Geithner, Bernanke, Paulson NYT OpEd mutual fund backstop

[kgtest]

Mods forgive me if this is in the wrong area.

I recently read a NYT Op Ed by Geithner, Bernake and Paulson that discusses the PR disaster surrounding the 2007/08 financial crisis. It goes into state that during that time the FDIC acted quickly and best appropriately to prevent essentially a "bank run".
The argument is that currently we've lost some of the powers/tools we had back in 2008 to prevent this in the future..and I am confused as to what specifically/technically those powers/tools were that are no longer legislation?

https://www.nytimes.com/2018/09/07/opinion/sunday/bernanke-lehman-anniversary-oped.html

'...we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. Acting in its traditional role as lender of last resort, the Federal Reserve provided massive quantities of short-term loans to financial institutions facing runs, while cutting interest rates nearly to zero.

./.

'But in its post-crisis reforms, Congress also took away some of the most powerful tools used by the FDIC, the Fed and the Treasury. Among these changes, the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds. These powers were critical in stopping the 2008 panic.'

I now understand essentially the emergency lending powers and the outcome of blanket guarantees of bank debt are no longer available.

My question is sort of, "Why?" What was the reasoning for restraining the powers, when it seems to have worked so well. Is it simply due to public sentiment as they go on to discuss below?

Then I found a supporting article at the observer that explained a bit further... as it related to the general publics/voters' sentiment below...

https://observer.com/2018/09/ben-be...y-geithner-regret-pr-failures-of-2008-crisis/
“The hardest thing was sitting at the table with my wife in the morning with her reading about what I was doing, and just seeing on her face the mix of despair and doubt,” reflected Geithner. “I believe she felt that we were ethical people trying to do the right thing, but she looked at what we did and said ‘Really?’ That was mirrored by what we faced across the country and the gap between what we thought would provide the broadest benefit as far as possible, with what people thought was fair and just.”


BTW, that Hear no, see no, speak no evil pose by these three is CLASSIC! Thoughts from the Econ peasants?

 

[Mdlerth]

Don't trust any of them

Most dangerously, trillions of dollars of risky credit were financed by uninsured, short-term funding

Totally disingenuous, since that crew (plus a few others) bears responsibility for creating the risky credit in the first place.

 

[kgtest]

SO as long as we avoid financing uninsured short term loans, we can learn from our mistakes?



Is this the same as a "pay day loan" ?

 

[MichaelB]

Totally disingenuous, since that crew (plus a few others) bears responsibility for creating the risky credit in the first place.

I think there is some merit to this view, especially if it includes the prior Fed Chief.

SO as long as we avoid financing uninsured short term loans, we can learn from our mistakes?

Is this the same as a "pay day loan" ?

Not the same, but not totally different. (How's that for a clear answer )
The Fed's preferred tool is to cut interest rates and lend lots of money to the financial system. Problem is, they don't have much room to do that right now if we suddenly have a need.

 

[dtbach]

I think there is some merit to this view, especially if it includes the prior Fed Chief.


Not the same, but not totally different. (How's that for a clear answer )
The Fed's preferred tool is to cut interest rates and lend lots of money to the financial system. Problem is, they don't have much room to do that right now if we suddenly have a need.

That's why they need to keep pushing rates up even if it unsettles the market to a degree. They have to have some ammunition stored up.

 

[kgtest]

Ahh, that makes it a bit clearer. I keep hearing 3 more rate hikes this year. Will be interesting to see the outcomes of that. We only have five more months so that would be on pace for about every other month.


Would this in turn move bonds a bit higher as well? In theory?

 

[Independent]

the Treasury would not be able to repeat its guarantee of the money market funds.

My, poorly informed, opinion goes like this. MM Funds compete against bank-managed checking accounts. The bank pays a premium for the FDIC insurance on the checking account, and bank regulators look at the bank's books and reserve ratios.

The MM Fund does not have those expenses. Hence, it can provide a little more yield. It seems wrong to bail out the MMF when the SHTF. If they want to be able to bail out MM Funds, then they should be pushing to have the MMFs subject to the same oversight and insurance premiums as the bank checking account.

(I said "poorly informed" partially because it's possible this change in oversight has occurred and I just don't know about it.)

 

[kgtest]

My, poorly informed, opinion goes like this. MM Funds compete against bank-managed checking accounts. The bank pays a premium for the FDIC insurance on the checking account, and bank regulators look at the bank's books and reserve ratios.

The MM Fund does not have those expenses. Hence, it can provide a little more yield. It seems wrong to bail out the MMF when the SHTF. If they want to be able to bail out MM Funds, then they should be pushing to have the MMFs subject to the same oversight and insurance premiums as the bank checking account.

(I said "poorly informed" partially because it's possible this change in oversight has occurred and I just don't know about it.)

AHA! Poorly informed yet informative. I was looking for the correlation to MM and the Fed...and competition is the winner. NOW it makes even more sense when you put it like that.

 

[audreyh1]

But substantial changes were made a few years ago to make money market funds far safer, so I don’t get this.

The safest money market funds, and certainly the ones used for core accounts, are mostly in government-backed paper.

 

[audreyh1]

Ahh, that makes it a bit clearer. I keep hearing 3 more rate hikes this year. Will be interesting to see the outcomes of that. We only have five more months so that would be on pace for about every other month.


Would this in turn move bonds a bit higher as well? In theory?

No - 2 more this year, Sept and Dec expected, and one in March next year. That is what the market currently expects.

 

[NYEXPAT]

Ahh, that makes it a bit clearer. I keep hearing 3 more rate hikes this year. Will be interesting to see the outcomes of that. We only have five more months so that would be on pace for about every other month.


Would this in turn move bonds a bit higher as well? In theory?

There will be a max of two, one this month and about a 72% chance of one in December.

(Sorry, did not see Audreyh1's post)

 

[kgtest]

There will be a max of two, one this month and about a 72% chance of one in December.

(Sorry, did not see Audreyh1's post)

Realized this a bit late. Thanks! but how high?

 

[audreyh1]

Realized this a bit late. Thanks! but how high?

0.25% raises are expected each time. So Fed funds rate at 2.5% by the end of this year, and 2.75% next March. Beyond that, the outlook is murky.

 

[Oz investor]

Ahh, that makes it a bit clearer. I keep hearing 3 more rate hikes this year. Will be interesting to see the outcomes of that. We only have five more months so that would be on pace for about every other month.


Would this in turn move bonds a bit higher as well? In theory?

i suspect only 2 rate rises ( in the final part of ) this calendar year

a 3rd might be seen as a 'panic reaction ' ( by the Fed )

but please feel encouraged to formulate contingency plans early

is there looming danger ?? i think there is , but from inflation fears or credit tightening might be a harder topic


in regards to bonds YES , but they are less likely to keep pace with inflation as they rise ( so not an immediate win )