Chris Sits down with JP Morgan

April 17th, 2015

Join Chris tomorrow on Your Financial Editor as he talks with JP Morgan’s Vice President, Client Portfolio Manager, Phil Camporeale. They will be discussing the markets on a global level and the impacts that has on your wallet.




About Philip Camporeale:

Phil is a Client Portfolio Manager in the Global Multi-Asset Group based in New York, focusing on a variety of the group’s retail strategies. An employee since 2000, Philip was previously a member of the New York Fixed Income group before joining GMAG in 2011. Philip was responsible for developing duration and yield curve overlay strategies across approximately $7 billion in assets covering a wide range of investment mandates using cash, exchange traded futures, non-dollar and OTC derivative products using macro-economic variables. Philip was also the primary alpha portfolio manager for many of the firm’s Central Bank relationships, which invested in AAA rated Agency MBS, Agency debentures, CMBS, ABS and Supra/Sovereign debt. Philip has a B.S. in accounting and an M.B.A. in finance from Fordham University and holds a Series 3 license.


Ben Bernanke’s Latest Defense of the Fed’s Failures

April 17th, 2015

APRIL 13, 2015 


Fed officials have been busy lately spreading the view that incessantly low interest rates are symptomatic of a still-dim economic reality rather than a result of their own monetary experimentation. Indeed they are full of self-praise for not having been hasty to raise rates given the overwhelming evidence that the natural or neutral level is indeed very low. They even weep for the plight of the small saver.

But the tears are crocodile tears so long as the designers and implementers of the wildest monetary experiment in contemporary US history continue to deny in this way their lead role in creating the interest income famine. Ben Bernanke in his first blog piece for the Brookings Institution has joined the campaign to exonerate the Fed of any responsibility for the famine. This is an exercise in great deception.

Is This Time Different?

The ex-Fed chief claims that his “great monetary experiment” has been successful despite the non-appearance of strong economic expansion. Small savers suffering income famine right now is not due to monetary policy failure, we’re told, but is due to a harshness of the economic environment which has turned out to be greater than what anyone could imagine. Bernanke told a reporter at his first press conference (April 2011) that “this time would be different.”

What Bernanke meant then by “different” was that “this time” economic recovery would be vigorous due to his deploying “non-conventional” tools of monetary policy. This Fed-induced vigor would be in contrast to a history of US economic upturns following great recessions which are slow and fitful, he claimed.

Bernanke’s history lesson on that day has always been questionable in the light of 150 years of US evidencesuggesting that the reverse is generally true.

Now in the midst of the slowest ever economic expansion following the Great Recession, the ex-Fed chief boasts that his particular skill was to resist the premature calls to raise short-term rates from near zero, thus preventing a relapse of the US economy into recession.

Amazingly, Bernanke, the notorious advocate of using long-term rates as a policy instrument, now contends in his blog that the Fed’s power to influence real rates of return, especially long-term real rates, is transitory and limited. The weakness of these instruments, Bernanke tells us, has little to do with the Fed and much to do with the “Wicksellian interest rate” (which he defines as the real interest rate consistent with full employment of labor and capital, perhaps after some period of adjustment).

Hence the blame for retirees able to obtain only very low rates of return on those savings does not rest with the Fed. Bernanke rejects criticism that he threw seniors under the bus. Rather, he writes:

Indeed, if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak but recovering economy of the past few years, all the indications are that the equilibrium real interest rate has been exceptionally low, probably negative. A premature increase in interest rates engineered by the Fed would have likely led after a short time to an economic slowdown and consequently lower returns on capital investment. Ultimately the best way to improve the returns attainable by savers was to do what the Fed actually did: keep rates low (closer to the low equilibrium rate) so that the economy could recover and more quickly reach the point of producing healthier investment returns.

This view that the Fed is not responsible for interest income famine and that it has the small saver’s plight at heart could become the leading popular narrative unless the advocates of monetary stability mount a powerful retort. What should this include?

What Might Have Happened

First of all, Fed critics should point out that if the Fed has abandoned its relentless plan to gain 2 percent inflation, and instead allowed prices to fall, savers would have made real gains on their savings even though nominal interest rates would have remained low. In turn, expectations of price recovery further ahead would have stimulated spending both by consumers and businesses.

