Author: WSJ.com: Real Time Economics

When it comes to marriage, a little college education is dangerous thing.

That’s one takeaway from a study on trends in marriage, divorce and fertility released today by economists Betsey Stevenson and Adam Isen of the University of Pennsylvania’s Wharton School.

As part of their research, the two examined divorce trends among different educational groups by race and gender. Across the board, college-educated people had lower divorce rates than people with less education. Ms. Stevenson suggests that might be because college educated couples go into marriage with a different set of expectations.

“They’re less likely to approach their marriages as sources of financial stability and they’re more likely to approach them as a source of personal fulfillment,” she says.

But while people with just a high school education or less had higher divorce rates than people with college diplomas, the group with the highest divorce rates are people who only have “some college” — those who have attended two-year program or have failed to complete a four-year degree.

The reason? The economists suggest that many people with only some college lacked the stamina or the resources to finish their educations — problems may have come up in their personal lives, for example, or they may have run out of money. The same things that cut an education short can also stop a marriage in its tracks.

The Congressional Budget Office’s new economic and deficit forecast is out today, a week before the White House updates its forecast. Some highlights:

• CBO expects that the unemployment rate, now 10%, will rise before turning down in the second half of the year, averaging 10% in the last three months of 2010. It sees a very gradual decline in unemployment in 2011 to an average of 9.1% in the fourth quarter of that year.

• CBO doesn’t expect the jobless rate to reach 5% — the level it deems consistent with the usual rate of job turnover in U.S. labor markets — until 2016.

• The agency estimates the U.S. economy shrank at by 0.4%, adjusted for inflation, between fourth quarters of 2008 and 2009, and predicted it’ll grow by 2.1% over the four quarters of 2010 and 2.4% over the four quarter of 2011, slower growth than the consensus of private forecasters and public forecasts of Federal Reserve officials.

Here’s how CBO summarizes its economic outlook.

“The deep recession that began two years ago appears to have ended in mid-2009. Economic activity picked up during the second half of last year, with inflation-adjusted GDP and industrial production both showing gains. Still, GDP remains roughly 6½ percent below CBO’s estimate of the output that could be produced if all labor and capital were fully employed (that difference is called the output gap), and the unemployment rate—at 10 percent—is twice what it was two years ago.”

“Economic growth in the next few years will probably be muted in the aftermath of the financial and economic turmoil. Experience in the United States and in other countries suggests that recovery from recessions triggered by financial crises and large declines in asset prices tends to be protracted. Also, although aggressive action on the part of the Federal Reserve and the fiscal stimulus package enacted in early 2009 helped moderate the severity of the recession and shorten its duration, the support coming from those sources is expected to wane. Furthermore, spending by households is likely to be constrained by slow growth of income, lost wealth, and constraints on their ability to borrow, while investment spending will be slowed by the large number of vacant homes and offices.”

The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, was mostly flat in November from a month earlier.

The index declined 5.3% from a year earlier. For the first time in 19 months, some of the cities the 20-city index posted a year-over-year price gain. Dallas, Denver, San Diego and San Francisco are in positive territory from a year earlier.

“While these data do show that home prices are far more stable than they were a year ago, there is no clear sign of a sustained, broad-based recovery,” said David M. Blitzer, chairman of the Index Committee at Standard & Poor’s.

Just five of the 20 areas saw monthly price gains in November. Phoenix posted the largest gain at 1.1%. Chicago fared the worst with a 1.1% drop.

Home prices nationwide had returned to levels similar to late 2003. By November the the 20-city was down 29.2% from its mid-2006 peak.

• See the full S&P/Case-Shiller report.
• Read the full story.

Below, see data from the 20 metro areas Case-Shiller tracks, sortable by name, level, monthly change and year-over-year change — just click the column headers to re-sort.

(About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)

Home Prices, by Metro Area

Metro Area	November 2009	Change from October	Year-over-year change
Atlanta	109.29	-0.80%	-6.20%
Boston	153.97	-0.50%	-0.70%
Charlotte	118.66	-0.30%	-5.50%
Chicago	129.39	-1.10%	-8.50%
Cleveland	104.75	-0.20%	-2.50%
Dallas	119.92	0.00%	1.40%
Denver	128.29	-0.50%	0.50%
Detroit	72.59	-0.70%	-13.00%
Las Vegas	104.22	-0.50%	-24.50%
Los Angeles	169.72	0.80%	-3.50%
Miami	149.08	0.00%	-12.10%
Minneapolis	123.85	-0.50%	-6.80%
New York	173.24	-1.00%	-7.10%
Phoenix	111.96	1.10%	-14.20%
Portland	150.38	0.30%	-7.50%
San Diego	156.06	0.40%	0.40%
San Francisco	136.63	0.60%	1.00%
Seattle	148.56	-0.50%	-10.60%
Tampa	139.66	-0.40%	-13.20%
Washington	179.2	-0.50%	-0.60%

Source: Standard & Poor’s and FiservData

Ben Bernanke’s bloody confirmation battle is yet another sign that Congress, and the public more broadly, are looking for change at the nation’s central bank. Congress is playing with many different ideas for how to do that: 1) Fire Mr. Bernanke by denying him a second term (something that’s looking less likely as pledges of ‘yes’ votes from the Senate trickle in); 2) Strip the Fed of its power to regulate banks; 3) Give Congress’s Government Accountability Office the power to audit Fed decisions; 4) Give Congress more say on the governance of regional Fed banks. Each of these ideas has a flaw … GAO audits, for instance, could invite congressional meddling on tough decisions about raising interest rates. Taking regulation away from the Fed isn’t necessarily going to make regulation better.

Here’s a proposal that hasn’t come up, but maybe ought to be on the table: Term limits for Fed chairmen. Two terms, eight years, and then you step down to a governor’s job, which gets 14 years, or leave.

It has the merit of addressing a problem that may actually have helped to cause the crisis. Former Federal Reserve chairman Alan Greenspan ran the Fed for nineteen years. Critics make the argument that the Fed became complacent during the latter years of his reign, keeping interest rates too low for too long, treating banks with light-touch regulation and underestimating building risks in the financial system. Because the economy seemed to do so well for so long, it became harder over time to second-guess the approach championed by Mr. Greeenspan. One example: Edward Gramlich, the late former Fed governor, tried to raise alarms about subprime mortgages, but he got nowhere.

If the Fed chairman were subjected to a limit of two terms it could help ensure that one person or set of views wouldn’t come to dominate the central bank again. It would be a simple move that voters would understand and populists would likely appreciate. It’s hard to see how it would threaten the Fed’s cherished independence – if anything it would insulate the Fed from political meddling because a chairman would know that there would be no point to pleasing political masters because the job runs out after eight years. The presidency of the European Central Bank runs for eight years – and that seems to be working well.

It fits in with the more consensus-driven approach that Mr. Bernanke has built over four years. On a personal level, if he gets another four years on the job, it’s hard to imagine him wanting even more after that.

“It would accomplish the goal of giving the public a greater sense of oversight without creating undue political influence,” says Simon Gilchrist, a Boston University economist and specialist on central banking. “It would also have the benefit of forcing the Fed to be more articulate about its specific goals and policies,” he said, because it would de-emphasize the power of single chairman.

Marvin Goodfriend, former director of research at the Richmond Fed official who is now a professor at Carnegie Mellon’s Tepper School of Business, is less enthusiastic. “Imposing term limits on a central bank chairman is not necessary or sufficient to produce effective monetary policy independence,” he says.

The U.K. economy crept back into growth in the fourth quarter, data out Tuesday showed, narrowly emerging from a deep recession that began in the second quarter of 2008. However, growth in the fourth quarter was far less than expected, raising questions about a possible extension of the Bank of England’s quantitative easing, or QE, policy and worries about a double-dip recession. Below, economists react.

