New York Fed does the heavy lifting

NEW YORK: Nine years ago this June, the worst recession since the Great Depression, ended after the unprecedented collapse of home prices, America’s biggest bankruptcy, the highest unemployment rate in 25 years and a stock market that lost almost 50% of its value.

The US government was a driving force behind that recovery, especially through the Federal Reserve system. Then as now, there was one bank to rule them all: the Federal Reserve Bank of New York.

Among the 12 regional banks created by the Federal Reserve Act of 1913, the New York Fed has the unique responsibility of executing monetary policy, supervising and regulating financial institutions, and helping to maintain payments at home and abroad.

Immediately after Lehman Brothers filed for Chapter 11 bankruptcy protection on Sept 15, 2008, the mood was so uncertain that Mohamed A. El-Erian, then chief executive officer of Pimco, manager of the largest bond fund, asked his wife to “go to the ATM and take as much cash as she could”. El-Erian, who is now a Bloomberg Opinion columnist, explained: “I didn’t know whether there was a chance that banks might not open.” That’s where the New York Fed comes in.

Its controversial initiatives during the final quarter that year helped not only to reverse the largest-ever plunge in American gross domestic product, but also to foster the ensuing 108-month expansion that has all the signs of becoming the longest in US history.

It’s no accident that interest rates and inflation still are well below their combined level preceding every downturn since 1955 and that American companies, measured by their debt ratios, are the healthiest since such data was compiled by Bloomberg in 1995.

For the first time since its inception, the Fed masterminded the acquisition of myriad financial assets that were frozen after the Lehman default while keeping overnight borrowing costs at zero. This coincided with government interventions to prop up Bank of America and Citibank, insurer AIG, mortgage originators Fannie Mae and Freddie Mac, General Motors and Chrysler.

The Fed introduced “stress tests” for U.S. financial institutions in 2009, conceived by Treasury Secretary Timothy Geithner, a former New York Fed president, to show how much capital the 19 largest banks needed to survive an economic debacle.

Determined to invigorate the economy with greater access to credit, the New York Fed embraced large-scale asset purchases known as quantitative easing, which became the template for rescuing Europe from recession.

During the aftermath of the financial crisis, the New York Fed evolved into a more transparent agent of the public, reducing the scope of conflicts of interest and other risks addressed by the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act.

All of these policies enabled the current expansion to have longer legs and fewer obstacles than the record 19912001 boom when Bill Clinton occupied the White House. At this point in the previous economic cycle, the Fed was a month away from completing six interest-rate increases to 6.5%, when inflation was 1.66% and dozens of dot-com companies perceived as a financial bubble were crashing.

Since 2015, the Fed has raised interest rates six times to 1.75%. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Chain Type Price Index, hovers at an annualized 1.9%. At the same time, the big and small companies included in the Russell 3000 index show their net debt to EBITDA ratio – or total debt minus cash divided by earnings before interest, taxes, depreciation and amortisation – diminished to the lowest on record in 2015. — Bloomberg