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Subtitle: An Insider's Take on Why the Federal Reserve is Bad for
America, Portfolio, Penguin, NY., 2017, 326 pgs., index, notes
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Reviewer comment -
This is a terrific book. Buy and read it and urge your Congress people to do
the same. Everyone interested in what is wrong with the American economy and
financial industry should study this account. It is the author's personal
memoir on her years of dedicated work inside the FED. We have a shelf full of
general accounts of various aspects of the financial catastrophe of 2007-9.
Many books accuse one or another party as the culprit. But Mrs. Booth goes to
the core of the fiasco, not only did the denizens inside the FED not recognize
what was coming, but also the FED had in many ways enabled creation of the
financial system that had generated it. She names names and describes events
and conversations. The FED is peopled by a self-proclaimed 'elite' staff of
Keynesian academic economists who think their Ph.D.'s show they know it all,
much more than simple people who own or manage real businesses. They are wedded
to the materialist 'economic man' concept that they are convinced can be and
has been replicated in their mathematical models. They are convinced that if a
policy has failed then applying more of the same will succeed. Currently they
are led by the hyper-Keynesian academic Janet Yellen. And the multitude of
panaceas that have been enacted in legislation since 2009 have not solved the
problems. The situation may be worse.
It is obvious the author is a professional writer as well as financial analyst.
Each chapter contains a delightful mix of her personal activities, her analysis
of financial markets and FED activities, and incisive appraisals of specific
leading figures in the FED. The general organization is chronological chapter
by chapter, but in these there are also references to related events and
discussions that took place at other times. The chronological thread is based
on her own career from Wall Street sell-side securities person to newspaper
writer in Texas to her career, rising through ranks in the Dallas Federal
Reserve Bank. From her position as an adviser to the President of the Federal
Reserve Bank of Dallas she was able to observe not only the standard operating
procedures within a typical bank of the 12, but also through her boss's
membership in the FOMC at headquarters in Washington witness the (inside and
well as outside) political maneuvering behind the formulation of national
monetary policy. As she rose in stature through her predictive analysis she
attended more conferences and meetings throughout the FED system as well as
developed more and more informative sources within the business, banking and
financial analysis community. This greatly expanded the breadth of her
understanding of the real world in comparison with many academic economists
sheltered (cloistered) within the FED fortress walls.
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Chapter 1 - "Groupstink"
The chapter begins with a 'look ahead' description of a FED FOMC meeting in
December 2008. But this chapter is a vehicle for her to provide the reader with
an overall description of what the FED is and what it does with respect to
setting 'monetary policy'.
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Chapter 2 - Who Would Buy That Crap?
She jumps back to mention her own earlier professional career in NYC from 1996
to 2002. And also comment on what FED chairman Greenspan had been doing during
that period. She gives one example of how the 'sales side' workers in a large
investment outfit are expected to sell stuff the company promotes - or as he
titles the chapter, 'crap'. She refused to inflict such stuff on her own
clients. Among the financial facts she sprinkles throughout the book, she notes
that the derivatives market jumped from $106 trillion in 2002 to $531 trillion
in 2008.
Among the market fiascos of that period was the infamous 'bail out' of LTCM.
She learned good lessons from both the activities of the LTCM Nobel winning
geniuses in the firm and the subsequent activities of Greenspan and company in
fashioning the rescue. The new wonder products - CDOs and MBSs drew her
attention. Siezing an opportunity, she escaped Wall Street for a journalism
desk at a Dallas newspaper and quickly made a mark. She specially informed her
readers with her early predictions on the 'bubble' in home real estate fueled
by dangerous mortgates.