Very disappointing. This is crawling out of recession. Not just disappointment on the services side, but also the industrial production figures. We seem to have ended the quarter in pretty weak shape. I think it will reopen the debate about whether the Bank of England will consider expanding QE at its February meeting. – Brian Hilliard, Societe Generale

The U.K. last recorded positive GDP growth in 1Q08 and has since contracted by 6% in what has been the most severe recession since the depression era. At this stage we only get an industry breakdown, which showed that services grew also by only 0.1%, as did production, while construction was flat. …. At the moment lead indicators are pointing to a robust recovery, with purchasing managers’ indices consistent with GDP growth of 2%+ in year-over-year terms. However, we are concerned that these are maybe a little optimistic. – James Knightley, ING Bank

Clearly a lot weaker than the market was expecting. And I guess more importantly weaker than the Bank of England was forecasting in the November inflation report. Clearly the economy has emerged from recession, albeit with a whimper and I think it underscores the challenges that the U.K. economy continues to face as we go through this year. … On the basis that the [BOE’s] GDP forecast has been undershot one imagines all things being equal the inflation forecast similarly will be undershot in the medium term…it does suggest the Bank of England will be thinking seriously about undertaking more policy stimulus…You have got to think now that the odds of further stimulus measures in February are increasing. £25 billion would be the obvious possible number, but there’s also uncertainty about how they spread it. – Adam Chester, Lloyds Corporate Markets

This is another desperately disappointing GDP release. While the U.K. officially exited recession in the fourth quarter of 2009, it could only crawl out. GDP growth of 0.1% quarter-on-quarter was well below expectations, with service sector output and industrial production only edging up by 0.1%. Construction output only stagnated after expanding in the previous two quarters. … Indeed, serious economic and financial obstacles stand in the way of significant, sustainable growth, and only marginal growth in the fourth quarter of 2009 reinforces our suspicion that recovery will be gradual and prone to losses of momentum. Straight away at the start of 2010, for example, the economy faces VAT rising back up from 15% to 17.5% while the car scrappage scheme is drawing to a close. – Howard Archer, IHS Global Insight

[W]ith such a significant divergence between the hard and soft data, this release looks like a candidate for revision. However, as things stand, the conclusion we must draw is that the recovery in the U.K. remains tepid. That is very disappointing, both relative to the euro area and in the context of the unprecedented loosening of financial and monetary conditions over the past 12 months. – BNP Paribas

Today’s data … present a big problem for the MPC [the BOE’s monetary policy committee] which has been expecting strong GDP growth to keep inflation on target in the medium term. The biggest impact of the MPC’s past cuts in interest rates has probably already been felt, but with the economy still clearly in intensive care, there is a strong case for more support from policy to boost growth and job creation. – Daiwa Capital Markets Europe

The main aim now must be to ensure that the modest recovery consolidates and slowly gathers momentum. It is critical for both the government and the Monetary Policy Committee to pursue policies that make it possible for business to invest and export. Regulatory burdens must be removed wherever possible, and access to finance improved. A double-dip recession must be avoided at all costs. – David Kern, British Chambers of Commerce

Journalists, economists, bloggers and others weigh in on the troubles facing Ben Bernanke’s confirmation as Fed chairman.

• [Bernanke] is no longer the academic intellectual who advocates inflation targetting. He is, instead, the voice for the consensus of th Federal Open Market Committee–and a member of that committee who can, by his own internal arguments, move that consensus at the margin. So he is going to reflect that consensus. So I am much more interested in moving the FOMC consensus in a constructive direction–in getting two extremely articulate and thoughtful sensible macroeconomists added to the FOMC via recess appointments by Obama to fill the vacant Fed governorships as soon as possible–than in demanding that Bernanke’s public statements deviate from the FOMC consensus: a Fed chair who doesn’t reflect the consensus in public has less power to move the consensus in private. From my perspective, I don’t think that there’s anything wrong with Ben Bernanke’s (private, intellectual, academic) analysis of the current situation. What is wrong is that the FOMC consensus is wrong–and Bernanke’s public statements reflect that wrong consensus. So here I tend to blame Obama more than I blame Bernanke for the recent character of Bernanke’s public statements–for the fact that Fed policy and rhetoric right now is not more Gagnonesque, because Obama could have done things over the past year to move the FOMC consensus that he has not done. –Brad DeLong, U.C. Berkley
• Mr. Bernanke was dealt a rough hand and we can kibitz about many of his calls. Yet his signal achievement of safeguarding the financial system easily merits re-appointment. Switching to someone new would create unnecessary confusion and a costly transition during a time when all is far from well. If the Senate wants to take from prosperous bankers and give more to poorer Americans, then they should do it directly with legislation, not try to expect the Federal Reserve chairman to play Robin Hood. –Ed Glaeser, Harvard University
• Bernanke, as the neoclassical economist most responsible for burying [Irving] Fisher’s accurate explanation of why the Great Depression occurred, is therefore an eminently suitable target for the political sacrifice that America today desperately needs. His extreme actions once the crisis hit have helped reduce the immediate impact of the crisis, but without the ignorance he helped spread about the real cause of the Great Depression, there would not have been a crisis in the first place. –Steve Keen, the University of Western Sydney
• If you want conservative , listen to someone like John Taylor who would likely already be raising interest rates and winding down asset purchase programs. Listen to someone like former Federal Reserve Bank of St. Louis President William Poole who would have likely let the too big to fail banks fail, Main Street be damned, and elevated inflation over all other goals. Ideological conservatives in general, and the inflation hawks among them in particular, do not approve of what Bernanke has done. Go ahead and criticize Bernanke for his policies, I think there is a genuine debate about quantitative easing that we can have, and it could be that not moving more aggressively is, in fact, a mistake, but don’t blame it on his politics. –Mark Thoma, University of Oregon
• I sometimes hear Bernanke’s critics speak as if there is some kind of shallowness to his world view, as if he is somehow incapable of seeing what is obvious to those with common sense. If you want a bumper-sticker-size summary of what he’s all about, here it is– Bernanke believes strongly that a credit crunch can be devastating to regular people, and has done everything in his power to mitigate that damage. You may agree or disagree with his claim that the extraordinary steps taken under his leadership “averted the imminent collapse of the global financial system.” But you must agree with two things: the global financial system did not collapse, and preventing its collapse is the reason Bernanke did what he did. If you think his motives were anything other than this, you have been sucked into a groupthink far shallower than the world view sometimes ascribed to Bernanke. –James Hamilton, U.C., San Diego
• A responsible Fed must have the power to crack down on the Goldman Sachs and Citigroups when their profit making bonanzas threaten the economy. Bernanke and his predecessor gave the Wall Street boys a green light to wreck the economy. If there is any hope that any future Fed chair will stand up to the financial industry then Bernanke must be fired for his failure to do so when it was so obviously necessary. –Dean Baker, Center for Economic and Policy Research
• I also have to put the kibbosh on plans which postulate Bernanke as failing to receive reconfirmation but staying on the Board and letting Donald Kohn slide into the de fact #1 slot and everyone working together as before. That’s just not how things work. Bernanke would more likely leave, plus outsiders would not know who was in charge or what the default was if the cooperation should break down. The resulting reputational equilibrium would again prove unworkable or at least highly disadvantageous. –Tyler Cowen, George Mason University
• Any good alternative for the position would face a bruising fight in the Senate. And choosing a bad alternative would have truly dire consequences for the economy. Furthermore, policy decisions at the Fed are made by committee vote. And while Mr. Bernanke seems insufficiently concerned about unemployment and too concerned about inflation, many of his colleagues are worse. Replacing him with someone less established, with less ability to sway the internal discussion, could end up strengthening the hands of the inflation hawks and doing even more damage to job creation. That’s not a ringing endorsement, but it’s the best I can do. –Paul Krugman of Princeton University, New York Times
• Mr. Bernanke is already far too susceptible to political pressure. As a Fed governor, he was Alan Greenspan’s intellectual co-pilot last decade when their easy money policies created the housing mania. When Congress later put political pressure on the Fed to direct credit toward housing, and even to student loans, Mr. Bernanke (who was then chairman) also quickly obliged. More ominously for the next four years, Mr. Bernanke continues to deny any Fed monetary culpability for creating the mania. –Wall Street Journal editorial
• The issue now is much bigger than whether Mr. Bernanke gets another term. By threatening his tenure for no apparent reason other than political panic and pandering, his new opponents have turned this confirmation process into a test of central bank independence, which is an indispensable element of modern economic management. If a stampede of spooked senators were to trample Mr. Bernanke’s confirmation, the message to markets would be that the value of the U.S. dollar is hostage to short-term politics. That would deliver a huge, possibly lasting, blow to the economy. –Washington Post editorial
• The Bernanke vote is a powerful way to send a message to the Administration that the public is NOT buying what they are selling on the financial front, and much more fundamental change is needed. In particular, one finesse that some Senators are no doubt considering is a “yes” vote on cloture (with Senators threatening to filibuster, the motion to end debate and proceed to a vote requires 60 votes to pass) and a “no” vote on the confirmation (which requires only a simple majority for Bernanke to be confirmed). Thus Senators could say they voted ‘no” on Bernanke, yet have fallen in line with the vote that mattered, the cloture vote.So it is important in contacting Senators to tell them specifically that you want a no on both the cloture vote AND the confirmation vote.. –Yves Smith, naked capitalism
• If you think this is not political, consider the 36 senate senate up for election in December: 8 said they would vote “aye” (5 democrats, 8 republicans) 9 said they would vote “no” (3 democrats, 6 republicans) 4 are publicly declared undecided and all are retiring and not running again ( 2 republicans and 2 democrats) 15 have made no public statements, all are running for reelection (8 democrats, 6 republicans) In other words, senators up for reelection are saying “aye” at a rate of 47%, not enough to get Bernanke reappointed let alone achieve 60% for cloture. Party affiliation does not matter.. –James Bianco, Bianco Research

