Tag Archives: Mary Schapiro

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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SEC Expand Single Stock Circuit Breakers for Russell 1000 Index And Others

The Securities and Exchange Commission approve new rules submitted by the national securities exchanges and FINRA to expand a recently-adopted circuit breaker program to include all stocks in the Russell 1000 Index and certain exchange-traded funds. The SEC also approved new exchange and FINRA rules that clarify the process for breaking erroneous trades, according to a press release.

“These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies.”

Mary L. Schapiro


A list of the securities included in the Russell 1000 Index, which was rebalanced on June 25, is available on the Russell website. The list of exchange-traded products included in the pilot is available on the SEC’s website. The SEC anticipates that the exchanges and FINRA will begin implementing the expanded circuit breaker program early next week.

The circuit breaker pilot program was approved in June in response to the market disruption of May 6 and currently applies to stocks listed in the S&P 500 Index.

Trading in a security included in the program is paused for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes.

The pause gives the markets an opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion.

The circuit breaker program is in effect on a pilot basis through Dec. 10, 2010.

A list of the securities included in the Russell 1000 Index, which was rebalanced on June 25, is available on the Russell website.

The list of exchange-traded products included in the pilot is available on the SEC’s website. The SEC anticipates that the exchanges and FINRA will begin implementing the expanded circuit breaker program early next week.

“These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies,” SEC Chairman Mary L. Schapiro says in a statement.

“We have worked quickly with the exchanges to take these steps, and we will continue to be very focused on addressing weaknesses exposed on May 6.”

The markets will continue to use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breakers as warranted based on their experience.

The erroneous trade rules were developed in response to the market disruption of May 6.

The rules will make it clearer when — and at what prices — trades will be broken by the exchanges and FINRA.

As with the circuit breaker program, these rules will be in effect on a pilot basis through Dec. 10, 2010.

For stocks that are subject to the circuit breaker program, trades will be broken at specified levels depending on the stock price:

  • For stocks priced $25 or less, trades will be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
  • For stocks priced more than $25 to $50, trades will be broken if they are 5 percent away from the circuit breaker trigger price.
  • For stocks priced more than $50, the trades will be broken if they are 3 percent away from the circuit breaker trigger price.

Where circuit breakers are not applicable, the exchanges and FINRA will break trades at specified levels for events involving multiple stocks depending on how many stocks are involved:

  • For events involving between five and 20 stocks, trades will be broken that are at least 10 percent away from the “reference price,” typically the last sale before pricing was disrupted.
  • For events involving more than 20 stocks, trades will be broken that are at least 30 percent away from the reference price.

On May 6, the markets only broke trades that were more than 60 percent away from the reference price in a process that was not transparent to market participants.

By establishing clear and transparent standards for breaking erroneous trades, the new rules should help provide certainty in advance as to which trades will be broken, and allow market participants to better manage their risks.

At Chairman Schapiro’s request, the SEC staff is also:

  • Considering whether market makers should be subject to more meaningful obligations to promote fair and orderly markets.
  • Working with the exchanges to prohibit the use by market makers of “stub” quotes that are not intended to indicate actual trading interest.
  • Studying the impact of multiple trading protocols at the exchanges, including the use of trading pauses and self-help rules.

The SEC staff also intends to work with the markets and CFTC staff to consider recalibrating market-wide circuit breakers currently on the books — none of which was triggered on May 6.

These circuit breakers apply across all equity trading venues and the futures markets.

Related by The Swapper:

May 6. 2010: “The Black Thursday”

Testimony Of A High Frequency Trader

Thursday May 6. – Busiest Day Ever On CBOE

Wall Street Collapse: Did Somebody See It Coming?

David Rosenberg: “The Weirdest 20 Minutes Of My Life”

U.S. Stock Crash Compels Further Investigation of Wall Street Scam

The Rise Of The New Market Makers

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Wall Street. "Temporary Parked"

It’s a lot more action on Capital Hill than on Wall Street friday. The stock market slides in to a weak ending with a light headwind from the dollar, as the investors park their portfolios in safe havens. But in Washington it’s full storm around treasury secretary Timothy Geithner and his FED-friends, while senator Ted Kaufman urges SEC to take action agains “manipulative” High Frequency Trading.

“It looks like some of this is investors shutting down for the end of the year, taking money out of profitable stock bets to temporarily park it in safe havens.”

Paresh Upadhyaya

(Article in Norwegian, links to sources in English).

saupload_5.jpg

Det er mer action på Capitol Hill enn på Wall Street fredag. Aksjemarkedet seiler inn til en svak ukeslutt i lett motvind fra stigende dollarkurs, mens investorene parkerer i sine trygge havner. I Washington stormer det for fullt rundt finansminister Timothy Geithner.

 

 

Det er ikka altid like lett å vite hva som driver dollarkursen, men to viktige forhold spiller uten tvil en rolle fredag.