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Chapter 3 - Saint Greenspan
The author begins this chapter with another personal episode, her first meeting
with Richard Fisher in fall 2005. This provides the setting for a broad
discussion of the financial markets in 2005, an explanatory bio bit on Fisher's
background and accomplishments, and some general comments on the nature of
asset bubbles and mortgage financing. She recalls her own concerns and
predictive writing from 2003 to 2005 on the coming financial collapse due to
the mortgage induced housing bubble. She names names and government political
agendas that fueled the then coming fiasco. "Saint' Greenspan comes in for
a goodly share of her analysis. Between all this she melds in much background
color on the physical environment in Dallas bank itself and more of her own
family background. She continues with more descriptions of her newspaper
articles on the growing dangers in the mortgage market. And she contrasts her
written premonitions with the continued 'all is rosy' garbage flowing from the
FED officers and spokespersons.
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Chapter 4 - Inside the Black Box
Another personal episode, this time her interview in fall 2006 with Harvey
Rosenblum at the Dallas FED opens this chapter on the next phase of her career
and the innerworkings of a FED regional bank. The mortgage collapse was already
in high gear and she had predicted it all. She accepted the offer to join the
research department at the FED. Her vivid description of the Dallas bank itself
as well as its occupants again reveals her eye for entertaining as well as
significant detail.
An interesting detail that does not escape her is the reality of
'profitability'. The FED earns billions of dollars from the interest the
Treasury pay it for the bonds it holds. From this it covers its own expenses
and returns the excess back to the Treasury, thus reducing the annual net
interest the government shows in its deficit. But, considering that all the
income the FED has comes from government activity, one can say that dollars NOT
returned to the Treasury are 'borne by the taxpayer'. Clever.
Another side fact: she writes that "there is about $1.45 trillion worth of
U.S. currency in circulation, almost half of the transactions in America are
paid for in cash."
Well, I have read elsewhere that U.S. currency in circulation in the U.S. is
about $830 billion, so she is probably including the nearly half that we know
is overseas. And while half of business total transactions involve the exchange
of currency, they are the tiny amounts one pays at a 7-11 or as tips and the
various small exchanges she mentions. The overwhelming volume of business
exchange is via bank credit accounts.
The author provides many more "fun facts". But her descriptions of
the mind set of most personnel - to ignore or discount the real financial and
mortgage markets - were facts but not fun. Her key words. "hubris and
myopia". Her diagnosis, "The overwhelming dominance of academics goes
a long way toward explaining why the financial crisis of 2008 blinded the
Fed".
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Chapter 5 - The First Tremors
The author spreads her view to the entire Federal Reserve and its reactions to
the bubble begining to burst from 2006. The New York Federal Reserve Bank and
Timothy Geithner come into for withering analysis. She brings her much wider
contacts with real-world financial sources into the bank's analytical
attention.
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Chapter 6 - Front-running the Fed
The chapter is full of 'back story' on Mrs. Booth's boss, Harvey Rosenblum, and
other leading figures during the financial crises of the 1980's.
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Chapter 7 - The Maverick
Another anecdote. Then more details about the Dallas FED bank itself and
especially more bio on Richard Fisher. Then comes the event of February 2007.
But few FED denizens understood. Meanwhile our author takes maternity leave.
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Chapter 8 - The Inner Sanctum
Another jump back to 2005 to describe some of the influence or lack of it that
Fisher had with the FOMC. Also, more description of prior efforts by Fisher and
Rosenblum to change the Washington FED headquarters about the coming financial
crisis including the change of Chairman from Greenspan to Bernanke. Plus we
have an introduction to one Janet Yellen, then president of the San Francisco
FED. .
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Chapter 9 - "Luddite!"
This chapter begins with the famous annual FED meeting at Jackson's Hole,
Wyoming in 2005 where Raghuram Rajan delivered a devastating paper on the
growing risk of the financial industry at a session that was expected to
glorify Greenspan. Of course he was 'persona non grata' after that.
