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The Fed: The Inside Story of How the World's Most Powerful Financial Institution Drives the Markets

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"In The Fed, Martin Mayer explains how the Fed works, how its world has changed, why all the old rules for Fed watchers are no longer operative, and what it is that investors must know to understand the Fed today. Mayer offers many behind-the-scenes stories from past and present Fed administrations, and he explains the overlooked significance of recent dramatic expansions in the Fed's powers and perks. Why does the Fed care about the difference between 30-year and 29-year bond yields? Why and how did the Fed join with its district banks in
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Overview

"In The Fed, Martin Mayer explains how the Fed works, how its world has changed, why all the old rules for Fed watchers are no longer operative, and what it is that investors must know to understand the Fed today. Mayer offers many behind-the-scenes stories from past and present Fed administrations, and he explains the overlooked significance of recent dramatic expansions in the Fed's powers and perks. Why does the Fed care about the difference between 30-year and 29-year bond yields? Why and how did the Fed join with its district banks in organizing the bailout of Long Term Capital Management? How was the age-old war between the Fed and the Comptroller of the Currency finally resolved in 1999? Why has the increased "sunshine" of announcing market interventions and posting proceedings of the Federal Open Market Committee not led to greater market stability? Why did Greenspan make the key decision of the Clinton boom years - to let the good times roll while unemployment sank to record lows - despite all historical evidence that it would be inflationary?"--BOOK JACKET.
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Editorial Reviews

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Nearly everyone knows that the Federal Reserve System and its vaunted chairman Alan Greenspan have decisive force in the American, and indeed, the world economy. Few people, however, know that in the last decade or so, its role has changed; that the Fed has had to reinvent itself to remain a potent institution. Martin Mayer, the author of the bestselling The Bankers, offers a comprehensive and very comprehensible study of the New Fed in the new world order.
Diana B. Henriques
Mayer, as usual, knows what he's doing. And what he's doing is splashing some cold common sense on the investing public's hysterical certainty that Greenspan really could rescue the world, if only he would.
New York Times Book Review
Kirkus Reviews
A somewhat dense, albeit informative, history and overview of the Federal Reserve System and its impact on the global economy. Alan Greenspan, chairman of the Federal Reserve Board, has sheparded the US economy through the longest period of sustained growth in the nation's history. Financial columnist (and Wall Street Journal contributor) Mayer's analysis of the Greenspan era includes a history of the early stages of central banking in Europe and the US, highlighting the often-bitter struggles that took place between bankers and regulators for control of the central banks. Although this story has been told many times before, the author provides some new insights into the bureaucratic rivalries that have resulted in the Fed's independence and extraordinary economic and corporate power. These rivalries have also, on occasion, given rise to near-comical financial transactions—such as a standoff that took place between the Federal Reserve and the Treasury in the early 1950s, resulting in the issuance of government bonds that were immediately purchased in toto by Fed officials who had opposed the issue. Mayer is a sharp observer, and he offers some blunt commentary on many of the players involved (referring to John Snyder, former Treasury Secretary under Truman, as a "total lightweight"), as well as an in-depth look at the differences in the development of American and European central banking systems. He offers a pretty thorough portrait of the Fed's current role in the financial marketplace, describing the Fed's wire system and supervisory functions (and sometimes losing the reader in an alphabet soup of government-agency acronyms). Anecdotal illustrations showing the Fed at its bestand worst (such as its intervention in the markets following the 1987 crash and the failed supervision in 1998 of Long Term Capital Management) add some light and air to a fairly heavy work. An in-depth (sometimes excruciatingly so) financial history of a complex organization.
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Product Details

  • ISBN-13: 9780452283411
  • Publisher: Penguin Group (USA)
  • Publication date: 6/25/2002
  • Edition description: Reprint
  • Pages: 352
  • Product dimensions: 5.38 (w) x 8.00 (h) x 0.85 (d)

