Some Fed Bond Purchases Spurred Hiring, Central Bank Paper Says

WASHINGTON—At least some of the Federal Reserve’s bond buying in the wake of the 2008 financial crisis bolstered employment, according to a recent paper by staffers at the central bank’s board of governors.

The third round of such purchases, also known as quantitative easing, starting in late 2012, spurred banks with large holdings of mortgage-backed securities to lend more to companies, authors Stephan Luck and Tom Zimmermann found. Shortly thereafter, U.S. counties with such banks saw faster employment growth—up to 0.4 percentage point more per quarter—than counties where banks held fewer mortgage-backed securities.

Employment growth in the two sets of counties was similar for more than 18 quarters before the implementation of QE3, as the program was known.

The findings come as policy makers continue to debate the full impact of the unconventional stimulus measures taken by the Fed after interest rates, reduced to near zero by the end Continue reading "Some Fed Bond Purchases Spurred Hiring, Central Bank Paper Says"

Real Time Economics: U.S. Threatens China With $200B More In Tariffs, China Promises Retaliation

This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here. Good morning. Today we look at U.S.-China trade tensions, lessons from the last housing bust, a slow trickle for repatriated profits, and the limited economic fallout from hurricanes and other natural disasters.  TRADE FIGHT HEATS UP The Trump administration plans to unveil fresh tariffs on $200 billion in Chinese products as soon as this week. Beijing is debating new ways to retaliate. The threats from both sides of the Pacific risk upending negotiations aimed at staving off a new round of tit-for-tat penalties. Already, China has threatened to pull out of preliminary trade talks, Jacob M. Schlesinger, Lingling Wei and Bob Davis report. With the expected new round of U.S. tariffs, combined with earlier rounds, the Trump administration will have levied duties on roughly half of the Continue reading "Real Time Economics: U.S. Threatens China With $200B More In Tariffs, China Promises Retaliation"

Financial Crisis May Have Hit ’80s Generation the Hardest

The children born into Ronald Reagan’s “Morning in America” era could be on track to become the last recession’s “lost generation,” new research from the Federal Reserve Bank of St. Louis says. Americans who entered the world in the 1980s “are at substantial risk of accumulating less wealth over their life spans than the members of previous generations,” the report’s authors say. “Not only is their wealth shortfall in 2016 very large in percentage terms, but the typical 1980s family actually lost ground in relative terms between 2010 and 2016, a period of rapidly rising asset values that buoyed the wealth of all older cohorts.” The St. Louis Fed research finds that as of 2016, those born in the 1980s had wealth levels 34% below where they would be absent the financial crisis and its aftermath. In comparison, people born in the 1970s had wealth levels that were 18% Continue reading "Financial Crisis May Have Hit ’80s Generation the Hardest"

Real Time Economics: Inflation | Korea Trade Deal | IRS Audits

This is the web version of the WSJ’s daily economic newsletter. You can sign up for daily delivery here This is an abbreviated edition of Real Time Economics. Regular publication resumes Monday. In this edition, inflation approaches the Fed’s 2% target, tax audits drop, Amazon.com helps the post office. FED’S TARGET IN SIGHT Inflation could soon be back at the Fed’s 2% target. In February the Fed’s preferred price index rose 0.23% excluding food and energy, propelled by brisk health care inflation. While it’s only up 1.6% in the last 12 months, that’s largely because  of very low monthly readings a year ago. In the last three months, prices have risen at a 2.8% annual rate. That suggests the 12-month rate could easily hit 2% in coming months as low year-ago readings drop out of the calculation. That won’t panic the Fed which has long expected such Continue reading "Real Time Economics: Inflation | Korea Trade Deal | IRS Audits"

