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What I Would Do as Fed Chairman

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First, admit the Fed's mistakes.

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Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.


What I would do as Federal Reserve Chief --
As an outsider with no ties to Congress, a political party, or to any member of the FOMC Board of Governors, my first step is to admit the Fed mistakes and raise the federal funds rate to 3%. I want to support the dollar, flatten the yield curve, and preemptively cut the risk of inflation.

I want to give Americans on Main Street higher interest rates on savings and money markets. I have always opined that in the US a federal funds rate below 3% was never a prudent monetary policy choice. This might finally provide an incentive for increased consumer spending.

I'd immediately begin to slowly unwind quantitative easing measures by allowing GSE mortgages and debt to mature, and not buy additional such securities. End it now, not the end of March.

I'd establish a single Discount Rate at 1% for commercial banks and primary dealers to provide liquidity when a financial institution faces stress. I'd disclose the names of the firms using the Discount Window and why. This would set up the mechanism to help unwind "too big to fail" financial institutions.

I'd give expanded oversight authority to the Open Market Trading Desk at the NY Fed. The Federal Reserve traders are the eyes and ears of the primary dealer community and should be able to judge the performance of their trading partners by their conduct of business with the Fed. I'd re-instate face-to-face meetings between the Desk and the dealers on a monthly basis to review balance-sheet risks and mark-to-market issues. I want to be ahead of monetary policy changes, not react to conditions in hindsight.

The Jobless Rate Rose in 43 States in December -- Forty-three states reported higher unemployment rates in December, which to me is a resounding warning that the US economy lacks traction. With 600,000 leaving the work force in December the unemployment rate is worse than reported.

Barney Frank, a champion of Fannie Mae (FNM) and Freddie Mac (FRE), now wants to abolish them. As readers know, I favored the liquidation of Fannie and Freddie months before the US Treasury took them over in Conservatorship. I suggested beefing up the government-backed Ginnie Mae mortgage program, while gradually liquidating Fannie and Freddie debt and mortgages. Instead, US taxpayers are on the hook for $111 billion and counting and will be covering all GSE losses through 2012, leaving a lifeline that could be double the current $400 billion.

By expanding the role of Fannie and Freddie the implicit guarantee has become explicit, making all GSE mortgages and debt the obligations of the US government and hence taxpayers. Wall Street and investors would have been on the hook under liquidation, not taxpayers on Main Street. It was Wall Street who sold GSE debt and mortgages to global investors stating that they were government-backed, when they weren't. Exotic mortgage-backed securities and related derivatives spread around the world were described and endorsed by Fed Chair Alan Greenspan as the way to spread the risk.

Because of Wall Street greed US citizens will be backing $5.5 trillion in GSE mortgages, and nearly $2 trillion in GSE debt. This must be added to the more than proposed $14 trillion US debt ceiling.

The large regional banks have hidden bad loans


BB&T Corp (BBT) charged off $517 million bad loans, up 10.5% from the third quarter, and nonperforming assets increased 7%. BB&T increased reserves for losses by nearly $200 million to $725 million. BB&T is slightly overexposed to C&D loans with a stuffed pipeline at 87.3%.

Huntington Bancshares (HBAN) described economic outlook as uncertain and fragile. They set aside $894 million for its loan-loss reserve, up 88% from the third quarter. Huntington Bancshares is overexposed to C&D loans with a stuffed pipeline at 81.1%.

SunTrust Banks (STI) described its results as continuing to be affected by recessionary pressures evidenced by soft revenue and weak loan demand from both consumer and commercial borrowers. The bank is hard hit by home equity and mortgage lending exposures in the struggling housing market, particularly in Florida. Net charge-offs declined 18.7% to $820.5 million and loan loss provisions declined $217 million to $973.7 million. Noncurrent loans totaled $5.4 billion. SunTrust Banks isn't overexposed to C&D or CRE loans but its portfolio of $8.75 billion in C&D loans are 82.9% funded, which is a sign of stress.

Send me your comments and questions to Rsuttmeier@Gmail.com.
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No positions in stocks mentioned.

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