By Sudeep Reddy and Jon Hilsenrath

Senate Majority Leader Harry Reid’s tepid endorsement of Fed chairman Ben Bernanke on Friday left some investors queasy. Mr. Reid said his support for Mr. Bernanke was conditional. “To merit confirmation, Chairman Bernanke must redouble his efforts to ensure families can access the credit they need to buy or keep their home, send their children to college or start a small business.” He added that he expected an announcement from the Fed chairman on this issue soon.

Vincent Reinhart, an economist at the American Enterprise Institute and former Fed staffer, called the statement a “death trap” for the Fed because it suggests that the senator wanted something in return for his vote. Any acknowledgment or action by the Fed could be seen as a breach of its independence.

We asked Mr. Reid’s office to elaborate. His spokesman, Jim Manley, said the Senate majority leader, who is in a tough reelection battle in Nevada, was “fighting for his constituents.” Does that mean Mr. Reid’s vote is dependent on some action by the Fed to help homeowners, college-bound students or small businesses?

Mr. Manley said Sen. Reid does “not necessarily” expect any particular action before the vote. What are the “plans” that the Fed chairman said he would outline? Mr. Manley said the senator was looking for “additional efforts to help homeowners in Nevada” from the “Fed and the federal government.” He noted that the rest of Mr. Reid’s statement pledges support for Mr. Bernanke and also that Mr. Reid had talked to the president Saturday and is working to get additional votes for the Fed chairman.

A spokeswoman for the Fed declined to comment.

On Friday, the Wall Street Journal’s Deborah Ball and Dave Kansas sat down with the new head of Switzerland’s central bank, Philipp Hildebrand.

We’ve already reported his comment’s on the regulatory push out of Washington and his intention to fight any “excessive” appreciation of the Swiss franc.

He had plenty of other interesting things to say; here’s the full transcript of Hildebrand’s conversation with the Journal.

Q. What is your view of the current discussions around new international banking regulations?

A. There is very broad consensus on the structure and the thrust of the regulation. The piece that is missing – which is the most difficult piece – is the calibration of all of this, or the actual levels. At this stage all the banks know what is coming their way in terms of the thrust of the regulation. And on the whole there is broad consensus in terms of the regulation. The hard bit is the calibration and the actual levels, and the question of the definition of the quality of the capital. This work will be completed by the end of this year. Then we will go into the implementation phase, with a goal of meeting the new targets in 2012.

I think the banks fully know and have accepted that this is the framework they will be operating under. Where there is debate is what the effect of all these various measures in the aggregate will be, mainly on the macroeconomic environment. That’s why this next phase is absolutely crucial in terms of determining the actual levels of capital and liquidity so that you know what the impact it.

Q. What do you think of the proposals the U.S. unveiled Thursday to restrict proprietary trading by banks?

A. One [important piece of new reform] is the treatment of trading book capital. I have no doubt whatsoever that this was one of the major weaknesses of the previous regime. It was a direct result of the market risk amendment which was introduced in 1996, when the capital requirements against the trading books of the big banks were drastically reduced. If you look at any chart of trading assets in the major international institutions, you will see that that was the beginning of the increase and eventually you had the explosion in trading assets, which was in turn one of the main contributors to the build up in leverage and one of the main causes of the crisis.

Now there is a discussion of whether we need to think further about trading books as conditions improve and how do we prevent the past from repeating itself. I certainly very much welcome that we focus intensely on the trading book treatment. Therefore the proposal yesterday is certainly something we are extremely interested in and broadly speaking we are very supportive of – of making sure certain activities, pure prop trading activities must not be allowed to grow again they way they did, or really explode again.

The issue here is not a pure return to Glass Steagel. It is clear to me that modern large international financial institutions need some trading assets to execute trading businesses on behalf of their clients. What is not acceptable is that you have this vast, huge risk that is purely focused on prop trading – narrowly defined – that has nothing to do with client business, but essentially puts the capital of the bank at risk in a highly leveraged manner with very little bearing in terms of direct effects on the economy. This is what is at stake here. Certainly, as long as governments are involved in these banks to protect deposit holders and certainly where you have implicit or explicit government guarantees to protect deposit holders, that kind of activity should not be prevalent in these banks. That’s the thrust of yesterday’s proposals and I think this debate is very much welcome.

What is your opinion of the ‘too big to fail’ issue?

A. The banks have fully recognized the problem. There is no one here who that argues that this problem doesn’t exist, that in the event of a serious crisis, you can only choose between government guarantees or accepting total turmoil. The too big to fail problem is a political question. How much residual risk from these big banks is the country willing to accept? That is a fundamentally political question.

The hugely complex factor is that for [any measures to wind down troubled banks] to be effective it has to have some sort of international mechanism. The aim is to first get to the stage of having compatible national regimes and then ultimately find a way for these regimes to have some sort of link, whether through mutually recognized arrangements or even some sort of treaty amongst the main financial centers so that we can to some extent synchronize insolvency procedures. It’s a very difficult process, there’s no doubt about it.

The other question is what banks and regulators can do ex ante to facilitate an orderly wind down should we ever arrive at a similar scenario. There are some ideas about some organizational changes ex ante that would make it easier for banks and regulators to deal with it in such a case. Some of these structural changes that are being discussed here may also facilitate risk management within the banks. If you look at the history of what’s happened here, you can also say that the problem was too complex to be managed. It was just too vast. Some of these proposals that are being examined now would not only facility an orderly wind-down in the future but could also enhance the ability of management to control the process within the banks, have more transparency and could enhance the ability of regulators to conduct more intense and effective supervision. We need much more intense and much closer supervision.

