WSJ / Trump on Yuan and Hacking…

Today “The Wall Street Journal” published a letter “Trump’s Right on Hacking, Wrong on Yuan” by Kevin Brock (CFS senior fellow / cybersecurity strategy) and me on page A18.

Donald Trump’s “Ending China’s Currency Manipulation” (op-ed, Nov. 10) mistakenly conflates cyberbreaches and currency manipulation.

View the full letter.

Sincerely yours,
Lawrence Goodman

Center for Financial Stability, Inc.
1120 Avenue of the Americas, 4th floor
New York, NY 10036

NYU Finance Professor Praises Derivatives

In a policy paper titled “In Defense of Derivatives: From Beer to the Financial Crisis,” New York University Clinical Professor of Finance Bruce Tuckman extolled the benefits of derivatives. “Policies that recognize the usefulness of derivatives and of holistic risk management and supervision,” he wrote, “will encourage businesses to use derivatives appropriately and, at the same time, reduce systemic risk.”

Professor Tuckman made the following arguments against several regulatory initiatives:

  • mandatory clearing may break apart bilateral portfolios that previously had comprised diversified combinations of liquid products (that now must be cleared) and illiquid products (that cannot be cleared);
  • imposing punitive margin requirements on uncleared derivatives might reduce derivatives volumes and risks, but also can increase nonderivative business risks; and
  • “required databases of derivatives trades and positions are unlikely to be useful in crisis prevention and management because they focus on a one-dimensional slice of firm and system-wide risks.”

He also recommended possible reforms that could reduce systemic risk without impairing the business uses of derivatives, including:

  • joint work by authorities and the industry to create common entity identifiers in order to improve firms’ and regulators’ abilities to manage holistic counterparty risk;
  • “a protocol to coordinate the liquidations of a failing firm’s most liquid derivatives and nonderivative claims”;
  • making the compression of over-the-counter derivatives positions a higher priority;
  • improving accounting norms in order to provide better holistic risk reporting, which would incorporate derivatives exposures; and
  • a narrowed safe harbor for derivatives to prevent the providers of illiquid leverage from being subsidized by their ability to circumvent the bankruptcy system.

Lofchie Comment: This excellent article should be read by anyone who is involved in financial regulation, whether at the political or regulatory level (or in the press).

Professor Tuckman is clear and to the point in his explanations as to (i) the benefits that derivatives provide (as well as their potential risks); (ii) the limited role that derivatives played in the financial crisis; and (iii) why a number of the measures taken by financial regulators to address systemic risk (e.g., mandatory central clearing) very likely did nothing or made the situation worse. (See recent article that included a statement by FDIC Vice Chair Thomas Hoenig, who is himself a proponent of mandatory central clearing, in which he effectively concluded that mandatory clearing was not effective in reducing systemic risk)..

If the economy is ever going to fully recover, then the people involved in its recovery must have a reasonable understanding of how financial products and markets work. Only on that basis is it possible to have a meaningful discussion about how to make the products and markets work better (or at least how not to undermine them). This article takes a significant step in that direction.


CFS Discussion on “America’s Bank” with Author Roger Lowenstein…

The Center for Financial Stability (CFS) thanks Roger Lowenstein for “America’s Bank: The Epic Struggle to Create the Federal Reserve.” “America’s Bank” is a gift for anyone interested in understanding the nuances and struggles behind the creation of the Federal Reserve.

Perhaps, of greatest importance, “America’s Bank” highlights lessons for today’s Fed stretching from governance to the size of the institution relative to the economy.

We are grateful to Roger Lowenstein for sitting down with CFS.  The following are excerpts from the conversation.

Best regards,
Lawrence Goodman

Lawrence Goodman
Center for Financial Stability, Inc.
1120 Avenue of the Americas, 4th floor
New York, NY  10036
1 212 626 2660

Sandor and CBOE Create Interbank Lending Exchange

We congratulate CFS Advisory Board Member, Dr. Richard Sandor on the creation of the American Financial Exchange (AFX) in partnership with Chicago’s CBOE Holding.  Richard is a source on unending financial wisdom for the CFS, given his interest in policy and role in creating some of the most innovative financial products over the last 40 years.  He is widely acknowledged as the “father of financial futures” and greenhouse gas derivatives.

Richard is now shifting his attention to a need for small and medium sized financial institutions to access short-term funding.  CFS Advances in Monetary and Financial Measurement data corroborates unique monetary challenges faced by regional and local financial institutions.

AFX is an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds. It will be aimed at the 1,740 US Community and regional banks with between $500m and $125bn in assets.

For more information, please see related articles:

Sandor and CBOE team up to create interbank lending exchange Financial Times, September 10, 2015

Environmental Financial Products, LLC (EFP) and CBOE Holdings, Inc. (CBOE) Announce New Interbank Lending Exchange and Interest Rate Benchmark.