Why It Isn’t Yet Time to Worry as Global House Prices Rise

Global house prices have reached precrisis levels, but that shouldn’t be cause for automatic alarm. “This is a time for vigilance, but not panic,” says Prakash Loungani, a top economist in the International Monetary Fund’s research department. In contrast to the 2008-09 financial crisis, the dynamics causing resurgent house prices this time around aren’t signaling another bout of global turmoil, Mr. Loungani and colleague Hites Ahir argue in a new IMF blog post. First, house prices aren’t uniformly rising around the world. Among the 57 countries in the IMF’s Global House Price Index, roughly a third are still seeing house prices fall, eight years after the crisis first hit. Many have been in the headlines for their ongoing economic woes: Brazil, Greece, Ukraine and Russia. Another group is experiencing a boom after a four-year bust, including Thailand, the U.K. and the U.S. And a third Continue reading "Why It Isn’t Yet Time to Worry as Global House Prices Rise"

How Paul Romer Is Already Stirring the Pot as the World Bank’s New Chief Economist

Just weeks in to his new job as the World Bank’s new chief economist, Paul Romer is already looking to shake up the aging development institution. The controversy-courting New York University professor and tech-firm founder is known as a chief proponent of the ideas-driven endogenous-growth theory. He is putting his economic philosophy into practice, rethinking how the World Bank can deliver President Jim Yong Kim’s vision of eradicating poverty by 2030. He’s already talking about starting a new university, setting up commercial banks and establishing a global identification system that could help tackle the problem of financial inclusion for the poorest in one fell swoop. As Mr. Romer settles into his tenure, two principles are guiding his mandate. First, helping the bank cultivate greater clarity. “Clear writing really is all about clarifying how we think about things,” he said in an interview with The Wall Street Journal. “That’s a nonnegotiable. Continue reading "How Paul Romer Is Already Stirring the Pot as the World Bank’s New Chief Economist"

Analysis of the Financial Crisis Inquiry Commission Documents Release

[wsj-responsive-image P="http://si.wsj.net/public/resources/images/BN-NA803_fcicre_P_20160311115058.jpg" J="http://si.wsj.net/public/resources/images/BN-NA803_fcicre_J_20160311115058.jpg" M="http://si.wsj.net/public/resources/images/BN-NA803_fcicre_M_20160311115058.jpg" caption="Financial Crisis Inquiry Commission Chairman Phil Angelides talks about the release of the commission's report on the causes of the financial and economic crisis in 2011 in Washington." credit="Jacquelyn Martin/Associated Press" placement="Inline" ] The National Archives released documents Friday on the causes of the 2008 financial crisis. The release of documents from the Financial Crisis Inquiry Commission, set up by Congress to delve into the crisis, includes interviews with key players in Washington and on Wall Street, from Warren Buffett to Alan Greenspan. The documents also include minutes of commission meetings and internal deliberations concerning the causes of the financial crisis. The documents from the Archives are here via Dropbox. Our reporters combed through the documents now and will offer insights, analysis and choice morsels in the live blog below. And explore our interactive dive into the Commission’s interviews. How The Wall Continue reading "Analysis of the Financial Crisis Inquiry Commission Documents Release"

‘The Big Short’ Movie’s Five Oscar Nods Aren’t Its Key Accomplishment

Christian Bale plays Michael Burry in “The Big Short,” for which he’s been nominated for an Academy Award for best performance by an actor in a supporting role. 
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You may not agree with “The Big Short” movie’s moralistic take on the financial crisis. But it gets the details right, says Wall Street Journal chief economics commentator Greg Ip. “It takes the hardest part of the story to tell, which is the abstruseness of the finance, and breaks it down into easy pieces. Even for us who cover the stuff for a living, this stuff is hard,” he said in a recent conversation with the film’s director, Adam McKay, and others at the Brookings Institution. Watch as you consider the movie’s bid for best motion picture of the year:

Gas Prices Are Plunging. So Why Is Everyone Freaking Out?

The price of gas in the Permian Basin oil field on Jan. 20 in the oil town of Andrews, Texas.
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Oil prices have declined nearly 75% from their recent peak in June 2014, roiling markets and sounding new alarm about the possibility of an economic slowdown. Wait, what? Weren’t lower gasoline prices supposed to help the U.S. economy? Gas is below $2 a gallon in all but 11 states, reaching the lowest level since 2009. Prices have been cut in half over the last 18 months. When oil plunged in the 1980s, it unleashed strong economic growth, even as Texas, Colorado and Oklahoma slid into recession.

