The plan hands vast new authority to the Federal Reserve...The proposals would, for the first time, create a set of federal regulators with authority over all players in the financial system, be they banks, insurance companies or other entities like hedge funds and private equity funds, which now operate virtually without regulation. But that authority would be limited...
![[Thorp and Goss]](http://s.wsj.net/public/resources/images/OB-BE500_it_tho_20080321135439.gif)
NY Times reports main street consumers start to feel the pinch.
Are we soon to see more regulations on banks, especially on investment banks? Paul Krugman thinks no regulation on "shandow banking system" is the reason why we got here today. He compared today's financial crisis with the Great Depression in 1930s. But aren't those regulated banks also in trouble? Can regulation solve the problem?
(click to enlarge)
The jump was larger than our expectation (+7.8%), as food prices surged 23.3%, steeper than our projection of 20.5% and contributing 90% of the month's inflation. Following the snowstorms, fresh vegetable prices jumped 46% YoY in February (+13.7% in January and +8.9% in 2007), while the supply of meat and poultry (+45.3% in February versus +41.2% in January and +31.5% in 2007) remained tight, especially that for pork (+63.4% in February versus +58.8% in January and +48.3% in 2007).In the non-food categories, there was a noticeable increase in utilities (+6.5% in February versus +5.5% in January and +3% in 2007), but other items showed stable trends. The Lunar New Year effect eased on items such as intercity transport (+4.2% in February versus +6% in January) and travel (+1.8% versus +5.1%) services, bringing overall service inflation to 2%, down from 2.6% in January.
But I would nevertheless caution that we need to be open to the possibility that no matter how low the Fed brings its target rate, it may not arrest the unfolding financial disaster. Unless the intention is to go all the way with enough inflation to avert the defaults, that means we need an exit strategy-- some point at which we all admit that further monetary stimulus is doing nothing more than generating inflation, and at which point we acknowledge that the goal for monetary policy is no longer the heroic objective of making bad loans become good, but instead the more modest but also more attainable objective of making sure that fluctuations in the purchasing power of a dollar are not themselves a separate destabilizing influence.
California's Soeveign Wealth Fund
Deputy Treasury Secretary Robert Kimmitt recently spelled out a few policy principles for sovereign wealth funds (SWFs), the most important of which was this: "Invest commercially, not politically." Mr. Kimmitt's concern is that "governments could conceivably employ large pools of capital in noncommercially driven ways that are politically sensitive."
Anyone interested in evidence of such behavior needn't look beyond America's borders. If California were a national economy, it would be the eighth largest in the world. And its Public Employees' Retirement System, Calpers, with $259 billion in assets, would rank fifth among the world's SWFs. Combine it with the $169 billion California State Teachers' Retirement System (Calstrs), and California runs the second largest SWF in the world, just behind the United Arab Emirates.
Calpers is a political entity in every sense of the word. Its board is comprised of four members of the state political hierarchy, two appointees of the governor, one appointee of the legislature and six elected members -- all six of whom have long ties to organized labor, including the board president, Rob Feckner, who is also executive vice president of the California Labor Federation. Calpers's investment policies are politically driven, often dictated by the legislature, and even involve foreign policy goals.
Gov. Arnold Schwarzenegger tried to tame the behemoth in 2005 by forcing public employees to join a defined-contribution pension plan. But he was driven into retreat by strong union opposition, and last October he joined the effort to politicize investments by signing legislation to force Calpers and Calstrs to divest about $3.4 billion in stock of companies that do business in Iran.
A Calpers spokesman estimated the likely divestment transaction costs to fundholders to be about $17.8 million. In total, investment politics have cost fundholders vastly more in recent years. Restrictions on the investments Calpers can make in developing countries have cost the fund approximately $410 million, according to a staff memo issued last year. That's equal to 2.6 percentage points in returns. The staff has long bristled at political interference, but their concerns are perhaps better viewed as economic interference with the state's foreign policy agenda.
Developing-country investment restrictions based on political factors and labor practices began in earnest in 2002 under the direction of then-state treasurer and Calpers board member Phil Angelides. These quickly put 14 of 27 such countries examined by Calpers off limits. When the Philippines was proposed for exclusion in 2004, its stock market and currency plunged. Spurred into action by the Philippine ambassador and heeding a call from Sacramento priests, six busloads of Filipino-Americans besieged a Calpers investment meeting, forcing officials into an embarrassing volte face. Mr. Angelides nonetheless called for Calpers to increase "positive pressure" on foreign governments. "It would be a mistake to walk away from an activist policy," he said.
When looking for the results of "positive pressure" exerted by Calpers's board, it is best to look close to home. In 2006, the Los Angeles Times revealed that individuals associated with three U.S. venture-capital firms donated money to the Democratic gubernatorial campaign of Steve Westly, who as state controller and Calpers board member had helped the firms land multi-million-dollar investments from the fund. A 2002 New York Times piece raised similar concerns about Calpers investment beneficiaries who donated tens of thousands of dollars to the election campaigns of Mr. Angelides and former Gov. Gray Davis.
The fund touts "good corporate governance." But the actual investments it trumpets typically relate to labor and environmental practices, not shareholder concerns.
In February, Calpers's chief investment officer, Russell Read, highlighted the California Initiative Program, which directs capital to "companies that employ workers who live in disadvantaged areas," and a new $2.5 billion investment program for environmentally friendly forest projects. Mr. Read justified the program by stating that "investing in forests is an important move to guard against inflation." At least someone is holding the Federal Reserve to account.
California's newest political target is, interestingly, sovereign wealth funds. A bill pending in the state assembly would restrict Calpers and Calstrs from investing in private-equity firms, or in any funds managed by such firms, if they are owned in whole or in part by SWFs. The assembly is clearly concerned that other governments will use their investments to pursue political agendas. Now, where could they have gotten that idea?
Here's one way that such a program might work: The federal government would lend each participant 20% of that individual's current mortgage, with a 15-year payback period and an adjustable interest rate based on what the government pays on two-year Treasury debt (now just 1.6%). The loan proceeds would immediately reduce the borrower's primary mortgage, cutting interest and principal payments by 20%. Participation in the program would be voluntary and participants could prepay the government loan at any time.
Nonfarm payroll employment edged down in February (-63,000), and the unemployment rate was essentially unchanged at 4.8 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment fell in manufacturing, construction, and retail trade. Job growth continued in health care and in food services.
(click to enlarge, courtesy CR)
![[Chart]](http://s.wsj.net/public/resources/images/MI-AP321_CMBS_20080302205614.gif)