Video Part 1:
Smalls and Mediums: Richard Sandor Looks To Transform The Small and Mid-Tier Bank Sector – Part 1

Video Part 2:
Smalls and Mediums: Richard Sandor Looks To Transform The Small and Mid-Tier Bank Sector – Part 2

Five Things to Watch for as the Federal Reserve Makes its Rate Hike Decision

Reporter James Puzzanghera interviewed CFS President Lawrence Goodman for an article published in today’s Los Angeles Times.

In “Five things to watch for as the Federal Reserve makes its rate hike decision”, Mr. Puzzanghera discusses the potential outcomes of today’s decision by Central bank policymakers. At 11:00am Pacific Time (2:00pm Eastern Time), the Fed will announce if the time has come for an increase, nearly a decade after the last increase in the benchmark federal funds rate.

While some experts do not believe a rise in interest rates would be constructive, others argue removing the questions about when the Fed would raise the rate would do more for financial stability, particularly in the long-term, than holding steady. “It’s this deep uncertainty surrounding the conduct of monetary policy that is exacerbating swings in financial markets,” said Lawrence Goodman, a former Treasury official who is president of the Center for Financial Stability think tank.

To read the complete article please go to

First Try at European Money Union Didn’t Work Either

Author Reunka Rayasam interviewed CFS Advisory Board member Charles Goodhart, emeritus professor at the London School of Economics and formerly a member of the Bank of England’s monetary policy committee, for a recent article in Reuters.

In “First try at European money union didn’t work either” Ms. Rayasam, using history as a guide, questions if politics could be the stumbling block as Greece and it’s eruo zone lenders finalize details of its third bailout package.  Professor Goodhart believes that “Currency and money are much more interconnected with political control than most people think.”

To read the complete article, please go to:

Shadow Casting

We are delighted that Center for Financial Stability (CFS) metrics are providing a standard to measure “shadow banking” or more aptly “market finance.”

Our analytics were featured in The “CFA Institute Magazine” July/August cover story, “Shadow Casting” by Maha Khan Phillips.

In the article, Ms. Khan Phillips questions if the financial industry should be worried about the potential growth in shadow banking.  She also investigates if regulators are being overzealous, or not zealous enough.

At CFS, we know market finance is undoubtedly compromising liquidity in international financial markets. According to CFS data, shadow banking is down a stunning 46% in real terms since it’s peak in 2008.

CFS believes that regulation has gone too far. There are very significant liquidity concerns in the market and regulation will make it worse.

To view the full article:

Today’s WSJ: ‘Fixing the Fed’s Liquidity Mess’

Today, on the fifth anniversary of Dodd-Frank, The Wall Street Journal published a CFS op-ed titled “Fixing the Fed’s Liquidity Mess.”

CFS special counselor Stephen Dizard and I note how:

Every Treasury Secretary since the late 1930s could proclaim with confidence that the U.S. bond market is the deepest and most liquid in the world. Today’s illiquid debt markets threaten the potency of this pledge. And it puts the global economy at risk for another financial crisis.

We offer three solutions:

– Lift the federal-funds rate to neutral levels.

– Ease restrictions on market finance.

– Arrange new private-sector liquidity facilities. Severe liquidity risks will not heal themselves—and waiting for the next crisis will be too late.

View the full article.

The Joint Services of Money & Credit

While credit cards provide transaction services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. But economic aggregation theory and index number theory are based on microeconomic theory, not accounting, and measure service flows. We derive theory needed to measure the joint services of credit cards and money. The underlying assumption is that credit card services are not weakly separable from the services of monetary assets. Carried forward rotating balances are not included, since they were used for transactions services in prior periods.

The theory is developed for the representative consumer, who pays interest for the services of credit cards during the period used for transactions. In the transmission mechanism of central bank policy, our results raise potentially fundamental questions about the traditional dichotomy between money and some forms of short term credit, such as checkable lines of credit.

I had the opportunity to present this paper, via video, along with my co-author Liting Su at the International Conference on Economic Recovery in the Post-Crisis Period  in Skopje, Republic of Macedonia (May 29-30, 2015). To see a video of this presentation, click here. (Download High Res .m4v) The paper can be found here.

The Finance Class That’s ‘Guaranteed’ to Get You a Job on Wall Street

In this Business Insider article by Portia Crowe, we are taken inside the Johns Hopkins University classroom of Professor Steve Hanke.

According to the professor, his applied economics and finance class guarantees its alumni top jobs on the Street. Professor Hanke, who’s been at Hopkins for 45 years, created the course two decades ago. It’s evolved but has always focused on “producing the top people in the country.”

To find out how, see:

Professor Hanke is also Special Counselor at the Center for Financial Stability.