Nominal rates would have remained positive throughout the cycle. Cumulatively, small savers would have been ahead in real terms even though interest rates in real terms would have been negative during the early expansion phase.

Yield-Hungry Investors Turn to Speculation

But, that didn’t happen, and instead, the actual monetary policy of zero rates and inflaming inflation expectations strengthened irrational forces in the marketplace as investors frantic for yield pursued one speculative story after another. In particular they chased in those early years of the Great Monetary Experiment the story of emerging market economic miracles, and most of all, a China miracle. Linked to this were claims of an oil shortage and an insatiable demand for iron ore. Commodity extraction industries boomed. Carry trades into emerging market currencies ballooned and fed vast consumer credit and real estate booms across the emerging market world. The steep fall of speculative temperatures now occurring across those specific asset classes, the related severe slowdown in emerging markets (including China), and the downturn in commodity extraction industries explains the decline in Bernanke’s “Wicksellian interest rate.”

The Fed Caused Widespread Uncertainty

There’s more to the story, however. The second effect of Fed policy is the huge monetary uncertainty which the great experiment has created. Almost everyone and their dog realizes that the Fed has been deliberately creating asset-price inflation with a view to stimulating the economic upturn. They know also that there has been much speculative froth across a wide range of markets — not all at the same time but partly in sequence. They can think of the private equity bubble, the sky-high prices for junk bonds and European periphery sovereigns and most of all, the Wall Street equity boom. They realize that all this may very well end badly in another crash and recession. In turn, corporate decision-makers find that they satisfy their shareholders best by paying out huge amounts of cash (equity buy-backs and dividends) rather than investing in long-term risky projects whose payoffs may come in the feared recession. Thus the monetary uncertainty— including the likelihood of eventual crisis — enfeebles the investment activity in the economy (except in those highly leveraged areas where the cost savings on debt trump other concerns). The weak investment which, according to Bernanke and his fellow travelers, explains low real interest rates is actually a direct consequence of their policies.

Bernanke in his consulting work since leaving the Fed has made much of the weak investment spending and low productivity growth in the US and elsewhere, albeit in another recent blog post he takes issue with the “secular stagnation hypothesis.” Many Investors suffering from interest income famine have been firmer believers in this hypothesis to justify their search for yield in the long-maturity US Treasury bond market. Investors who have convinced themselves about secular stagnation in their bond market strategies are not inclined to embrace long-run economic optimism elsewhere. In fact their intuitive sense of a “day of reckoning” ahead becomes sharper. This is the third piece linking the great monetary experiment to weak economic outcomes: low interest rates and small-saver blight.

Image source: iStockphoto
Note: The views expressed on are not necessarily those of the Mises Institute.

5 Best States for Retirement

April 17th, 2015

You have saved and planned and are looking forward to retirement. And now comes the million-dollar question: Where should I retire? Deciding where to retire might be simple, but no location fits every dream.

According to a recent report, Wyoming is the best state for retirement. Bankrate ranked all 50 states based on cost of living, taxes, health-care quality, crime rate, well-being and climate.

“Deciding where to live in the golden years is still a very personal decision,” said research and statistics analyst Chris Kahn. “This list is meant to help inform, rather than choose a state for you. For example, if you want to retire on the beach and need top-notch health care, this can help narrow down your choices.”

These are the top 5 states to retire — and here’s why, according to Bankrate.

No. 1: Wyoming

  • Taxes: Wyoming is the lowest-taxing state in the country when you combine income, sales, property and other taxes.
  • Weather: Yes, the winters are frigid. But Wyoming also can boast better-than-average levels of sunshine. Cheyenne, for example, enjoys an average 68% of its maximum possible sunshine, according to government records from 1981 to 2010. That compares with a national average of 60%. Wyoming’s climate is relatively dry. Its humidity levels in the morning and afternoon are both below the national average at 67.8 and 45.5 percent.

