http://www.marketwatch.com/…

Central bankers and regulators are rethinking their faith in the ability of market forces alone to police the increasingly complex global financial system.

In a speech in Jackson Hole, Wyo., Federal Reserve Chairman Ben Bernanke said the Fed’s toughest challenge is not restoring growth, fighting inflation, or providing fragile banks with sufficient liquidity to get through the current financial crisis. Rather, it’s finding a way to prevent the next one.

The bailout of Bear Stearns in particular represents a failure of the supervisors to monitor the system. Bear wasn’t a particularly large institution, but its assets and liabilities were so thoroughly linked with the rest of the financial world that its failure would have been devastating, Bernanke said. Read the speech.
It’s not that Bear Stearns was too big to fail, it was too interconnected.

Bernanke suggested that the Fed and other bank supervisors need to use a holistic approach, rather than look at each institution in isolation. The explosion of securitization and derivatives in the past few decades has shifted risks in ways that aren’t immediately apparent. A risk that would be manageable for one bank would be unbearable if it applied to all, because systemic risks tend to create illiquid markets.

The regulators also have to clearly explain when and under what conditions financial institutions will be allowed to fail and when they will be bailed out, Bernanke said. To limit moral hazard, bailouts should be structured so that shareholders are wiped out, similar to the way failing banks are now treated by the Federal Deposit Insurance Corp.

Imposing systemwide supervision and regulation won’t be easy to design or cheap to implement. Unintended consequences are certain to appear. But the alternative of doing nothing would consign us to periodic costly boom and bust cycles that could leave us all poorer.

Just… wow. The organization that is the biggest nonfree component of the current economy and who is looking daily to increase its power doesn’t have faith in the market’s ability to handle things. What a shock. I love that last sentence too. “But the alternative of doing nothing would consign us to periodic costly boom and bust cycles that could leave us all poorer.” Is this guy serious? Has this guy ever opened an economics book or thought critically on the subject? Making us poorer? The Fed’s massive inflation has helped do that. So has the socialization of so many aspects of our lives. We have periodic costly boom and bust cycles BECAUSE they refuse to do nothing. The bust doesn’t make us poorer. It makes us wealthier in the end. The bust is the liquidation of bad investments. If you continue on with the malinvestment you’re continuing on with an inefficient system and not investing in the things with the highest priority. The boom shouldn’t be happening in the first place. Spurred on by cheap debt and other manipulations. Some debt so cheap, like today, that they in fact are paying people to take money. Price inflation being higher than interest rates. Even if you don’t believe Mises and Rothbard on that one show me where the Fed has stopped the cycle? Please. Once you’re finished show me how well government regulation and interference in healthcare, education, housing, the poor, drugs, etc. has done.

http://www.economist.com/…

A LIFELONG libertarian, Alan Greenspan does not ordinarily advocate giving the government more power. But he does so in a new epilogue to the paperback edition of his memoir, parts of which were made available to The Economist. The crisis of the past year has convinced him it is the lesser evil. Better someone else be in charge of bail-outs, he argues, than the Federal Reserve, which he led for 18 years.

Mr Greenspan says a high-level panel of American financial officials should be given broad power to seize any financial institution whose failure threatens the entire economy, bail out its creditors and close it down. “We need laws that specify and limit the conditions for bail-outs” and do so transparently with taxpayers’ money, “rather than circuitously through the central bank, as was done during the blow-up of Bear Stearns,” he writes in “The Age of Turbulence”. (Penguin is to release the paperback on September 9th.)

If that means the government has to wade in, so be it. “Our country has long since abandoned the notion that we should leave crises to be resolved solely by the marketplace,” he says. “The critical need…is to formalise…the procedures improvised in the case of Bear Stearns. This should ensure that in the future, government financial assistance to lending institutions does not impact the Federal Reserve’s balance-sheet and monetary policy.”

He says a standby panel, empowered by Congress, should determine if an institution’s failure is dangerous enough to require taxpayer support. It would then form a vehicle to take the firm into “conservatorship”, wipe out the equity, preferably impose a “haircut” on its debts before guaranteeing them, and then sell its assets. Mr Greenspan’s model is the Resolution Trust Corporation (on whose board he served), created in 1989 to take over failing thrifts, sell their assets, then close itself down. He pours cold water on a proposal by Hank Paulson, America’s treasury secretary, to give the Fed broad responsibility over market stability.

