitions

Barbara Novick (BlackRock Vice Chairman and CFS Advisory Board Member) discussed financial industry transitions at the recent CFS Global Markets Workshop.

Presentation highlights include:

– Indexed equity strategies remain relatively small,
– Challenges of applying macroprudential tools to market finance,
– Potential risks to the US financial system from the future of Libor to bondholder rights to pension underfunding, among others.

For accompanying slides:
www.CenterforFinancialStability.org/research/BNovick-slides11-29-18.pdf

Don’t dismantle the post-crisis early warning system…

Greg Feldberg posted a thoughtful piece on the Office of Financial Research (OFR) – “Don’t dismantle the post-crisis early warning system.”  The OFR is a National treasure…and should be treated as such.

Greg covers much ground and is well informed as a former Senior Associate Director for Research at the OFR, Director of Research at the Financial Crisis Inquiry Commission (FCIC), and current Yale research scholar.

The perspective is well articulated.  I have a few remaining questions for Greg – such as his perspective on the relationship between FSOC and the OFR as well as the prior study on investment management.  Investment managers differ dramatically from banks.

I highly recommend the read – https://www.brookings.edu/research/dont-dismantle-the-post-crisis-early-warning-system/

Best,  Larry

Crisis Detection and Prevention

I discuss crisis detection and prevention based on experiences chairing an inter-agency crisis prevention group (while at the U.S. Treasury), working as a strategist on Wall Street, and advising a global macro hedge fund. The paper was published as a chapter in “The 10 Years After” the financial crisis volume published by the Reinventing Bretton Woods Committee.

My views differ from many recently offered.

I conclude with eight actionable ideas to improve crisis detection for investors and officials.

For full remarks:
www.CenterforFinancialStability.org/research/10YearsAfter_Goodman_Chapter.pdf

Sandor on “Creation and Evolution of New Markets: The Case of Interest Rate Benchmarks”

Dr. Richard Sandor – CFS Advisory Board Member and CEO of the American Financial Exchange (AFX) delivered remarks “Creation and Evolution of New Markets: The Case of Interest Rate Benchmarks” at a recent CFS roundtable.

Richard discussed the new Secured Overnight Financing Rate (SOFR) and American Interbank Offering Rate (Ameribor) – which is a new transaction-based interest rate based on actual overnight, unsecured transactions. As a perennial financial entrepreneur, his comments on LIBOR, financial innovation and the seven stages of market creation were especially noteworthy.

For the presentation: http://centerforfinancialstability.org/research/Sandor-11-16-18.pdf

For more on the AFX and Ameribor, please request a briefing pack from Rafael Marques at rmarques@theafex.com.

From China / Central Banking East and West since the Crisis…

I had the pleasure of presenting “Central Banking East and West since the Crisis,” at a discussion hosted by the Shanghai Development Research Foundation (SDRF) and Friedrich Ebert Stiftung.

Key takeaways include:

  • Much has changed in China and central banking in the last decade.
  • Most analysis of central bank balance sheets fails to incorporate the impact of the People’s Bank of China (PBOC) on the provision of global liquidity. This is a critical error – especially as the Chinese yuan (CNY) moves toward reserve currency status.
  • The Federal Reserve, PBOC, Bank of Japan, and Bank of England were early providers of global liquidity in the aftermath of the crisis. Yet, after 2011, central bank liquidity created distortions.
  • Extraordinary monetary policies were far from costless.
  • Analysis of speculative activity in futures markets after large injections of central bank liquidity reveals that:
    1. Speculative activity skyrockets.
    2. Net speculative long positions increase and push valuations upward.
    3. The volatility of investor positioning or investor switching behavior also increases.
  • Removal of excess central bank liquidity remains one of the most formidable challenges for markets today.

For slides accompanying the presentation: www.CenterforFinancialStability.org/speeches/ShanghaiDRF_101518.pdf

On a parenthetical note, after over two decades of travel to China, this was one of my most extraordinary visits.

Hanke on Money in Forbes…

Johns Hopkins University professor and CFS special counselor, Steve Hanke wrote a superb piece on understanding money in Forbes.

He writes that “The Fed’s money supply measures are poor quality and misleading. For superior measures, go to the Center for Financial Stability in NYC, and use its Divisia M4 metric.” His piece stretches into important detail and reveals common misconceptions.

From my perspective, our monetary data have been exceedingly helpful at understanding the efficacy of Fed policy and wiggles in the US economy. Money and financial liability data are applicable for investment managers and economists of all stripes… Keynesians, monetarists, etc.

The full piece is available at … https://www.forbes.com/sites/stevehanke/2018/10/29/the-feds-misleading-money-supply-measures/

CFS Financial Crisis Timeline

As the 10-year anniversary of the global financial crisis approaches, assessment of key events before, during, and since is essential for understanding varying dimensions of the crisis.

The CFS Financial Timeline, created and managed by senior fellow Yubo Wang, seamlessly links financial markets, financial institutions, and public policies. It:

  • Covers more than 1,100 international events from early 2007 to the present.
  • Provides an actively maintained, free, and easy-to-use resource to help track developments in markets, the financial system, and forces that impact financial stability.
  • Curates essential inputs on a real time basis from established public sources.

Since 2010, the Timeline has become an integral part of the work done by scholars, students, government officials, and market analysts. View the Timeline.

We hope you find it of use and interest.

UK-US Financial Regulation: The Benefits of Greater Coherence

“UK-US Financial Regulation: The Benefits of Greater Coherence” illustrates the importance of “regulatory coherence” across borders.

Authors Ike Brannon, Bob Jennings, and Julie Chon delve into the longstanding and seminal UK and US relationship from a financial regulatory perspective.  They examine pathways to deepen and formalize cooperation with the aim to strengthen the international financial system.

As always, comments, critique, complement, or alternative thoughts are eagerly sought.

View the paper.
http://www.centerforfinancialstability.org/research/US_UK_Regulatory_Coherence.pdf