Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America

The author spent several years working inside the Dallas Federal Reserve Bank, bringing her Wall Street experience to a bunch of academics. Often it was unwelcome, but she developed a good relationship with Richard Fisher, a member of the Fed’s Board of Governors. She left the bank when he retired, and now is entering the financial pundit scene with some serious street cred. She now has this book and gets a speaking fee of $30,000. She has hit several conservative radio/TV shows and podcasts. I find her writing style interesting and easy to listen to, and her stories about the inside of the Fed are fascinating. The book is worth a read, and she is an entertaining interview (her blog seems a bit forced and no longer offered for free). Where I was disappointed was in the book’s aftertaste. I did not sense a solution. It felt like the Republicans under Obama; fully willing to say what he was doing wrong but without any of their own solutions. I hope that she runs for office at some point and comes prepared with ideas to improve the situation.This is a book of stories and contrasts. On the one hand is the academic bureaucracy of the Federal Reserve system, where someone without a PhD is treated with pity but no one thinks to seasonally adjust data. The view presented of academic economists is not pretty, but also not surprising. Since I make jokes about the Wall Street guys over-relying on the current price rather than intrinsic value, and DDB seems impressed by Warren Buffett, it would be useful to have a companion or follow-up book try to pick the best of each group and design a valuation system for regulators that was better than the current one driven by groupthink. This could be a first step along that path. If not, savers (pensions, insurers, retirees) will crash and burn. Central banks have manipulated rates down to create liquidity, but banks won’t issue loans and the velocity of money continues to hit new lows. Systemic risk is high. Contrarian viewpoints are needed and in short supply. Bankers are unable (and unwilling) to self-regulate successfully. Culture drives results.Last year I wrote a research report on systemic risk. Regulatory capture is a big problem in finance, especially with banks and the turnstile between them and the Fed/Treasury. This makes regulators less likely to probe banks, looking instead at peripheral groups like private equity firms and hedge funds. Regulators need to add contrarian opinions to their process, bringing in experts from other fields. When I hear that a bank like JP Morgan has 5,000 people in their risk management area, and then they miss the London Whale, it makes me wonder what they are all doing. Risk is driven by culture, and if certain groups are allowed to do whatever they want with no questions asked it will not end well.DDB describes the San Francisco bank, led by Janet Yellen (who left Harvard after not receiving tenure), as the Keynesian Fed, and the St. Louis Fed as where monetarists rule. As an aside, the St. Louis Fed has the best data sets for financial topics anywhere. Other banks classified were New York as the Wall Street Fed and Dallas as the free market Fed. I wonder if that will survive Richard Fisher’s term in Dallas. It is important to have each of these groups represented, but where has any effort been expended to get them to interact? It seems like each bank’s own board would be a good source of alternative thoughts, but that does not appear to happen either.The room is full of people to blame for the financial crisis of 2008, and this book is consistent with my prior understanding. While Dodd-Frank is often presented as the savior, Barney Frank was a big part of the problem too (especially in letting Fannie and Freddie run amok). The Bush administration (and Clinton before that) had both blame and at times tried to lower the risks from growing. While politicians were meeting with lobbyists, Zoltan Pozsar wrote The Rise and Fall of the Shadow Banking System, calling out the overleveraged and under-regulated shadow banking system and eventually (surprisingly) getting a job offer from the NY Fed. Using the rules-based Basel I Accord and regulatory arbitrage, credit risk transfer instruments were able to net risk while ignoring