This CFP blog post is the first in a series on Wall Street legend Henry Kaufman’s new book, Tectonic Shifts in Financial Markets (Palgrave Macmillan). Tectonic Shifts is the fourth book by Dr. Kaufman, who spent most of his career in senior management at Salomon Brothers overseeing the firm’s premier fixed income research organization.
Kaufman was an early Fed watcher, and has much to say about the central bank’s successes and foibles since the Second World War. “Ironically,” he observes, “the Federal Reserve has vaulted itself into a position of high prominence not because of its achievements but because of its shortcomings.” The Fed’s key blind spot was its failure to take proper account of dramatic structural changes in financial markets when formulating monetary policy – from the rise of spread banking, to burgeoning securitization, to financial concentration, to the rapid growth of off-balance-sheet transactions and debt, the latter growing at a much greater rate than GDP. Piecemeal financial deregulation (such as the seemingly innocuous phase-out of Regulation Q) left financial markets more vulnerable to crisis and in some ways less competitive.
The 2008 debacle only accelerated financial concentration, Kaufman laments. “As a consequence, monetary policy is increasingly guided by the actions of our financial markets. Large financial conglomerates that are now too-big-to-fail have become financial public utilities, but other institutions will be allowed to fail. That will further increase financial concentration and intensify political scrutiny of monetary policy.” And we should all be concerned about a politicized Federal Reserve.
David B. Sicilia is Henry Kaufman Associate Professor of Financial History and a CFP Academic Thought Leader.