The Triple-A Credit Rating Is Not Bottomless

Did you watch 60 Minutes’ interview with Chairman Ben Bernanke last night? There was some good stuff in the interview and the footage of the inside of the Fed was something to see. I bet we all could use a pallet of one hundred dollar bills

I agree with the comment that next to the President of the United States, the Chairman of the Federal Reserve Bank is the most powerful person as it relates to our economy. The central bank of any country has an enormous responsibility for not just the monetary policies of the country, but with the United States, our domestic economy and the economies of the rest of the world. For many years, the United States’ economy has been viewed as the locomotive that pulls the other economies of the world with it much like the locomotive pulls the other cars of the train.

Ben Bernanke is highly qualified to be the Chairman of the Fed, but like all of us, experience has a lot to do with the knowledge we bring to the job. Before becoming Chairman of the Fed, Ben Bernanke was a professor of economics at Princeton University. His area of expertise was central banking and the Great Depression. Unfortunately, technology has permitted the world of banking to change, and those changes have, in my opinion, rendered the old tools of monetary policy incapable of influencing the growth of the money supply as well as creating what I would call “leaks” in the system.

Over the last several months, the Fed has had to take ex-ordinary measures to deal with the financial crisis. But, unless the Fed and the Federal Government (Congress) are prepared to make some permanent changes in the way banking is done, we are going to travel the road of a financial panic and crisis again.

The Fed must, in my opinion, have complete control of the credit rating process. The issuance of the triple-A credit rating must no longer be in the hands of the private sector, to be “shopped” by the underwriters as was done in the recent past. The credit ratings are the weights and measures of finance, and must be controlled by the Federal Reserve Bank. There is in my mind a mathematical relationship between the growth of the money supply and the issuance of the triple-A credit rating. The triple-A credit rating can not be inflated and stand for nothing. The integrity of the triple-A rating is essential to our economy not going down the same road to a financial crisis again.

Wall Street will abuse the credit rating system again as it has done several times in the past. The fixed income sector of the market that creates the billions of dollars of structured financial obligations and their triple-A credit ratings is not bottomless.

Stay tuned.

D-Day June 6, 1944 - June 6, 2009

This was our finest hour. We freed Europe. We defeated Nazi Germany. Today, all Americans and Europeans should take a moment to remember what the United States of America did on that day.

The Federal Reserve Bank Needs New Tools

When I was a little boy, I loved those books where you took a pencil and connected the dots by following the numbers until a picture took form before your eyes. Understanding economics and monetary theory is very much like connecting the dots with a pencil in those books I loved as a child.

Understanding what money is and the forms it can take, as well as understanding that like a commodity money can go up in down in value, also known as purchasing power, and, to rent money, the interest rate that is paid by the borrower can change over time.

The concept of a central bank with power over the commercial banks orbiting around it, is the stuff that makes our economy so dynamic and gives it its strength. However, we know the world is not static, as there are always new innovations that can short circuit the best systems. Our central bank, The Fed, had its sights on growing the economy and did not realize that computers and a few bright guys could create a whole new sector of finance known as structured debt obligations. Once securitization came about, it was time for The Fed to reexamine the situation and ask itself if it had the necessary tools to continue to influence the growth rate of the money supply.

Securitization of mortgages did not exist when the first tools of monetary policy were put together. The world of finance changed, but The Fed did not anticipate how that change would affect their ability to run monetary policy. Securitization, the triple-A bond rating, and a world wide market for collaterized mortgage obligations (CMOs) changed the framework under which monetary policy could be effective.

The Federal Reserve Bank needs to control the issuance of the triple-A rating as a tool to influence monetary policy. The triple-A rating, in a world of the securitization of mortgages, can not remain in the hands of the private sector. The weights and measures of finance, the credit ratings by which billion$ of dollars are underwritten, must be in the hands of the Federal Reserve Bank.

There are a lot of people that will disagree with my opinion, but no one can disagree with the fact that with the securitization of mortgages, the Fed has lost influence over the monetary policy for which it is charged. Congress needs to step up to the plate and recognize that the financial playing field of the 21st century is far different than it was when Congress created the Fed. A Federal Reserve Bank without control over the triple-A rating and thus the issuance of CMOs, is a Fed lacking control of its own monetary policies.

Stay tuned.

The Antichrist of Monetary Policy

Today, I want to talk about something that has been going around in my head for a while, but for some reason I have not written it down, so, here goes.

The Federal Reserve Bank can influence the growth of the money supply by using three basic tools of monetary policy. The first tool is OPEN MARKET OPERATIONS. Open Market Operations is the buying and selling of U.S. Treasury securities on the open market. If the Fed buys securities they put more reserves into the banking system, and, if they sell securities they take reserves out of the banking system. The second tool is the FED FUNDS RATE. The Fed can raise and lower the Fed Funds Rate to encourage more or less lending and thus influence the growth of the money supply. The third tool is the RESERVE REQUIREMENT for commercial banks. By raising or lowering the Reserve Requirement that banks must maintain, the Fed can again influence the growth rate of the money supply. The Fed can not control the growth rate of the money supply because if people do not want to borrow money the Fed can not force them to borrow. This is sometimes known as “pushing on a string.” You can push a frozen rope, but you can not push on a string. Try putting a piece of string on a table and pushing it with your finger. It does not work, and neither does the Fed. Let me explain.

