Monthly Archives: September 2010

FED Adds QS To QE: Here's The Transcript of Bernanke's Testimony

Appearing before the US Senate Banking Committee Thursday, FED chairman Ben Bernanke began his testimony on the recently approved US legal overhaul  – the regulation of the financial system. In a prepared speech, Bernanke praised the Dodd- Frank Act for addressing critical regulatory gaps that were revealed by the financial crisis, pointed out that the Federal Reserve was working closely with other regulators to enact the law that was approved by Congress in July. The chairman also introduced “quantitative surveillance” of the US banking system.  Read the full transcript of Mr. Bernanke’s testimony.

“The stress tests also showed how much the supervision of systemically important institutions can benefit from simultaneous horizontal evaluations of the practices and portfolios of a number of individual firms and from employment of robust quantitative assessment tools.”

Ben Bernanke


“As it was put by my former colleague, Markus Brunnermeier, a scholar affiliated with the Bendheim center who has done important research on bubbles; we do not have many convincing models that explain when and why bubbles start. I would add that we also don’t know very much about how bubbles stop either.”

The FED chief thanked the Senate for confirming two of three outstanding Federal Reserve Board governor nominees , filling key slots on the central bank’s board.

The lawmakers approved Janet Yellen as a member of the board, as well as vice chairman of the FED, and Sarah Bloom Raskin as a member of the board.

Bernanke will over the next days participate in a panel taking questions from Senators on implementation of the latest financial overhaul. The panel also includes Sheila Bair, head of the Federal Deposit Insurance,  Mary Schapiro, head of the Securities and Exchange Commission and Gary Gensler, head of the Commodity Futures Trading Commission.

Ben Bernanke started his opening statement by saying:

“In the years leading up to the recent financial crisis, the global regulatory framework did not effectively keep pace with the profound changes in the financial system. The Dodd-Frank Act addresses critical gaps and weaknesses of the US regulatory framework, many of which were revealed by the crisis. The Federal Reserve is committed to working with the other financial regulatory agencies to effectively implement and execute the act, while also developing complementary improvements to the financial regulatory framework.”

Adding:

“The act gives the Federal Reserve several crucial new responsibilities. These responsibilities include being part of the new Financial Stability Oversight Council, supervision of nonbank financial firms that are designated as systemically important by the council, supervision of thrift holding companies, and the development of enhanced prudential standards for large bank holding companies and systemically important nonbank financial firms designated by the council,  including capital, liquidity, stress test, and living will requirements.”

“In addition, the Federal Reserve has or shares important rulemaking authority for implementing the so-called Volcker Rule restrictions on proprietary trading and private fund activities of banking firms, credit risk retention requirements for securitizations, and restrictions on interchange fees for debit cards, among other provisions,” he said.

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Introducing QS 1

According to Mr. Bernanke, a critical feature of a successful systemic or macroprudential approach to supervision is a “multidisciplinary perspective.”

“Our experience in 2009 with the Supervisory Capital Assessment Program – popularly known as the bank stress tests – demonstrated the feasibility and benefits of employing such a perspective. The stress tests also showed how much the supervision of systemically important institutions can benefit from simultaneous horizontal evaluations of the practices and portfolios of a number of individual firms and from employment of robust quantitative assessment tools,” he told the senators.

“Building on that experience, we have reoriented our supervision of the largest, most complex banking firms to include a quantitative surveillance mechanism and to make greater use of the broad range of skills of the Federal Reserve staff,” he said.

Here’s the full transcript of chairman Ben Bernanke’s testimony before Banking Committee today.

And Defending QE 2

One of the things Mr.Bernanke probably will have to explain to the senators is the – now famous – monetary policy called quantitative easing.

The policy, based on the economic theories of John Maynard Keynes,  means in practice to pour money into the the financial system in numerous ways to stimulate economic growth in times of contraction.

Many economists, commentators and other financial experts have started to question the theories, used by both central banks and governments to build their arguments and actions.

After spending unknown trillions of dollar to counter the economic downturn, without much visible results, it’s quite understandable.

However, Ben Bernanke, will defend the FED’s policy with the strongest conviction.

Speaking at a conference at Princeton last Friday, he said:

“Standard macroeconomic models, such as the workhorse new-Keynesian model, did not predict the crisis, nor did they incorporate very easily the effects of financial instability. Do these failures of standard macroeconomic models mean that they are irrelevant or at least significantly flawed? I think the answer is a qualified no.”