If you can’t get international agreement on regulations aimed at addressing the “too big to fail” issue, will you proceed in Switzerland with some national regulations anyway?

That’s a key question. To create as level a playing field is the raison d’etre of the Financial Stability Board (FSB). [Our] fundamental aim is to avoid slipping into a protectionist, fragmented global financial system and to create robust rules with a robust consensus at the international level. But in the end we remain responsible for the stability here in our own financial system. Therefore, it is quite possible that, depending on what comes out of the international process, we may have to have in certain areas stricter rules. It’s something we’ve already had [in Switzerland]. It would be perfectly justifiable given [the large size of the banks relative to the Swiss economy]. It also depends on what the business model of these banks is going to look like in the future. That will determine to what extent we may require additional, more stringent requirement relative to that which will come out of the global process.

What challenges do you see still facing UBS?

The main challenge for UBS at this stage is to return to profitability. They have restructured the bank very aggressively and the solvency of the bank is assured today. The bank is stable. What is left is the challenge of returning to profitability and returning to a business model that can generate sustainable earnings going forward without generating the sort of risks that we have seen in the past. Here we go back to the trading discussion. It has to be a business model that doesn’t simply depend on massive leverage to generate profits but can generate profits in a sustainable way. That is the main challenge and there is still a lot of work left to do. In terms of stability concerns and confidence, there is no question there.

Do you envision UBS allowed to repurchase the assets that you are now holding in the Stability Fund?

A. The timing of this depends on the strategy and the choices of UBS and will be dependent on our assessment as to whether such a transaction would reintroduce risk in terms of the stability of the institution. At the moment, it is clear from both sides and such a transaction is not on the table. We will see how things evolve. At the moment it is not an issue. The timing will depend on the evolution of these markets that are impacting the assets in the fund. We don’t have people knocking on our doors en masse wanting to buy back these assets.

What are your views on the current debate about bank bonuses?

You can approach it from a moral, ethical, social equality, or risk perspective, I’ve always taken the view that we need to stick to the risk dimension. That is why we care about this as central bankers. What we care about is that compensation does not become an additional risk factor by creating incentives that run counter to financial stability priorities. I think the new compensation schemes of UBS and Credit Suisse have come a very long way in addressing and responding to the FSB guidelines and are vastly improved relative to the compensation schemes in place in the years prior to last year.

There is the other dimension, which not one where central bankers have a particular expertise to comment on, but that it is eminently in the banks’ self interest to exercise restraint on (absolute pay) levels, because we know that levels clearly impact the political environment. The banks themselves have a huge interest in making sure that the level of compensation doesn’t generate a political process that then really can begin to undermine the foundations of the market-based system. My big concern here in terms of levels is that unless the banks exercise self restraint, it can trigger a political process that can undermine the basics of a market based system.

I think they have not sufficiently taken this dimension into account. I would urge them to do so very quickly. This is a (political) process that is beginning to be visible. I can’t imagine that they don’t see this. It is very visible. Anybody who takes a longer term view in the interest of a market-based structure to our economic systems has got to be very concerned about what is happening. To the extent that they have not responded in trying to figure out what to do in terms of self restraint, it is high time they do so.

If a new international regulatory regime were different than what you have in Switzerland, could you envision adapting the rules here?

It depends on which areas. It also depends on how the banks reposition their business model. The more oriented the new business model is towards sustainable profitability and the more that excessively risk activities such as pure prop trading are reduced, and the more the banks address themselves issues such as compensation and organizational issues, the more we can be comfortable that whatever the new setting is is appropriate. The answer depends on the final calibration of the Basel rules and secondly the extent to which the banks at that stage will have reoriented their business models. Then we will have to revisit the question of whether we need an additional burden.

Could you imagine relaxing some of the tougher restrictions that Switzerland now has on the banks?

At this stage, it’s hard to imagine. It would have to entail a very substantial reorientation of the banks’ business.

The economy in Switzerland is recovering and the OEDC recently warned against sticking with the ultra loose monetary policy the bank currently has in place. At the same time, there are the problems in Greece, which is driving a flight to quality. All this could make it more difficult for you to prevent an appreciation of the Swiss franc. What are your thoughts?

The monetary environment in Switzerland is challenging. The reason is that in the short term, we continue to have huge uncertainty relative to the basic outlook. We have a moderately optimistic baseline scenario, around which you have very large uncertainty, particularly on the downside. Moreover, relative to our definition of price stability, we have very little room on the downside. We continue to have considerable residual deflation risks, particularly in the event that we were to be hit by a renewed shock of some sort. And clearly the exchange rate shock would be one that would be particularly damaging regarding deflation risks. So our policy is very clear in the short term. Given those risks, and given the deflation risks that continue to be in the system, we will not let those risks materialize through an excessive appreciation of the exchange rate. The trade-weighted Swiss franc in real terms has appreciated around 10% since the beginning of 2007. That’s the short term picture. It gets challenging in the long term. We know that, as the OECD has rightly pointed out, we can’t forever keep monetary policy as expansionary as it is. And so that’s the balance that we’re operating under.

When might you make changes in your monetary policy?

It’s impossible to say because we don’t know what the developments will be. The particular difficulty is that at the moment, while we have a moderately optimistic baseline scenario, the risks around that scenario are very wide. And so it is a question that I can’t answer today. What we do know is that at the moment certainly raising interest rates would be inappropriate. Our policy is clear: We will resolutely prevent an excessive appreciation as long as there are deflationary risks. We are equally committed to preventing deflation as we are to preventing inflation.

We have used the interest rate mechanism all the way. We are obviously at a zero rate policy. We have very limited means to do quantitative easing the way that other countries have given the size and structure of our bond market.

What prospects do you see in securing true international cooperation in regulating the international financial system?

It is imperative that we all work together and continue in the spirit we had during the crisis and to make sure we go as far as possible in creating a common regulatory framework and together address these too big to fail issues. By definition these are very hard to address domestically. They are global multilateral issues. They involve a number of key countries, although the number itself is not that large.

In the end if we can create a common framework, and if we get together the UK, Germany, the US and Switzerland, we are a long way down the road. If we can create a common framework around the problem of proprietary trading, and if we can get this down to a common framework in the US, UK Switzerland and to some extent Germany, we’ve come a very long way. US leadership is key of course. It’s crucial in all of this. That’s why it’s very important and why I welcome the initiative by the US to take a clear stand on a number of these issues, particularly on the trading side. If you think of this overall objective to create a common global framework, you can’t get that done unless the US is part of it.

A roundup of economic news from around the Web.

• Walk Away: Writing for the New York Times, Richard Thaler looks at whether underwater borrowers will walk away from their mortgages. “A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.”
• Health Insurance: Keith Hennessey writes on his blog about the problems of passing pieces of health legislation. “Most of the current insurance “reform” debate instead focuses on the guaranteed issue and community rating provisions of the House- and Senate-passed bills. I oppose these provisions, but they have broad-based bipartisan support. Yet those Republicans who claim to support these provisions do not support the other policies required to make these provisions effective. These Republicans have taken a politically savvy but substantively inconsistent (and, I believe, irresponsible) position that could come back to bite them. There is a broad policy consensus that guaranteed issue and community rating cannot work by themselves.”
• Gender and Academics: On voxeu, Ronald G. Ehrenberg says that the gender of U.S. academic leaders matters. ” Will having more women on the board of trustees at academic institutions increase the number of women in the faculty? This column presents evidence suggesting that if a board is one-quarter women, it reaches the critical mass needed to hasten gender diversity.”