So why are people acting as if this is a bad thing for the economy? It’s true that falling gas prices should help the U.S. economy because, even despite a recent boom in domestic energy production, America is
Continue reading "Gas Prices Are Plunging. So Why Is Everyone Freaking Out?"

What a Community’s Capacity to Borrow May Tell Us About Its Resilience

People stand on the Seaside Heights boardwalk in New Jersey two years after superstorm Sandy on Oct. 29, 2014. It’s now been nearly three years since the storm, and researchers at the Federal Reserve Bank of New York say communities’ ability to borrow helps explain their pace of recovery. 
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Income and wealth can tell us a lot about a community’s ability to bounce back from a disaster—be it a financial crisis, hurricane or destructive protests. But there’s another metric that’s often overlooked: the ability of a community to access credit. In the years since the financial crisis, experts have analyzed the income and assets of U.S. households to help explain why some communities were hit so much harder by the downturn, and have taken longer to recover. High unemployment, stagnant wages and the massive hit to household wealth caused by plunging home prices held back the recovery in pockets
Continue reading "What a Community’s Capacity to Borrow May Tell Us About Its Resilience"

The U.S. Economy Just Had Its Worst Month Since the Recession

A container ship sits docked in a berth at the Port of Oakland in February. A shutdown earlier in the year weighed on exports, and the overall U.S. economy, in the first quarter.
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The U.S. economy had a really bad March, the worst since the financial crisis. But don’t panic. The broadest gauge of U.S. economic output, from the Commerce Department, tracks the economy on a quarterly basis. The private forecasting firm Macroeconomic Advisers provides a measure to track gross domestic product on a monthly basis, highlighting some of the volatility that gets smoothed out in the official quarterly figures. Macroeconomic Advisers on Thursday said its monthly estimate showed GDP fell an inflation-adjusted 1% in March, the largest drop since December 2008, “when the U.S. economy was in the throes of recession,” the firm said. Monthly GDP had climbed 0.3% in
Continue reading "The U.S. Economy Just Had Its Worst Month Since the Recession"

Norges Bank Governor Says Tighter Banking Rules May Not Avert Crises

Tighter banking rules may not be enough to avert financial crises, the head of Norway’s central bank said Monday. Norges Bank Governor Oystein Olsen said in a speech in London that central banks should be prepared to raise interest rates to safeguard financial stability and shouldn’t rely solely on newer “macroprudential” policies aimed at curbing credit growth. “We cannot proceed under the assumption that new regulations alone will eliminate the risk of financial instability. A robust monetary policy should therefore take into account the risk of a build-up of financial imbalances,” Mr. Olsen told the London School of Economics, according to a text of his remarks.
His remarks underscore an ongoing debate central bank circles about how best to respond when financial-sector excesses threaten to hurt the economy. Some policy makers believe interest-rate policy should stay focused on meeting inflation and employment goals, and favor using separate tools Continue reading "Norges Bank Governor Says Tighter Banking Rules May Not Avert Crises"

