The main job of Fed Chairman is to save lives. For the past century people have found other goals for the Fed to aspire to: “prevent unemployment” and “prevent hyperinflation,” but those are second to the main goal of saving lives.
How does the Fed save lives? Despite the lack of respect that Main Street gives Wall Street (or Nassau Street, where the Fed of NY lives), Wall Street and Main Street are the same thing. If the lights go out on Wall Street, they are going out on Main Street as well.
If there’s any doubts as to the relationship between Wall Street and Main Street you need look no further than Google Trends for your answers. Google Trends tracks how popular particular search phrases are.
It’s interesting to see what search phrase spiked up exactly during the period when the market was veering from the financial collapse. I’ll show the chart first, then guess the phrase:
The phrase is “Suicide methods” and I clicked on “United States” so I would see the U.S. results only.
Exactly starting in September, 2008 (right around the time of the Lehman collapse) and going through March, 2009 (when the market finally bottomed) the number of people searching the phrase “suicide methods” hit all time highs.
When the market was crashing, people were killing themselves.
I see why the academics, or the Ron Paul-lovers of the world hate Wall Street and hate the bailouts. But the reality is that the financial system did stabilize after the bailouts, the market somewhat recovered, and people stopped killing themselves (or at least stopped searching Google to figure out how to do it).
Main Street equals Wall Street. Our mutual fund holdings, our 401k plans, our net worth (and sadly, our self worth) is wrapped up in how well Wall Street is doing. Sure, as a country we probably need mass therapy. But short-term, a higher Wall Street is the best anti depressant.
So, if I were Fed chairman, my main goal would be to prevent people from committing suicide:
• Keep interest rates low (less than 2%) forever, or at least until the S&P hit 1700+.
• Don’t mind a little inflation. I’d even go for a 5-7% annualized inflation. The benefits of inflation?
- We screwed the people who lent money to us. The value of the debt we owe them will decline.
- Our tax revenues will go way up (people will be flush and our exports would go up).
- Housing would recover (a weaker dollar would encourage more foreign buyers/investors of our housing market.
- The stock market is a great hedge for inflation.
• Right now the Fed is paying money for banks to keep reserves. Lets stop that! Get the reserves out there by cutting the reserve rate we are paying banks back to zero. Its never been above zero before until this recent crisis. I’d move it back!
Check out this chart of the excess reserves in the bank system:
The reason the fed has been forcing the banks to be conservative is so that they have liquidity in case of a run on their capital. Well, the time for runs has passed. Lets get back to the business of forcing banks to lend.
• Continue to buy the garbage paper on the banks books. Not only MBS but credit card paper, auto loan paper, etc. Do this until the US banking system balance sheet (minus the Fed) is totally sterile.
• Set up a regulatory body to oversee mortgage originations. Require the following:
- Every bank must keep at least 5% of a mortgage on their books post-securitization;
- A borrower must sign a one-sheet which explains in clear bullets what their interest rate is, what it will adjust to under various conditions, what their exact payments will be, etc. This will go far to protecting the naïve borrower;
- Allow mortgages to trade. So, for instance, if a bank is writing down a paper with my mortgage in it, another bank (or I) can buy the mortgage for pennies on the dollar and thus reduce my payments;
- All of the above should apply to credit card paper, auto loan paper, etc;
• In times of distress use the Fed’s capital to prop the stock market up. The Fed should use its trillion dollar balance sheet to fill any gaps in liquidity throughout the system that could cause systemic collapse. Clearly, as the “Suicide methods” example shows, when the stock market is collapsing, there is systemic risk. The Fed should fill that liquidity and NOT be required to tell the public what its doing with its balance sheet.
• The Fed should push to repeal FASB 157. Evidence: the housing market had already collapsed all through 2007 and even late 2006. The stock market was fine, even reaching new highs. We were absorbing the collapse. Repealing FASB 157 caused the banks, midstream, to have to re-mark their entire portfolio, causing liquidity issues. Mark-to-model, yes, is severely flawed. But having to mark to an illiquid market like the ABX, which was easily manipulated by hedge funds, caused the collapse of 2008. When did FASB 157 get issued? November, 2007, the peak of the market. Repeal it now!
• Force the SEC to reinstate the uptick rule. This would avoid even the rumors of bear raids, which were bad for the market.
If I were Fed Chairman and facing a congressional committee that asked me point blank with haughtly indignation, “Mr. Chairman, what is it exactly that you do as Chairman of the Federal Reserve,” I’d have no problem answering:
“I save lives.”