Mayer on The Fed

["Ian Murray" <seamus2001@xxxxxxxx>]

[From the NYT]
June 17, 2001
Pitiful, Helpless Giant
Martin Mayer says the Federal Reserve is in for a lot of trouble.
By DIANA B. HENRIQUES

THE FED
The Inside Story of How the World's Most Powerful Financial
Institution Drives the Markets.
By Martin Mayer.
368 pp. New York:
The Free Press. $27.50.


Back before booze was largely banned from America's newsrooms,
grizzled old city editors would prop their scuffed brogans on their
desks and ruminate about the staffers they'd want on duty to cover the
end of the world. One noticed, as young reporters do, that the
Doomsday Team almost never included a financial reporter.

Is it too late to nominate Martin Mayer? It's not just that the man
has covered -- and written books about -- almost every near-Doomsday
experience in the financial world over the past 50 years. And it's not
just that he almost invariably brings something fresh and provocative
to the conventional wisdom about those various apocalyptic events. No,
the real reason you want Mayer on your team for that last big roundup
is that he has perfect pitch for such events -- an eye for the weird
majesty of destruction, a vocabulary well stocked with superlatives, a
tone exactly balanced between horror and grandeur.

But why on earth has this Baedeker of the business boneyard -- the
author of ''Nightmare on Wall Street,'' about the way a Salomon
Brothers trader finagled the Treasury market, and ''The Greatest-Ever
Bank Robbery,'' about the savings and loan quagmire -- written ''The
Fed''? The Federal Reserve System is just about the only American
institution that has managed to emerge from the late unlamented 20th
century with its reputation not only intact but enhanced. No hint of
scandal or disaster there, surely? And with all due respect, isn't the
world already pretty adequately supplied with books about the
enigmatic Alan Greenspan and his masterly orchestration of the global
economy?

Never mind. Mayer, as usual, knows what he's doing. And what he's
doing is splashing some cold common sense on the investing public's
hysterical certainty that Greenspan really could rescue the world, if
only he would.

Mayer argues that Greenspan probably has less control over the engines
of credit than any Fed chairman in history -- simply because banks,
whose cost of funds the Fed can influence, have lost their primacy as
suppliers of credit to American business. They have been largely
supplanted by the financial markets, which have a will of their own
when it comes to the cost of borrowed money.

And what it takes to influence the financial markets these days, in
Mayer's shrewd estimation, is a little magic and a lot of sunshine. He
gives Greenspan a round of applause for the ''prestidigitation'' that
helped calm global markets after Russia defaulted on its debt in
August 1998. He also gives Greenspan credit for realizing that the
Fed's obsessive secrecy about its interest-rate deliberations could
not survive in the Information Age.

But Mayer asks some serious, long overdue questions about whether the
culture and internal architecture of the Federal Reserve System can
successfully handle the new role the institution was given by Congress
in 1999. When it officially repealed the Depression-era law that
barred banks from the securities industry, Congress designated the Fed
as the ''umbrella supervisor'' of the ''financial holding companies''
that make up most of the American financial services industry. In the
arm-wrestling of official Washington, it was a breathtaking triumph
for the Fed, and it came as most other nations were actually
diminishing the regulatory role of their central banks, Mayer points
out.

''Four days after the legislation was signed by the president,'' he
observes acidly, ''Greenspan made a speech to the American Council of
Life Insurers, saying in effect that he was now their umbrella
regulator, and, in the immortal words of Washington mayor Marion Barry
to the white middle class that had voted overwhelmingly against him,
they had better get over it.''

Mayer's honed analysis of the legislation that handed the Fed its
regulatory umbrella is unsettling, to say the least. He points out,
for example, that the new law gives the Fed the power to ask the
Securities and Exchange Commission to set aside any securities
regulation ''that the Fed does not wish to see enforced'' against one
of the financial holding companies it regulates. If the S.E.C.
persists, the Fed can take the agency to court.

''The Truth-in-Lending Act of 1969 gave the Fed the authority to write
regulations, and left enforcement of those regulations divided among
nine other agencies,'' Mayer says with a distinct testiness. ''But at
least it didn't encourage agencies of the U.S. government to sue each
other.''

What kind of über-regulator is the Fed likely to be? Mayer's
assessment makes one pause for a moment of silent prayer. After he
argues persuasively that the Fed's new role will demand flexibility,
transparency and innovation, he portrays an institution that is
instinctively inflexible, secretive to the bone and biased steeply
toward the status quo.

The Fed, he claims, has resisted the development of a truly efficient
national electronic payments system. (Well, this being Martin Mayer,
what he actually accuses the Fed of is ''sabotage.'') Most
explosively, he insists that the Fed's rescue of Long Term Capital
Management, the giant hedge fund that nearly collapsed in September
1998, was intended not to prevent a domino-effect market panic but to
conceal ''the sloppy performance'' of the fund's overly generous
bankers and the ''careless, trusting supervision'' of those banks by
their regulator: the Fed itself.

Like any icy shower, this book requires willpower. It is untidy and
sometimes infuriatingly arcane, almost runic, in its complexity. The
uncompromising Mayer makes few allowances for amateurs; if you can't
keep up with him, it's your problem, not his. Chapter 7, ''The Age of
Invention,'' is well-nigh indigestible, and even the sprightliest
chapters contain chunks of gristle that require a lot of chewing.

But it's worth it. Other, more accessible writers have exhaustively
explored Alan Greenspan's past. Mayer instead explores how well the
chairman has prepared the Fed for the future. You may not agree with
his conclusions, but he is certainly asking the right questions.