Threats to Global Financial Stability Are Rising, the IMF Says

The International Monetary Fund on Wednesday published its latest review of the top threats to global financial stability, saying risks to the system had increased since last year. The fund cited a long list of potential trouble spots around the world, from currencies to monetary policy. Here are eight major risks on the fund’s radar. Rising Volatility:  Wide, damaging swings in exchange rates and bond markets “could become more common and more pronounced” as the financial industry evolves. Events such as the flash crash in U.S. Treasurys last October and the surge in the value of the Swiss franc are the harbingers of such volatility. “Low market liquidity may act as a powerful amplifier of financial stability risks,” the fund said. New technology such as high-frequency trading, stronger regulation of the traditional banking sector and the changing makeup of market participants are creating new vulnerabilities. Deflation and Bad Loans: Policymakers in the eurozone and Japan could foment instability if they rely too much on easy-money policies and fail to address problem loans and overhaul their economies to make them more competitive. “Failure to support current monetary policies will leave the economy vulnerable and risks tipping it into a downside scenario of increased deflation pressure, a still-indebted private sector, and stretched bank balance sheets,” the fund warned. Oil Price Plummet: Consumers, especially in net oil importers such as the U.S., China, India, Europe and Japan, are getting a windfall from falling energy costs. But oil companies and their creditors are facing losses on their cash-intense investments in production. Many companies are finding it increasingly hard to pay their debts.
Dollar Debt: Emerging-market firms and governments that borrowed in dollars, but whose revenue is largely denominated in local currencies, that are depreciating against the dollar are facing strained finances. That has fomented investor flight during periods of investor anxiety and could do so again. Rough Fed Exit: If investors are surprised by the U.S. Federal Reserve’s strategy to normalize interest rates, it could send tremors throughout the global financial system as portfolios are adjusted across the spectrum of assets and markets. Raising rates more sooner or more quickly than markets anticipate could cause a rapid spike of longer-term interest rates and a whirlwind of volatility.
Market Bubbles: Low interest rates fueled by mass central bank easing are perpetuating a search for yield and “stretching some asset valuations.” Risk Conjunction: If the dollar surges again, U.S. borrowing costs rise sharply and geopolitical risks worsen, emerging markets could get hit with outbreak of financial turmoil. “After a prolonged period of inflows, foreign investors could abruptly reduce their holdings of local currency debt, thereby adding to turbulence and creating debt rollover challenges. China Real Estate: The IMF estimates that banking system exposures to real estate in the world’s No.2 economy totals nearly 20% of gross domestic product. Falling property prices could not only strain China’s financial sector, but feed through into other financial markets as well, the fund said.

IMF Warns (Again) of Growing Shadow-Banking Risks

Christine Lagarde, managing director of the International Monetary Fund, last year.
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Fearful that turmoil is brewing in opaque areas of the global financial system, the International Monetary Fund is renewing its call for greater oversight of the so-called shadow-banking industry. “The evidence calls for a better supervision of institution-level risks,” the fund said Wednesday in a new assessment of the global financial system. “Currently, the oversight of the industry focuses on investor protection and disclosure, and regulators conduct little monitoring in most countries,” the fund said. In the wake of the financial crisis, regulators around the world tightened oversight of the traditional banking sector. That bolstered the safety of one part of the financial sector. But lending–and risks—have since migrated to the shadow-banking industry. The sector, which includes mutual funds, exchange-traded funds, hedge funds and other institutional investors, has ballooned since the financial crisis. It now has over $75 trillion in assets.
The IMF has identified several key risks where regulators and investors need to pay greater heed. A large number of assets are managed by a small number of institutional investors. That means any change in the consensus on interest rates or the global economy can send shock waves through markets as those investors moved in or (more importantly) out of equities, bonds or currencies. “If funds exacerbate the volatility of capital flows in and out of emerging markets or increase the likelihood of contagion, significant consequences will be endured by the recipient economies,” the fund warned. If investors rush to the exits en masse, acting as a herd, asset prices could plummet and markets could face funding problems. “One cannot take for granted that liquidity will be there when markets become under stress,” IMF financial counselor José Viñals said late last year.
And while shares of many funds are freely tradable, the assets in the portfolio are often a lot less liquid. That can effectively pour sand into the gears of the financial system. That liquidity mismatch is most notable among bond mutual funds, especially corporate and emerging market debt funds, the IMF said. One way to prevent liquidity mismatch problems, the IMF suggests, is through redemption fees. “Regulators should find ways to reduce the incentive for investors to withdraw their money when they see others exiting,” said Gaston Gelos, a senior author of the report. Related reading: Greg Ip’s Capital Account: Capital Account: Postcrisis Risk Casts a Darkening Shadow What We Don’t Talk About When We Talk About Shadow Banking Fed’s Stanley Fischer Urges Vigilance on Shadow-Bank Risks Regulators Are in the Dark on Shadow Banking, Says BOE’s Cunliffe IMF: Shadow Banks ‘Could Compromise Global Financial Stability’ Fed’s Fischer Floats Ideas for Regulating Shadow Banks Fed’s Lockhart: Regulators Must Watch Shadow Banks Very Closely  