Compiled by Phil Izzo

Sen. Jeff Merkley (D., Ore.) last month became the first Democrat to oppose Ben Bernanke’s confirmation for a second term as Federal Reserve chairman. (The leading liberal against Bernanke, Sen. Bernie Sanders of Vermont, is an independent.)  He’s been joined now by three other Democrats and a growing list of Republicans. We talked with him about how the Bernanke vote is shaping up among Democrats:

From where you stand, how does this nomination for Chairman Bernanke look right now?

A lot of folks have been coming up to me in the hall, saying that they want more information and that they’re seriously considering voting against him, or that they’re leaning towards voting against him.

Are they asking you for more information?

Some have. … The main points I’ve been making are that there are at least four major issues that happened in the course of the last eight years: expansion of proprietary trading, derivatives, the lifting of leverage and the failure to address the dysfunction in the [regulation of] mortgages — that is, the kickbacks, the yield spread premiums and the prepayment penalties. While not all of these were the responsibility of the Fed, very much in his role as chair of the Council of Economic Advisers, as a member of the Fed, as chair of the Fed, he was at the economic policy table and did not raise concerns about these major issues that had systemic impact.

We’re hearing that about 10 to 15 members are opposed from the Democratic side. Is that right?

I have not tried to tally folks, but there’s nothing in that number that I would react to and say that’s off base. But a bunch of folks have said they’re wrestling with it, or they’re leaning. I don’t know that 10 to 15 have in any public way said that they clearly are opposed.

Are the political ramifications of the Massachusetts election affecting the Bernanke vote substantially?

I don’t really think that’s what’s going on here. I think what’s going on is that folks are very aware that many of the policies we worked on this last year were addressing the potential plunge into a Great Depression — unemployment going up, major institutions on the verge of collapse that could have caused others to collapse. We did a lot to those stabilize financial institutions. We’ve got to pivot to fighting for the financial success of our families. … Here we have an economic policy leader, he did a good job with the fire hose this last year. But he certainly also — in his roles over the last eight years — he helped create the circumstances that set the house on fire. Is he really the person you want now to be the carpenter to rebuild the house?

Do you have any worries about how a Senate vote against Bernanke might influence financial markets here and abroad?

This is always raised in regard to nominations. I think one of the reasons folks have been hesitant despite Bernanke’s involvement in burning down our economic house has been not to upset Wall Street. But what is going to have the biggest impact in the long term: Having a person in economic leadership that has missed every significant systemic risk development, putting them in charge, or putting someone in charge who has the ability to see those risks and respond in an appropriate way, to lean into the wind?

Alan Greenspan issued the following statement amid the recent turmoil over Fed Chairman Ben Bernanke’s confirmation:

Ben Bernanke is far and away the best person to lead the Fed going forward. He should be reconfirmed as soon as possible.

Federal Reserve Chairman Ben Bernanke’s reappointment has gotten more cloudy in recent days, as more Democratic senators have come out in opposition. But monetary policy and the structure of the rate-setting Federal Open Market Committee aren’t likely to be affected by the delay — as long as it remains a delay for scheduling reasons, and not due to diminishing support.

Fed Chairman Ben Bernanke (Reuters)

The FOMC begins a two-day meeting on Tuesday, and it’s likely that Bernanke won’t be confirmed by then. But the committee will look the same as it would had the Senate voted “yes.”

The chairman and vice chairman of the FOMC are chosen separately from the main Board of Governors. At the first meeting of the year, the committee members vote for the two positions. The chairman of the Board is usually named chairman of the committee and the president of the New York Fed is traditionally the vice chairman. At next week’s meeting, the FOMC is expected to vote for Bernanke and William Dudley of the New York Fed to take those positions for 2010. Though Bernanke’s term as chairman of the Fed’s Board is up on Jan. 31, he retains his position as Fed governor and remains on the FOMC. As long as he stays on the Board of Governors, he can lead the rate-setting committee.

But things won’t be as stable at the Board of Governors. When Bernanke’s term expires on Jan. 31, Vice Chairman Donald Kohn is set to become acting chairman. Kohn remains in that position until Bernanke or another nominee is confirmed. If for some reason, Kohn were to leave the Fed before the Senate approved the president’s nominee, the Board of Governors would elect a chairman from its ranks. If such a situation occurred, Bernanke as a governor would be eligible to be acting chairman.

There’s one more interesting issue of Fed hierarchy: Humphrey Hawkins testimony. The first of the Fed’s semiannual monetary policy reports to Congress usually occurs at the end of February. It’s hard to imagine the confirmation drama extending that long, but if the Bernanke nomination is scuttled or remains in limbo, Kohn could have to face lawmakers next month. The chairman of the Fed Board, not the FOMC, delivers the testimony.

Last Updated: Jan. 25 at 7:05 pm

Federal Reserve Chairman Ben Bernanke’s confirmation became less clear in recent days after some Democratic senators came out in opposition to his reappointment.

Dow Jones Newswires and The Wall Street Journal have compiled a tally of senators who have declared their intentions for the confirmation vote based on interviews with the senators or their offices. Amid the threat of a filibuster, Bernanke needs the support of 60 senators for his nomination to succeed.

The current tally:

Voting “Yes”: 40 (28 Democrats, 11 Republican, 1 Independent)
Voting “No”: 17 (4 Democrats, 12 Republicans, 1 Independent)
Officially Undecided: 32 (18 Democrats, 14 Republicans)

The remainder of the senators haven’t officially commented.

The Senate Banking Committee voted 16-7 last month to move the Bernanke confirmation to the full Senate.

The following full list of U.S. Senators is sortable by their intentions to vote.

