Friday, June 27, 2008

End of Exceptionalism

Der Spiegel, in "The Shrinking Influence of the US Federal Reserve," (hat tip reader Saboor) discusses how the US is submitting to a detailed, comprehensive investigation of it financial system under the Financial Sector Assessment Program.

While Der Spiegel claims that this program is a humiliation to the US, the real significance may be that this is another blow to American exceptionism. While the exam is far-reaching, which means intrusive, Canada, the UK, Italy, indeed 2/3 of the IMF members have participated in the program. However, the Bush Administration has resisted it strongly, and agreed only on the condition that it be completed after a new President is at the helm.

One has to wonder whether a president less dismissive of international organizations would have been this high-handed. The FSAP was created in 1999; it's unlikely its sponsors, the IMF and the World Bank, would have wanted to road test a new program on a large, complex financial system like America's. Thus it is unlikely any request would have been made under the Clinton Administration. However, there could well have been predecessor exams that went under different names, so this practice may be long-standing.

Similarly, a very quick check on Google raises some questions. Canada proudly announced in February 2008 that it was the first G-7 member to participate in the FSAP. Yet an FSAP report on the UK is dated 2003. Perhaps there are targeted and more comprehensive versions of the exam. If so, there may indeed be more to the politics of this than meets the eye.

From Der Spiegel:

No Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing.
This is partly down to circumstances,,,

After years of growth, the United States is now on the brink of a recession, one that is more likely to be deepened than softened by a tight money policy...

Some of Bernanke's personal adversaries are also contributing significantly to his current humiliation. In the past, the chairman of the Federal Reserve was a pope among the priests of the financial elite. But unlike his predecessor Alan Greenspan, Bernanke is finding that his policies are not universally accepted, even within the Fed.

The last seven decisions reached by the Federal Open Market Committee, which sets monetary policy, were accompanied by a growing number of dissenting votes. Bernanke's critics say that with his policy of cheap money -- in other words, recurring rate reductions -- he in fact helped fuel the inflation problem he is now trying to combat....

Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.

As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests -- worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar.

Under its bylaws, the IMF is charged with the supervision of the international monetary system. Roughly two-thirds of IMF members -- but never the United States -- have already endured this painful procedure.

For seven years, US President George W. Bush refused to allow the IMF to conduct its assessment. Even now, he has only given the IMF board his consent under one important condition. The review can begin in Bush's last year in office, but it may not be completed until he has left the White House. This is bad news for the Fed chairman.

When the final report on the risks of the US financial system is released in 2010 -- and it is likely to cause a stir internationally -- only one of the people in positions of responsiblity today will still be in office: Ben Bernanke

- from calculated risk/derspiegel


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