Former Fed Gov. Mishkin Sees `Significant' Odds Inflation May Go Too Low

Labor Unions Prolonged the Depression

The Age of Prosperity Is Over

"This administration and Congress will be remembered like Herbert Hoover." By Arthur B. Laffer.

The Age of Prosperity Is Over

This administration and Congress will be remembered like Herbert Hoover. By Arthur B. Laffer.

Credit Panic: Stages of Grief

Uncertainty about Washington will slow the recovery.

Nixon imposes wage and price controls - August 15, 1971

Alan Greenspan Testimony 10/23/08

Alan Greenspan Testimony 10/23/08

Former Fed Chairman Alan Greenspan testifies before the House Oversight Committee

Alan Greenspan explains "Fedspeak"

Editorial video on "price gouging" during hurricane season

In this editorial James Smith, General Manager and Vice President of KSLA-TV Shreveport, argues that anytime a hurricane enters the Gulf of Mexico the price of gas should be frozen. Do you think this is a good idea?

Obama and the Tax Tipping Point

Bernanke Is Fighting the Last War

This evaluation of the Fed's response to the current crisis is by Anna Schwartz. She was co-author, with Milton Friedman, of one of the most important books of the 20th century: "A Monetary History of the United States" (1963).

A Liberal Supermajority

Checking the Fed's Balance Sheet

"The Fed & Wall Street"

Fed's Steps May Be Helping Commercial Paper

Wall Street Journal OCTOBER 16, 2008, 1:05 P.M. ET

By ANUSHA SHRIVASTAVA

NEW YORK -- The U.S. commercial paper market shrank for the fifth consecutive week but the slowing pace of declines shows this market may be stabilizing as the Federal Reserve sets up a facility to support it.

Investors are not only returning to this market, which companies rely on for short-term expenses like rent and payrolls, they are also willing to lend for more than just one day, saving the issuers the trouble of constantly refinancing their debt.

Market participants expect further improvement once the Fed's commercial paper backstop is operational in two weeks, but there are still lingering doubts about whether enough companies will participate in the program to make it successful.

Another positive sign is that the asset-backed segment of the commercial paper market finally grew this week, even though by just $400 million, according to data released Thursday by the Federal Reserve.

"It's a good sign that it didn't go down," said Ira Jersey, interest rate strategist at Credit Suisse, who noted that there will likely be a more substantial improvement only after the Fed's facility to buy directly from highly-rated issuers is fully functional Oct. 27.

The commercial paper market shrank by $40.3 billion on a seasonally-adjusted basis in the week ended Wednesday, Fed data show. The market was closed Monday for the Columbus Day holiday.

In the prior week, it fell by $56.4 billion, down from the more pronounced shrinkage of $94.9 billion in the week before.

The cumulative decline in the past five weeks is $304.7 billion. This brings the size of this market to $1.511 trillion, down from the $2.2 trillion peak in July, 2007.

Thursday's data show financial sector commercial paper outstanding declined by $36.1 billion this week versus a $42.4 billion decline last week. The level of shrinkage is down though, as this segment had declined by $64.9 billion two weeks ago.

Investors' interest in paper that matures past just one day is also increasing. For double-A rated financial paper that matures in 41 to 80 days, the weekly average outstanding rose to 150 billion this week, up from just 38 billion in the week ended Oct. 3, according to Fed data.

For the same issuers, for debt maturing in one to four days, the weekly average outstanding is $9.4 billion versus $8.05 billion in the week ended Oct. 3, but down from $10.27 billion in the week ended Oct. 10.

Mr. Jersey also said the Fed's program "will ultimately help because some people will use it" but the "magnitude of its impact is in question," because it is not clear what the participation will be like.

Only highly-rated U.S. issuers of commercial paper, including U.S. issuers with a foreign parent, are eligible to participate. They have to register for the program beginning Oct. 20 and pay an upfront fee.

For unsecured debt, they then have to pay the three-month overnight index swap rate plus 1.0 percentage point and an additional 1.0 percentage point surcharge. For commercial paper backed by assets, the cost will be the overnight index swap rate plus 3.0 percentage points.

Some market participants have voiced their concern about the costs associated with participating in the program, fearing this may even steer them away from it.