No. 2: Colorado

  • Weather: Good weather isn’t only about the warmth. What Colorado lacks in heat, it makes up in low humidity (67.4% in the afternoon vs. a national average of 77.7%), and it’s very sunny. Pueblo, Colo. gets as much sun as Key West, Fla., and it’s actually sunnier than Honolulu or Miami.
  • Community pride/satisfaction: National surveys of individual wellness show that seniors (65 and older) in Colorado are exceptionally satisfied with their community. The surveys, sponsored by the Healthways well-being company, ask questions such as “are you satisfied or dissatisfied with the city or area where you live” and “did you smile or laugh a lot yesterday.” Given the responses, Colorado is ranked as the sixth best in the country when it comes to personal well-being.

No. 3: Utah

  • Health care: The federal Agency for Healthcare Research and Quality gives each state an annual scorecard on how well its health care system is operating. It tracks more than 150 different quality indicators in every state. This year, AHRQ says that Utah’s health care system is the seventh best in the country.
  • Weather: Just like other Rocky Mountain states, Utah makes up for its cold winters with mild summers, lots of sunshine and low humidity. Milford, Utah, for example, gets more sunshine than Tampa, Fla.

No. 4: Idaho

  • Crime: Idaho has the second-lowest crime rate in the country, just behind Vermont, with 217 violent crimes and 1,864 property crimes per 100,000 people recorded in 2013.
  • Cost of living: Idaho has the third-lowest cost of living in the U.S., ranking behind Mississippi and Tennessee.

No. 5: Virginia

  • Crime: Virginia has the fourth-lowest crime rate in the country, with 196 violent crimes and 2,066 property crimes per 100,000 people recorded in 2013.
  • Health care: Virginia’s health care system is among the best in the country.

Slow growth doesn’t have to be ‘the new normal’

March 13th, 2015

James K. Glassman
March 9, 2015 10:14 am | USA Today

Three reforms could reboot the U.S. economy.


Today’s employment report shows 1.3 million net new jobs were created in the past four months, and the jobless rate, at 5.5%, is the lowest in seven years. That’s good news, but we’re not out of the woods. Not by a long shot. The new jobs numbers do little to allay fears that the long-term pace of the U.S. economy has slowed significantly. To reverse that trend, we need major policy changes, and the most effective places to begin are corporate taxes, trade and immigration.

Gross domestic product is the single best indicator of economic health. Since 1947, GDP has risen at an average rate of 3.3%, but since 2001, the rate has been just 1.9%. The last time GDP grew more than 3% was 2005. We seem to be in the midst of a secular, or long-term, slowdown.

The reduced growth rate means that living standards are increasingat about half their post-World War II pace for individual Americans. For low- and middle-income families, that’s not much better than standing still.

Echoing a growing pessimism among economists that a “New Normal” of tepid growth is developing, Robert Gordon, a Northwestern University scholar, published a paper in 2012 titled, “Is Economic Growth Over?” Gordon wrote that it was time to ask “basic questions about the process of economic growth,” including, “the assumption, nearly universal since (Richard) Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever.”

One danger sign is the lack of a quick rebound from the 2007 to 2009 recession. Usually, sharp declines produce sharp recoveries, but not this time. For the 10 downturns since World War II, it took an average of a little less than two years for employment to get back to the level at the start of the recession. But for the most recent recession, it took six and a half years.

Home prices are still lower than they were 10 years ago, unemployment rates for African Americans are still in double-digits, and the labor force participation rate has hit its lowest point since 1978.

Republicans say that high spending in the wake of the recession plus the introduction of Obamacare and regulations stemming from the Dodd-Frank law have been a drag on the economy. Democrats say government has not spent enough to give the economy a real boost. But neither of those analyses explains why sluggish growth extends to the start of the century.

Gordon and other economists in the New Normal camp cite longer-term problems: mismatched demographics (too few workers supporting too many retirees), poor education and disappointing productivity gains from the information revolution. But is a secular decline in growth really inevitable? I don’t think so.

There are three simple actions that both parties can agree on now to enhance growth:

1. Bring U.S. corporate taxes in line with the rest of the world. At 39%, including state taxes, we have the highest marginal rate among all 34 countries in the Organization for Economic Cooperation and Development. The OECD average is 25%. High rates put our companies are at a competitive disadvantage, with less money left over for capital investments, and high rates discourage foreign firms from putting plants here.

Unlike practically every other nation, we have a worldwide corporate tax system, which means that companies based in the U.S. owe taxes both abroad and at home for their foreign profits. Those taxes come due when our companies bring their profits back to the U.S.; as a result, they have a huge incentive to keep money abroad.

