Fed’s Soup Kitchen Becomes Magnet for Lobbyists: Caroline Baum

Commentary by Caroline Baum

June 18 (Bloomberg) -- Maybe it’s a sign of the times, or a manifestation of bailout fatigue, that news of lobbyists descending on the Federal Reserve creates little reaction and no outrage.

“Executives and lobbyists now flock to the Fed, providing elaborate presentations on why their niche industry should be eligible for Fed financing or easier lending terms,” writes the New York Times’s Edmund Andrews in a June 13 article.

When I read that, I felt a pang in my stomach. It’s my gut that warns me when something’s “not right.”

Traditionally the Fed was credit neutral. It bought or sold U.S. Treasury securities when it wanted to adjust interest rates or the size of its balance sheet.

Once the Fed got into the credit business, providing financing for selected assets and essentially picking winners and losers, it was only a matter of time before interested parties wanted to sit down for a chat.

“The minute you start to engage yourself in the business of buying different kinds of assets, it opens up the opportunity for various potentially affected groups to apply for those subsidies,” says Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. and a former research director at the Atlanta Fed.

Andrews goes on to describe how Hertz, the rental car company, enlisted lawyer Stuart Eizenstat, a veteran of the Carter and Clinton administrations, to provide “elaborate presentations on why their niche industry should be eligible for Fed financing or easier lending terms.”

K Street Invasion

I can just picture K Street’s three-piece suits descending on 20th Street and Constitution Avenue, NW, the home of the Federal Reserve Board, armed with facts, statistics and pre- written legislation.

Wouldn’t it be simpler, not to mention more transparent, to hold a street fair, with tables set up for specific industries? That way, lobbyists could stop by, drop a card in the fish bowl -- entering them in the drawing for a free weekend at Harrah’s - - network with their peers and perhaps speak with a Fed “specialist” about his industry’s particular concerns and needs?

It’s one thing to seek feedback on new rules and regulations. Most federal government agencies are guided by the Administrative Procedure Act, which provides for a period of public comment. (Nothing there about a private audience.)

It’s another thing for the central bank to receive lobbyists. While the practice arose in response to the Term Asset-Backed Securities Loan Facility (TALF), it is something that the Fed should dispense with as soon as possible.

Borrower Outreach

The TALF was created to increase credit availability to consumers and small businesses. The idea was to make loans to investors for the purchase of AAA-rated asset-backed securities. The market for ABS had shut down last year, and the Fed wanted to encourage banks to make more credit-card, auto and student loans. Creating an incentive for investors to buy them seemed like the best way to get credit flowing.

The Fed announced the creation of TALF in November, but it didn’t make its debut until March because of legal hurdles and gun-shy investors, who were afraid their participation would subject them to the long arm of government.

What’s more, the Fed was moving into new territory and needed an education in order to understand and manage risk. Hence, the outreach to various industries interested in being included in the program.

To be sure, this isn’t the first time the Fed has gotten feedback from interested parties. When the central bank decided in 2003 to impose a penalty for borrowing at the discount window, setting the rate above that on interbank loans, it received feedback from depository institutions.

‘Soup Kitchen’

There’s something different, even unseemly, about mobile- home manufacturers, equipment makers and car dealers lining up at the Fed with cup in hand. These, and other types of collateralized loans, are now TALF-eligible, along with commercial and residential mortgage-backed securities.

Perhaps it was inevitable that getting into the credit business would subject the Fed to all the political trappings. After all, if you hand out subsidies, people will come, Eisenbeis says. “This is the soup kitchen.”

If the public perceives the Fed as propping up various industries instead of ministering to the economy at large, the central bank may lose some of its hard-won credibility. And that would be a bad thing with the Fed doubling the size of its balance sheet in the fourth quarter of last year.

The Fed wants to make sure inflation expectations remain anchored. Unfortunately, most of the increase in long-term Treasury yields this year has been in inflation expectations, not real rates. The boat appears to be dragging its anchor.

Reputation Risk

Fed officials can’t be happy to read that a couple of hedge funds are raising money to bet on a resurgence of inflation, even hyper-inflation. They’re well aware that their credit policy and flirtation with lobbyists may undermine their credibility and affect their ability to conduct old-fashioned monetary policy.

I suspect Fed chief Ben Bernanke has even less interest in financing Center City Motors’ floorplan loans, which car dealers use to carry their inventory, than President Barack Obama has in running General Motors.

Now, if Kobe Bryant were to request special consideration for his securitized future endorsements, the hoops-shooting President and Fed chief might be interested.