If I had five minutes to question the top US monetary policy official, I don't think I would ask about Moroccan Pottery or whether US treasury securities are performing assets. I guess that means I won't serving in the Congress, . Such were some of the highlights of Bernanke's two day affair before Senate and House committees.
The gist of Mr. Bernanke's testimony can be summarized as the following. Conservatives who for the most part have a weak grasp of monetary economics bashed the Fed's recent easing actions, presumably because the Heritage Foundation told them they're supposed to hate QE. Then most members asked about the effect of the sequester. Bernanke responded in what seemed like a thousand iterations that short term growth depends on the volume of spending in the economy, including spending by government, and long term growth comes from investments in human talent, industrial capital, and infrastructure by both government but mainly the private sector. The obvious solution is to seek to slowly phase in spending cuts to protect the fragile recovery, while simultaneously pursuing longterm entitlement and other fiscal reforms to stabilize the country's public finances in the out years. It was like he was reading from an Econ 101 textbook. I wonder if it has occurred to Mr. Bernanke to simply send along a copy of the latest edition of his own pedagogical tome to each Congressman who demanded that Bernanke submit written answers to their tired, over-wrought inquiries.
Alas, public self aggrandizement had bipartisan support. The newly elected Senator from Massachusetts, Elizabeth Warren, got testy with Bernanke over the 'subsidy' granted to big banks because they enjoy cheaper borrowing rates on the short term funding market. An IMF paper claims that large institutions pay up to 40 basis points less for very short term funding, a discount attributable only to implicit government guarantees. The term subsidy is a misnomer, since the market is providing the discount, not the taxpayer. Furthermore, it is quite debatable if the discount is attributable to a special 'too big to fail' status of some banks. Most interbank lending still takes place in the context of established relationships between institutions that go back years, rather than through an exchange or an intermediary. Small banks are also a rule have much more liquid cash on their balance sheets as a result of week loan demand, so they might not have the sophistication to seek the best rate when they do need short term financing. Finally, for small banks which may only need to borrow several million dollars overnight, the economic incentive for managers to seek the best rate is minuscule. For example, saving 10 basis points on a 1 million dollars overnight amounts to a paltry $2.74. Therefore, it is unlikely that CFOs of small banks expend much effort to seek the best rates. Finally, it must be noted that one of the Fed's biggest achievements in the past four years has been the stabilization of short term interbank lending markets in the wake of the 2008-09 crisis. In sum, this whole thing looks like just more chest thumping by Ms. Warren as she continues to brandish her bank-bashing bonofides which started her political career in the first place.
Chairman Bernanke for his part impressively maintained his composure, respectfully yet forthrightly responding to the plethora of mostly irrelevant questions, the majority of which brought up as ways for individual members of Congress to grandstand in front of their respective constituencies. However, Mr. Bernanke at times appear to let show a bit of exasperation, at times appearing with a strain look on is face and placing his index and middle fingers on his temple. At the end of the hearing, after an aggressive line of questioning from Sean 'The Real World' Duffy (R-WI), the Chairman could not contain a few chuckles.
On FX, the reaction was largely mute, with EUR edging higher on a few bright signals out of Europe. The USD consolidated its gains against so-called risk-assets following the recent bout of risk aversion. The Yen also held its recent gains. MXN was only big mover, falling to nearly 12.90 to the greenback only to surge 1000 pips on hawkish comments from deputy governor Manuel Sanchez of Banco de México. One USD bought 12.77 MXN as of 7:28 PM GMT.
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