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Chapter 10 - Helpless
Back to 2007 for the emergency delivery of Mrs. Booth's twins in December. But
neither hospital stay nor home stay prior and recovery afterward kept our
intrepid author from her CNBC and study of credit default swaps (CDS) . In
November her quick reaction and alert about the CDS to Fisher gained her more
attention. In 2008 she was providing daily real-time market information. She
tracks the year's FOMC meetings. She frequently disagreed with the official
views coming from DC or NY. This was the year of Bear's demise followed by that
of Lehman Brothers. Mrs. Booth pauses in the rushed excitement to provide some
background on each and on their CEO's. The events are well known and frequently
discussed, but the author here provides more 'insider' information.
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Chapter 11 - Slapped in the Face by the Invisible Hand
Even after the collapse of the Bear, sentiment in the FED remained optimistic.
Mrs. Booth was not. Along with much else, she describes meeting Mr. Zoltan
Pozsar and discovering the one analyst who had devoted many days to a deep
understanding of the detailed structure of the "shadow banking
system". As always, she avidly absorbed this new information. Thus we also
learn quite a bit about this "massive web of debt issued outside the
capital markets completely outside regulator's purview". (Or FED academic
economists' knowledge).
Her conclusion: "Shadow banking combined with the Fed's utter lack of
understanding about the true shape of the financial system, set the stage for
the catastrophic meltdown of September 2008".
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Chapter 12 - Heads Must Roll
The author shifts back to Lehman and Maria Bartiromo versus Erin Callan. And it
was Callan's head that rolled. We receive a spot description of Lehman and its
CEO, Dick Fuld and his expensive and ostentatious office. The account of events
from September 2008 is ugly, well known in general but better elaborated here.
All the leading actors were involved, Bernanke, Geithner, Paulson, Ken Lewis,
Dimon, John Thain, Vkram Pandit, John Mack, Lloyd Blankfein plus others. Then
we learn more about AIG.
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Chapter 13 - Breaking the Buck
Can it get worse? Yes, indeed. Now the poor Bruce Benets Sr., and Junior. were
dragged in to the maelstrom. Their Reserve Primary Fund was a model of the
money market industry - actually the grand daddy of them all. The officers, in
pursuit as always of greater yield, had placed significant capital with Lehman.
Poof - gone. The "Buck' was 'Broken'.
We lost some money in that event since our broker had our temporary sweep
account in that 'safe' fund.
But there were more trillions at stake, since all money market funds came under
immediate question. The age old problem, short term liabilities with long term
assets hit within hours. The FED and Treasury had to respond more immediately
with emergency funds and promises of unlimited government support. Mrs. Booth
does not miss the other 'culprits - victims' either, such as Washington Mutual.
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Chapter 14 - Breaching the Zero Bound
The 'zero bound' is the idea that zero is the lowest possible rate of interest
that the FED and banking system can achieve because any lower, that is zero or
minus interest rate, would result in depositors keeping their funds out of
banks. But it turned out that this proved false. Actually, the FED through what
is called 'financial engineering' has set interest rates less than the rate of
inflation thus generating negative returns for savers in the past and continues
to do so even without going below zero. The chapter is about the insiders'
discussions at FED meetings over policy, especially interest rates. Some of the
dialog Mrs. Booth supplies is hilarious if not ludicrous in its hashing over
the significance of various related words in English - such as 'edged' 'smidge'
'somewhat'. Her boss, Fisher, comes out the hero in this, being the only member
to vote no on monetary policy.
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Chapter 15 - The Walking Dead
The time is now 2009 and Mrs. Booth has her first opportunity to present an
oral brief to the bank economists preparing for the coming FOMC meeting. She
describes in detail the process such preparation followed rigidly. She also
describes the elaborate new funding mechanisms the FED created in its effort to
protect the various components of the shadow banking system from default.
Throughout, the FED was hampered by its multi-purpose responsibilities - not
only to protect the value of the dollar and protect the banking system itself,
but also to prevent unemployment and strengthening the home ownership market.
In attempting to accomplish this the FED was expanding its own balance sheet
debt by trillions as it purchased securities and mortgages.