Senator	Yes	No	Declared Undecided	Unknown
AKAKA, Daniel K. (D-HI)	X
BAUCUS, Max (D-MT)	X
BAYH, Evan (D-IN)	X
BEGICH, Mark (D-AK)			X
BENNET, Michael F. (D-CO)	X
BINGAMAN, Jeff (D-NM)	X
BOXER, Barbara (D-CA)		X
BROWN, Sherrod (D-OH)	X
BURRIS, Roland W. (D-IL)			X
BYRD, Robert C. (D-WV)			X
CANTWELL, Maria (D-WA)			X
CARDIN, Benjamin L. (D-MD)			X
CARPER, Thomas R. (D-DE)	X
CASEY, Jr., Robert P. (D-PA)			X
CONRAD, Kent (D-ND)	X
DODD, Christopher J. (D-CT)	X
DORGAN, Byron L. (D-ND)		X
DURBIN, Richard J. (D-IL)	X
FEINGOLD, Russell D. (D-WI)		X
FEINSTEIN, Dianne (D-CA)	X
FRANKEN, Al (D-MN)			X
GILLIBRAND, Kirsten E. (D-NY)			X
HAGAN, Kay R. (D-NC)	X
HARKIN, Tom (D-IA)			X
INOUYE, Daniel K. (D-HI)	X
JOHNSON, Tim (D-SD)	X
KAUFMAN, Edward E. (D-DE)			X
KERRY, John F. (D-MA)	X
KLOBUCHAR, Amy (D-MN)			X
KOHL, Herb (D-WI)	X
LANDRIEU, Mary L. (D-LA)	X
LAUTENBERG, Frank R. (D-NJ)				X
LEAHY, Patrick J. (D-VT)			X
LEVIN, Carl (D-MI)			X
LINCOLN, Blanche L. (D-AR)				X
McCASKILL, Claire (D-MO)			X
MENENDEZ, Robert (D-NJ)	X
MERKLEY, Jeff (D-OR)		X
MIKULSKI, Barbara A. (D-MD)			X
MURRAY, Patty (D-WA)			X
NELSON, Ben (D-NE)	X
NELSON, Bill (D-FL)	X
PRYOR, Mark L. (D-AR)	X
REED, Jack (D-RI)	X
REID, Harry (D-NV)	X
ROCKEFELLER IV, John D. (D-WV)	X
SCHUMER, Charles E. (D-NY)	X
SHAHEEN, Jeanne (D-NH)				X
SPECTER, Arlen (D-PA)			X
STABENOW, Debbie (D-MI)				X
TESTER, Jon (D-MT)	X
UDALL, Mark (D-CO)				X
UDALL, Tom (D-NM)			X
WARNER, Mark R. (D-VA)	X
WEBB, Jim (D-VA)				X
WHITEHOUSE, Sheldon (D-RI)	X
WYDEN, Ron (D-OR)				X
LIEBERMAN, Joseph I. (ID-CT)	X
SANDERS, Bernard (I-VT)		X
ALEXANDER, Lamar (R-TN)	X
BARRASSO, John (R-WY)			X
BENNETT, Robert F. (R-UT)	X
BOND, Christopher S. (R-MO)			X
BROWNBACK, Sam (R-KS)			X
BUNNING, Jim (R-KY)		X
BURR, Richard (R-NC)	X
CHAMBLISS, Saxby (R-GA)			X
COBURN, Tom (R-OK)				X
COCHRAN, Thad (R-MS)			X
COLLINS, Susan M. (R-ME)	X
CORKER, Bob (R-TN)	X
CORNYN, John (R-TX)		X
CRAPO, Mike (R-ID)		X
DeMINT, Jim (R-SC)		X
ENSIGN, John (R-NV)				X
ENZI, Michael B. (R-WY)				X
GRAHAM, Lindsey (R-SC)	X
GRASSLEY, Chuck (R-IA)			X
GREGG, Judd (R-NH)	X
HATCH, Orrin G. (R-UT)	X
HUTCHISON, Kay Bailey (R-TX)		X
INHOFE, James M. (R-OK)		X
ISAKSON, Johnny (R-GA)			X
JOHANNS, Mike (R-NE)	X
KYL, Jon (R-AZ)		X
LeMIEUX, George S. (R-FL)			X
LUGAR, Richard G. (R-IN)	X
McCAIN, John (R-AZ)		X
McCONNELL, Mitch (R-KY)			X
MURKOWSKI, Lisa (R-AK)			X
RISCH, James E. (R-ID)			X
ROBERTS, Pat (R-KS)				X
SESSIONS, Jeff (R-AL)		X
SHELBY, Richard C. (R-AL)		X
SNOWE, Olympia J. (R-ME)			X
THUNE, John (R-SD)			X
VITTER, David (R-LA)		X
VOINOVICH, George V. (R-OH)	X
WICKER, Roger F. (R-MS)		X
BROWN, Scott (R-MA)			X

See a full interactive graphic.

Just four states recorded a drop in the unemployment rate for December, indicating that though the labor market continues to inch toward stabilization widespread job growth still hasn’t arrived.

Earlier this month, the Labor Department reported that the unemployment for the nation as a whole held steady at 10% in December from a month earlier. Just 16 states and Washington D.C. have higher jobless rates than the national average.

Most of the country continues to see job losses, but employment increased in 11 states and Washington D.C.

State	Dec. 2009 Rate	Nov. 2009 Rate	Nov. to Dec. change	2008 to 2009 change
U.S. National Rate	10%	10%	0	2.6
Alabama	11%	10.5%	0.5	4.5
Alaska	8.8%	8.4%	0.4	2
Arizona	9.1%	8.9%	0.2	2.5
Arkansas	7.7%	7.4%	0.3	2
California	12.4%	12.4%	0	3.7
Colorado	7.5%	6.9%	0.6	1.7
Connecticut	8.9%	8.2%	0.7	2.3
Delaware	9%	8.6%	0.4	3.3
District of Columbia	12.1%	11.8%	0.3	3.9
Florida	11.8%	11.5%	0.3	4.2
Georgia	10.3%	10.1%	0.2	2.8
Hawaii	6.9%	6.8%	0.1	1.8
Idaho	9.1%	9.1%	0	3
Illinois	11.1%	10.9%	0.2	3.9
Indiana	9.9%	9.6%	0.3	2.1
Iowa	6.6%	6.7%	-0.1	2.2
Kansas	6.6%	6.4%	0.2	1.6
Kentucky	10.7%	10.6%	0.1	3.1
Louisiana	7.5%	6.7%	0.8	2
Maine	8.3%	8%	0.3	1.8
Maryland	7.5%	7.3%	0.2	2.1
Massachusetts	9.4%	8.7%	0.7	3
Michigan	14.6%	14.7%	-0.1	4.4
Minnesota	7.4%	7.4%	0	0.8
Mississippi	10.6%	9.8%	0.8	2.8
Missouri	9.6%	9.4%	0.2	2.5
Montana	6.7%	6.4%	0.3	1.7
Nebraska	4.7%	4.6%	0.1	0.8
Nevada	13%	12.3%	0.7	4.6
New Hampshire	7%	6.7%	0.3	2.7
New Jersey	10.1%	9.7%	0.4	3.3
New Mexico	8.3%	7.8%	0.5	3.6
New York	9%	8.6%	0.4	2.4
North Carolina	11.2%	10.7%	0.5	3.1
North Dakota	4.4%	4.1%	0.3	1.1
Ohio	10.9%	10.6%	0.3	3.5
Oklahoma	6.6%	7.1%	-0.5	2
Oregon	11%	10.7%	0.3	2.7
Pennsylvania	8.9%	8.5%	0.4	2.5
Rhode Island	12.9%	12.7%	0.2	3.5
South Carolina	12.6%	12.3%	0.3	3.8
South Dakota	4.7%	4.9%	-0.2	1
Tennessee	10.9%	10.2%	0.7	3.3
Texas	8.3%	8%	0.3	2.7
Utah	6.7%	6.3%	0.4	2.6
Vermont	6.9%	6.4%	0.5	1
Virginia	6.9%	6.6%	0.3	1.9
Washington	9.5%	9%	0.5	3
West Virginia	9.1%	8.4%	0.7	4.6
Wisconsin	8.7%	8.2%	0.5	2.8
Wyoming	7.5%	7.2%	0.3	4.3

A roundup of economic news from around the Web.

• Deficit Reduction: Bob Williams writes on the Tax Polcicy Center’s TaxVox blog that higher income taxes alone won’t solve the budget problem. “Under the higher tax baseline of current law, we’d have to raise all individual rates by 15 percent to meet our 2 percent deficit goal. But under the lower-revenue scenario of current policy, rates would have to jump nearly 50 percent. In other words, the 10 percent bracket would become nearly 15 percent and the 35 percent top rate would go to 52 percent. What if Congress just raised taxes for high-income taxpayers? Their rates would go up more than 40 percent under current law and more than 150 percent under current policy. In other words, the top tax rate would return to the bad old days of 90 percent. Even if we go for the Administration’s more modest goals—start with current policy and aim for deficits averaging 3 percent of GDP—those top tax rates would have to more than double, taking the top rate over 75 percent.”
• Discouraged Workers: On the Atlanta Fed’s macrobog Julie Hotchkiss and Laurel Graefe say that the impace of discouraged workers may be overstated. “How quickly the discouraged workers will re-enter the labor force, holding everything else constant, is not necessarily the most important question. A more significant question is how quickly the overall labor force will grow. Employment would need to grow at the same rate as the labor force in order for the unemployment rate to remain at 10 percent, which amounts to roughly 91,000 jobs per month if we use the average annual growth rate of the labor force during the three years following the 2001 recession, which was 0.84 percent. Bottom line: While not insignificant, the number of discouraged workers that can be expected to re-enter the labor market once job prospects turn around is only a small piece of the puzzle. More focus should instead be placed on the larger issue of job creation.”
• Geithner: Treasury Secretary Timothy Geithner talks to PBS Newshour about the proposed bank plan. “JUDY WOODRUFF: So in essence, are you saying, big banks need to be broken up? TIM GEITHNER: No, this does not propose that. What this does is try to make sure we limit risk-taking – the kind of risks that could threaten the stability of the system in the future… JUDY WOODRUFF: Let me ask you about one particular aspect and that is banks that would separate some of their investment operations. Does it mean, for example, that at J. P. Morgan – without naming a bank, that in essence, would have to spin off its investment operations? TIM GEITHNER: Banks will have some choice about how they comply with this, and it’s going to have to change, result in some changes. And we’re going to work very carefully with the Congress and the regulators to make sure we do this in a sensible way.”