Mr Greenspan’s proposal may be politically difficult. For years Fannie Mae and Freddie Mac, America’s mortgage giants, resisted the creation of a regulator that could close them down. With other large institutions—be they investment banks, hedge funds or insurance companies—there might be even more of a fuss. And the Fed is not yet ready to bow out. “Unless I hear from Congress that I should not be responding to a crisis situation, I think that it’s a long-standing role of the central bank to use its lender-of-last-resort facilities,” Ben Bernanke, Mr Greenspan’s successor at the Fed, said last month.

Just because the man used to hang out with Ayn Rand and was apparently a libertarian Objectivist doesn’t mean he continues to be one. Anyone who advocates aggression is not by definition a libertarian. But what better way to destroy a movement then by redefining the words? Eric Arthur Blair would be proud. It was done at around the turn of the 20th century with ‘liberal.’ In economics ‘inflation’ has been redefined. Now a concerted effort appears to be being made to change the meaning of ‘libertarian.’ People like Glenn Beck and Neil Bortz nationally claim to be libertarians. Advocating government manipulation of the market and money bailouts, immigration control and war with people who pose no threat is NOT libertarian.

Posted on his own website a few days ago,

Rep. Scott Garrett (R-NJ) called for answers in response to the reported value of the Bear Stearns portfolio released by the New York Federal Reserve today at 4:30pm. Garrett, a member of the Financial Services Committee, will be among those questioning Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke on Thursday, July 10 at 10:00am.

“The Fed’s action in bailing out Bear Stearns sets a precarious standard,” Garrett said. “This unprecedented expansion of authority without congressional approval exposes taxpayers to tremendous financial risk. Like most Americans, I want market discipline – but the Federal Reserve cannot create that by fabricating new regulatory authority.”

Garrett also criticized House Financial Services Committee Chairman Barney Frank (D-MA) for the delay in holding hearings into the incident. With the support of 23 other members, Garrett sent a letter to Frank requesting a congressional hearing, a request that was largely ignored for three months. It was only recently that Frank scheduled committee hearings to explore the potential systemic risk associated with the Fed’s actions. In the statement released by the House Financial Services Committee on Wednesday, Frank announced that the committee would explore the adequacy of current oversight and regulatory tools.

“Our nation’s hardworking taxpayers have been put on the hook for Bear Stearns’ collapse. They deserve a thorough explanation of the Fed’s rationale for the bail-out, as well as a solid plan for how the Fed will deal with future instances of this nature,” Garrett said. “While it is important that the government work closely with industry to ensure the stability and liquidity of our nation’s financial markets, we must be cautious about encouraging further risky business decisions by using government tools to prevent the free market from acting appropriately.”

An audio link of Garrett’s questions and Federal Reserve Chairman Ben Bernanke’s answers here.

Transcribed / paraphrased text on the other side of the jump…

Read More…

http://www.bloomberg.com/…

Federal Reserve Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation’s financial system, said the central bank may extend its emergency-loan program for investment banks into next year.

“The Federal Reserve is strongly committed” to financial stability and is “considering several options, including extending the duration of our facilities for primary dealers beyond year-end,” Bernanke said in a speech to a conference in Arlington, Virginia.

Woot! More inflation!

Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should “take a leading role in any such process” in consultation with regulators, he said. Such a resolution mechanism may help reduce concern that investors and dealers begin counting on Fed aid in case their bets go wrong.

So like enforcing the current bankruptcy laws? I somehow doubt it.

Fed officials are working with the Securities and Exchange Commission and securities dealers “to increase the firms’ capital and liquidity buffers,” Bernanke said.

More inflation!!

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the same conference that he supported Fed and Treasury proposals for “policies, because of what happened, to take proper action if a large investment bank goes bankrupt.”

Of course he does. He, and the rest of Wall St., directly benefit from this intervention and inflation.

Without any liquidation procedure in place, the Fed in March decided to make a bridge loan to keep Bear Stearns out of bankruptcy. The central bank then agreed to take on $30 billion of hard-to-trade Bear Stearns assets to help secure its takeover by JPMorgan.

“The Federal Reserve in essence bought $30 billion of mortgage product from Bear Stearns; I want to remind people we bought $350 billion,” Dimon said today. “We don’t really think” the deal will end up costing taxpayers money, he also said.

