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Who Captured the Fed?
A hundred years ago, monetary policy – control over interest rates and the availability of credit – was viewed as a highly contentious political issue. People on the left of the political spectrum feared the central bank would be used to prop up Wall Street banks; those on the right thought it would unduly expand the role of government, giving too much power to politicians.
In the 1980s we entered a phase in which the Federal Reserve, along with other major central banks around the world, was seen as independent and run by technocrats supposedly immune from political pressure.
But in the light of the crisis of 2008 and its aftermath, we have to ask: Has our central bank fallen back under the influence of special interests?
The origins of the Federal Reserve System lie in an emotional debate, conducted more than 100 years ago, about whether the government should seek to affect interest rates – and support the credit of Wall Street firms during times of crisis – and, if so, how.
The Panic of 1907 convinced many people that the United States needed a central bank of some kind. A complete collapse of the financial system was too scary a prospect. But there was also a longstanding American aversion against ceding too much power to big banks.
At the dawn of the republic, Thomas Jefferson railed against the risks posed by government backing for concentrated power in the financial sector. President Andrew Jackson fought to abolish the Second Bank of the United States in the 1830s, the leading private bank of his day, which helped manage public finances and the banking system. Consequently, there was nothing resembling a central bank in the United States for much of the 19th century.
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In Vitro a Fertile Niche for Lenders
Julie Barth’s prayers were answered when a doctor in Crystal Lake, Ill., told her in vitro fertilization might get her pregnant.
But he didn’t stop there, referring her to a “fertility finance” company that lent her $5,000 at an interest rate of 7.99% to help cover the $24,000 procedure. Her daughter, Olivia, was born about a year later.
“You can’t put a price on a smile like that,” says Ms. Barth, 32 years old. She hopes to pay off her loan from Springstone Financial LLC, based in Southborough, Mass., by her daughter’s third birthday in 2014.
At a time when many traditional lenders are struggling, companies that join forces with doctors to make loans for in vitro fertilization, egg harvesting and other fertility treatments say their business is thriving.
One reason: Fertility-finance companies are getting a boost from the banking industry’s retrenchment. For example, credit has become tight for home-equity loans and credit cards, two ways couples often have paid for fertility treatments that often top $20,000. Mike Gilroy, Springstone’s president, says business is robust because “if the time is right” to have a baby, “people want loans even in a sluggish economy.”
Amid a struggling economy, companies in the business predict that lending will grow this year as demand swells from couples desperate to have a baby but unable to afford fertility procedures on their own.
Despite the demand from would-be parents, the loans have generated criticism from some doctors, concerned that they take advantage of couples’ desire to have a baby at any cost. Some doctors won’t offer the loans. Others worry that doctors who invest their own money in fertility-finance companies will push the loans on patients.
CONSUMER CREDIT DEMOLISHES EXPECTATIONS, GROWS $19 BILLION
It’s hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit
Cnosumer credit expanded by $19 billion in December. That’s far more than the $7 billion that was expected by economists.
Revolving consumer credit (credit cards) grew by $4.1 billion sequentially, and is basically flat from last year again (up barely).
One more point on this: A lot of people think that US consumer have too much debt, and that a big number here is “bad” and we could imagine that being true. But if we’re talking about cycles, and whether the economy is in rebound or recession mode, re-expanding credit is OBVIOUSLY what you want to see.
Read the full announcement here.
This chart from Reuters’ Soctty Barber basically tells it all.
It’s a very slow week economic data-wise, but this is the biggie…
Consumer credit for December comes out at 3:00 PM ET.
Analysts expect $7 billion worth of new credit for the month. That’s down from $20.3 billion in the month before.
Remember, last month REVOLVING consumer credit registered flat year over year growth for… Continue reading
MF Global Unloaded Hundreds Of Millions In Securities On Goldman Before Collapse: Sources
MF Global unloaded hundreds of millions of dollars’ worth of securities to Goldman Sachs in the days leading up to its collapse, according to two former MF Global employees with direct knowledge of the transactions. But it did not immediately receive payment from its clearing firm and lender, JPMorgan Chase & Co (JPM.N), one of the sources said.