For det første den europeiske sentralbanksjefen Jean-Claude Trichets antydninger om at ECB er klar til å stramme inn pengepolitikken igjen.

Billige penger har vært hovedmotoren i aksjemarkedet det siste halvåret, på bekostning av dollarkursen.

Når Trichet nå signaliserer at han tenker å skru ned styrken på pengepumpen et hakk, reagerer naturligvis dollaren med et comeback.

Dollarindeksen er opp 0,4 prosent, og stryrker seg mot alle de andre 16 ledende valutaer.

EUR/USD:

urdusd_obv_rsi_intra.gif

EURO mot DOLLAR, On-balance Volume (blå), Relative Strength Index (gul).

Dermed dingler råvareprisene (bortsett fra gull og sølv) ned igjen, og trekker de tunge råvarerelaterte aksjene med seg.

Energiselskapene i Standard & Poor’s 500 er som gruppe ned 0,9 prosent og står for det største sektorvise fallet fredag.

– Vi lever i en verden hvor alle investeringsklasser beveger seg i samme retining på dag-til-dag basis, og det er i motsatt retning av dollarkursen, sier investeringsdirektør John Kattar hos Eastern Investment Advisors tilBloomberg News.

– Aksjer over hele verden og alle høyrisiko investeringer er drevet av denne likviditetsfaktoren, understreker Kattar.

Parkert

Tryggheten om at Ben Bernanke og Federal Reserve vil holde den amerikanske signalrenten rundt null til langt ut i 2010 sendte Wall Street til sitt høyeste nivå på 13 måneder tidigere denne uken.

Men fredag forteller markedsaktører at pengene er på vei inn i andre typer investeringsklasser med mindre risiko.

– Det ser ut som om noen investorer er i ferd med å lukke butikken for i år, og tar pengene sine ut av profitable aksjer for å parkere dem midlertidig i en trygg havn, sier valutaforvalter Paresh Upadhyaya hos Putnam Investments til The Wall Street Journal.

– Men hvis du ser på forventningene til en renteøkning fra FED, blir de dyttet lenger og lenger frem i tid. Det burde favorisere å ta mer risiko, ikke mindre, på lengre sikt, legger han til.

S&P’s 500 indicators:

 s-p500_obv_rsi_intra.gif

Standard&Poor’s 500, On-balance Volum Indicator (blå), Relative Strength Index (gul).

Gull videre opp

Gullprisen trosser dollarstyrkelsen og klatrer videre opp mot 1150-merket.

Etter å ha studert den siste oppdateringen fra World Gold Council som ble publisert torsdag, er det klart at sentralbankene nå er de største kjøperne i gullmarkedet.

Og når kjøpersiden har tilnærmet ubegrenset kjøpekraft, er det heller ikke så merkelig at selgersiden tar den beste prisen den kan få.

De tekniske indikatorene tyder også på at gullprisen skal videre opp uansett.

 gull_obv_rsi_intra.gif

Gullprisen, On-balance Volum (blå), Relative Strength Index (gul).

Og for det andre..

Som nevnt innledningsvis er det to hovedforhold som driver dollarkursen opp; det andre er fornyet fokus på problemene i Øst-Europa.

Les: Alarm i Ukraina

De store sentraleuropeiske bankene er sterkt eksponet mot disse vekstmarkedene.

Usikkerheten omkring hva som skjer fremover svekker euroen – til fordel for, blant annet, dollar.

Vil sparke Ben og Tim

Men det i den amerikanske Kongressen på Capitol Hill i Washington dramaet utspiller seg i øyeblikket.

Politikerne er ikke fornøyd med svarene de får fra finansminister Timothy Geithner om den økonomiske krisen.

Geithner har tette forbindelser både til Federal Reserve, Wall Street og særlig til bankgiganten Goldman Sachs.

Spørsmålene som senatorene nå er mest opptatt av er hvilke interesser Geithner har ivartetatt best i sin håndtering av krisen.

Ikke alle tror det er skattebetalernes.

Her er et videoklipp med senator Dodd som for kort tid siden la frem et radikalt forslag til reformer i finansnæringen, og som tidligere har hevdet at utnevnelsen av Ben Bernanke til en ny periode som styreformann i FED var avtalt spill.

Førstkommende onsdag skal de amerikanske politikere stemme over et forslag om å evaluere nasjonens sentralbanksystem, U.S. Federal Reserve.

Senator Ted Kaufman har fredag sendt et brev til lederen for børstilsynet (SEC), Mary Schapiro, der han ber tilsynet ta umiddelbare grep for å stanse den manipulatative HFT-handelen.

“While it is clear that high frequency trading brings certain benefits to our markets, it is also clear that manipulative high frequency algorithms are almost certainly operating today and that sponsored access creates a systemic risk today.”

Her er en elektronisk kopi av brevet fra senator Kaufman til Securities and Exchange Commission.

 

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Filed under International Econnomic Politics, National Economic Politics