liquidity, leverage, and moral hazard. This is where instruments like credit default swaps and overnight loans were created. Today firms use alternative asset classes to reach for yield, and I believe the risks are not well understood by the buyers. A new word introduced in this book for me is rehypothecated, where collateral is used more than once. It’s likely a key in the next crisis. I’ll be looking to learn more about it in the meantime. Regulation keeps the last problem from reoccurring but often directs the market to create the next problem.A hundred years from now there will be books that may be able to determine the incentives of all the players, including AIG and Treasury. Certainly the biggest banks ended up bigger and with larger moats.While his earlier paper was predictive, in 2010 Pozsar wrote a paper detailing the interconnections between various financial subsidiaries. The lack of transparency was addressed in Dodd-Frank through the Office of Financial Research. This group does some really good work and I fear it will be torn apart in a wave of deregulation.A story I had not heard before was about the origin of the Jackson Hole annual conference. Each August since 1982 economists, bankers, and other noteworthy attendees discuss the current state of the economy. The location was chosen to entice Fed Chairman Paul Volcker to attend, as he enjoyed fly fishing. It worked! Raghuram Rajan, currently at Chicago Booth but previously Governor of the Reserve Bank of India and chief economist at the IMF, in 2005 presented a controversial paper at the conference (Greenspan’s last) expressing concern about tail risk driven by a transformation of banking that made the world riskier. He expressed concern about compensation and products like credit default swaps (CDS) that allowed banks to double down on certain risks that were not transparent. No one would know where the exposures were. While he was correct, the reception to his paper was anything but cordial.I write and tweet about Berkshire Hathaway more than any other company, so it was interesting to hear her comment about investment bankers who sell investments that would fail every fiduciary test if it was applied to them. She notes that their bonuses are often invested in municipal bonds and BRK stock. Does this show a correlation with Buffett’s disdain for most investment bankers?I don’t have a good reason for including this quote, but I really like it. It’s from an Arctic weather station. “Theory is when you understand everything, but nothing works. Practice is when everything works, but nobody understands why. At this station, theory and practice are united, so nothing works, and nobody understands why.”DDB does make some recommendations for the Fed system, from realigning office locations to reflect today’s economy to my favorite, allowing a mix of backgrounds to work in the research department of the Fed branches. If you want alternative thoughts to appear, everyone can’t be Ivy League trained and from the east coast.A couple of years ago I suggested a research project where regional offices would contribute to a federal Chief Risk Officer for the US. DDB notes that various states had success post crisis but that the Fed did nothing to spread good ideas to other regions. I worry that we have not cleared the system and that the next time will be worse since debt has reached new highs at a time when demographic trends are working against OECD growth. Politicians will blame the Fed, but the responsibility is theirs. Abdication does not absolve you from responsibility. Being a person who allows someone to abdicate does not make the Fed any better. There is a balance needed between regulation and markets, and I see no signs of them working together in a reasonable way. A generation where credit risk was free has not helped. Creative destruction only works if those responsible lose their jobs and their wealth. Otherwise financiers reap the rewards and the public pays the price.I wish Mrs. Dimartino Booth well as she enters the group of pundits who appear for sound bites on CNBC and are well compensated for newsletters. Hopefully she will continue to share proactive solutions and not always talk Republican talking points as she seems to be doing so far. If so, she will be worth listening to.