I do. Anyone with a cursory understanding of economics could see that taxpayers will be both directly and indirectly paying for this. The indirect in terms of all the likely new regulations and powers the Fed will get on top of the inflation that will continue to destroy the middle class and poor are likely the greatest costs.

Congress should legislate “consolidated supervision” of investment banks and other big securities firms, with the unspecified regulator having authority over capital, liquidity holdings and risk management, Bernanke also said today.

The Fed should also get “explicit oversight authority” over payment and settlement systems, putting the it on a par with counterparts from around the world, Bernanke said.

U.S. central bankers will already play a part in setting capital cushions at securities firms under an agreement yesterday with the SEC. The two agencies will collaborate in determining “guidelines or rules concerning the capital, liquidity and funding” arrangements of investment banks, the accord said.

Because obviously planned economies have worked so damn well. They function like clockwork everywhere they have greater control. Right Ben?

http://www.ft.com/…

Banks and investment banks whose health is crucial to the global financial system should operate under a unified regulatory framework with “appropriate requirements for capital and liquidity”, according to Timothy Geithner, president of the Federal Reserve Bank of New York.Writing in Monday’s Financial Times, Mr Geithner, a key US policymaker throughout the credit crisis and one of the main architects of the rescue of Bear Stearns, says that the US Federal Reserve should play a “central role” in the new regulatory framework, working closely with supervisors in the US and round the world.

In his speech, Mr Geithner will also say the Fed is examining whether to make “permanent” some of the new liquidity facilities put in place during the credit crisis, and called for central banks to establish a “standing network of currency swaps, collateral policies and account arrangements” to bolster liquidity during a future crisis.

So when they screwup, which is all the time, they directly instead of indirectly effect everyone on the planet. Wonderful…

http://money.cnn.com/…

The Federal Reserve did not have any advance warning of the impending financial collapse of Bear Stearns (NYSE:BSC) , but now has examiners onsite at investment banks to evaluate their capital situation and potential risks, Fed Chairman Ben Bernanke told Congress’s Joint Economic Committee this morning.Bernanke said the first notification was on the morning of Thursday, March 13 that the liquidity position of the company had deteriorated drastically and that it would file for Chapter 11 bankruptcy reorganization the next morning unless some financing was arranged.

The Fed and Treasury arranged 30 bln usd of financing through JP Morgan Chase. ‘We did not bail out Bear Stearns,’ Bernanke told the committee. ‘We did what we did because it was necessary to maintain the integrity and viability of the financial system.’ While Bernanke said the actual financial risk to the Fed in taking on suspect securities as collateral for the loan was nowhere near the potential 29 bln usd now on its books (JP Morgan would take the first 1 bln usd of any losses), he also told the committee: ‘I’d hope not to ever do it again’.

Because the Fed has now opened up its discount window for direct lending to investment companies as well as banks, the Fed now has its bank examiners on site at the investment companies to assess their financial positions and Bernanke said he did not expect another Bear Stearns-type situation to occur.

I don’t doubt they didn’t realize that Bear Stearns was in trouble till that Thursday but they should have known something like that was likely to happen. Bernanke could have ratched down the interest rates slowly starting 6 months ago but if he had the market would have dived because it would have meant there was suspicion of a problem. Which would have been accurate and a dive at that point would have likely been nothing in comparison to what we have now. Several things really frighten me about all this. 1. The opening of the loans to investment firms creates a whole new level of central control corruption. 2. The word has come out that they have been planning to do that since last year. 3. “We did not bail out Bear Stearns.” Bullshit. bailout: A situation in which a business, individual or government offers money to a failing business in order to prevent the consequences that arise from a business’s downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may or may not require reimbursement. 4. ”We did what we did because it was necessary to maintain the integrity and viability of the financial system.” This shows how fragile things are. If a single company failing can cause the public to lose faith in the entire financial system sounds to me that system deserves it. 5. From what I’ve gathered the Fed had offered loans to the investment firms before Bear Stearns had bad problems so why didn’t they take out a loan from the Fed to cover their position? Why did the Fed supposedly push so hard for the $2 a share deal and get pissed at the $10 a share deal? Something happened behind the scenes we don’t know about and even though Ben “hope[s] not to ever do it again” I think we are more likely to head toward the Nordic system the Bush administration was talking about then go back to a freer economy based on personal responsibility and honest money.