New Regulations May Lower Chance of Another Crisis, Bernanke Says

Former U.S. Federal Reserve Chairman Ben Bernanke, who headed the central bank from 2006 to 2014, said it’s impossible to rule out the possibility of future crises.
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Efforts to strengthen regulatory oversight of financial institutions in the U.S. following the 2008 debacle should make future crises less likely to occur, or less severe if they do, former U.S. Federal Reserve Chairman Ben Bernanke said Friday. “Nobody knows where the next shot will be,” Mr. Bernanke told bankers at a convention in the Mexican resort of Acapulco. The man who led the Fed through the worst financial crisis since 1929, and an expert on the Great Depression, said it’s impossible to rule out the possibility of future crises. “I hope we don’t get tested.” Steps such as submitting large banks to Fed stress tests to assess risk should lessen the likelihood of another crisis or soften the broader economic impact should one occur, he added. “The Fed has more resources for monitoring the system,” he said. Mr. Bernanke, who headed the central bank from 2006 to 2014, gave no view on when the Fed is likely to start raising short-term interest rates from near zero, except to say that its communications efforts could mean much of the related market volatility will precede the first rate increase and investors may embark on a relief rally once rates rise. “The trick is always when to move,” he said, since raising rates too soon risks crimping the recovery, while waiting too long risks letting inflation rise to undesirable levels. Mr. Bernanke said he was “cautiously optimistic” that Abenomics—Japanese Prime Minister Shinzo Abe’s eponymous program designed to lift Japan out of deflation and into steady long-term growth—can render results. But he was less so about Europe’s prospects for economic improvement via monetary policy, noting that the European Central Bank’s new bond-buying program lacks fiscal support and is being implemented “rather late.” Plus, there are the problems in Greece. “Monetary policy can only do so much,” Mr. Bernanke said. If efforts in Japan and Europe fail to stoke demand and economic improvement, the Fed will face additional headwinds, he said.  

Six Charts That Tell the Story of the Unfathomably Bleak Economy the Fed Faced in 2009

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With hindsight, we know that the economy reached a turning point in mid-2009: It stopped shrinking and began growing again. But the expansion would be slow and disappointing and would leave millions unemployed for years. As Federal Reserve policy makers battled the financial and economic crisis in 2009, it was far from obvious when the downturn would end. Details of their internal discussions that year were revealed Wednesday when the central bank released transcripts of the meetings its policy meetings after their customary five-year lag. Here’s a look at the data, in six charts, that illustrate the economic conditions the policy-making Federal Open Market Committee confronted in 2009. All the charts end in December 2009. (1) The Market
By the start of 2009 it was clear that the stock market was in the midst of a full-fledged panic. Despite the Fed’s historic decision to cut its benchmark short-term interest rate, the federal funds rate, to nearly zero in December 2008, stocks continued to plunge at the beginning of 2009. By early March, the Standard & Poor’s 500 index had lost more than half its value since late 2007. In mid-March, the mood of the market had changed, and Fed officials were quick to seize on the momentum. On March 15, 2009, then-Fed Chairman Ben Bernanke went on CBS’s “60 Minutes” and declared that he was beginning to see signs of “green shoots” in the economy. “As those green shoots begin to appear in different markets– and as some confidence begins to come back– that will begin the positive dynamic that brings our economy back,” Mr. Bernanke said. It turned out that the market had reached a bottom six days earlier.
Continue reading "Six Charts That Tell the Story of the Unfathomably Bleak Economy the Fed Faced in 2009"

