Friday, December 19, 2014

Swan Song from Floyd Norris on the Financial Foxes

Floyd Norris, Leaving NYT
Floyd Norris, the chief financial correspondent and business columnist for The New York Times, accepted a buyout and is exiting The Times today. A brief note says simply: "This is Floyd Norris's final column for The New York Times."

His departure is part of a reduction in editorial-side staffing of 100 positions, the fourth round of reductions since 2008.

His swan song, after 26 years with the newspaper and 15 years in his current position, is about the financial foxes (not his words), the people who take risks with our money and want taxpayers to bail them out when they destroy the financial system.

His opening question is: "What happens when you turn over regulatory responsibilities to people who think there is really no need for regulation?"

The question answers itself - regulation becomes lax.

In case you were wondering what specific case Norris had in mind, his column, "High & Low Finance", goes on immediately to talk about Alan Greenspan, a disciple of Ayn Rand who described himself as a "market fundamentalist" who believed "markets were far smarter than governments" and should be left alone to do their work. The term "market fundamentalist" has since the financial meltdown of 2008 become, he says, a term of derision.

Greenspan was made Chairman of the Board of Governors of the Federal Reserve System. I used to work for the Board of Governors as a financial economist when the Chairman was William McChesney ("Bill") Martin, Jr.  His most famous quote, repeated by Norris, is that the Fed's job is like that of a chaperone who orders the punch bowl removed just as the party is really warming up.

Greenspan let the punch bowl stay in place until the place was trashed.

As he surveyed the wreckage from deregulation, Paul Volcker, another former Fed Chairman, summed it up well in 2009 when he said, as Norris quotes:
The most important financial innovation that I have seen the past 20 years is the automated teller machine. 

It is sad for me to see Norris take so much knowledge with him out of The New York Times, especially since I like the thrust of his swan song.

Janet Yellen is more like Martin than Greenspan, seeing the Fed as having a big job to do not just in controlling interest rates to influence the pace of economic growth, but also - and, in her view, independently - regulate the financial system on a targeted basis to control the risks from too-big-to-fail institutions and from institutions that have been engaging in risks that are far beyond their capital adequacy to absorb.

But the regulatory system we were left with after the go-go Greenspan years is not something we can be comfortable with. During the era of weak financial regulation, the shadow banks - risk-taking sparsely regulated investment banks - were at work leveraging their capital.

This has happened before. After the crash of 1929, the Federal Reserve was paralyzed (the only person who understood what should be done, Benjamin Strong, died the previous year). Eugene Meyer, the head of the Federal Reserve System, wrote a long memo to President Hoover explaining in well-written prose why the Fed didn't have the power to do anything at all. Hoover tried to impress on FDR that the three biggest financial problems facing the country in 1933 were inflation, budget deficits (at all levels of government) and excessive government spending.

FDR wasn't much interested in financial matters and he turned it all over to his team headed by Treasury Secretary Will Woodin, a Republican business executive who came out of the railway rolling-stock manufacturing business. It is remarkable what a great job they did, restoring confidence in banks in a few weeks, performing stress tests on each bank via Treasury auditors before it was reopened (some were not), producing $2 billion in new currency notes by working the Bureau of Engraving and Printing overtime and filming the trucks going out to different cities so that the public could see in their movie theaters that cash was on the way.

Most important, in 1933 FDR's team - with Senator Carter Glass and Rep. Henry Steagall - created a Federal Deposit Insurance Corporation to insure bank deposits and, in return for this gift to the commercial banks, a system for protecting taxpayers from the risk that shadow-banking foxes might speculate with insured deposits. Amazingly, the system worked pretty well for 70 years despite the constant chipping away at the protected henhouse of insured commercial banks by the financial foxes who wanted access to insured (and therefore risk-blind and cheap) deposits.

When the market fundamentalists get to meet their makers and they ask God why She didn't warn them about the possibility of a global financial meltdown of the scale of 2008, I can imagine the reply: "What do you mean? I gave you the Savings and Loan Disaster, Long-Term Capital Management, Enron, Global Crossing, WorldCom... None so blind as will not see."