When a Fed insider, somebody with nine years of service at the permanently dissenting Dallas Fed, decides to blow the whistle on the most contentious (and perhaps even the most independent) branch of government, you drop what you’re doing and you read what they have to say.I was dying to hear Danielle DiMartino Booth’s inside view on how an organization like the Fed balances its often opposing roles of monitoring the economy versus cheerleading, the inside view of how the sundry presidents coordinate with each other, the inside view on what the staff is told to research and how the results of the research are released, the inside view on how the Fed is adjusting its famous (and famously inadequate) models to the changing environment around it, the inside view on the unofficial role the value of the dollar plays in the calculation of interest rate policy (the dollar is allegedly the business of the Treasury, but how can it only be that?), the inside view of what responsibility the Fed has to other nations that effectively peg their currency to the dollar, the inside view on how the Fed calculates the pros and cons of zero interest rates for savers versus businesses, the inside view on the discussion that is surely taking place regarding whether it is the level of QE purchases or the pace of new purchases that influences the economy more (Bernanke is on record saying it’s the level, but that’s just his view), the inside view of how it will be best to go about unwinding QE, the inside view of the debate that must be raging on when and how this process ought to start, the inside view on the true level of labor slack, the insider view on labor hysteresis (a Yellen special), the inside view on what the wealth effects of low rates are, who they accrete to and how they trickle down.Away from the technical, I was also hoping that the book might probe the more political / more philosophical issues: Why did the Fed shift from the “taking away the punchbowl” mode to “money for nothing” mode at the historical juncture when it did? Greenspan was a man of his time, surely, not a shaper of opinion. When did the Fed become an underwriter of prosperity rather than a guarantor of the system’s integrity? Is the above ever discussed in the inner sanctum?Well, I’ve finished the book and I’m none the wiser about any of the above.This account alternates between telling the personal story of the author’s career at the Fed, providing an actually rather decent narrative of how the crisis of 2006-2009 unfolded (which would be fine if this was not the tenth such book I’ve bought), complaining that Goldman Sachs has infiltrated the Fed like it’s done all other important parts of government (watch out: the Germans have invaded Poland, I’m told) and moaning about the insularity of the Fed’s staff, all of whom hold a PhD in Economics from MIT, Harvard, Stanford, Yale or Chicago (memo to the author: their problem with you is that 1. for all your three degrees, you are uneducated and for example think Pandora came out of the box, as you say on page 40 / economically uneducated and think the delays to the official data come from seasonalisation, which is instant, not that you don’t have a PhD and 2. Unlike your boss Fisher, geeks often do not realize that the uneducated can have valid views).Away from the author’s, at times interesting and touching, personal story, there is ABSOLUTELY NOTHING here that you could not have found in the newspaper, I’m afraid. Except perhaps for stuff that I could not possibly care about. Dunno, for example Dallas represents the 11th district and San Francisco the 12th. Or where the checks get processed, where the bullion is kept and where the cash is kept. I’ve already forgotten, because I could not care less, but that stuff actually can be found in the book. Along with the fact that the Fed did not see the crisis coming. Duh.If you were abducted by aliens in 2006 and they just released you and for some reason you want to find out about the financial crisis of 2006 – 2009 this book is as good a book as any other book out there and probably better in some respects, because the author has some great credibility in the “I told you so” department: she did see the crisis coming and she wrote about it, first in the press and then in her internal reports in the Fed. Buy it, read it and you’ll have a decent idea about how it went.But it truly does not contain a single original finding.In the absence of original thoughts, the book would still be worth buying if the author had listed all her gripes with the Fed clearly in one place. A well-drafted chapter on all the failings of the Fed, written by somebody with the authority that can only come from having been on the inside, would have been dynamite. You won’t find one here, I’m afraid. The sundry issues the author has with the Fed are diffused through the story and only ever summarized (kind of) in the… introduction.In short, this book does not build an argument. It’s a long moan, with some history thrown in.I pretty much agree the author’s views on most of the issues, so I find that to be a total shame.