For its part, the Fed has said the higher-than-market costs are designed to keep investors and issuers trading with each other, with the Fed acting only as the fallback option.

Their aim is to ease strains in the market, which has been under renewed stress in recent weeks.

It first contracted sharply in August 2007 when investors fled due to an exposure to subprime-related mortgages.

In the past few weeks, the decline was driven by money market funds, which were hoarding their cash for fear of redemptions. This may also change as investors put about $58.38 billion into money market funds in the week ended Oct. 14, according to Money Fund Report, published by iMoneyNet, a research firm that monitors money fund data.

Money market funds are the largest buyers of commercial paper, purchasing about a third of outstanding paper. Other buyers include retirement and pension funds, corporate treasuries and life insurance companies.

Commercial paper generally offers a higher yield than other short-term assets like Treasurys and certificates of deposit.

Oct 15 - Bernanke speaks at Economic Club of NY 2/2

Oct 15 - Bernanke speaks at Economic Club of NY 1/2

Lessons from the Past - Greg Mankiw

How to Recapitalize the Financial System - Greg Mankiw

No Depression This Time, Uncle Sam Has Got Our Back

We Have the Tools to Manage the CrisisNow we need the leadership to use them. By PAUL VOLCKER

A Short Banking History of the United States - Why our system is prone to panics.

Lessons from Wall Street's 'Panic of 1907'

This is an article and a 5 minute audio interview about the "Panic of 1907." It was recorded in August 2007 when most people realized that the problems in the subprime mortgage market were significant, but believed we could avoid a full-blown crisis. We now know better.

Interview with former Fed Chair Paul Volcker

Paul Volcker, Fed Chairman from 1979-1987 and the man most responsible for saving the economy from runaway inflation in the early 1980s, explains his view of the current crisis.

"You get these situations where people don't trust their counterparties. The point is there is a lack of trust. This is the opportunity or necessity to restore some sense of trust that the banks are able to meet their obligations, and flowing out from that that the other institutions are able to meet their obligations. That unfortunately takes government support at this point. I hate this business where the government has to step in to protect the private market, but we're there. Let's deal with the larger goal - stabilize the economy. Let's get in there, get it done, then we'll rebuild the financial system. " - Paul Volcker 10/9/08

Is Greenspan to blame? Interview with former Fed Gov. Lyle Gramley

The Week's Final Numbers

The true story of the carnage from this week on Wall Street, with CNBC's Steve Liesman, Tyler Mathisen, Bill Griffeth and Sue Herrera.

Bernanke speech to NABE Oct. 7, 2008 part 2

Bernanke speech to NABE Oct. 7, 2008 part 1

Are we close to depression? "No" says author of "FDR's Folly"

DOW POSTS WORST LOST SINCE 1987

Finding Trust In the System

"The general public is having its faith in investing in equities crushed, and they're leaving, and they're not going to come back for a long time...."

Assessing Market's Fall

DOW Plunges Below 9,000

Market's Staggering Stats

Sometimes a picture is worth a thousand words

This chart shows how the total amount of reserves that banks have borrowed from the Fed has varied over the last 23 years. You can see that, prior to this past month, the total rarely strayed far from the zero line, except for a brief spike in 2001 (the week after the 9/11 terrorist attacks).

In the past month borrowed reserves are off the chart - about 10 times the previous record. Private lenders have panicked and refused to lend. The Fed has, to a degree, stepped in to fill the void.

Wall Street Journal OCTOBER 7, 2008

We're Not Headed for a Depression

No, this isn't the crisis that kills global capitalism.

By GARY S. BECKER

In order to promote a much smoother functioning of the financial system, it is paramount to distinguish between the immediate steps needed to cope with the present crisis and the long-run reforms needed to reduce the likelihood of future crises. Let's start with the short-run fixes.

David Gothard

First of all, the magnitude of this financial disturbance should be placed in perspective. Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far smaller crisis, especially in terms of the effects on output and employment. The United States had about 25% unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP. Other countries experienced economic difficulties of a similar magnitude. So far, American GDP has not yet fallen, and unemployment has reached only a little over 6%. Both figures are likely to get quite a bit worse, but they will nowhere approach those of the 1930s.