“Economic models are useful only in the context for which they are designed. Most of the time, including during recessions, serious financial instability is not an issue. The standard models were designed for these non-crisis periods, and they have proven quite useful in that context. Notably, they were part of the intellectual framework that helped deliver low inflation and macroeconomic stability in most industrial countries during the two decades that began in the mid-1980’s,” Ben Bernanke said at the conference, sponsored by Center for Economic Policy Studies and the Bendheim Center for Finance.

PS: Don’t Blame The Models

On the other hand, human behavior is still a big problem.

Or as the FED chief puts it: “Most economic researchers continue to work within the classical paradigm that assumes rational, self-interested behavior and the maximization of “expected utility” – a framework based on a formal description of risky situations and a theory of individual choice that has been very useful through its integration of economics, statistics, and decision theory.9 An important assumption of that framework is that, in making decisions under uncertainty, economic agents can assign meaningful probabilities to alternative outcomes. However, during the worst phase of the financial crisis, many economic actors – including investors, employers, and consumers – metaphorically threw up their hands and admitted that, given the extreme and, in some ways, unprecedented nature of the crisis, they did not know what they did not know.”

The idea that at in certain times, decisionmakers simply cannot assign meaningful probabilities to alternative outcomes –  even not think of all the possible outcomes – is known as Knightian uncertainty, after the economist Frank Knight who discussed the theory in the 1920’s.

“Research in this area could aid our understanding of crises and other extreme situations. I suspect that progress will require careful empirical research with attention to psychological as well as economic factors,” Bernanke replies.

Another issue that clearly needs more attention is the formation and propagation of asset price bubbles, the FED chairman acnowledge.

“Much of the literature at this point addresses how bubbles persist and expand in circumstances where we would generally think they should not, such as when all agents know of the existence of a bubble or when sophisticated arbitrageurs operate in a market. As it was put by my former colleague, Markus Brunnermeier, a scholar affiliated with the Bendheim center who has done important research on bubbles, “We do not have many convincing models that explain when and why bubbles start.” I would add that we also don’t know very much about how bubbles stop either.”

“The financial crisis did not discredit the usefulness of economic research and analysis by any means; indeed, both older and more recent ideas drawn from economic research have proved invaluable to policymakers attempting to diagnose and respond to the financial crisis. However, the crisis has raised some important questions that are already occupying researchers and should continue to do so. As I have discussed today, more work is needed on the behavior of economic agents in times of profound uncertainty; on asset price bubbles and the determinants of market liquidity; and on the implications of financial factors, including financial instability, for macroeconomics and monetary policy,” Ben Bernanke concludes.

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Here’s a copy of the Princeton speech.

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Related by the Econotwist:

Goodbye Keynes – Hello Ricardo!

US Economic growth slows to 1,6% – Does Quantitative Easing Really Matter?

US Congress Question Morals of Monetary Policy

“A Breakdown In Our Values”

Force The Rich!

Wild-West Capitalism (Don’t Blame The Baby Boomers)

Socialism For The Rich – Capitalism For The Poor?

2010 Analysis: The Road to Disaster

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Filed under International Econnomic Politics, National Economic Politics

EU Respond To Cyber Threath Alarm

EU’s anti-cyber-crime agency ENISA will start working with Europol to track down hackers and the creators of botnets like Conficker and Stuxnet, the EUobserver reports. A new law is about to be adopted, making the setup of these zombie networks illegal. The EU commission says it does not want to terrify people but notes that the Stuxnet could be used to sabotage a nuclear plant.

“To anyone who thinks that cyber-attacks are an abstract concept, I would say that for millions of people each year there are already direct practical consequences.”

Neelie Kroes


During a press briefing in Brussels Thursday, the EU commission for Home Affairs highlighted the creation of two large-scale cyber weapons in the past two years as examples of the increasingly dangerous environment on the Internet, citing internal alerts from British, French and Germany military intelligence.  In January and February last year the Conficker prevented French fighter planes from taking off, in addition to  shutting down the British and German army websites.

The so-called Conficker botnet has since 2008 installed malicious software on an estimated 12 million personal computers worldwide turning them into “zombies,” capable of collectively sending 10 billion spam emails a day without the owners’ knowledge.

The massive spamming can be used to steal money, blackmail banks or other firms with the threat of a shutdown or to get hold of classified information.

