Centralverse News Flash 3/23/2018
Too many important events of the past two weeks, so we’ve started a new series called News Flash. Today’s Flashes include: Bear Stearns, The Senate Dodd Frank Bill, NYFed’s Presidential Search, and the FOMC meeting. As always, I can be reached for comments, feedback, or questions on twitter or via my website www.thebanksterpodcast.com.
I am Alexander Bagehot and you’re listening to The Bankster Podcast, the only podcast dedicated to the fascinating and ever more consequential world of central banking.
I really enjoyed the responses on Twitter to the last episode of the podcast about the entertaining video produced by the Central Bank of Sweden to celebrate their 350th birthday. I was sent a few other central banking videos, my favorite of which was one produced by the Central Bank of Indonesia. Featuring a catchy tune that was stuck in my head for days, the song follows a singer as she dances around a local market showing people some of the new security features in the Indonesian currency, the rupiah.
Now, a lot happened in the Centralverse in between the release of the last episode and today, and there are numerous ways to keep up with the Centralverse on a more frequent basis than the biweekly Bankster Podcast; however, between the unbelievable short attention span of the political news cycle and the March Madness basketball tournament this month, it’s very possible that you missed some of the big news coming out of the Centralverse. So I’m introducing a new section of the Podcast today called, News Flash. In each News Flash I’ll quickly go through the key Centralverse events of the previous weeks that you may have missed.
One of the key goals of The Bankster Podcast and the website Centralverse.org is not only to share with you the latest news from the Federal Reserve and other central banks from around the world - it’s bigger than that. We want to enable you to follow them and keep up to date on your own. So a key part of this new section - News Flash will be not only sharing the actual news but also the key sources of the information that I used. Not only will we share the information with you but how we got the information in real time so you can be ahead of the Centralverse curve in the future. Today, four flashes: Bear Stearns, Dodd Frank, NYFed’s presidential search, and this week’s FOMC meeting.
10 years ago this month one of the oldest Investment Banks in the country collapsed. Bear Stearns, founded in 1923, by 2007 had grown into what Forbes called the second most admired securities companies in the industry. It’s stock price was trading at above $170 per share and things were looking bright. Within a year that bright future would turn into a Wall Street nightmare. The company had been heavily leveraged in the mortgage securitization market (go read the Michael Lewis book and then watch the movie the Big Short to learn about mortgage securitization). Anyways, basically, when the US housing market collapsed Bear Stearns was stuck in serious trouble. Things got so bad so quickly that a fire sale was required to keep the company from having to file for bankruptcy, which would have brought the rest of the market down with it (not unlike what happened when a few months later Lehman Brothers, another investment bank did in fact file for bankruptcy). The troubled Bear Stearns was sold to JP Morgan for a meager $10 per share in March of 2008.
Planet Money Indicator episode from March 16, 2018
House of Cards, book by William Cohan
The Senate Dodd Frank bill
The US Senate passed a bill amending the financial reform bill that had passed after the Great Recession called the Dodd Frank act. The basic premise of the bill is to raise the regulatory thresholds. One principle in banking regulation is that the bigger the bank the more strict the regulations are. Banks are traditionally divided into three categories: community banks, regional banks, and large banks. The thresholds currently stand at about $0-10B, $10-50B, and $50+. An oversimplified summary of the changes that the Senate’s bill would do is raise those thresholds. That means that fewer banks would be classified as large and regional banks. The idea being that those banks that move down a level will see a decrease in regulatory oversight.
NYFed’s presidential search
The New York Fed announced that they have narrowed the search for the next President of the New York Fed down to just “a handful of candidates”. On the whole this news was greeted with somewhat perplexed expressions. From one camp there came the general sentiment that this was very much an un-announcement announcement, meaning they didn’t really announce anything we didn’t already know. And from a second somewhat stronger attitude camp resurged the proposal that the process by which Reserve Bank presidents are chosen is very opaque and needs to be updated. In order to fully understand this issue you have to understand how the Board of Directors at Reserve Banks work. Head back to episode 18 to get the full scoop on who the Directors are and what they can and cannot do. There was actually one other interesting twist that came out a day or two after the announcement that they had narrowed down the field. One of the Directors who had been on the search committee was resigning, most likely because he will be going to work for a financial institution. That really got the second camp of people concerned with the process worked up.
NY Fed’s twitter feed
An additional update regarding one of the board of directors on the search committee resigned - email notification
As expected raised the Fed Funds Target range by 25 basis points, which means by one quarter of one percent, to 1.50-1.75. That means on Friday the reported overnight bank funding rate will probably be about 1.64.
Economic Projections included: 7 participants who think there will be a total of 4 or more rate hikes this year and 8 thought there would be 3 or less.
Jay Powell’s first press conference as Chair. It felt like half of the questions involved these economic projections and he reiterated in a dozen different ways the important note about the projections - it’s important to not put too much stock in the median. Each of the current FOMC voters has their own models and forecasts of what the Fed should do (note that it’s not what the Fed will do). Head back to episode 9 to get an overview of the Dot Plot and then episode 20 to really learn about the important nuances in interpreting the Dot Plot.
Eight news notifications (WP, WSJ 2x, Bloomberg, Yahoo 2x, NYT, Chi Tribune)
CSPAN, MSNBC, or any business news channel for live-streamed press conference
You probably won’t use all of these sources. Your level of interest in being at the cutting edge of Centralverse information may not be as high as mine. That’s ok. I hope that this episode and the future News Flash episodes will give you a broader look at how I keep up with the Centralverse, and how you can keep up on your own, whatever your level of interest. Remember that Central Banks wield exceptional power. And as the example of Flash Three today about the New York Fed’s process of selecting a new president shows, sometimes keeping track of what is happening at a Central Bank is not as easy as other parts of the government. That’s in part because the founders of the Federal Reserve designed it as such. However, it doesn’t mean we can’t follow and observe closely. Not only is it interesting for interest's sake, but it affects our finances and therefore our lives in very real ways. And that’s why they’re worth following. Sign up for the newsletter where I’ll send you one email per episode outlining the sources cited and how you can become a Fed Watcher yourself.
Today’s episode was written, edited, and produced by me, Alexander Bagehot. Go to www.thebanksterpodcast.com to sign up for the show notes and get in touch with me directly. Thanks to all of you for listening, and I’ll see you next time on The Bankster Podcast!