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

Fed Balance Sheet Since 1914

Kurt Schuler (CFS senior fellow in financial history) and students of Steve Hanke (CFS special counselor) converted the Fed’s weekly balance sheet from its beginning into spreadsheet form.

The data should prove useful for anyone concerned with the quantitative study of monetary policy in the United States over the last 100+ years.

Our joint Johns Hopkins / CFS working paper, “The Federal Reserve System’s Weekly Balance Sheet since 1914,” is available here.

Accompanying Spreadsheets

Similarly, Bank of England’s Ryland Thomas informs of an improved balance sheet dataset for the Bank and new paper “The Bank of England as lender of last resort: new historical evidence from daily transactional data.”

Bondi Testimony on SEC Seform

CFS senior fellow Bradley J. Bondi testified before the U.S. House of Representatives Subcommittee on Capital Markets, Securities, and Investment at a hearing entitled, “Ensuring Effectiveness, Fairness, and Transparency in Securities Law Enforcement” on June 13, 2018.

In his testimony and written statement, Brad advocated for transparency and reform from the SEC with respect to the imposition of issuer/shareholder penalties and disgorgement, advised against extending the statute of limitations for SEC enforcement actions, and discussed pending legislation to reform SEC administrative proceedings and to preempt enforcement of certain state securities laws.

Testimony and written statement
https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=403565

Bondi’s CFS Ten-Point Blueprint for SEC Reform
http://www.centerforfinancialstability.org/research/Bondi_8_17_17.pdf

Paul Tucker interview on central banking and “Unelected Power”…

The Center for Financial Stability (CFS) thanks Sir Paul Tucker – Former Deputy Governor, Bank of England and Chair, Systemic Risk Council, and Harvard Fellow – for “Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State.”  “Unelected Power” is broad and deep.  It is a joy to read – with priceless quotes and footnotes.

We are grateful to Paul for sitting down with CFS to discuss:

– Governance and central banking,
– A “Money – Credit Constitution” with emphasis on “inside” and “outside” money,
– Division between fiscal and monetary activities,
– Examples of central banking excellence,
– Prospect for normalizing monetary policy,
– Regulatory policy – ten years after the crisis,
– Surprises and motivation for writing “Unelected Power.”

The following are excerpts from the conversation.
http://centerforfinancialstability.org/research/Tucker_Unelected_Power.pdf