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Chapter 16 - Dr. Ben Pulls a Bait and Switch
We move to 2010. Mrs. Booth transferred to a new department but continued her
principal task of providing real market information to Richard Fisher. Among
the major policy issues was the idea expressed by some that if something was
'too big to fail' then it ought to be too big to exist and should be split up
and reduced in size. Of course the few big banks denounced this and actually
grew larger. The author discusses the VIX and the financial crisis in Greece.
She finally met her shadow banking system expert, Zoltan Pozner and received
even more detailed instruction on the inner conduits of the system. The battle
over the proper level of interest rates continued.
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Chapter 17 - A Turning Point
The chapter is about the author's successful move to a more independent office
and role amid the continuing financial policy disputes in the FED.
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Chapter 18 - Insider Trading?
By 2011 outside political pressure to 'end the Fed' was expanding. The author
receives more assignments and expands her stable of contacts throughout the
financial industry even more. Inside the FED the bureaucratic conflict raged
between those set on continuing with ZIRP and QE strategies and those who
sought to end the FED intervention. So federal debt continued to expand. The
author continues to describe the real actions in the financial markets. The
year proved valuable for her, when she was invited by David Kotok to join the
exclusive group of experts at the annual Camp Kotok fishing hole in Maine.
I read about this famous outing every year when John Mauldin informs his
readers of his pending attendance.
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Chapter 19 - Spinning Fedwire
Come January 2012 and Bernanke is pushing for the FED to announce a goal of 2
percent inflation. Fisher dissented but Bernanke had his way. If course no such
goal has been met at yet. "Fedwire' was the unofficial nickname of Jon
Hilsenrath, financial writer at the WSJ who always seemed to publish some news
about coming FED actions that would move the market. The struggle over the
level of the FED interest rate and bond buying continued.
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Chapter 20 - The Taper Tantrum
The year 2013 brought more dissention. The impact of Dodd-Frank regulation was
causing confusion. Government policy was attacking itself. The government
policy claimed to desire expanded bank loaning, increased consumer buying based
on credit. But the government bank regulators were demanding and enforcing
reduced loans by banks and increased capital reserve ratios. The author
explains in detail what was going on. In September Fisher tried to end QE but
failed. Once again Bernanke had his way.
Mrs. Booth's comment: "Bernanke's Herculean efforts to fix the economy
with Keynesian remedies stumbled even as he pulled up to the finish line".
Enter Janet Yellen as the new Chair person. The author notes her background as
a dedicated and doctrinaire Keynesian academic economist from Berkeley with
full liberal (progressive) credentials. No wonder Pres. Obama selected her.
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Chapter 21 - The New Sheriff in Town
That was and still is Yellen. The year is 2014, another in the 3 year rotation
in which Richard Fisher would have a vote at the FOMC. But Yellen still refused
to raise interest rates. Our author was looking ahead for herself as well as at
the economy and financial markets and making her own rounds by presenting
speeches to eager audiences. Her analysis indicated that another financial
crisis was building.
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Chapter 22 - Culture Shock
Now the author is back again at Camp Kotok in 2015. Government and private debt
are continuing to expand. The FED has $4.5 trillion on its own balance sheet.
But the FED academic economists are still tied to their Keynesian models. The
chapter includes comment on incidents from 2014 to 2017. Blame for the 2008
crisis and especially the failure of the FED to recognize and predict it is
bouncing around. Failure of regulators to regulate requires more regulation and
presumably better regulators. "Group think" is identified by group
thinkers. Mrs. Booth reports on the investigation and conclusions of the Beim
team. Dr. Yellen begins to consider increasing interest rates. The FED is
firmly in charge.
She also notes the expanded power of Goldman alumni within the FED. There is a
striking dichotomy. The FED is full of academic economists including several
presidents of District banks, but when practical bankers are brought in they
appear to be mostly from Goldman.
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Recommendations: We leave this summary with a summary of some of Mrs.
Booth's many recommendations for reforming the FED including its mission
statement and for changes in monetary policy. Here are a few along with my
comments.
