Goldman Finds Most Modern Recessions Were Caused By The Fed

… Overnight, it was Goldman’ turn to scare its clients with an extended analysis of when and under what conditions the next recession could strike, and as Hatzius and co write in “s economic team write in The Next Recession: Lessons from History, “with the current expansion already the third longest in US history, investors have begun to look ahead to the next recession. We ask how likely the next recession is to come soon and where it is likely to come from….

While some frequent contributors to postwar recessions such as oil shocks look less threatening today, others such as declines in financial asset prices, sentiment-driven investment swings, and too-rapid tightening of monetary policy retain their relevance as recession risks. Combining lessons from this historical investigation, our cross-country recession model, and both our own research and academic research on US-specific leading indicators, we then develop a recession risk dashboard. The dashboard reinforces our view that recession risk remains only moderate.

While the answer to the first part remains elusive, and to Goldman it is still relatively low, the answer for the second part is clear: in the post WW2, virtually every recession (and depression) was caused by the Fed.

Goldman starts with a historical overview of the causes of recessions. Looking at 33 US recessions since the 1850s, it finds that while many pre-WW2 recessions originated in the financial sector, most post-WW2 recessions were caused by monetary policy tightening and oil shocks and, and sentiment-driven swings in borrowing and investment led to recessions in both eras. A similar IMF study of the key contributors to 122 advanced economy recessions shows that even before 2008, financial crises were a fairly common source of modern recessions too.

…continue reading

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Inside the New York Fed: Secret Recordings and a Culture Clash

Barely a year removed from the devastation of the 2008 financial crisis, the president of the Federal Reserve Bank of New York faced a crossroads. Congress had set its sights on reform. The biggest banks in the nation had shown that their failure could threaten the entire financial system. Lawmakers wanted new safeguards.

The Federal Reserve, and, by dint of its location off Wall Street, the New York Fed, was the logical choice to head the effort. Except it had failed miserably in catching the meltdown.

New York Fed President William Dudley had to answer two questions quickly: Why had his institution blown it, and how could it do better? So he called in an outsider, a Columbia University finance professor named David Beim, and granted him unlimited access to investigate. In exchange, the results would remain secret.

After interviews with dozens of New York Fed employees, Beim learned something that surprised even him. The most daunting obstacle the New York Fed faced in overseeing the nation’s biggest financial institutions was its own culture. The New York Fed had become too risk-averse and deferential to the banks it supervised. Its examiners feared contradicting bosses, who too often forced their findings into an institutional consensus that watered down much of what they did.

The report didn’t only highlight problems. Beim provided a path forward. He urged the New York Fed to hire expert examiners who were unafraid to speak up and then encourage them to do so. It was essential, he said, to preventing the next crisis.

A year later, Congress gave the Federal Reserve even more oversight authority. And the New York Fed started hiring specialized examiners to station inside the too-big-to fail institutions, those that posed the most risk to the financial system.

One of the expert examiners it chose was Carmen Segarra.

Segarra appeared to be exactly what Beim ordered. Passionate and direct, schooled in the Ivy League and at the Sorbonne, she was a lawyer with more than 13 years of experience in compliance – the specialty of helping banks satisfy rules and regulations. The New York Fed placed her inside one of the biggest and, at the time, most controversial banks in the country, Goldman Sachs.

It did not go well. She was fired after only seven months…

via Inside the New York Fed: Secret Recordings and a Culture Clash – ProPublica.

The Secret Goldman Sachs Tapes

Probably most people would agree that the people paid by the U.S. government to regulate Wall Street have had their difficulties. Most people would probably also agree on two reasons those difficulties seem only to be growing: an ever-more complex financial system that regulators must have explained to them by the financiers who create it, and the ever-more common practice among regulators of leaving their government jobs for much higher paying jobs at the very banks they were once meant to regulate. Wall Street’s regulators are people who are paid by Wall Street to accept Wall Street’s explanations of itself, and who have little ability to defend themselves from those explanations.

Our financial regulatory system is obviously dysfunctional. But because the subject is so tedious, and the details so complicated, the public doesn’t pay it much attention.

That may very well change today, for today — Friday, Sept. 26 — the radio program “This American Life” will air a jaw-dropping story about Wall Street regulation, and the public will have no trouble at all understanding it.

The reporter, Jake Bernstein, has obtained 46 hours of tape recordings, made secretly by a Federal Reserve employee, of conversations within the Fed, and between the Fed and Goldman Sachs. The Ray Rice video for the financial sector has arrived…

via The Secret Goldman Sachs Tapes – Bloomberg View.

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