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Central Bankers’ Favorite Games: We’re Being Played

Posted by Larry Doyle on February 21, 2012 10:30 AM |

War. Street hockey. Hide the belt. Kick the can. Flipping cards.

The games of my youth growing up in my neighborhood section of Boston provide very fond memories. The best part of these games was the simple fact that everybody was included, the rules were clear cut, and the older kids looked out for the little guys.

In a manner of speaking, the central bankers of today are similarly engaged in a few different games. What are the games being played on both sides of the Atlantic? Kick the can and charades. Regrettably, the central bankers are not playing by the rules as we defined them.

News this morning out of the EU that Greece has entered into another agreement to address its massive deficit is met with less than a resounding response. As the Greeks and their European counterparts once again ‘kick the can,’ the simple fact is the central bankers involved in this ‘charade’ are continuing to look for a means not to trigger the overwhelming derivatives exposure to Greece and other EU nations held by financial institutions on both sides of the pond.

The Wall Street Journal addresses this reality and other challenges the Greeks face in writing, Greece Faces Hurdles After Deal:

But the long-awaited deal will still leave Greece with a huge debt burden and faces implementation challenges that may derail the program and could prevent the country’s return to growth after several years of a devastating recession that is already causing social upheaval and political uncertainty.

However, the success of the bailout depends on how private-sector investors will receive changes in the terms of a “voluntary” swap of their Greek bondholdings.

Voluntary? Might that be defined as ultimately, “You’ll take it and you’ll like it” or “We may have to intimidate and expose you” in the same fashion that creditors of certain automotive companies “voluntarily” participated in a restructuring here in the states? Basic rules of free market capitalism are not utilized in these games.

As the games continue overseas, Ben Bernanke and team continue their charades here at home as well. How so?

There is no doubt in my mind that the Fed’s flow of liquidity props the market, but truly serves as a distraction for Ben and team to operate. While the Fed should be keeping a closer eye on fraudulent mortgage activity (as recently exposed at CitiMortgage), what are they really doing? How are we to know as The Wall Street Journal highlights that the Fed Writes Sweeping Rules From Behind Closed Doors:

The Federal Reserve has operated almost entirely behind closed doors as it rewrites the rule book governing the U.S. financial system, a stark contrast with its push for transparency in its interest-rate policies and emergency-lending programs.

While many Americans may not realize it, the Fed has taken on a much larger regulatory role than at any time in history. Since the Dodd-Frank financial overhaul became law in July 2010, the Fed has held 47 separate votes on financial regulations, and scores more are coming. In the process it is reshaping the U.S. financial industry by directing banks on how much capital they must hold, what kind of trading they can engage in and what kind of fees they can charge retailers on debit-card transactions.


The Fed is making these sweeping changes—the most dramatic since the Great Depression—almost completely without public meetings. Rather than discussing rules and voting in public, as is done at other agencies with which the Fed often collaborates, Fed Chairman Ben Bernanke and the Fed’s four other governors have held just two public meetings since July 2010. On 45 of 47 of the draft or final regulatory measures during that period, they have emailed their votes to the central bank’s secretary.

The votes, in turn, weren’t publicly disclosed until last week, after The Wall Street Journal requested the information for this article. On Feb. 14, for the first time, the Fed posted on its website the names of the Fed governors voting for or against each closed-door regulatory action on Dodd-Frank since July 2010, when that law was enacted.

Why is it that the Fed needs to operate in the dark and continue the charade? For the very simple reason that the health and the exposures of our major financial institutions remain very cloudy.

Really? Yes, really. Why else would the Fed not require individual institutions to release specific details while undergoing stress tests. CFO highlights this part of Ben’s charade in recently writing, Bank Stress Tests: Too Cloudy for Treasurers?:

The aim of the tests is to ensure banks have sufficient capital to withstand large losses in adverse economic conditions and that they construct capital-planning processes that are risk-averse. Among other things, the results will help regulators decide if individual banks are strong enough to issue dividends or repurchase stock.

Outside of the biggest banks and regulators, though, it’s unclear whether the stress tests will be of any informational value to anyone else — corporate bank customers and their treasury departments included. That’s because the data released publicly may not be institution-specific or detailed enough to be meaningful in a risk assessment, says Mark Zandi, chief economist for Moody’s Analytics.

Unclear whether the stress tests will be of any informational value to anyone else? 

Why is that?

See, in the games being played by central bankers circa 2012, as taxpayers we are not playing, rather, we are being played.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

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