Yellen's Fed Thumbs Nose at Congress

Wednesday, 30 Jul 2014 06:55 AM

By Patrick Watson

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This week’s Federal Reserve policy meeting marks Janet Yellen’s first six months in the hot seat. What has she accomplished, beyond further inflating Ben Bernanke’s asset bubble?

Answer: not much.

Keeping the cash flowing was always set to be Yellen’s main job. The banks installed Stanley Fischer as Fed vice chair to make sure she didn’t forget – and she hasn’t. QE3 will likely wind down this fall but no one expects significant tightening afterward.

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Monetary policy gets more attention but is only part of the Federal Reserve’s job. Yellen is also the nation’s top bank regulator. The Federal Reserve Act gives her that responsibility and the 2010 Dodd-Frank financial reform law gave her more.

Specifically, Dodd-Frank requires the Federal Reserve to make sure no bank is “Too Big to Fail.” Institutions deemed “systemically” important must submit a “Living Will” document outlining how they would unwind their obligations in a crisis.

The subject came up in Yellen’s semiannual congressional testimony earlier this month. Senator Elizabeth Warren, D-MA, found Yellen’s answers far from sufficient.

Warren asked Yellen if she was satisfied at JPMorgan Chase’s (JPM) resolution plan, pointing out that JPM now has four times more assets than Lehman Brothers did at the time of its 2008 bankruptcy.

Here’s a trivia question for you. How many subsidiaries does JPM have? You might guess a few dozen. Wrong; the correct answer is 3,391. JPMorgan has more subsidiaries than Canada has banks.

How does a bank with 3,391 subsidiary entities collapse in an “orderly fashion,” like the Dodd-Frank Act says it should? I don’t know. Yellen doesn’t know, either.

Unlike me, knowing the answer is part of Yellen’s job.

Congress specifically ordered the Federal Reserve to determine if these plans were credible and, if necessary, make banks sell off assets and shrink if they could not plausibly explain how they would resolve their affairs in a crisis.

You have to see the video of their exchange to grasp how clueless Yellen looked. Yellen should have known the question was coming; Warren is a fierce critic of Wall Street and has never been shy about it.

Nonetheless, the best Yellen could muster was a feeble, “I understood this to be an iterative process.” The Fed is waiting for “feedback” from JPM and other big banks… four years after Dodd-Frank went into effect.

This tells us three important facts.

  • First, our top banks are still “Too Big to Fail.” They will demand another bailout in the next crisis.
  • Second, the Federal Reserve has zero interest in actually enforcing the law or ending the TBTF regime.
  • Third, the big banks own Congress. Yellen can thumb her nose at Warren and get away with it.

The bubble will eventually burst. They always do. What will happen then?

Banks are already using cybersecurity to justify a minor bailout, but that will be small potatoes compared to the cost of saving JPMorgan and its 3,391 subsidiaries.

Since we know this will happen, each bank should have a plan to deal with it. Dodd-Frank has its flaws but it is correct on that point. Yet Yellen is still waiting for feedback.

She’ll get her feedback… when the bubble pops.

Editor's Note:
Seniors Scoop Up Unclaimed $20,500 Checks? (See if You qualify)

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