The Fed's Regulatory Reputation Won't Survive Long-Term Scrutiny

Because Bear Stearns had a bank run and primary dealers got Discount Window access, there's been a rush to find regulatory prowess at the Fed. The Fed is justly regarded as an institution with high standards for hiring and performance of personnel. We need to recognize and explain, however, the awful results of Fed regulated institutions during the crisis (they are fortunate they have government backing, or perhaps they are unfortunate if it induced poor performance). We also need to explain the gimmicks intended to seem to address the short-term interbank market which just cost Fed credibility (and the withdrawal of the Bear Stearns 28 day facility after a day). A light moment: In August, Fed officials convened a conference call of major Wall Street institutions to announce that “appropriate” use of the discount window would be seen as a “sign of strength.” This was followed by press releases (sometimes joint) by banks announcing that they had each done their part, with token one time small (and identically sized) borrowings. This was the first step down a constant-slope decline in Fed credibility until the Bear Stearns facility withdrawal, which was a huge jump down.


Regarding http://calculatedrisk.blogspot.com/2008/04/pimcos-mcculley-fed-should-regulate.html

Mr McCulley has something backwards. The worst performers by far were the banks, regulated by the Fed. Bear Stearns demonstrates little on this point since Citi would have had a bank run 6 months before Bear had it not been 2-big-2-fail as well as encrusted with implied government guarantees. Fed regulation has been a disaster.

The connection between access to the Fed window and Fed regulation is a confusion. There can be a division of labor. Central banks intervene in currencies yet treasuries decide when and how much. The Dept of Energy manages nuclear weapons labs but the Dod uses the product and so on. There's nothing wrong with having all operation of Basel and so on centralized in one agency, which should probably be the Fed. But the idea that it's somehow the Fed's money (as opposed to the Treasury's) so the Fed must watch it follows from nowhere.

Regulatory Reform

While it's hard to know for sure what the right regulatory reforms are, a few principles should govern their choice:

1. No regulation should fix a very specific recent market failure since regulations have unintended consequences (biofuels) and the market takes care of such matters anyway. For example, lenders unfortunately won't be lending to people of modest income who can't repay for some time to come so regulatory assistance in this regard isn't necessary.

2. Regulations should carry over to other areas those regimes that operated well in parts of the financial sector. For example, whatever regime governed hedge funds should be adopted for all financial institutions and whatever regime governed banks should be assiduously avoided.

3. Regulators who behave disreputably should not accrue responsibility. For example, the Fed provided a 28 day funding facility to Bear Stearns on March 14, with the clear intent to create market reliance on that. It was withdrawn the same day. This as yet unexplained act of astonishing credibility destruction and lack of wisdom should discredit whoever's responsible for it from having any greater responsibility for the financial system

4. Clearinghouses are good.

Obama's Poker Winnings Are Missing from His Tax Return

Mr. Obama is a well-regarded poker player, for money.
Where are his gambling winnings and losses on his tax return?