The answer is to cut the rate to 25%, the level of Canada and the Netherlands, and go to the more common territorial system, which would bring profits home. Short-term fixes, like a specially reduced rate if companies repatriate their earnings for a year or two, won’t change long-term behavior. Lower rates and an end to the worldwide system will.

2. Immigration involves another kind of global competition: for the best and brightest workers and entrepreneurs. Our current system discourages smart foreigners who have been educated in the United States from staying here to start or join businesses — to the benefit of the economic growth.

Again, the fix is relatively easy — end the limits on visas for skilled workers, such as the H1-B visas for skilled foreign professionals, currently capped at just 65,000 per year plus another 20,000 for graduates of U.S. universities with advanced degrees. That’s less than 10% of total immigration each year and less than one-tenth of 1% of total U.S. jobs.

3. The third element of a bipartisan growth agenda is an expansion of trade. Broader and deeper trade relations mean more exports for U.S. manufacturers and service providers and lower costs for consumers. After a lackluster record in its first six years, the Obama administration is getting close to deals with the European Union and a group of Pacific nations, including Japan, but Congress needs to give the president the same negotiating power it’s given his predecessors.

These are just three policy changes that can boost economic growth. Certainly, there are others with strong merit, including improving education, cutting the fat from the bureaucracy and encouraging greater contributions to retirement accounts.

The “New Normal” is not inevitable. But unless we make changes soon, we could face a sluggish economy for decades.

This article was found online at:

The Fed’s Effect on the Markets

March 6th, 2015



Source: PerTrac. Federal Reserve Bank of St. Louis. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Returns do not represent any actual investment. Past performance is no guarantee of future results. The illustrations are not intended to predict the performance of any specific investment or security. The unmanaged indices do not reflect fees and expenses and are not available for direct investment. For performance of the Hatteras Funds visit Correlation from December 28, 2005 to November 19, 2008 and November 26, 2008 to December 31, 2014.

Source: Hatteras Funds

Shelby Says He Will Seek Bipartisan Legislation Aimed at Fed

March 6th, 2015

The head of the powerful Senate Banking Committee signaled he wants to work with two Democratic critics of the Federal Reserve to fashion legislation aimed at the Fed after a hearing in which lawmakers of both parties attacked the central bank’s record.

“I do see some interests that might be put together hopefully in a legislative package,” Richard Shelby, Republican of Alabama, said Tuesday in a brief interview in Washington. “What we’re going to do is continue hearings and see what we can fashion or bring together.”

Continue reading the article here:

The 15 Happiest Economies in the World

March 6th, 2015

Feeling bummed about your economy? It’s time to pack your bags for Switzerland.

That’s one way to read the fate of 51 economies (including the euro area) this year, based on Bloomberg calculations of what’s known as the “misery index.” Inflation and unemployment, two factors that make consumers unhappy, are remarkably low in the 15 countries shown below, according to economists surveyed by Bloomberg News.

See the full article by Michelle Jamrisko here:

Co-Author of American Sniper will be joining me this Saturday on Your Financial Editor

March 6th, 2015

American Sniper

Co-Author of American Sniper Jim DeFelice will be joining me on Your Financial Editor this Saturday 2/14/2015. You can listen live from anywhere Saturday morning at 8am on AM 930 WFMD by logging on to and clicking the “listen live” button! If you can’t tune into the show, there will be a podcast available the week following the show here.

For those who are not familiar with this amazing story: From 1999 to 2009, U.S. Navy Seal Chris Kyle recorded the most career sniper kills in United States military history. His fellow American warriors, whom he protected with deadly precision from rooftops and stealth positions during the Iraq War, called him “The Legend”; meanwhile, the enemy feared him so much they named him al-Shaitan (“the devil”) and placed a bounty on his head. Kyle, who was tragically killed in 2013, writes honestly about the pain of war—including the deaths of two close SEAL teammates—and in moving first-person passages throughout, his wife, Taya, speaks openly about the strains of war on their family, as well as on Chris. Gripping and unforgettable, Kyle’s masterful account of his extraordinary battlefield experiences ranks as one of the great war memoirs of all time.

