EconomicCrisis.US

Everything we know about classic economic theory suggests the U.S. economy should be experiencing Zimbabwe-like hyperinflation right now, thanks to the nearly $2.2 trillion the U.S. Federal Reserve has pumped into the system.

But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward – all in a desperate bid to make Americans feel better about the global financial crisis.
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The financial crisis is now more than a year old, and Americans are still angry — angry that the economy tanked, angry that they’re out of work. But mostly, people seem outraged by Wall Street bonuses.

Seeking to assuage that ire, the Obama administration’s “compensation czar,” Kenneth Feinberg, last week announced plans to cut the pay of top executives at the seven companies receiving federal support. He has suggested that the cuts, which slashed pay for top executives by an average of 50 percent, should be a model for the rest of Wall Street and corporate America.

In outlining the change, Feinberg has had to grapple with several misconceptions about Wall Street bonuses.
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The debate over financial services reform has meandered for weeks without a clear sense of urgency. It would be a huge opportunity lost if our political, regulatory and business leaders cannot craft a credible new regulatory foundation for one of America’s pre-eminent industries. It’s time to set politics and regulatory infighting aside and establish the new rules of the road for this critically important business.

Several principles should guide reform. Our country needs to strive for transparency in financial-company balance sheets and recognize the direct correlation between clarity in asset value and how financial enterprises are valued by investors. Mark-to-market based accounting must be revitalized, and complex instruments and securities must be subject to regular market-valuation tests whenever possible.
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Federal Reserve vice chairman Donald Kohn believes that prices of mortgage-backed securities are likely to fall when the Fed eventually begins selling mortgage-backed securities (MBS) from its portfolio, according to a MarketNews International report by Steven K Beckner last Thursday.

The report continues: “He gave no indication when that might be. But Kohn, echoing earlier comments by New York Federal Reserve Bank President William Dudley, said the Fed may well avoid any losses on its asset holdings, as well as on its liquidity facilities. ‘These programs may be unwound without loss,’ Kohn said, commenting from the audience at a Boston Federal Reserve Bank conference. He said the Fed entered the market ‘when prices were depressed by high premiums’ and so ‘the Fed could finance without risk.’ That in turn will mean they can be ‘unwound without loss.’”
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