Do world stock markets believe Congress is just offering
up some Halloween excitement?
Last week, they responded to the government shutdown
in the United States and the possibility the U.S. might default on its debt for
the first time ever with the bravado of teenagers standing in line for a
haunted house. Markets around the globe finished the week higher with some
notable exceptions that included Chinese and Mexican markets and America’s
NASDAQ.
It’s also possible market performance could be
attributed to the lack of economic data available since the government shutdown.
Even private economic indicators sometimes rely on federal government
information to calculate their numbers, so markets may be weighting signs that
America’s elected officials are making progress more heavily than they might if
other data were accessible.
The positive progress in U.S. stock markets is particularly
interesting since a lot of Americans – many of whom may be investors – have negative
feelings about the fiscal policy impasse in Washington, according to a new NBC
News/Wall Street Journal poll. Sixty percent of Americans polled said “if they
had the chance to vote to defeat and replace every single member of Congress,
including their own representative, they would.”
That may go a long way toward explaining the recent
deterioration of consumer sentiment in America. The Thomson Reuters/University
of Michigan's overall index on consumer sentiment declined for the third month
straight in October. The change was relatively small, but sentiment reached its
lowest level in nine months.
A Federal Reserve System primer… Last Wednesday, vice chair of the
Board of Governors of the Federal Reserve Janet Yellen was nominated to take
over as Chairman when Ben Bernanke steps down in January. If confirmed, she’ll
take the helm of the institution entrusted with safeguarding our country’s
monetary and financial system.
Congress
established the Federal Reserve System a century ago in response to the
financial panic of 1907. According to the Federal Reserve Bank of Boston:
“Financial panics and bank runs were all
too common during the 19th and early 20th centuries. Some
were more severe than others, but most followed the same general pattern. The
misfortunes of a prominent speculator would undermine public confidence in the
financial system. Panic stricken investors would then scramble to cut their
losses. And, because it wasn’t uncommon for speculators to double as bank
officials, worried depositors would rush to withdraw their money from any bank
associated with a troubled speculator. If a beleaguered bank couldn’t meet its
depositors’ demands for cash, panic would quickly spread to other banks.
(Remember! There was no federal deposit insurance until 1933. If a bank failed,
depositors had little hope of ever seeing their money again.)
The
panic of 1907 ended when J.P. Morgan intervened and set up emergency loans for
financial institutions. The clamor for reform led to the passage of the Federal
Reserve Act (which created the Federal Reserve System (Fed), which became law
in 1913.
Today,
the Fed includes a Board of Governors in Washington, D.C. and 12 Federal
Reserve Banks. The Board of Governors oversees the Fed. Its members are
appointed by the President of the United States and confirmed by the Senate.
They serve 14-year terms. The Reserve Banks are responsible for the Fed’s
day-to-day operations which include “conducting monetary policy, supervising
and regulating banks, and providing payment services all help maintain the
stability of the financial system.”
Monetary
policy is set by the Federal Open Market Committee (FOMC) which is composed of
12 voting members and includes the seven members of the Board of Governors and
a rotating group of five Reserve Bank presidents. The chairman of the Board of
Governors is also the chairman of the FOMC.
Weekly Focus – Think
About It
“The greatest thing in family life is to take a hint when a hint is intended – and not to take a hint when a hint isn't intended.”
--Robert Frost, American poet
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