WP: Modern (global) Markets Shatter Model Of Fed Chairman's Power

[DeepModem Mom]

Modern Markets Shatter Model Of Fed Chairman's Power
By Steven Pearlstein
Wednesday, October 26, 2005; Page D01


In all the hubbub over the appointment of Ben Bernanke to replace the irreplaceable Alan Greenspan, one inconvenient development has been ignored:

Thanks to the growing power of global financial markets, the job of Fed chairman ain't what it used to be.

For years, perhaps out of a primal need to believe that some wizard oversees the economic machine, everyone from Wall Street traders to Washington politicians to business editors has ignored that new reality.

Instead, they cling to the notion that the Federal Reserve chairman has a dial in his office that can control economic activity and inflation in the United States....The past 30 years, however, have not been kind to this Newtonian view of how the economy works. Periods of simultaneous high inflation and high unemployment (late '70s) or low inflation and low unemployment (late '90s) raised doubts about the trade-off of the Phillips curve. And the traditional link between money supply and the pace of economic growth began to break down. Structural economic changes -- globalization, deregulation, new technology and the shift from manufacturing to services -- have confounded the Fed's forecasts.

But perhaps the biggest change has been that big banks are no longer the main intermediary between savers and borrowers, pricing capital and channeling it to its highest and best use. Instead, complex new financial markets perform those functions more efficiently, using junk bonds and convertible debentures, collateralized debt obligations and other derivatives. A household is more likely to get a loan from a mortgage broker than from a savings bank. A growing company is as likely to get its capital from a private equity fund, mezzanine lender, venture capitalist or hedge fund as from a commercial bank. And the source of all this capital is as likely to be the central bank of China as a rich retiree in Palm Beach....


http://www.washingtonpost.com/wp-dyn/content/article/2005/10/25/AR2005102501809.html?sub=AR