Compiled by Phil Izzo

In a press release, the bank said this new group would be called the Special Investment Management Group, and it promoted Sarah Dahlgren to executive vice president to lead the group.

Dahlgren, a long-time staffer, was previously in charge of the New York Fed’s relationship with American International Group Inc., the troubled insurer that was bailed out by the central bank to protect the financial system.

The new group will have responsibility for overseeing the credit extended to AIG, along with the holdings the New York Fed has from its bailout of failed investment bank Bear Stearns.

“This move represents an additional enhancement to the Bank’s governance and risk management in light of the tremendous expansion of the Bank’s balance sheet over the past eighteen months by separating out the management of the new investments from the Bank’s financial risk management,” the New York Fed said in a press statement.

The Fed’s balance sheet has grown massively over the course of the financial crisis as the central bank has intervened in financial markets and extended credit. From just over $800 billion in primarily government bond holdings at the start of the financial crisis in August 2007, the balance sheet now stands at $2.3 trillion, largely due to Fed buying of mortgage-related assets.

The Fed currently values the holdings acquired through its AIG and Bear Stearns interventions at at least $64 billion. The interventions were highly controversial, with observers wondering about propriety of the actions, along with the risk taken on by the central bank. Policy makers have strongly defended the actions as necessary and they have been confident the Fed won’t lose any money either.

The Fed has come under increased scrutiny for its AIG work of late. This week, Fed Chairman Ben Bernanke said in a letter to the Government Accountability Office that the central bank would welcome a formal government review of “all aspects of our involvement in the extension of credit to AIG.”

The unveiling of the creation of the new group came amid a slew of personnel announcements at the bank. The institution said senior vice president Deborah Perelmuter has been named to a new post in the communications arm of the New York Fed. The official has a quarter century of service with the bank.

Bank president William Dudley said in a statement that Perelmuter’s “extensive experience in monetary policy operations and financial markets make her uniquely qualified to serve the New York Fed as a resource to our many external stakeholders and reinforce our critical mandates with respect to monetary policy, operations, capital markets, financial stability and other central banking activities.”

 

 

Small businesses are saying thanks, but no thanks, to the Obama administration’s plans to refocus the Troubled Asset Relief Program on boosting lending to small firms.

Small businesses don’t believe Geithner will use TARP funds as promised. (Getty Images)

The National Federation of Independent Business today released a letter supporting an amendment by Sen. John Thune (R., S.D.) that aims to end the Treasury’s ability to spend any uncommitted TARP funds. Senators are trying to add the amendment to a broader bill raising the U.S. debt ceiling.

“The full $700 billion that was originally allocated for TARP is no longer needed and should not be used as a bucket of money for the Treasury Department to create new federal programs,” wrote NFIB Senior Vice President Susan Eckerly in the letter.

The move represents a rebuke of the Obama administration, which announced plans to refocus TARP in December. Treasury Secretary Timothy Geithner outlined an exit plan for the program in a letter to top lawmakers last year. Some parts of TARP such as the Capital Purchase Program, which injected money into banks to shore up their balance sheets, were closed, but remaining funds were expected to be funneled into programs to prevent foreclosures and increase lending to small businesses.

“We recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses. We are also reserving funds for additional efforts to facilitate small business lending,” Geithner said in the letter. The Treasury secretary also promised not to use additional funds “unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability.”

But the NFIB isn’t convinced that TARP funds will be used as promised. “I have no indication it’s going to be used to help small business or that it’s going to be effective,” said Bill Rys, tax counsel at the small-business group. “When [TARP] was passed, the talk was that we need to help Wall Street to help Main Street. And now they say we need to keep this going to help Main Street. We didn’t get there last year, and there’s no indication we’ll get there now.”

The group isn’t necessarily opposed to administration aid, but they worry that TARP funds could be used to create new programs. Worries about expansion of federal mandates are “keeping our members on the sidelines,” said Rys.

“There’s a bigger benefit to use this money for deficit reduction,” he said. “Let’s get our fiscal house in order, and this is a good way to start.”

Federal Reserve Chairman Ben Bernanke earlier this week expressed the central bank’s eagerness for congressional auditors to review the Fed’s role in the American International Group rescue. Congress heard the call, and now the Fed is poised to get what it asked for.

In a letter today, House Oversight and Government Reform Committee Chairman Edolphus Towns and Rep. Elijah Cummings (a senior Democrat on the panel) requested that the Government Accountability Office — the auditing arm of Congress — launch a “broad investigation” into the federal aid to AIG.

The lawmakers asked for “a full review of all aspects of federal assistance” through the Fed, Treasury or any other government entity from 2007 to the present. Included in the review, they said, should be an examination of (1) AIG’s payments to counterparties of credit default swap contracts and specifically whether the decision “left money on the table” (2) Who made the decision to pay counterparties at par and under what authority (3) The decision not to disclose the identities of those counterparties until March 2009 and why (4) The decision not to allow AIG to file for bankruptcy protection and (5) The implications of the AIG bailout for future federal aid to private firms.

“Due in no small part to consistent pressure applied by Congress, the details regarding the AIG counterparty issue have emerged to paint a clearer picture of how events unfolded over a tumultuous period in the financial markets,” the lawmakers wrote to Acting Comptroller General Gene Dodaro. “Now, through this request, we ask not only what happened, but also, why?”

A GAO audit will take at least several months. Next Wednesday, the lawmakers may get some of the answers they want when the Oversight committee holds a hearing on the AIG rescue.

Economists, lawmakers, bloggers and others weigh in on President Barack Obama’s bank-regulation plan.