A work from Co-Author Jim Felice:

Jim Defelice

I was honored to attend the New York City premiere of the film “American Sniper” at Lincoln Center on Dec. 15th, 2014. It was an emotional evening. I thought Bradley Cooper did a fantastic job of portraying Chris Kyle, and Sienna Miller stole every scene she was in as Chris’s wife Taya. As Clint Eastwood said when he introduced the movie– this is an important story and I am happy and humble to have been a part of it.

The movie tie-in paperback of “American Sniper” (with Bradley Cooper on the cover) features wonderful stories from Taya Kyle about how much care the movie stars and crew took to get the details of their lives right for the screen. Screenwriter Jason Hall added his thoughts on writing the film.

The movie will be released on Christmas Day. And Chris Kyle’s legacy continues through his charity the Chris Kyle Frog Foundation, which works to help military families and veterans (at

More about Mr. DeFelice

Jim DeFelice is the author of over fifty books, including numerous best sellers and fourteen that have made the New York Times’ national best sellers list. He has written books for young adults and children as well as adult fiction and non-fiction.


In addition to books, DeFelice has worked on a number of video games as a writer and developer, most notably Ace Combat Assault Horizon and the forthcoming Afro Samurai: Revenge of the Bear.


Scott Mather Discusses PIMCO’s Total Return Strategy

February 19th, 2015

Bonds have continued to rally so far this year, even as the Federal Reserve contemplates raising interest rates. In the following interview, Scott Mather, CIO U.S. Core Strategies, discusses recent developments in the bond markets, the outlook for the year ahead and the investment implications for PIMCO’s Total Return Strategy. Mather co-manages the strategy with Mark Kiesel, CIO Global Credit, and Mihir Worah, CIO Real Return and Asset Allocation.

Q: Scott, you and the team took over the strategy at a challenging time, considering market volatility and client outflows, yet performance has generally been strong. Have you needed to make adjustments to how you manage the strategy in light of this backdrop?

A: The short answer is no. The important thing to recognize is that Total Return, as a high-quality core bond strategy, operates in some of the most liquid markets in the world. Whether there are inflows or outflows, every day we ensure that the strategy maintains the target exposures we have set for the portfolio in each fixed income sector. Flows are not a reason to change the way we manage the strategy.

Indeed, we are intensely focused on performance for our clients in Total Return, and flows have not been an issue in that regard. I think the generally strong performance across the strategy in the past few months proves that. We believe our performance reflects our time-tested investment process.

Q: Let’s turn to markets. Bonds have rallied since September, and long-term yields have fallen sharply. What’s been driving this move?

A: There are a number of factors drawing yields down in the U.S., including low yields outside of the country and the expansion of quantitative easing programs by the Bank of Japan (BOJ) and the European Central Bank (ECB). Those lower-yielding markets are exerting a gravitational pull on longer-dated Treasury yields.

Another factor is the market’s preoccupation – or maybe fixation – with the drop in energy prices and what that is doing to headline inflation. Unlike some market participants, we do not believe that the lower headline inflation stemming from energy prices might be an omen of a deflationary outcome for the U.S., or that it will push the Federal Reserve’s first interest rate rise out much further into the future. But those beliefs have undoubtedly pushed yields down.

Similarly, while some have pointed to isolated signs of weaker U.S. growth as a reason for lower yields, we do not think U.S. economic growth should have played a large part in the drop of long-term yields.

Q: Looking to the year ahead, what is PIMCO’s outlook for global growth and inflation?

A: In terms of the big picture, we think divergence will be an overarching market theme this year, within both developed and emerging markets. The big changes in commodity prices have created both winners and losers throughout emerging markets, and many will be wrestling with these changes. In the developed markets, we have the divergence between the U.S., which is shifting to a level of growth above potential, and most other developed markets, which are struggling just to reach their own, lower levels of potential growth. Finally, and not insignificantly, we have monetary policy divergence, with the ECB and BOJ on full throttle even as the Fed contemplates its first rate hike in this cycle.

For investors, the key is to take advantage of the divergences. It is going to be a riskier world in many ways, with higher levels of financial market volatility, but investors may be able to find opportunities in the market’s overshoots.

