Marketplace Scratch Pad

Tied up in knots

Scott Jagow Aug 11, 2009

Guess who is hiring? The Federal Reserve Bank of New York. It’s looking for a few good Wall Streeters to conduct some business for the Fed. Yes, I’m serious.

From The Financial Times:

The New York Fed – the arm of the US central bank that implements its monetary policy – plans to increase the staff in its markets group to 400 by the end of the year – up from 240 at the end of 2007.

The Fed, which says that most of its new recruits come from private sector financial firms, is hiring employees as many banks, rating agencies, hedge funds and private equity groups shed staff…

The Fed’s need for more traders is a direct consequence of the central bank’s efforts to keep credit flowing through the US economy. The Fed has been buying fixed-income securities at such a rate that its assets have more than doubled to $2,000bn in the past year, leading the central bank to conclude that it needs more people to monitor the markets and to manage its credit risks.

Let me see if I understand this. The NY Fed is planning to hire people who may have failed to manage risks at their banks to manage risks for the Fed, who is trying to make up for the fact that banks failed to manage their risks and for the fact that the Fed failed to notice the banks had failed to manage their risks.

Still with me? There’s more. One reason the Fed is hiring is that it has gone so far outside of its traditional duties that it needs “expertise” in those areas:

Patricia Mosser, senior adviser, said: “Once we started to have to implement programmes that were clearly outside the traditional credit-easing tools that the Fed has used before, it became illogical to manage some of the new programmes inside the current structure.”

She said many of the new programmes – ranging from first-ever purchases of mortgage-backed securities to lending money to hedge funds to buy securities backed by loans – “needed their own resources”.

And who else would the NY Fed call upon to be those resources but Wall Street? Check out this story from the Washington Post last month (emphasis mine):

…the bank is so close to Wall Street — physically, culturally and intellectually — that some economic experts worry that the New York Fed puts the interests of the financial industry ahead of those of ordinary Americans.

“The New York Fed sticks out as being not just very, very close to Wall Street, but to the most powerful people on Wall Street,” said Simon Johnson, an economist at MIT. “I worry that they pay too much deference to the expertise and presumed wisdom of a sector that screwed up massively.”

The image that comes to mind is two balls of string that are getting more and more tangled. It gets harder to see an exit strategy for the Fed when it seems to be “unwinding” things by tying more knots.

But perhaps, that is incorrect. Our New York Bureau Chief Amy Scott is doing a story on this for Marketplace tonight and one of her sources is Anil Kashyap. He’s a professor of economics and finance at the University of Chicago. He also sits on the New York Fed’s Economic Advisory Panel. Here’s what he says about the Fed hiring from Wall Street:

“If you’re gonna rule out anybody that’s worked at large financial institutions in the last ten years, you’re going to end up with a government that’s full of much less qualified people than I think we would want…

I don’t think so many of the people that were responsible for the problems are the kind of people the Fed would be hiring, or who would be looking to get a job at the Fed anyway.”

Kashyap says the Fed is looking for people to do some basic blocking and tackling. I still think it’s worth keeping an eye on.

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