Conficker in January and February 2009 prevented French fighter planes from taking off and shut down British and German army websites.

The Stuxnet botnet is designed to take over the control systems of industrial plants, including nuclear installations, in order to sabotage operations.

It has reportedly affected facilities in China and Iran prompting speculation on the involvement of Israeli and US secret services.

A former US National Security Agency officer, Charlie Miller,  estimates that a hostile foreign power, given just €86 million ($105 million) and a team of 750 spies and hackers, could launch a devastating cyber attack on the EU.

In Miller’s worst case scenario, the 27 EU countries would wake up one day to find electricity power stations shut down, phone and internet communications disabled, air, rail and road transport impossible,  stock exchanges and bank transactions frozen, crucial data in government and financial institutions stolen and military units cut off from central command or receiving fake orders.


Celia Malmstrøm

“I don’t want you to walk out of here totally terrified, but just to give you an idea that there is a threat,” EU Commissioner for Home Affairs, Cecila Malmstrom, said at the press briefing in Brussels, on Thursday, according to the EUobserver.com.

“To anyone thinking that cyber-attacks are an abstract concept, I would say that for millions of people each year there are already direct practical consequences. When your money is quietly stolen from your bank account or your country is shut down – as happened to Estonia in 2007 – the threat suddenly becomes very real,” EU’s Information Society Commissioner, Neelie Kroes,  said at the same event.

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5 Years In Prison For Cyber Crime Attempt

The Malmstrom-Kroes package, presented today,  gives new powers to the EU Crete-based European Network and Information Security Agency (ENISA), as well as new anti-cyber-crime legislation that could put people in jail for years.

Ms. Kroes wants ENISA to work with Europol (the EU version of Interpool) and Frontex (the EU’s Warsaw-situated border security agency) in forensic operations to track down the people behind cyber attacks.

ENISA will also to set up an EU-wide alert system on the cyber attack threat level, and a Computer Emergency Response Team inside the EU institutions.

The agency’s mandate has up until now been limited to research on security of e-commerce.

The Malstrom directive draft, approved by the commission today,  is aimed to obligate the EU countries to criminalize the creation of botnets, and to collect and share cyber-crime data.

It will also demand that member states punish cyber criminals and the “instigation, aiding, abetting and attempt” of cyber crimes with up to five years in prison.

Ms. Kroes says she hopes the new measures will be in place by 2012, and that she is “rather hopeful” of success after the first contacts with the members of the EU Parliament and member states who will have  to give the new developments a green light.

Europe: Cyber Criminals Attack Critical Water, Oil and Gas Systems

Hackers Steal CO2-emission Permits Worth $4bn

Another Carbon Fraud Raid Reveals Firearms, Piles Of Cash

EU Demand Explanation On US Plan To Monitor Money Transfers

Julian Assange: Journalist, Activist or Informant?

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In Defence Of A Robot

This must be one of the weirdest lawsuit we have seen in long time: Starting this week, the two Norwegian day traders who are charged with fraud and violation against an automatic trading robot will appear in Oslo District Court to defend their actions. However, the poor robot,  being called a stupid, cheating liar, have the best representatives any offended robot can have; a hard-hitting police attorney, backed by an army of experts from the Oslo Stock Exchange. The robots owner, Timber Hill, has not been seen, nor heard from since the news story broke in August this year.

“Either the robot is very, very stupid, or the person who programmed the robot is very, very stupid.”

Sven-Egil Larsen

The case against the two traders in the so-called “robot-case,” where alleged manipulation of a the stock market trading machine is essential, started Monday. The Norwegian police believe that the day traders,  Sven-Egil Larsen and Peder Veiby, has conducted a number of unlawful acts against the brokerage firm Timber Hill and its stock trading robot, and have charged them on grounds of market manipulation.

“This case should never have come up before the court. It is the Oslo Stock Exchange who has initiated proceedings against the accused and the court will lead the crusade. None of the authorities that have looked at the case, neither the Financial Authority or the police, seems to be able to look at it with competent and critical eyes. For this reason, we now have a case that hardly anyone in the market can understand,” says Mr. Larsen’s lawyer, Halldor Christen Tjoflaat, according to the website Stocklink.no.

“Timber Hill appeared in 2008 as a poor investor in selected papers and on selected days. Rather than do something about the obviously poor investor who moved prices randomly when there only was a small trade in  papers they were active in, the Oslo Stock Exchange have turned against them who has a different trading strategy than Timber Hill and made money off it,” he adds.