BOE Official Says Bank Retrenchment May Bring Benefits

A slump in bank lending across borders could give central banks’ interest-rate policies more oomph, according to a former economic adviser to President George W. Bush who now sits on the Bank of England’s rate-setting panel. Kristin Forbes, a U.S. academic who joined the BOE’s Monetary Policy Committee in July, in a speech to students in London on Tuesday, described how financial “deglobalization” will have widespread repercussions for the U.K. economy and, potentially, for central banks around the world. Many big banks have in recent years quit far-flung foreign markets and refocused their activities closer to home. The result has been a dramatic collapse in the ebb and flow of bank loans across borders; international capital inflows are now equivalent to 1.6% of global gross domestic product, compared with a peak of 16% in 2007, Ms. Forbes said in a speech at Queen Mary University, according to a text of her remarks. One upshot of this retrenchment is that banks will no longer have such easy access to cheap cash to finance lending from a multitude of overseas subsidiaries. Ms. Forbes said banks in the past have called on these funds when their home central bank has raised interest rates, a strategy that can go some way to deadening the impact of changes in monetary policy. One way central banks influence economic activity by changing interest rates is by making it cheaper or more expensive for banks to lend, the so-called bank lending “channel” of monetary policy. But this reduction in cross-border banking makes transferring funds to bypass such changes in policy much harder. “As a result, the lending channel of monetary policy is likely to be more effective in the future,” Ms. Forbes said. Her remarks highlight the tradeoffs policy makers face in the years since the financial crisis triggered a global recession. Finance’s global reach made it easier for companies, households and governments to borrow but it also meant some countries struggled when foreign capital took flight. Financial deglobalization may bring costs and benefits, too, Ms. Forbes said Ms. Forbes’ speech was peppered with references to The Beatles, whose colossal foreign earnings helped narrow the U.K.’s deficit in trade and earnings with the rest of the world in the 1960s. She noted the absence of easy flows of banking finance may make it harder or more expensive for the U.K. to finance its yawning current account deficit in future. She didn’t discuss the outlook for U.K. monetary policy in her remarks. The BOE signaled Wednesday it is unlikely to raise interest rates in the U.K. until the second half of next year.

Bernanke Who? Twitter Weighs in on Edward Quince

With the financial world collapsing around them in 2008, U.S. officials weighed whether to bail out American International Group Inc. and other financial institutions. Emails flying around from former Federal Reserve Chairman Ben Bernanke came from the alias Edward Quince. The natural next question, is, well, why?
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The pseudonym had gone unnoticed until it was revealed as evidence in a class-action lawsuit brought against the government by shareholders of AIG, which received a giant Fed-backed bailout as it teetered toward collapse. That case is now unfolding in court in Washington. We now know Mr. Bernanke used the nom de plume “to make sure he didn’t get extraneous emails,” according to testimony by Fed general counsel Scott Alvarez. Twitter has since chimed in with its own thoughts on the matter, as well as speculating what might have inspired Mr. Bernanke’s name choice and how it compares to other well-known aliases. Even the recent news Mr. Bernanke couldn’t refinance his mortgage didn’t go without notice. Here are our favorites.  
Related Coverage:
What’s your financial crisis pseudonym? Bernanke Defends Government’s AIG Rescue in Court Testy Words Fly in AIG Suit Fed’s “Doomsday Book” Has Day In Court Geithner Testifies in AIG Bailout Suit Bernanke, Paulson and Geithner Face Grilling Over AIG Bailout U.S. to Take Over AIG (Sept. 17, 2008)