The Treasury's announced insurance of all money-market funds, and the full insurance of bank deposits, carry considerable moral hazard risks, but they have not aroused much controversy. The main thrust of the new banking law allows the Treasury secretary to purchase bank assets up to $700 billion in order to increase the liquidity of the banking system. These assets are of uncertain worth since there is essentially no market for many of them, and hence they have no market price. The government hopes to create this market partly through using auctions, where banks would offer their assets at particular prices, and the government would decide whether to buy them. I would have preferred starting with a smaller dollar value of purchases, and up the amount if the situation deteriorates further.

Partly because many consumers are repelled by the intention to bail out companies and their executives who made decisions that got the companies into trouble, the new law includes income and severance pay limits for executives whose firms seek government help. Even though one cannot think much of executives who led their banks into such a mess, that is a bad precedent since it involves too much micromanagement of bank operations. Moreover, such salary controls can be evaded by very generous fringe benefits.

The moral-hazard consequences for banks receiving a bailout now is worrisome since they may expect to get rescued again by the government if their future investments turn sour. Yet while I find helping these banks highly distasteful, moral-hazard concerns should be temporarily relaxed when the whole short-term credit system is close to collapse. Still, the bank bill with its huge bailout does suggest that the $29 billion bailout of the bondholders of Bear Stearns in March was a mistake. It seemed to have a moral-hazard effect by encouraging Lehman Brothers and other investment banks to delay in raising more capital because they too might have expected the government to come to their rescue if times got much worse. Although the government was apparently concerned that foreign central banks were major holders of the bonds, it was unwise to give them and other bondholders such full protection.

One troubling provision is that the government can take an equity stake in banks it helps. Some economists have proposed a similar role for government equity in these banks. I believe it is unwise to give governments equity in private companies, even if the government does not have voting rights in company policies. Many examples in recent history, such as the current Alitalia fiasco, show that political interests outweigh economic ones when governments have some ownership of private companies. This is likely to happen in this bailout if some banks that are helped decide to sharply cut employment in the districts of some congressmen, or to transfer many jobs overseas.

Taxpayers may be stuck with hundreds of billions of dollars of losses from the various government insurance provisions and government purchases of assets. Although the media has made much of this possibility through headlines like "$700 Billion Bailout," such large losses are highly unlikely except in the low probability event that the economy falls into a sustained major depression. Indeed, with efficient auctions, the government may well make money on its actions, just as the Resolution Trust Corporation that took over many savings-and-loan banks during the 1980s crisis did not lose much, if any, money. By buying assets when they are depressed and waiting out the crisis, the government may have a profit on these assets when they are finally sold back to the private sector. Making money does not mean the government involvement is wise, but the likely losses to taxpayers are being greatly exaggerated.

The temporary banning of short sales is an example of a perennial approach to difficulties in financial markets and elsewhere; namely, "shoot the messenger." Short sales did not cause the crisis, but reflect beliefs about how long the slide will continue. Trying to prevent these beliefs from being expressed suppresses useful information, and also creates serious problems for many hedge funds that use short sales to hedge other risks. Their ban can also cause greater panic in other markets.

The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have limited understanding of the aggregate risks created by the system. That is, insufficient appreciation of how the whole incredibly complex financial system operates when exposed to various types of stress. In light of such limitations, it is difficult to propose long-term reforms. Still, a few reforms seem reasonably likely to reduce the probability of future financial crises.

- Increase capital requirements. The capital requirements of banks relative to assets should be increased after the crisis is over in order to prevent the highly leveraged ratios of assets to capital in financial institutions during the past several years. Possibly a minimum ratio of capital to assets should be imposed by the Fed on investment banks and money funds. As much as possible, the measure of capital should not be its book value but its market value, such as the market value of publicly traded shares of banks. Book value measures, for example, apparently badly missed the plight of Japanese banks during their decade-long banking crisis of the 1990s.

- Sell Freddie and Fannie. The government should as quickly as possible sell Freddie Mac and Fannie Mae to fully private companies that receive no government insurance or other help. These two giants did not cause the housing mess, but in recent years they surely greatly contributed to it, partly through congressional pressure on them to increase their purchases of subprime loans. They have owned or guaranteed almost half of the $12 trillion in outstanding mortgages while having a small capital base. The housing market already has excessive amounts of government subsidies, such as from the tax exemption of interest on mortgages, and should not have government sponsored enterprises that insure mortgage-backed securities.

