Fed Chairman's Senate Testimony

Said Bernanke, in Congress to testify,
To the Senators: "Gents, it is best if I
Admonish this hearing
The fiscal cliff's nearing
Which brinksmanship must be arrested by."

Federal Reserve Chairman Ben Bernanke gave his semiannual testimony to the Senate Banking Committee yesterday, and painted a bleak picture of the economy's prospects. Among the familiar litany of economic ills are high unemployment, a weak housing market due to tight credit standards and poor creditworthiness, and a slow business investment outlook. Unfortunately, it appears that the additional tools at the disposal of the Fed are limited in scope and liable to cause unwanted side effects. The Chairman reminded the senators that another economic danger - the so-called "fiscal cliff" of expiring tax cuts and automatic federal spending reductions set for January - is outside of the Fed's purview and squarely in the hands of his Congressional interrogators. Alarmingly, they as yet show no signs of applying the brakes before the sputtering recovery is driven over the precipice.

Sales Slump

The heart of the market is rending
When retail is downwardly trending,
But is it a shock
When a nation in hock
Will at times prefer saving to spending?

The US government reported retail sales down 0.5% in June, making the first negative sales quarter since April 2008. These light sales figures will weigh on the reelection hopes of Pres. Barack Obama, confirming as they do the picture of a weak domestic economy. But: is it wise or realistic to expect an overly indebted, underemployed US consumer to reach out of his or her meager savings to jumpstart the economy? Better for Uncle Sam to use his still-first-class credit rating to fund the renewal of our national infrastructure, thereby picking up the economy and providing something useful at the same time.

The Long Goodbye

Of his tenure at Bain said Mitt Romney,
The presumptive Republican nom'nee:
"I was much too engrossed
To give up my post
While Olympian tasks were upon me."

In the American political world right now, the one question that obsesses the Presidential campaigns is: when did Mitt Romney leave Bain Capital, the private equity firm of which he was founder, sole owner and CEO? The answer appears not to be as simple as either Mr. Romney's campaign or that of President Barack Obama would have you believe. That is to say, Mr. Romney did not execute a clean break from his firm before it was involved in politically inconvenient outsourcing transactions, though he was clearly preoccupied with the turnaround of the Salt Lake City Winter Olympics from Febuary 1999 onwards. While the management of the firm was certainly left to his colleagues during the 3-year long winter of discontent, it remains an awkward task to disavow the actions of a firm of which one was the officially registered chief executive.

A Victimless Crime?

Said an interbank trader, at pains
To manipulate LIBOR for gains:
"Though perhaps this offense
Is at someone's expense,
It's alright unless someone complains."

After the scandal and outcry over the fraudulent LIBOR fixing at Barclays and other banks, and the large fines and executive dismissals imposed upon Barclays by British regulators, came the inevitable, what's-the-big-deal backlash from those arguing that this is old news, that everybody does it, and that it's a victimless crime. MIT economist Simon Johnson answers the naysayers in a New York Times column. First, the fact that the rate-rigging has long been an industry practice is more - not less - troubling, as it goes to the heart of the cultural encroachment of fraud and corruption in the financial industry. Likewise, if everybody is in fact doing it, how much more Herculean is the task of cleaning the financial Augean stables. Finally, the notion that the LIBOR fraud is a victimless crime is false on its face. If two parties enter into a transaction and one of them is secretly rigging the price to his benefit, then the other party loses. Though the complexity of the global financial system may make it conveniently difficult to identify the victims, they nevertheless do exist.

An Unshakable Arrogance

A firm of the banking nobility,
Whose investments displayed fallibility,
Lost more than they should have,
And would that they could have
Developed a sense of humility.

Tax Cut Extension

Said Obama: "My favorite motif
Is of middle-class tax-rate relief,
For the push that it prods
As well as my odds
Of remaining Commander-in-Chief."

A Banker Called To Account

Said Barclays' Bob Diamond quite bluntly:
"I roundly resent the effrontery
To be fired abroad
For a silly old fraud
We'd soon overlook in my country."

The LIBOR-setting scandal has caused heads to roll at Barclays Plc, the first bank to be investigated in the case. Among them is CEO Robert E. Diamond, Jr., a "hard-charging" American who has been relieved of his duties at the behest of the Bank of England and the Financial Services Authority.

As Gretchen Morgenson wrote in The New York Times, he may have "thought he’d be subject to American rules of engagement when confronted with evidence of wrongdoing at his bank. You know how it works on this side of the Atlantic: faced with a scandal, most chief executives jettison low-level employees, maybe give up a bonus or two — and then ride out the storm. Regulators, if they act, just extract fines from the shareholders."

In a refreshing change of pace, British regulators actually demand that bankers be called to account for their wrongdoing.

ECB Rate Announcement

Said Mario Draghi: "Please heed me:
Our 'zone isn't going agreeably;
The better to serve you
In line with our purview,
We'll pay you to borrow if need be."

In an acknowledgement that things are bad all over, the European Central Bank has dropped its benchmark interest rates to record lows. ECB President Mario Draghi admitted in a press conference that his fears of a general slowdown in the euro zone have come to pass. Even such notable ECB hawks as Germany's Jens Weidmann have grasped the olive branch and joined in the unanimously dovish rate decision.

After a 0.25% reduction, the central bank's refinancing rate is now 0.75% and the overnight deposit rate, 0.00%. As Mr. Draghi reminded his listeners, this means that real (inflation-adjusted) rates are negative. At the same time, Europe's central banker is aware that any expansion of credit must be driven by demand, and thus the efforts to get the continent's economy moving again may amount to "pushing on a string."

LIBOR Rate Upset

There's an interbank market in London
To set rates where one's fellows will fund one,
But if dubious sorts
Give phony reports,
Then faith in the market is undone.

Barclays PLC Chairman Marcus Agius has resigned to take responsibility for the LIBOR rate-setting scandal that resulted in a $453 million settlement paid by the bank. The significance of the scandal is that, by reporting artificially low rates to the British Bankers' Association in the months before the financial crisis unfolded, the bank (and other participants in the rate-setting scheme) made it appear as though the market for bank liquidity was more stable than was actually the case. Thus, what could have been a valuable warning sign was missed; the canary in the coal mine was kept on artificial life support.