Meet Edward Quince, the Secret Federal Reserve Chairman in 2008

Former Fed Chairman Edward Quince. Or is it Ben Bernanke?
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Edward Quince was arguably the most powerful person in the world in the fall of 2008, with the fate of financial markets resting on his high-stakes decisions. It turns out he didn’t actually exist. Mr. Quince was the pseudonym then-Federal Reserve Chairman Ben Bernanke used on emails when he was conferring with colleagues during the financial crisis. The false name was revealed as evidence as part of a class-action lawsuit against the government by shareholders of American International Group Inc., which received a giant Fed-backed bailout as it teetered toward collapse. A Fed spokeswoman, who confirmed Mr. Bernanke’s use of the pseudonym, wouldn’t say why he was using an alias. She said the name didn’t have any particular significance. A Justice Department lawyer, Kenneth Dintzer, introduced emails to and from Mr. Quince as evidence in the case on Wednesday, blowing the cover on the world’s perhaps first undercover, super-secret central banker. On Saturday, Sept. 13, 2008, then-Fed vice chairman Donald Kohn sent an email to then-Fed governor Kevin Warsh, then-New York Fed president Timothy Geithner and the mysterious Mr. Quince, relaying a conversation Fed officials had with AIG. The insurance giant at the time was running out of access to short-term funding, a problem government officials feared could have a calamitous global impact. AIG officials wanted Fed assistance–fast. “They were vague as to what they expected from us but it sounded like an open-ended liquidity factility,” Mr. Kohn wrote. “‘A bridge to nowhere’ at this point.” Later in the email, Mr. Kohn went on: “At the end we could blink if they are too connected to fail, but that will open up an unknown can of worms in terms of access to discount-window credit.” Mr. Quince replied shortly thereafter: “We think they are days from failure. They think it is a temporary problem. This disconnect is dangerous.” Mr. Dintzer, the Justice Department attorney, told everyone in the courtroom that Mr. Quince was in fact Ben Bernanke, which Mr. Geithner confirmed on the witness stand. It’s not clear why Mr. Bernanke used a false name for emails during the crisis or when the practice started. A search of other records shows at least one public reference to Mr. Quince before now. In a hearing of the House Oversight and Government Reform Committee in January 2010, Rep. Spencer Bachus (R., Ala.) read a piece of an email dated March 2009, citing Mr. Geithner (by then the U.S. Treasury Secretary) and William Dudley of the New York Fed: “Secretary Geithner e-mailed William Dudley and Edward Quince, and he said, ‘Where are you on the AIG counterparty disclosure issue?’ You know, are you for disclosing or not?” The email apparently went on a screen at the hearing, a transcript of the event suggests, but there was no other mention of Mr. Quince after that. Edward Quince doesn’t exactly seem like the type of name you pull out of a hat, but it’s hard to tell what the significance might have been. There is at least one Edward Quince with a Facebook account, though, based on the profile picture of two adolescents on scooters, it doesn’t appear to have anything to do with Mr. Bernanke. There also appears to have been an Edward Quince who lived during the 19th century and moved from England to Australia as a “bounty immigrant” with his wife.  
Related Coverage:
Testy Words Fly in AIG Suit Fed’s “Doomsday Book” Has Day In Court Geithner Testifies in AIG Bailout Suit Bernanke, Paulson and Geithner Face Grilling Over AIG Bailout U.S. to Take Over AIG (Sept. 17, 2008)