The process of securitization of structured finance obligations, mortgage-backed bonds, etc., short circuits the Fed’s influence over monetary policy. When mortgages or any other structured financial obligations are bundled and made into fixed income securities, given the triple-A rating by the Credit Rating Agencies and sold around the world, the Fed has lost influence over the growth rate of the money supply. I do not believe that Chairman Greenspan fully understood this at the time it was happening. The more I read about Alan Greenspan the more I think he was an idiot savant. Greenspan’s interest in economics and his thing for numbers was no substitute for an understanding of the subtleties of monetary theory.

The financial bubble that was created was a direct result of the process of securitization of the mortgage market and the sale of mortgage-backed obligations to investors around the world. In essence, the Fed, our central bank, lost control and the resulting financial crisis that hit the United States and then the rest of the world began with the expansion of mortgage credit writ large by the world wide appetite for mortgage-backed bonds.

I guess if I am right, that would make me the Antichrist of monetary policy, but if it does so be it. There is a flaw in our Central Banking System, and until this flaw is recognized and dealt with, this flaw will come back to bite us all in the ass again.

Stay tuned.

NBC Executives Wake Up

Last night I watched the NBC Special on the Obama White House. I have seen the White House from the street, but I have never been in the White House. It is always interesting to see what the White House looks like inside. The program was entertaining as it should be, but news programs should be more than entertaining and they are not much more than entertainment.

While Brian Williams and President Obama were in the car making a burger run down to the city, Williams asked Obama if he ever stops as he is switching channels and watches some of the cable news shows. Obama’s answer was “no”, he does not watch because there is nothing for him to learn from the same worn characters saying the same worn things. I agree, but it is all I have, so I watch it.

I have written about the fraud of the Credit Rating Agencies many times, and yet, not one of these TV news shows has discussed the role this fraud played in the financial crisis and the bond market meltdown. Why has there been no discussion of this vital piece of the puzzle? Is it that it is too difficult for people to understand a bond rating system that starts with triple-A? Or, is it more likely that a discussion of the role that the Credit Rating Agencies played in the mortgage-backed bond fraud is not sexy enough for the people that repeatedly appear on these news shows?

I hope the big shots at NBC watched the Obama White House Special last night and heard what the President said about their political news shows on MSNBC. How about putting on some new faces that know some new things to talk about? Have not we all heard enough from Pat Buchanan for the rest of our lives?

Discussing politics requires an understanding of the economic factors that drives the political debate. NBC, how about bringing on some people that know something about the Credit Rating Agencies, the mortgage-backed bond market? Is not it worth a gamble to shoot a little higher and try for a more knowable show that might even get the President’s ear?

Stay tuned.

The Economics of Health Care Reform

The President’s Council of Economic Advisers says that it is for the economic good of the nation that we have health care reform. Because it will save jobs and help large and small businesses that this health care reform might happen. We are not going to get health care reform where everyone will be covered because it is the right thing to do, or, that as humans, everyone has a right to health care. Those reasons really do not carry any weight. It is because in Dollar$ that it makes sense that there is hope that reform will take place. This is just one more example of my philosophy about life in America, and perhaps all over the world in varying degrees, that money talks and bull shit walks. Show the economic imperative, yes the word imperative is used in the article about health care that I read this morning, and you might just be able to get enough votes to get reform passed by the Congress of the United States.

I love the part of the article where they discuss the Dollar$ that will be saved by the typical family of four as a result of health care reform. The Council of Economic Advisers can tell us how much we will save 20 and 30 years out in 2009 Dollar$. This kind of economic analysis is just so much crap that it is beyond laughable. They can not tell you the purchasing power of the Dollar in five years much less 20 or even 30 years. But, for the vast majority, these people on the President’s Council of Economic Advisers sound like they know what they are talking about. May the FORCE be with them.

I hope we get health care reform passed soon. I think we will be a better nation if everyone knows that they will not be destroyed by health care costs or that they can not take a better job for the security of their family because they fear losing coverage because of a preexisting condition. I know there must be another million reason why health care reform will be good for this country, but we do not need to list each one.

Stay tuned.

Washington & Wall Street Incorporated For Profit

Today starts a new month and for me a new project. For the next three months I will be working on writing a story. This is my story, a true story, something that I lived.

Over the last year and three and one half months I have written my opinions about the economy, the markets and the way government policy has affected our domestic economy.

Now it is time for me to try a new strategy and write a book. I do not know if anyone will publish my story, but at this point in time, I feel like I have to make the effort now. So, for the next three months, I am going to be writing this story with the goal of having a book written by September 1, 2009.

I will still write my blog MONEYTHOUGHTS; however, I will be writing a lot less. I have given my blog my best shot, and while I realize what I write about is not the sexiest stuff in the world, I nevertheless think it is important that someone makes the effort to get the story out there.

The basic argument for me is that the federal government has an obligation to protect the investor, private individuals and public pension funds. Fiscal policy and monetary policy in the United States makes saving money over the long term a losing proposition, thus forcing people and institutions to invest in the stock and bond markets. With investing a necessity to reach actuarial assumptions set by actuaries, the investment game needs to be on the level. Making marks out of people by Wall Street’s greedy is not sport, and should not be tolerated the way it has been by the Federal government and is still today. Regulations, oversight, transparency and enforcement of the security laws needs to be brought to the investment industry. Congress has an obligation to the people of the United States to run a clean investment game. It is my opinion that this has not been the case, better regulations are needed as well as need to be enforced. A whole nation of hard working people have been financially crippled because of the greed of a few. This should not stand, but it will take effort to change the way business is done in Washington and Wall Street. W & W incorporated is not a not for profit enterprise.

I will still write a few times a week, but my main thrust will be going into my book. I may recycle some of my old posts if I need to.

stay tuned.