The two Norwegians are accused of price manipulation of shares listed at the Oslo Stock Exchange, during the period November 2007 to March 2008.

Oslo Stock Exchange is in a strategic alliance with London Stock Exchange where Timber Hill is a member.

Price Manipulation

According to the charges, the day traders placed over 2,200 orders, and managed to give the market a false picture of supply and demand.

Christian Stenberg

Christian Stenberg

“We believe the two are guilty of a numerous cases of price manipulation. They have added buy and sell orders that was not real, they have had another motive; namely to move the price,” prosecutor Chris Stenberg of the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (Økokrim) told the newspaper Dagens Næringsliv, when the lawsuit was filed.

“It’s not about fooling anyone, but to be smarter than someone,” one of the traders says.

Sven-Egil Larsen and Peder Veiby was among the most active equity traders on the Oslo Stock Exchange in 2007 and 2008.

According to the allegations, they manged to make a pre-programmed trading robot at the brokerage firm Timber Hill offer better prices than it was supposed to do.

Stupid Robot

Both Mr. Larsen and Mr. Veiby deny any accusations of any wrongdoings, and believe that they only found a weakness in a system.
They emphasize that non other than the electronic player has been harmed.
They admit, however, that they have exploited the weakness, but denies the accusation of  manipulating the market.

Larsen believes that either the robot is very, very stupid, “or the person who programmed the robot is very, very stupid,” he says.

Larsen was the one that first found the weakness in the Timber Hill system when he was doing arbitrage trading in low liquidity stocks at OSE. Peder Veiby was long in Hafslund and had followed the stock over a longer period. This made Mr. Veiby able to form a picture of automated systems trade patterns over time and found that Timber Hill had its special way of behavior. He observed how the Timber Hill system changed the level of price and orders,  and decided to try to make money on this behavior.

It all began in November 2007 and lasted until March 2008.

Mr. Veiby considers it likely that he would have made money on the deals.

Both traders purchased a large chunk of stocks at a specific  price, followed by series of smaller purchases at a higher price. All within a short periode of time.

The Timber Hill robot reacted by raising the price on the shares, and Larsen and Veiby did what every skilled trader would do; they dumped their holdings and secured the profit.

They also did the same exercise by shorting shares, but then making the profit by selling to the ever lower price.

According to the two traders statement in court, it was not every time the strategy succeed.

Occasionally, the robot did not react as they had anticipated, usually caused by other players preventing the trade pattern to repeat itself, they explained in court.

200 Trades A Day

In their statement they also says that they was surprised every time it was possible to get the robot to repeat the same pattern.

Sven-Egil Larsen

Veiby is charged with 42 cases of violations of the Securities Act’s, while Larsen is charged with 30, involving a total of 2.200 transactions.Larsen estimates that during 2008, he made about 20.000 trades, which indicates between 100 and 150 trades per day, on average.

Veiby estimates that he performed about 60 to 70 trades per day during the period.

Asked by the judge, Larsen and Veiby said that they did not knew each other before this case, and that they had not been cooperating.

On the contrary, they had by several occasions destroyed each other’s plans.

Quote Stuffing

Police attorney Christian Stenberg will only make general comments, and not go into details.

He believes the two defendants placed orders with the purpose of moving the price, and since the market relates to the quotes provided by the exchange (the robot) it would be a form of manipulation.

The District Court in Oslo has to the decide on the rather interesting question whether this is illegal, or not.

“The question is whether the orders that was entered is legitimate. That’s for the court to decide,” the police attorney says.

No Sign Of The Robot Owner

During questioning, the police was interested to know what would be a “natural behavior,” and what perception the two traders had of the Timber Hill trading platform.

However,  the public prosecutor did not offer any explanation as to why representatives of the Timber Hill was not summoned as a witness.

Peder Veiby’s lawyer, Anders Brosveet, said in his procedure that it was not the two defendants who moved prices,  and claimed it was Timber Hill since they deleted their own orders and then raised the price.

The problem is that the brokerage firm’s robot was so poorly programmed that it failed to pick up signals that any rational market participant would do, he argued.

We might expect a ruling by the court at the end of the week.

Related by The Swapper:

Update: Day Traders Crack The Timber Hill Trading System

Oslo Stock Exchange Comments On Market Manipulation

Illegal To Outsmart A Trading Robot, Expert Says

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