Q: Turning to the Federal Reserve, fed funds futures as of the end of January suggest investors expect only one rate hike this year and for rates to be only 1.5% by the end of 2017. That is a substantial lowering of expectations since September. Is the market too dovish on the Fed?

A: Yes, that appears to be the case; we think the market has overshot the mark in suggesting that the Fed will not move until the end of this year.

The Fed has been very clear that while the data and international developments matter in its decision-making, lower energy prices are positive for growth and should result in an improved labor market and wage growth. While the Fed would like to see faster wage growth and may thus be willing to allow the economy to “run a bit hot,” it is increasingly unwilling to keep rates at zero in the face of a strong economy and a labor market that will likely reach full employment levels in the second half of the year.

Leaving rates at zero would mean that monetary policy is getting more accommodative as slack disappears. This would raise the risk of a more urgent need to abruptly raise rates in the future, which is something the Fed should try to avoid. With respect to inflation, the Fed clearly looks through the energy-induced drop in headline inflation (even though the market appears reluctant to follow this commonsensical approach). The Fed knows that it is wages that ultimately matter most, and all indicators point to rising wage trends. Modest moves upward in interest rates are unlikely to alter the improving labor market and wage trends. Lastly, we do not think a move off of zero would damage economic growth prospects and such a move may actually help prolong and sustain the expansion. Zero percent rate policy is a distortion from equilibrium pricing with diminishing returns, and it increasingly represents a cost and risk to the economy rather than a stimulative benefit.

Monetary policy would remain extremely accommodative and supportive of growth with rates at levels below 2% (which we think is close to the New Neutral equilibrium rate), especially when one also considers the effect of the Fed’s still very large balance sheet, which undoubtedly will continue to ease monetary conditions well into the future. In addition, as foreign central banks ease policy, global financial conditions should also ease and thus allow the Fed to begin to normalize rates sooner than otherwise. So a move off of the “emergency policy rate” as early as this summer makes sense.

That said, given its desire to reflate the U.S. economy, the Fed is going to move at a slow pace and will make sure to continue to let the economy grow above potential and allow inflation to accelerate to target and perhaps beyond in the years ahead.

Q: Turning back to the Total Return Strategy, can you discuss the investment positioning in light of PIMCO’s macro outlook?

A: We have several investment strategies that we think will pay off in the year ahead.

First, we have moved our yield curve exposure out of what we think is the significantly overpriced front end and focused our exposure in seven- to 10-year maturities. Also, certain sectors are misvalued, in our view, including inflation-linked securities. In the TIPS market, for example, 10-year breakeven inflation has been priced as low as 1.5% recently, which reflects very low, and we think unrealistic, 10-year inflation expectations. Once oil prices have bottomed and headline inflation turns back up, we think the market will focus on TIPS as an underpriced asset class.

We also think the dollar is likely at the start of a long-lasting, upward trend, though it may experience volatility along the way. Not only did it rise from relatively cheap levels, but given continued divergences in the global economy, the dollar still has a significant tailwind.

By: Scott A. Mather

In general, more global divergence, more volatility and more overshoots will create great opportunities for active fixed income investors. But a good defense is required as monetary policy is likely to represent a headwind for all financial assets instead of the steady tailwind it has been for the past several years.

Q: With yields persistently low, how would you respond to investors who are wondering about the role of core bonds in their portfolios?

A: All financial assets, not just bonds, have seen their prices elevated over the past several years as a result of monetary policies around the world. Future returns have been pulled forward to today, and that means prospective returns on many financial instruments are going to be lower. Also, one should remember that interest rate rises will happen very gradually relative to history, and that the ultimate destination of equilibrium rates is going to be much lower than it has been at any other time in the past several decades.

Still, it is important for investors to remember why they own bonds: A well-diversified core bond strategy serves as an anchor to the portfolio. It has the potential to provide income and capital preservation and to generally perform well when riskier investments do not.

It is also important to distinguish between a strategy that blindly invests in the index, and is thus completely beholden to the ups and downs of the markets, and an active fixed income strategy. In today’s low-yield environment, the benefits of active management are more important than ever. Alpha will be a larger percentage of return going forward.