This book does two things relatively well:1. Presents a nice chronicle of the Global Financial Crisis and (more particularly since there are fewer books on it) its aftermath;2. Gives up some useful insights into the inner workings of the Federal Reserve from the perspective of a Regional Fed as opposed to the Washington Fed (the latter being where just about all Fed books I know of have emanated from).The book is non-technical but still interesting if you already know your way around economics and/or the Fed.The author's dislike for Fed Chairs Greenspan, Bernanke & Yellen is palpable throughout the book. Such obvious feelings can sometimes be a nuisance in books like this (aka I was right and they were always wrong), but it isn't too much of a problem here.I thought a couple of times before buying this book: would there really be anything new in it given all the other Fed-related books out there these days? But it is worth it.

This book should is a must read for anyone interested in economics. It will make the reader angry that monetary policy in the US has been hijacked by a cabal of neo-Keynesians who are addicted to lose money and QE as an answer to all economic ills Such is the misguided certainty in the correctness of their own theories they, and the Fed staffers that surround them, bulldoze, bully and ridicule all opposition that tries to point out that their policies are ruinous.In the wake of one of the biggest credit bubble in history bursting, the economic recovery since 2008 has been weakest on record. What do the policy makers expect as the household sector de-levers itself?! This is exactly what happened in Japan after their late 1980's mega credit bubble. Their misguided monetary interventions have done nothing except elevate asset valuations to nose-bleed levels, ready to collapse at some point.The unusual monetary intervention that should have occurred is not the QE that has tried to reflate this soufflé, but much more rapid tightening during the 2002-2007 period. John Taylor (of the Taylor rule for Fed Funds), has lambasted the Greenspan/Bernake Fed for allowing a credit bubble to get out of control on their watch. Yet Bernake in 2012 commissioned the Fed to do a study of what they could of done differently to prevent the 2007/8 Financial crisis. Their answer? Nothing!! Apparently excessively easy money during the period was down to Chinese capital flows. I call that dissembling. Others would just call it lies. Remember Time Magazine declared Bernanke person of the year! This is a man who apparently was the best person to have as chair of the Fed during the crisis because he was an "expert" on the 1930s Great Depression. Yet no-where in his thesis was there an explanation for the role of the 1920s credit bubble that laid the seed for the 1929 inflation of stock market valuations and economic bubble and the subsequent crash.And so it was in the run-up to the 2007/8 Finacial Crisis and so it is now, with the current money printer in chief, Janet Yellen totally ignorant that she and her loose money policies have created another massive credit bubble (this time in the corporate sector and recently highlighted by the IMF), which will cause another economic collapse just like 2007/8. She didn't see the last crisis coming and she can't see this one coming.After the next economic collapse is again laid at the Fed's door, I do not expect they will retain their independence, nor should they.Yellen, Bernanke and Greensoan and their idealogical supporters are, in my opinion, economic zealots who have seized controls of the levers of monetary power and cannot be ousted.Please buy and read this excellent, well written book. You will then understand Danielle's and like minded economists utter disbelief and frustration at what has happened. You will also get a taster of the next crisis that is surely heading our way. You will be angry. And you should be angry.Albert Edwards

I have read many books on the Global Financial Crisis (GFC) and many more on past financial crises. Danielle's book approached the topic from a different view; as a person inside the Fed. Though much of the details about the GFC have been well-covered in other books, this book shows you what went on inside the Fed as events unfolded.Danielle describes how the Fed suffers from Groupthink, which to me was an eye-opener. Fed governors and staff are so pressured into thinking and saying and agreeing to the same things that they become afraid to speak out against a majority consensus. This is what has gotten the Fed in trouble in the past. I believe that Groupthink is deeply entrenched in the ECB and other central banks as well.Danielle writes about her experience on Wall Street from 1996 before joining the Fed to her role while at the Fed beginning in 2006. She gives details and backgrounds on several members of the Fed, which to me was a first time read. I found it very interesting and insightful, especially the background of Richard Fisher. With few exceptions, such as Fisher, Groupthink dominates the Fed. One reason for Groupthink, which should be alarming, is due the vast number of academics in leadership positions at the Fed... Bernanke and Yellen are just a few. How could academics who have no experience in running a financial institution be put in charge of regulating them and controlling the country's money supply?The book goes on to detail events at the Fed during the Long-Term Capital Management (LTCM) crisis in 1998 and how unprepared the Fed was at dealing with such a case. It was the first time the Fed had to deal with a derivatives blow-up. The rise of derivatives caught the Fed with its pants down. Danielle mentions some of the key players during this time such as Robert Rubin and Larry Summers. However, I wished she had given more background on them as she did with Fed officials. Summers was a key player during the Clinton Administration at ensuring derivatives remained unregulated and was an active advocate for the repeal of the Glass-Steagall Act. Both of these are directly attributed to the mess we find ourselves in today.Several chapters of the book are dedicated to the GFC, which gives the reader more reasons why the Fed must change.Overall, it's a must read for those following financial crises or for those interested in learning why a growing number of people are calling for "an end to the Fed" or "audit the Fed."

entertaining book to read

Powerfully written. Couldn't put it down. Incredible insider's view of the Fed's myopic , out of touch with reality view of the economy. Danielle reveals the incredible internal pressure to conform with the group think ( love the group stink phrase ) within the entire Fed. 1,000 economic PH'Ds on board , and the Fed. did not see the housing melt down coming.Yellen is exposed as one who would not see a crisis coming if she was sitting on a broken Levee in New Orleans during Katrina.( my analogy ). Serious reform ( unfortunately highly unlikely ) of the Fed's culture is required if they are going tobe successful in their regulatory role and anticipate/prevent/manage the next financial disaster. With Yellen in charge America will never return to normal interest rates and un-do the economic distortions ZIRP creates.