• President Obama is right to be very critical of these practices that have unnecessarily exposed the American people and our economy to substantial risks. In the midst of the Great Depression, Congress passed the Glass-Steagall Act to prevent banks from mixing commercial lending with investment activities. As time passed, Congress mistakenly relaxed those restrictions and the greed that subsequently ensued contributed to the financial collapse that began in 2008. Now is the time for Congress to act and put those safeguards back in place so that the American people are protected from greedy Wall Street firms. –Rep. Maurice Hinchey (D., N.Y.)
• If one wishes to find the true source of the economic debacle of 2008, one need only look to the government policies that cajoled, encouraged and then demanded that banks loan money to people to buy houses they couldn’t afford — and then put the American taxpayers on the hook for the loans that will never be paid back. This proposal is not going to put one American back to work, which is where the Administration should be focused –Rep. Jeb Hensarling (R., Texas)
• President Obama’s proposal is a major step forward to limit the greed and reckless behavior of Wall Street that has caused so much damage to the economy. We need to do everything we can to limit the size of too-big-to-fail financial institutions and end the gambling addiction on Wall Street. One of the reasons I am strongly opposed to the re-nomination of Ben Bernanke is that, in truth, he has had the power to do this from day one. Our goal must be to create a new Wall Street that invests in the productive economy creating decent paying jobs for all Americans. –Sen. Bernie Sanders (I., Vt.)
• Push every Republican to take a public stand on this question, and you will be amazed at what you hear (if they stick to what they have been saying behind closed doors on Capitol Hill.) The spin from the White House is that the president and his advisers have been discussing this move for months. The less time spent on such nonsense tomorrow the better. The record speaks for itself, including public statements and private briefings as recently as last week — this is a major policy change and a good idea. The major question now is — will the White House have the courage of its convictions and really fight the big banks on this issue? If the White House goes into this fight half-hearted or without really understanding (or explaining) the underlying problem of unfettered banks that are too big to fail, they will not win.” –Simon Johnson, MIT
• We continue to believe the best way of achieving those goals is to establish a tough, competent and accountable systemic risk regulator. We believe providing for strengthened regulatory oversight, and flexibility like that originally proposed by the Administration, as opposed to arbitrary restrictions on growth and activities, is a more effective way of mitigating systemic risk ending ‘too big to fail’. –Tim Ryan, Securities Industry and Financial Markets Association
• Today, President Obama sent a strong and clear message to Wall Street: The game is over. Taxpayers will no longer be held hostage by Wall Street’s obsession with reckless policies and obscene profits… By limiting the scope of financial institutions and limiting excessive growth of the financial sector, President Obama and Chairman Volcker’s proposals are important steps towards ending the risky practices that helped get us in the financial crisis we are in today and getting America back on the road towards economic recovery. –Anna Burger, Service Employees International Union
• Note we have to move two other pieces of reform in order to make this credible: we need a system where parties are aware of the derivatives holdings of an investment bank pre-crisis, say through a clearinghouse or exchange, so to make resolution credible and prevent panics. We also need a new resolution authority to handle these firms in a manner that won’t destroy the system. Regulating exchanges, and special bankruptcy proceeding for financial firms: we’ve done this before in the New Deal, we just never upgraded it for a new century, and right now a broken financial sector calls again for these changes. –Mike Konczal, Roosevelt Institute
• I am concerned, as a general matter, about arbitrarily limiting the size of the banks, since our modern, complicated, global economy demands that the U.S. have at least a few banks capable of providing a very wide range of services each on a large enough scale to be efficient. However, there certainly may be circumstances in which regulators ought to push a bank or banks to be smaller in general or smaller in certain activities. The question is how to balance the considerations and avoid arbitrary limits or decisions. –Douglas J. Elliott, Fellow, The Brookings Institution
• President Obama completely missed the mark on the causes of and solutions to the financial crisis. In his speech this morning, the President outlined a major initiative to increase regulation of banks. He claims the financial crisis was caused by reckless speculation by greedy bankers in search of quick profits. What he fails to acknowledge is that this behavior was the direct result of the cheap credit supplied by the Federal Reserve and the moral hazard supplied by government regulations and subsidies. –Peter Schiff, Euro Pacific Capital
• As someone who has been campaigning for the break-up of universal banks and the separation of retail banking from investment banking, this is welcome news. Investment banking should not be allowed to co-exist alongside retail within the same bank, because it always achieves a dominant position and invariably ends up exploiting retail clients. – Michael Lafferty, Lafferty Group
• Proposals to preemptively break up large, well-managed, and well-capitalized banking companies, or to reimpose Glass-Steagall restrictions, are based on a misdiagnosis of the causes of the financial crisis. Trading, proprietary or otherwise, did not lead to the financial crisis. Rather than arbitrarily banning certain activities, or setting arbitrary size limits, our policy response should focus on improving risk management, internal controls, corporate governance, and supervisory oversight, and creating the authority to resolve large financial institutions. The problem of’too-big-to-fai’ isn’t that some institutions are large, it’s that there is currently no statutory authority to wind down a financial conglomerate in the way that the FDIC is currently authorized to unwind banks. –Rob Nichols, Financial Services Forum
• In principle, I am against attempts by government to structure industries. But I take the view that the political economy of small banks is better than that of large banks. Large banks find it easy to persuade regulators that they are doing wonderful things and find it easy to persuade politicians that they need to be bailed out. Maybe small banks would find this task somewhat harder. –Arnold Kling, Econlog
• These proposals don’t exhaust the needed changes, and who knows what Congress will actually do — I don’t think we’ll get anywhere near the amount of change we need when all is mostly said and little actually gets done — but this is a move in the right direction. Too bad it didn’t happen months ago. –Mark Thoma, University of Oregon
• The wrong solution for the wrong problem. –Lawrence White, New York University’s Stern School of Business
• Such a proposal represents a massive expansion of unchecked discretionary power on the part of regulators. The same regulators who missed the crisis. How these regulators are supposed to know the right bank size is something the President fails to address. –Mark Calabria, Cato Institute
• It should be absolutely clear that banks which are too big to fail must be shrunk, and that using government-guaranteed consumer deposits to trade securities for profit is a terrible idea. It is a relief to see these holes in the regulatory structure get some attention. –Free Exchange blog, The Economist

Senate Majority Leader Harry Reid hasn’t yet filed cloture (to limit debate and overcome a filibuster) on Ben Bernanke’s nomination for a second four-year term as Federal Reserve chairman, pushing a vote into next week at the earliest. Does that suggest anything about Bernanke’s prospects?

Sen. Bernie Sanders (I., Vt.) leads the charge against Fed Chairman Bernanke. (Getty Images)

Probably not, even if the delay might feed speculation on Capitol Hill and Wall Street. Given the Senate upheaval after the Republican victory in Massachusetts, the focus on scheduling a central bank nominee’s confirmation surely dropped a bit in the leadership office. But Sen. Bernie Sanders (I., Vt.), who is leading the charge among liberals to fight the nomination, thinks the Massachusetts outcome will influence the Bernanke vote in another way. In a statement Wednesday, Sen. Sanders said he senses “growing opposition” to the nomination in light of the Massachusetts “wake-up call” for Democrats.

“There is a growing understanding that our economy is in severe distress, a greater appreciation that people are disgusted with the never-ending greed on Wall Street, and a better recognition that we need a new direction at the Fed,” he said in his statement. “People do not want another term for the man whose major job as Fed chairman was to protect the safety and soundness of our financial system but instead was asleep at the switch. I am confident that more and more senators understand that we need a new Fed and a new Wall Street and will oppose Bernanke’s confirmation.”

Of course, Sanders is one of at least four lawmakers trying to block the Bernanke vote, so it’s not surprising that he’d want to build opposition. In an interview, he said he’s been talking with other senators and urging them to vote “no.” (In public, many Democrats have been noncommittal about how they’d vote.) Sanders said he’s heard from more Democrats in recent days who would vote against Bernanke, but he declined to name them. “You’re beginning to see, maybe this vote is kind of symbolic of one’s attitude toward Wall Street, and whether or not we’re going to stand up to them and move it in a new direction with new leadership, or whether we keep up the same old same old,” he said.

Would opponents actually have the 41 votes needed to block the Fed chairman for another term? The Fed chairman regulates many Wall Street firms, but this battle may come down to how many senators buy the argument that a mild-mannered former Princeton professor — who lawmakers routinely say they like personally — is really that closely linked to Wall Street.

If the full Senate votes in the same proportion that the Senate Banking Committee did in its 16-7 approval last month, Bernanke would receive at least 69 votes — nine more than he needs to clear under Senate rules. (That would be worse than Paul Volcker, who was confirmed 84-16 amid economic turmoil in 1983.) Even if he lost roughly two-thirds of the 41 Republicans on the Senate floor — more than the 60% he lost in committee — he’d still need to lose almost a quarter of Democrats to be defeated. All of that is not entirely inconceivable, but it would be surprising for a former Bush administration official who is the Democratic president’s nominee. (So far from the left, only Sanders and Sen. Jeff Merkley have indicated their plans to vote against Bernanke, while Sen. Byron Dorgan is also seen as a possible “no” vote.)

Sanders, when we walked through the math, acknowledged the odds. But he maintained that he has a shot at getting 15 Democrats. “It’s going to be close,” he said.