Original Article can be found here

Regulation of Shadow Banking Takes a Dark Turn

February 13th, 2015

Photo: Corbis

Written by: Peter J. Wallison- The Wall Street Journal- 2.9.2015

Recent statements by senior Federal Reserve officials show that the agency is stepping up efforts to investigate and ultimately regulate what they call the “shadow-banking system.” As the regulators define that term, it is nothing less than capital and securities markets—the industries principally responsible for the growth of the U.S. economy over the past 40 years.

In December, Stanley Fischer , the Fed’s vice chairman and head of its internal systemic-risk committee, told an asset-management group that the New York Fed is “mapping” the relationships between and among financial institutions with a view to determining the scope of the shadow-banking system. The Fed, he said, is considering whether it has sufficient authority to regulate shadow banks. If it doesn’t, he said, the Fed will turn the matter over to the Financial Stability Oversight Council—created by the Dodd-Frank law and made up of the heads of all federal financial regulators, with the Treasury secretary as chairman—for appropriate action.

And on Jan. 30, Daniel Tarullo , a Fed governor, told a conference of financial regulators that the agency was working to corral financial activities that “migrate outside the regulated perimeter”—that is, financial activities that are not regulated like banks. The Fed, he said, wants to “serve the macroprudential aim of moderating the build-up of leverage” in shadow banks.

Most people probably imagine that the term shadow banking refers to large nonbank financial institutions that do what regulated banks do—borrow short-term funds like deposits and turn them into long-term assets like loans. Maturity transformation, as it is called, can be risky, because a firm that has lent out funds it has borrowed short-term may be pressed for cash if its short-term creditors want their funds returned immediately. The fear is that large firms facing this difficulty could fail, creating a “systemic” event.

For this reason, Dodd-Frank is based on the idea that all large nonbank financial institutions, including investment banks, finance companies and insurers, should be subject to designation by the FSOC as systemically important financial institutions, or SIFIs. Once designated, SIFIs are turned over to the Fed for stringent regulation.

The regulators apparently want to cast an even wider net. A 2012 report by the international Financial Stability Board—made up of central bankers and bank regulators of which the U.S. Treasury and the Fed are members—stated that systemic risks are created in the shadow-banking system through “a complex chain of transactions, in which leverage and maturity transformation occur in stages.”

What is a “chain of transactions”? As former Fed Chairman Ben Bernanke explained that year, a finance company might create a pool of auto loans for securitization. Afterward, “an investment bank might sell tranches of the securitization to investors. The lower-risk tranches could be purchased by an asset-backed commercial paper (ABCP) conduit that, in turn, funds itself by issuing commercial paper that is purchased by money market funds.” In other words, a “chain of transactions” involving many different firms can create the same systemic risks as a single large firm.

These are normal transactions in the securities and capital markets. So when Fed officials say that they are investigating and hope to regulate shadow banking, what they mean is that they want to regulate what kind of transactions occur in the securities and capital markets. What is necessary, Mr. Tarullo noted, is a “significant building out of a regulatory regime” for shadow banks, “and so I think that’s where attention is going to be paid.”

One big, threshold question: Where do the Fed and FSOC imagine that they obtained the grant of such power? It can’t be from Dodd-Frank. As capacious as this legislation is, it doesn’t provide authority to regulate financial firms that by themselves are not systemic but become systemic because they participate in a “complex chain of transactions.”

The most likely possibility is the Financial Stability Board, an entity little known outside the financial industry. This group was deputized by the G-20 leaders in 2009 to reform the international financial system, and since then—with the explicit approval of the G-20—has made the regulation of the shadow-banking system a major objective. Perhaps the FSOC and the Fed see the decisions of the G-20—of which President Obama is a member—as authority for their actions in the U.S.

While this might be true in other countries, the U.S. Constitution provides for a separation of powers in which Congress makes the laws and the president carries them out. The fact that a president has agreed with other G-20 leaders to take international action of some kind would not give federal agencies the authority to act in the absence of explicit legislation.

And yet if Congress fails to insist on a recognition of its authority, the Federal Reserve and the Financial Stability Oversight Council will be free to take control of and regulate sectors of the economy that even the drafters of the far-reaching Dodd-Frank law saw fit not to include.


Mr. Wallison is a senior fellow at the American Enterprise Institute. His most recent book is “Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again” (Encounter, 2015).