{"id":53114,"date":"2020-10-26T11:07:37","date_gmt":"2020-10-26T15:07:37","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=53114"},"modified":"2020-10-26T11:07:37","modified_gmt":"2020-10-26T15:07:37","slug":"put-the-blame-on-me","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2020\/10\/put-the-blame-on-me\/","title":{"rendered":"Put The Blame On Me"},"content":{"rendered":"

At least since the global financial crisis of 2008, Federal Reserve officials have, by and large, denied or downplayed the idea that their zero-interest-rate policies and mammoth bond purchases have artificially inflated financial assets even as the Fed is buying trillions \u2013 with a capital T \u2013 of U.S. Treasury and mortgage-backed securities markets and more recently corporate bonds. Now the presidents of a few of the Fed\u2019s regional banks are suggesting that the Fed study whether its monetary policies are encouraging overly risky investor behavior. <\/p>\n

Loretta Mester, the president of the Cleveland Fed, conceded that prolonged periods of low rates could incite \u201chigher levels of borrowing and financial leverage, increased valuation pressures, and search-for-yield behavior.\u201d<\/p>\n

\u201cWhile monetary policy that leads to a stable macroeconomy encourages financial stability, it is also possible that in an environment with low neutral rates, a persistently accommodative monetary policy could, in some cases, increase the vulnerabilities of the financial system,\u201d she said<\/a>.<\/p>\n

Boston Fed President Eric Rosengren went even further, suggesting that the Fed \u201crethink\u201d financial regulation \u2013 but apparently not monetary policy \u2013 to rein in speculative behavior.<\/p>\n

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\u201cIf you want to follow a monetary policy\u2009.\u2009.\u2009. that applies low-interest rates for a long time, you want robust financial supervisory authority in order to be able to restrict the amount of excessive risk-taking occurring at the same time,\u201d he told the Financial Times said. \u201c[Otherwise] you\u2019re much more likely to get into a situation where the interest rates can be low for long but be counterproductive.\u201d The Fed, he said, currently lacks sufficient tools to \u201cstop firms and households\u201d from taking on \u201cexcessive leverage.\u201d<\/p>\n

If I read him correctly, he\u2019s saying that investors need to be restrained from doing what the Fed is basically forcing them to do. By design, the Fed\u2019s purchases of government bonds and MBS have driven yields so low that investors have had little alternative than to buy stocks and other riskier assets if they want to earn more than what government bonds are paying, which is next to nothing. Now Rosengren and his colleagues are suddenly worried that these \u201cfirms and households\u201d are taking on \u201cexcessive leverage\u201d and creating asset bubbles, and that the Fed may need to intervene.<\/p>\n

Neel Kashkari, the president of the Minneapolis Fed, agreed with Rosengren, although he stopped short of calling for tougher regulation.<\/p>\n

\u201cI don\u2019t know what the best policy solution is, but I know we can\u2019t just keep doing what we\u2019ve been doing,\u201d Kashkari said. \u201cAs soon as there\u2019s a risk that hits, everybody flees, and the Federal Reserve has to step in and bail out that market, and that\u2019s crazy. And we need to take a hard look at that.\u201d<\/p>\n

But at least one other regional Fed president said there\u2019s really not a whole lot the Fed can do in trying, on the one hand, to carry out zero-interest monetary policies and massive asset purchases, while on the other trying to prevent investors from taking the logical and self-interested steps in reaction to those policies, namely reaching for yield and buying more risky assets.<\/p>\n

\u201cWe should always watch for excess risk-taking, we should always watch for excess leverage,\u201d Mary Daly, the president of the San Francisco Fed, said. \u201cBut we shouldn\u2019t regulate off the fear that could happen, and at the expense of so many millions of Americans who need the employment and the income and the access to the economy.\u201d<\/p>\n

In other words, the Fed really has no alternative but to do what it\u2019s doing, so it can\u2019t very well complain if some people need to take on risks that they might not normally take absent Fed policy \u2013 indeed, because of Fed policy.<\/p>\n

Actually, the Fed and the other federal financial regulators should take some credit for tightening up and enforcing stricter capital requirements and taking other measures to better ensure the safety and soundness of the nation\u2019s banks after the 2008 crisis, monetary policies that have prevented a similar debacle during the pandemic. While second-quarter earnings at the nation\u2019s biggest banks were reduced by large provisions for expected loan losses, neither did they report negative income \u2013 not even close. The third quarter was even better, as most banks sharply reduced their loan loss provisions and earnings in some cases were better than the pre-pandemic period of 2019. They\u2019re still making plenty of money. <\/p>\n

So it\u2019s a little hard to understand why we need more \u201crobust financial supervisory authority\u201d when we already have it, and the banks seem to be doing just fine, both from a safety and a profitability standpoint. <\/p>\n

If the Fed is serious about wanting to curb \u201cexcessive leverage,\u201d then it should roll back its asset purchases and start raising interest rates, which of course it won\u2019t do. Asset inflation brought on by speculation is a genuine concern. But if Fed officials want to look for the cause, they should look in the mirror.<\/p>\n

Visit back to read my next article! <\/p>\n

George Yacik<\/a>
\nINO.com Contributor - Fed & Interest Rates<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

At least since the global financial crisis of 2008, Federal Reserve officials have, by and large, denied or downplayed the idea that their zero-interest-rate policies and mammoth bond purchases have artificially inflated financial assets even as the Fed is buying trillions \u2013 with a capital T \u2013 of U.S. Treasury and mortgage-backed securities markets and […]<\/p>\n","protected":false},"author":16,"featured_media":53117,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[7023,6824,511,7333,230,5324],"class_list":["post-53114","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ino-com-contributors","tag-fed-and-interest-rates","tag-federal-open-market-committee-fomc","tag-federal-reserve","tag-geroge-yacik","tag-interest-rates","tag-zero-interest-rate-policy-zirp"],"yoast_head":"\nPut The Blame On Me - INO.com Trader's Blog<\/title>\n<meta name=\"description\" content=\"Presidents of a few Federal regional banks are suggesting that the Fed study whether its monetary policies are encouraging overly risky investor behavior.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/wwwtest.ino.com\/blog\/2020\/10\/put-the-blame-on-me\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Put The Blame On Me - 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