"Congress should release the Fed from the bondage of its dual
mandate." She means the impossible demand to reduce unemployment.
"the Fed needs to get out of the business of trying to compel people to
spend by manipulating inflation expectations".
This has resulted in reduced individual savings, increased debt including
foolish issue of bonds by corporations, imposibility to accurately determine
valuations, mis-allocation of capital. But it is straight out of the Keynesian
policy proposed during the 1930's and periodically since then.
"Limit the number of academic PhDs at the Fed" and "bring in
more actual practitioners - business people."
I hope this does not result in total staffing from Goldman.
"Governors should be given terms of five years, with term limits."
Always a good idea for any organization.
Reorganize the geographic district zones to increase representation from the
Western USA. Excellent advice for many reasons.
"Slash the Fed's bloated Research Department". and "Send most of
the PhD economists back to academia where they belong".
Excellent advice. But even more is needed. Bring in non-Keynesian economists
such as from George Mason Univ. and from Stanford, Chicago, Clermont,
Hillsdale. Throw out all the math model making. Bring in financial
practitioners such as 'private equity' entrepreneurs.
Strengthen the financial system regulator staff. "the Fed must give bank
examiners the resources they need to understand the ever-evolving financial
innovations created by Wall Street..."
Yes, but also realize that regulations are made to be broken. Regulators will
never suffice. In addition reorganize the financial system itself, split
depository and investment banking again.
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Here are a few references.
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David Hackett Fischer - The Great Wave: Price Revolutions and the
Rhythm of HistoryOxford Univ. Press
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Peter Conti-Brown - The Power and Independence of the Federal
Reserve - Princeton Univ. Press
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George Selgin - Floored! CATO Institute
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Rana Foroohar - Makers and Takers - Crown Publisher
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Peter Wallison - Hidden in Plain Sight: What Really Caused the
World's Worst Financial Crisis and Why it Could Happen Again - Ecounter
Books
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George Melloan - The Great Money Binge
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Ludwig von Mises - The Theory of Money and Credit
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Ludwig von Mises - Human Action
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Frederic S. Mishkin - The Economics of Money, Banking &Financial
Markets
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Board of Governors - The Federal Reserve Systemn Purposes and
Functions
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David Wessel - In FED We Trust
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Charles Gasparino - Bought and Paid For - Sentinel
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Anat Admati & Martin Hellwig - The Bankers' New Clothes -
Princeton Univ. Press
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Douglas W. Hubbard - The Failure of Risk Management: Why it's Broken
and how to Fix it - John Wiley
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Gretchen Morgenson and Joshua Rosner - Reckless Endangerment -
Henry Holt
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Alan Greenspan - The Map and the Territory: Risk, Human nature, and
the Future of Forecasting
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Felix Martin - Money: The Unauthorized Biography - Alfred Knopf
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Charles W. Calomiris - Stephen H. Haber - Fragile by Design: The
Political Origins of Banking Crises and Scarce Credit - Princeton Univ.
Press
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Carmen M. Reinhart & Kenneth S. Rogoff This Time is
Different
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Geoffrey Ingham - The Nature of Money
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Barry Ritholtz - Bailout Nation
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Paul Krugman - The Return of Depression Economics
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Kwasi Kwarteng - War and Gold: A 500-year history of Empires,
Adventures, and Debt
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S. Herbert Frankel - Two Philosophies of Money: The Conflict of
Trust and Authority
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G. L. S. Shackle - Epistemics and Economics: A Critique of Economic
Doctrines
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Perry Mehrling - The New Lombard Street: How the Fed Became the
Dealer of Last Resort
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Nicholas Wapshott - Keynes - Hayek: The Clash That Defined Modern
Economics
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Philip Coggan - Paper Promises: Debt, Money and the New World
Order
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Lawrence H. White - The Clash of Economic Ideas
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Jeffrey Friedman - Engineering the Financial Crisis
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Some additional recommended reading
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