The sale of securities to Goldman occurred on October 27, just days before MF Global Holdings Ltd (MFGLQ.PK) filed for bankruptcy on October 31, the ex-employees said. One of the employees said the transaction was cleared with JPMorgan Chase.
At the same time MF Global, which was run by former Goldman Sachs head Jon Corzine, was selling securities to Goldman to raise badly needed cash, the futures firm was also drawing down a $1.2 billion revolving line of credit it had with JPMorgan, according to one of the former MF Global employees.
JPMorgan spokeswoman Mary Sedarat said the bank did not withold money because of the line of credit. She declined further comment on details of the transactions.
JPMorgan has fought aggressively in bankruptcy court to protect its interests, and received a lien on some of MF Global’s assets in exchange for… Continue reading
Finance & Investment Tips
Topic Covered:
- Benefits of a Savings Account
- How High Yield Interest Savings Account Work
- Mutual Fund Expense Ratios Explained
- Home Loans With Bad Credit
- How To Get a Written Credit Report
- How To Buy Life Insurance
- How To Buy An Investment Property
- Definition of Expense Ratio
- What Is a Cash Reserve Fund
- How To Calculate Credit Card Interest
- How To Get Your First Credit Card
- How To Establish Credit Without a Checking Account
- Whats The Fastest Way To Build Credit
- How To Get Out Of Debt
- What Is Expense Ratio
- How To Buy Stocks
- How To Buy Mutual Funds
- Debit Cards Explained
Lessons of the 1930s: There could be trouble ahead
In 2008 the world dodged a second Depression by avoiding the mistakes that led to the first. But there are further lessons to be learned for both Europe and America.
“YOU’RE right, we did it,” Ben Bernanke told Milton Friedman in a speech celebrating the Nobel laureate’s 90th birthday in 2002. He was referring to Mr Friedman’s conclusion that central bankers were responsible for much of the suffering in the Depression. “But thanks to you,” the future chairman of the Federal Reserve continued, “we won’t do it again.” Nine years later Mr Bernanke’s peers are congratulating themselves for delivering on that promise. “We prevented a Great Depression,” the Bank of England’s governor, Mervyn King, told the Daily Telegraph in March this year.
The shock that hit the world economy in 2008 was on a par with that which launched the Depression. In the 12 months following the economic peak in 2008, industrial production fell by as much as it did in the first year of the Depression. Equity prices and global trade fell more. Yet this time no depression followed. Although world industrial output dropped by 13% from peak to trough in what was definitely a deep recession, it fell by nearly 40% in the 1930s. American and European unemployment rates rose to barely more than 10% in the recent crisis; they are estimated to have topped 25% in the 1930s. This remarkable difference in outcomes owes a lot to lessons learned from the Depression.
Debate continues as to what made the Depression so long and deep. Some economists emphasize structural factors such as labour costs. Amity Shlaes, an economic historian, argues that “government intervention helped make the Depression Great.” She notes that President Franklin Roosevelt criminalized farmers who sold chickens too cheaply and “generated more paper than the entire legislative output of the federal government since 1789”. Her book, “The Forgotten Man”, is hugely influential among America’s Republicans. Newt Gingrich loves it.
A more common view among economists, however, is that the simultaneous tightening of fiscal and monetary policy turned a tough situation into an awful one. Governments made no such mistake this time round. Where leaders slashed budgets and central banks raised rates in the 1930s, policy was almost uniformly expansionary after the crash of 2008. Where international co-operation fell apart during the Depression, leading to currency wars and protectionism, leaders hung together in 2008 and 2009. Sir Mervyn has a point.
Look closer, however, and the picture is less comforting. For in two important—and related—areas, the rich world could still make mistakes that were also made in the 1930s. It risks repeating the fiscal tightening that produced America’s “recession within a depression” of 1937-38. And the crisis in Europe looks eerily similar to the financial turmoil of the late 1920s and early 1930s, in which economies fell like dominoes under pressure from austerity, tight money and the lack of a lender of last resort. There are, in short, further lessons to be learned.