Table of Contents

Preface
Pt. 1 Magic Tricks 1
Ch. 1 The Magician on the World Stage 3
Ch. 2 The Magician at Home 28
Pt. 2 Central Banks 53
Ch. 3 What Is a Central Bank? 55
Ch. 4 The Question of Independence 80
Pt. 3 Avoiding Catastrophe 99
Ch. 5 The System and Its Risks 101
Ch. 6 The American Lender of Last Resort 120
Pt. 4 Making Money 141
Ch. 7 The Age of Invention 143
Ch. 8 Monetary Policy in the Maelstrom 164
Ch. 9 Disaster Time 181
Ch. 10 Greenspan and the Markets 205
Ch. 11 Internationally 226
Pt. 5 The Day Jobs 245
Ch. 12 The Payments Franchise 247
Ch. 13 Supervisions 264
Ch. 14 The Fed and the Poor 285
Pt. 6 What's Next? 299
Ch. 15 The Fed in Our Future 301
Notes 323
Index 339
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First Chapter

Chapter 1: The Magician on the World Stage

Since the last great universal crisis of 1867 many profound changes have taken place. The colossal extension of the means of transportation and communication -- seagoing steamers, railroads, electric telegraphs, the Suez Canal -- have made the real world market a fact...Infinitely greater and varied fields have been opened in all parts of the world for the investment of superfluous European capitals, so that it is far more distributed, and local overspeculation may be more easily overcome. By means of these things, the old breeding grounds of crises and opportunities for the growth of crises have been eliminated or strongly reduced.

-- Friedrich Engels (1894)

As the millennium turns, central banks are in apotheosis. Never has their prestige, their authority, or their independence -- indeed, their mystique -- been greater. But the appearances are deceptive. The volcano rumbles under Olympus and fissures are visible on the slopes. The unprecedented volatility in the markets -- stock markets, bond markets, foreign exchange markets -- demonstrates that instead of settling down, the postmodern financial system is acting up. Central banking in the twentieth century, especially as practiced by the Federal Reserve System in the United States, is one of the great stories in economic history, and no one can understand the present policy dilemma worldwide (the need, as former Treasury Secretary Robert Rubin put it, for a new financial architecture) without understanding that story. In a world where tiny changes in interest rates canproduce rapid and vast change in the prices of financial instruments and the viability of national economic policies, the decisions the central banks must make are exquisitely important. They had better know what they're doing. We had better know what they're doing.

The touchstone has to be October 1998. It very nearly all came apart in October 1998.


As they do in two of every three years, bankers and central bankers, financiers and finance ministers came to Washington by the thousands in the first week of October 1998 for the annual meetings of the International Monetary Fund and the World Bank. It turned out to be an experience they will never forget as long as they live, a weekend of pure terror, as though an asteroid were descending on Earth, much worse than the riotous and riotously publicized protests at the smaller Interim Committee meeting eighteen months later. David Komansky, CEO of Merrill Lynch, the prototype of the jolly fat man, said that he woke up on Saturday morning an optimist, and that night he wanted to crawl under the bed to hide.

This was far from a normal experience at the Bank/Fund meetings, which have usually been a kind of reward for their participants, divided by age. Seniors enjoy their importance in various caucuses formed for self-congratulation and finger-pointing at others outside the caucus. They eat and drink the very best, decorously, at parties in venues like the Corcoran Gallery and the Folger Library. Juniors, drafted during the day to provide an audience for the big shots at the plenary sessions in the enormous ballroom of the Sheraton Park Hotel near the National Zoo, party vigorously late into the night at the expense of various publications and suppliers to the finance community. All the 182 countries that belong to the Bank and the Fund are represented, usually by both finance minister and central bank chairman (all expenses paid by the Bank or the Fund), and all the world's two hundred largest banks are there (at their own expense), sometimes with delegations of thirty and forty people.

