August 6, 2008, 1:57 pm

Ex-Fed Official: Financial Crisis Toughest in Post-War Period

The past year has seen the "most challenging financial crisis in the entire post-war period,": and industry experts have outstripped even regulators with their plans to improve the stability of the financial sector, the former president of the Federal Reserve Bank of New York said Wednesday.

Corrigan

Gerald Corrigan - now a managing director at Goldman Sachs - was speaking on the release of the latest report from the Counterparty Risk Management Policy Group he co-chairs.

Though the report’s recommendations aren’t a fix for the current crisis, substantial progress has been made in understanding its causes, to prevent a recurrence, he noted. "That doesn’t mean there won’t be further write-downs,": he said, "there almost surely will be.":

This third report, the first since the financial crisis erupted last summer, tackles in particular the changes necessary to make doing business safer in the over-the-counter markets for derivatives and credit default swaps. The objectives in this third report, "The Road To Reform,": are "extremely ambitious, and they will take time,": Corrigan said.

But there should be no bureaucratic holdup for the proposals. Most of the steps recommended in the report can be implemented under the terms of the existing regulatory structure, Corrigan said.

As a former president of the New York Fed, Corrigan is a firm believer in the key role the central bank should play in that oversight. "Central banks are the only institutions of public policy that literally operate in financial markets every day of the week,": he said. "If that doesn’t give you some kind of advantage, I don’t know what does.":

Corrigan isn’t an advocate of the Fed taking the preemptive measure of targeting asset prices, though, pointing out that bubbles are hard to identify in advance. "The risk of misjudgment and miscalculation is very high,": he said. -Emily Barrett

Comments

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It is the Fed’s target interest rate that was a large part of the problem: fund overnight with no risk of getting an uptick surprise. But of course investment banks don’t want to give this certainty up, so Corrigan’s proposals are bound to miss the real problem. Meanwhile Feldstein apologizes for supporting those silly Keynesian consumer rebates - the marginal propensity to consume myth may be dying as well.

Comment by Mark Hanna - August 6, 2008 at 2:37 pm

Corrigan’s analysis is okay, but too many talking heads only spoil the psychology, and it’s psychology that trumps fundamentals.

Psychologyofthecall blog comes highly recommended as a source trade spot ~

Comment by Elliot Cohen: - August 6, 2008 at 3:02 pm

They keep calling for "shock absorbers":.. oh funny..

The Fed Reserve missed these small problems..

Unbridled mortgage lending to parties unable to repay..

CDS OTC markets way out of control.. no netting.. no confirms..

Piles of off balance sheet liabilities..conduit fever..

Credit raters on drugs..

Leverage higher than Petronas Tower..

Fed does have a big window and a big checkbook..

But that will not stability make..

Comment by Illinois... - August 6, 2008 at 3:06 pm

Mr. Hanna though I know this may sound stupid, I gotta ask (love free advice), what is the problem? Is it a lack of a free floating rate which encourages risky behavior?

Comment by Kafka - August 6, 2008 at 4:27 pm

I thought Corrigan was the intrepid central NY banker. If he did not realize the degree to which, on his watch, investment banks/hedge funds had marginalized their balance sheets over the last ten years (way to go MBA combines), then I truly tremble for our futures..have these guys no cohones..admit they screwed up..simple. The US as an arbitor of financial markets has been compromised by deceit at all levels.

Comment by WHODA THOT - August 6, 2008 at 4:48 pm

If the government had acted to counterbalance we wouldn’t be in this mess.

The problem is that everybody loves a bull market and the regulators and policy makers are too stupid to see the future cost of their current policies.

Comment by Anonymous - August 6, 2008 at 5:39 pm

Carrigan is right : the FED is the only one that can make a difference from having such a mess again. But no difference will be made if he thinks that today’s regulatory structure works. This structure is based in fundamentalist economics: markets are self regulated and savvy bureaucrats are to make this happen.

Comment by Comment by Disappointed - August 6, 2008 at 7:20 pm

Kafka, if you are still around, one of the few good things the Fed does is provide us with flow of funds data. Check out the time series on what happened to dealer balance sheets when the Fed moved to announcing targest in the early 90s. They moved from being off and on net funders with repos to heavily funding bigger balance sheets with repos. You basically know your overnight costs with the targeted rate, so build a balance sheet to trade mortgages. You can sell T-bills forward to hedge against rate increases as meetings approach. The buyers of these repos were the rest of the world. (and guess what, asset positions in Treasuries became negative.)

Comment by Mark Hanna - August 6, 2008 at 7:34 pm

And without the Fed in the market at a fixed rate, overnight costs would have been more costly to hedge. Hence CDO risk premiums would have been higher.

Comment by Mark Hanna - August 6, 2008 at 7:37 pm

Mr. Hanna, thank you, I probably get 50% of what you are describing but now have something to ponder, never considered the Fed move in the early 90s as to how target rates were disseminated (from the previous more frequent and smaller changes approach) as having a material impact. It seems awful coincidental that the changes coincide with the beginning of substantial increases of M2 and M3.

Comment by Kafka - August 6, 2008 at 8:31 pm

I am concerned about those who continue to support President George W. Bush.

President Bush has increased the national debt to $9.5 trillion. This debt is serious, and even if surpluses are found, it will take years to reduce the debt. The debt will probably reach $11 trillion before we can begin to pay it down.

This debt requires us to borrow money from other governments such as China. The value of the dollar is falling because of the debt.

Each time taxes were reduced the debt has increased. First we must reduce the debt to reasonable levels, then cut taxes.

We have record oil and food prices, a housing crisis, an auto industry in trouble and a loss of jobs. There has been extreme mismanagement of the economy by President George W. Bush.

Comment by econ - August 6, 2008 at 8:34 pm

The Pres has taken a lot of heat, some of it deserved for domestic spending. But he kept us safe and stuck with our young men and women in Iraq. And now the plac has a chance.

Comment by Mark Hanna - August 6, 2008 at 9:54 pm

econ, you owe the government $148,000 dollars minimum. The money went to waste. it wasnt’ you choice of action, but you owe this large sum of cash buddy, so cough it up.

Comment by Independence what? - August 6, 2008 at 10:20 pm

Mark, how come he didn’t keep us safe and protected from the federal reserve and the banks which combined created the subprime mess?

Comment by Independence what? - August 6, 2008 at 10:24 pm

Mark Hanna-Kafka understood 50% of what you said. I picked up 25%, which is an accomplishment for me, an English major in college.

What is your background regarding this knowledge-more academic or more practical?

Do you trade t-notes or other debt instruments?

Comment by Numbskull - August 6, 2008 at 10:46 pm

Re: Financial Crisis Toughest in Post War Period. Mr Corrigan; (1)In case you didn’t notice the U.S. is still at war and (2)As far as bubbles being hard to identify in advance, your firm Goldman Sachs has a reputation for making the markets in buubles.

Comment by Ex-Apostle of the $USD - August 6, 2008 at 10:58 pm

Numbskull, I was probably lying about the 50% but dude is pretty bright and I know he likes Friedman whom I idolize though I know that aint cool anymore.

Comment by Kafka - August 6, 2008 at 11:09 pm

sorry, by lying about 50%, I mean much less (not more).

Comment by kafka - August 6, 2008 at 11:11 pm

banking cartel.. old news but probably the only way a financial system can survive in such a dishonest climate.

Comment by Jae Canada - August 6, 2008 at 11:44 pm