- No more bailouts. The "too big to fail" approach to banks and other companies should be abandoned as new long-term financial policies are developed. Such an approach is inconsistent with a free-market economy. It also has caused dubious company bailouts in the past, such as the large government loan years ago to Chrysler, a company that remained weak and should have been allowed to go into bankruptcy. All the American auto companies have asked for and received handouts too since they cannot compete against Japanese, Korean and German car makers, partly because these American companies have been incredibly badly managed. A "too many institutions in trouble to fail principle," as in the present financial crisis, may still be necessary on rare occasions, but failure of badly run large financial and other companies is healthy and indeed necessary for the survival of a robust free-enterprise competitive system.

Is this a final "Crisis of Global Capitalism" -- to borrow the title of a book by George Soros written shortly after the Asian financial crisis of 1997-98? The crisis that kills capitalism has been said to happen during every major recession and financial crisis ever since Karl Marx prophesized the collapse of capitalism in the middle of the 19th century. Although I admit to having greatly underestimated the severity of the current crisis, I am confident that sizable world economic growth will resume before very long under a mainly capitalist world economy.

Consider, for example, that in the decade after various predictions of the collapse of global capitalism following the Asian crisis, both world GDP and world trade experienced unprecedented growth thanks to the power of market competition on a global scale. The South Korean economy, for example, was pummeled during that crisis, but has had significant economic growth since. World economic growth will recover once we are over the present severe financial difficulties.

Mr. Becker, the 1992 Nobel economics laureate, is professor of economics at the University of Chicago and senior fellow at the Hoover Institution. Portions of this article first appeared on his Web site.

Please add your comments to the Opinion Journal forum.

The global financial crisis has taken a perilous turn....

Wall Street Journal OCTOBER 7, 2008

Markets Fall on Doubts Rescues Will Succeed

Fed, U.K. Weigh More Action as Initial Salvos Fail to Rally Confidence; Dow Closes Below 10000 in Wild Day for World Exchanges

By JON HILSENRATH and CARRICK MOLLENKAMP

The global financial crisis has taken a perilous turn: As government efforts to tame it grow more aggressive, markets are becoming less confident those efforts will succeed.

On Monday, the Federal Reserve and European governments stepped up relief efforts, above and beyond the $700 billion rescue package approved by the Congress last week. But markets around the world responded with a massive vote of no confidence. European stocks saw their biggest drop in at least 20 years, and the Dow Jones Industrial Average dropped below the 10000 mark, a stark sign that the crisis may be outpacing policy makers' ability to contain it.

The deepening malaise illustrates how the financial crisis has moved far beyond U.S. subprime-mortgage troubles to a much more fundamental breakdown of trust. The best efforts of U.S. and European officials haven't solved the central problem: Nobody knows which firms will go under, making almost everybody afraid to lend.

The problem has become so severe that it's affecting not only banks, but regular companies, which are finding it more difficult to borrow money for everyday activities such as paying workers and buying supplies. If sustained, the freeze in short-term-lending markets will weigh heavily on the weakening global economy. Investors are now coming to recognize this harsh reality.

"In order to shore up confidence in the system -- and by the system, I mean the money markets -- you need something bigger, and you need something that is pretty consistent across countries," says Hans Lorenzen, credit strategist in London for Citigroup Inc. "And you need it pretty quickly."

The Fed, 12 months into a sometimes makeshift campaign that is rewriting textbooks on central banking, unveiled more measures Monday to unblock the stoppage that has plagued short-term-lending markets for the past few weeks. It said it will begin paying interest on the reserves that banks leave on deposit with the central bank, a key addition to its playbook. The move will make it easier for the Fed to manage interest rates while it floods a damaged financial system with loans that nobody in the private sector will make.

U.S. officials are also examining ways to ease deepening strains in the commercial-paper market, a crucial source of short-term loans for banks and other companies in the U.S. and Europe. Interest-rate cuts by the Fed look increasingly likely to follow....

Fed's Actions Today

CNBC summary of week

Wall Street's Worst Week in seven years