Not much work is required. Some of the pleasantries in the corridors will turn into deals, and everybody's Rolodex grows larger. But the closing communiqués are in large part ritual, and where in fact real decisions must be made, the terms if not the details are arranged before the first limousine takes the first delegate from Dulles Airport to his or her hotel. "The deputies" have already met, in Paris or Tokyo or Rome, and written the draft of the communiqué, which will be presented in Washington to selected representatives of the outliers of globalism, noblesse oblige, before the public meetings begin on Monday. If disagreements persist, they are resolved on Saturday, when the finance ministers of the seven big financial powers (the list includes Canada, but not China or Russia) meet as a group.

The official meetings are only part of the show. Perhaps the most important side event is a Monday morning conference sponsored by the Group of Thirty, a think tank established in the late 1970s with help from the Rockefeller Foundation. The anointed Thirty in 1998 included active executives of the Bank for International Settlements in Basle, the Banque de France, the European Central Bank, the Bank of England, and the Bank of Israel, plus former chief executives of the Federal Reserve, the Bank of Japan, Danmarks Nationalbank, the International Monetary Fund, and the Federal Reserve Bank of New York; half a dozen academics; and present or recently retired senior executives of Citibank, Dresdner Bank, Deutsche Bank, Goldman, Sachs, Industrial Bank of Japan, Merrill Lynch, J. P. Morgan, and Morgan Stanley. When the Bank/Fund meeting is in Washington, the Group of Thirty affair occurs at the Pan-American Union or in the top-floor meeting room of the Federal Reserve's Martin Building.

Beneath the practiced mallet of Paul Volcker, a former Fed chairman, the conference proceeds in an orderly fashion for three hours through presentations by a dozen speakers (it always, miraculously, ends on time). Private bankers, finance ministers, and central bankers -- since 1987, the list has always included Federal Reserve chairman Alan Greenspan, early in the proceedings -- present their views on the world's financial situation and respond to a few questions from the audience. In 1998, the usual list of the great and the good -- the finance minister of Italy, the chairman of the Bank of Japan, a senior executive from Deutsche Bank, and so on -- was supplemented by George Soros, who had just lost $2 billion in Russia.

But for once the context of the meeting had been set not by its own eminent speakers but at another meeting two days before, when Deutsche Bank, the largest by some margin of the German banks, presented the report of its Global Markets Group. Volcker also chaired this meeting, which was held in the downstairs ballroom of the Omni Hotel near the Sheraton. Each member of the audience was presented with an 83-page large-format coated-paper pamphlet on Global Emerging Markets, tastefully illustrated on the cover with a drawing of the Titanic sinking in an iceberg field and a bunch of lifeboats seeking to escape. Next to the illustration was the sentence: "The real problems lie below the waterline."

Lumping together the five nations devastated by the Asian financial crisis, the Deutsche Bank researchers concluded that "While it is difficult to argue that governments are insolvent...under most scenarios, the ability of the government to service its debt in the short run is questionable." Turning attention to Russia, the German bank's experts argue that "there is a very high risk that Russia will not be able or willing to repay its foreign debt" -- ever. Latin America might have a chance because most countries had large enough reserves to ride out a long storm, but "failing to stay on course might have very costly and lasting consequences." And the main speaker in the Latin American part of the program, Professor Guillermo Calvo of the University of Maryland, thought it would be wisest to abandon hope. Then David Folkerts-Landau, "Global Head" of Emerging Markets Research, formerly director of capit

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  • Anonymous

    Posted September 10, 2002

    Packed with Knowledge!

    This intricate history of the U.S. Federal Reserve Bank contains many surprising revelations about the hidden world of our central bankers, and one that might not come as much of a shock: The people calling the shots are probably no brighter than you. This simple observation is the take-away moral of Martin Mayer¿s hefty book, which pulls the curtain aside to provide a fascinating, if sometimes rambling, glimpse into the world of the U.S. Fed. We from getAbstract heartily recommend this substantive work to anyone interested in learning how the U.S. economy really functions. (Postscript: Kudos to Mr. Mayer for pointing out a couple of years ago that the positive trends we enjoyed under the Greenspan heyday could indeed reverse.)

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