New York Fed Needed a Culture Change, Columbia Professor Says

In 2009, Columbia University professor David Beim was asked by the Federal Reserve Bank of New York to conduct a confidential study of its supervision of banks. He found a culture among the staffers which he believed left them too deferential to superiors and unwilling to take a stand on looming threats to the financial system. Mr. Beim’s study came to light in a recent story by ProPublica and This American Life of the radio station WBEZ Chicago. The Wall Street Journal’s Jon Hilsenrath recently caught up with Mr. Beim in New York for a video discussion of his findings and the culture of Wall Street and its regulators. A transcript of excerpts from the interview appears below. Mr. Beim was Mr. Hilsenrath’s finance professor at Columbia Business School in 1995 and Mr. Hilsenrath wrote case studies on Asia for Mr. Beim’s textbook, “Emerging Financial Markets.” Mr. Beim said the Fed – and Wall Street banks more broadly – need more people who will speak up when they see something that isn’t right. In response to Mr. Hilsenrath’s interview with Mr. Beim, a New York Fed spokesman referred The Wall Street Journal to a recent bank statement. In it, the bank said Mr. Beim’s report included recommendations that were incorporated into “a significant reform of the New York Fed’s supervision group beginning in 2011” and that these changes “improved New York Fed supervision by deepening its view of the institutions it supervises and across the industry, and facilitating more candid and frequent interactions with decision-makers.” Excerpts from the Hilsenrath-Beim interview: WSJ: Tells us what you found in your study. You spent months inside the New York Fed and you gave us one of the few windows that we have into how that institution worked in 2009. Beim: We found basically a culture that was too risk averse. We found a culture in which people were incredibly deferential to their superiors, very unwilling to stand up and be counted. They really just did as they were told. I compared it a little bit to an army, the kind of high degree of cultural conformity that you get in an army. That was the way many U.S. corporations used to be organized, the kind of culture you had in many companies. But most companies have gotten away from that because that doesn’t work very well. Most companies now have a much more decentralized organizational culture. They push decisions much more down to the grass roots. The New York Fed needed to do the same. WSJ: What kinds of problems did that cause? Beim: The New York Fed had some terrific people. I really came to admire them greatly. They are intelligent, they’re well-meaning, and they’re hard working and really good people. But what they told me was that time and again they would see a problem and they wouldn’t do anything about it. So they would say, “Oh, subprime is getting a little out of hand here.” There was some wringing of hands but nobody said, “And therefore here’s what we’re going to do about it.” I think they needed more of that spirit. They needed a spirit that said, “Let’s take some action and do something to change the world and change the institution.” They found it incredibly hard to take that step. I recommended they get over it. WSJ: Do you think the Fed has changed since the crisis? Beim: I think they have wanted to change. They have done some things that are very good and quite different. They have increased the number of their bank examiners. They have created an entire group called risk management that looks across banks at systemic-type issues which is exactly the right thing that should have happened. And yet, as the NPR broadcast mentioned, the culture remains much as it was, or appears to. I don’t have separate evidence of this. I just listened to the broadcast. WSJ: You haven’t done any work on this since the 2009 study. Beim: I have not. WSJ: Do you think the culture of Wall Street is changing as a result of the financial crisis? BEIM: I think the culture of Wall Street has become more risk averse. Many institutions just about died during that crisis and basically have been very cautious since. WSJ: Why can’t banks stop themselves when we get into these periods of manias or booms? Beim: Financial institutions have been doing this for hundreds and maybe thousands of years. As long as there have been banks in the world, and that means at least since the times of ancient Rome, we’ve had banking crises and collapses. It seems to happen with amazing regularity. Why? There are a number of theories but one of them is that there are just cycles of human psychology. The old fashioned words are greed and fear. People swing in mood between enthusiasm and euphoria, on one hand, and disgust and discouragement on the other. WSJ: Which institutions survive? Beim: Generally it is the institutions with strong internal cultures that have some degree of self-regulation about them. They had some degree of self-discipline. They may have gotten swept up in the euphoria, but they had a few, at least, checks and balances on that process and they came out relatively better than the others. The problem with euphoria is it feels so good. It is like being on a drug. It makes everybody feel like they are floating on a cloud and nobody wants to call an end to it. But it is the Fed’s job to call an end to it. The Fed has long seen its mission on the monetary sphere as taking away the punch bowl just as the party is getting good. They need to do that in the area of systemic risk. WSJ: You have thought a lot about the Fed’s policies and its bond-buying programs [referred to by some as quantitative easing or QE]. Do you think they’re working? Beim: In a word, no. We want to believe that they work. We want to believe that daddy is taking care of us and that we’ve got somebody up there powerful enough to direct the economy. But I think if you do a careful review of the QE programs, their impact is seriously marginal. Maybe there is a little, tiny impact on the particular instruments that they were buying. But it is hard to measure and unlikely to be important macro economically. We give way too much deference to the Fed in saying they control the economy. And certainly not these tools.  
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