The Federal Reserve on Thursday proposed tough new rules to require banks to hold even more in reserves as a capital buffer to better withstand future financial crises.
Wall Street has been watching the rulemaking on capital buffers closely. Requirements about capital cushions can directly impact banks' ability to lend, make financial bets and profit off those loans or bets.
Tougher capital cushions are also a key step toward making banks safer and avoiding future taxpayer bailouts.
"Pre-crisis capital requirements were too low in general," said Federal Board Reserve Board governor Daniel Tarullo at a meeting Thursday.
The rules would require banks to keep 7% of risk-weighted assets -- the loans banks make judged by the degree of risk involved -- aside. Banks would have until 2019 to meet the new rules.
For 20 banks with more than $250 billion in total assets, the rules would be a little tougher -- 3% of all assets, including "off-balance sheet exposures" such as derivatives, would have to be kept off limits as a leverage ratio.
The provision would affect all the major megabanks, including JP Morgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Citibank (C, Fortune 500), among others.
Derivatives are the risky bets that helped lead to the financial crisis of 2008.
The new rules are drawn from a 2010 deal negotiated with foreign nations, part of the so-called Basel III accords, requiring all banks to put more capital aside for emergencies.
Capital cushions have come under scrutiny again, in light of revelations that JPMorgan Chase lost $2 billion in bad bets made earlier this year and disclosed last month.
"This should improve the overall resiliency of the banking system," according to a memo on the new capital cushion rules released by the Fed.
Additionally, the Fed released new details on what qualifies as capital -- guidelines that are tougher than current standards -- the central bank notes.
Federal Reserve staff said that roughly 80% of banks already meet the tougher buffer of 7% of risk-weighted assets. They calculated that $3.6 billion would need to be raised to meet the new criteria.
The proposed rule will be voted on by the Federal Reserve Board and then faces 90 days of public comment.
Then the Fed and other federal regulatory agencies would officially approve it later this year. The rules would be phased in starting in January 2013.
During a Senate Banking Committee hearing Wednesday, bank regulators said that all U.S. banks were safer than they were three years ago.
JPMorgan Chase has a capital cushion of $101 billion, compared to $1.8 trillion in assets, said its regulator, Comptroller of the Currency Thomas Curry. That's about 5.6% of all assets. But JPMorgan will likely have to set even more capital aside under the new rules.
That's because the proposed rules do not address an additional and controversial capital cushion that the largest U.S. banks may also have to meet.
That rule could raise the required buffer at some banks from the new standard of 7% to as high as 9.5% of risk-weighted assets.
The Federal Reserve is expected to tackle that issue later.
President Barack Obama was largely dismissive of the Republican presidential field Tuesday, claiming that he's not thinking too much about any of his potential 2012 opponents at the moment.
"I'll let (the Republicans) winnow it down a little bit," Obama told CNN's Wolf Blitzer in a one-on-one interview. But once the GOP chooses a presidential standard bearer for 2012, "I'll be ready for them," the president promised.
Obama made his remarks during what many analysts have characterized as a three-day campaign-style swing through the key Midwestern states of Minnesota, Iowa and Illinois.
Asked to respond to Texas Gov. Rick Perry's assertion that members of the armed services would prefer a commander in chief who served in the military, Obama said presidential candidates have "got to be careful" about what they say. But as Perry just got into the presidential race, Obama said, he will "cut (Perry) some slack" for the moment.
Regarding former Massachusetts Gov. Mitt Romney's remarks that "corporations are people," Obama conceded that corporations play a critical role in the generation of wealth but stressed his disagreement with some conservatives over the closure of tax loopholes benefiting certain major corporations.
"If you tell me that corporations are vital to American life, that the free enterprise system has been the greatest wealth creator we've ever seen ... that I absolutely agree with," Obama said. But "if on the other hand you tell me that every corporate tax break that's out there is some how good for ordinary Americans ... then that I disagree with."
Ultimately, Obama conceded, the "buck stops with me" when it comes to the economy. "I'm going to be accountable" in 2012, he said.
But the president was quick to emphasize the "mess" he inherited from former President George W. Bush in 2009. He also blamed the economic drag created by state and local government layoffs, as well as "headwinds over the past six months" coming from Europe's debt crisis and a tsunami-ravaged Japan
"Everything we've done has been related to jobs, starting with the (2009) recovery act," Obama said. The president stressed, however, that he is "going to need a partner" in Congress -- now partially controlled by the Republicans -- in order to pass legislation needed to strengthen the economy in the short term.
While admitting that politically popular entitlement programs such as Medicare are contributing to Washington's spiraling deficits, Obama refused to offer details about what he is willing to do to help control medical costs. He stressed the need to lower health care costs as a whole, as opposed to going along with what he characterized as GOP attempts to "voucherize" Medicare and leave more responsibility for health expenses in the hands of vulnerable seniors.
They’re both Texans. One is a governor; one was a governor. And both of them have been photographed near planes. On the surface, they might be easy to confuse.
But what’s the real difference between Rick Perry, now a candidate for the GOP presidential nomination, and George W. Bush?
Simple.
“He’s a Yale graduate. I’m a Texas A&M graduate,” Perry explained to reporters.
Policy differences? Perry wouldn’t say. Instead, CNN reported, he devoured an entire pork tenderloin, calling it “the other white meat.”
But for anyone else wondering about the differences between the two, here is a list I came up with earlier, composed mainly of facts about Rick Perry and occasionally of myths about Rick Perry that Perry has been working hard to disseminate.
George W. Bush: Has not, as far as we can tell, threatened to end Ben Bernanke.
Rick Perry: Has threatened to do Bad Texan Things to Ben Bernanke (“I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas” if Bernanke prints more money).
George W. Bush: Has written a book with a polysyllabic word in the title.
Rick Perry: Has written a book.
George W. Bush: Is probably not carrying a gun.
Rick Perry: Is probably carrying a gun.
George W. Bush: Likes to make up whimsical words.
Rick Perry: If anyone coins any new words, he would treat him pretty ugly down in Texas.
George W. Bush: Pardoned some turkeys at Thanksgiving.
Rick Perry: Would never sit by at such a miscarriage of justice; plans to execute several innocent turkeys immediately upon taking office.
George W. Bush: Sometimes cried in public.
Rick Perry: Only cries in public because his tears have the power of job creation.
George W. Bush: Has never fought a coyote.
Rick Perry: “The Second Amendment allows me to go jogging with my daughter’s dog over here. And if a coyote jumps out, I can take care of it.”
George W. Bush: Got misunderestimated.
Rick Perry: Gets misoverestimated.
George W. Bush: Is the son of a president.
Rick Perry: Emerged fully formed from the head of Zeus, clutching a dead coyote.
George W. Bush: Was president.
Rick Perry: Looks like he was president in one of those made-for-TV movies in the mid-’90s.
George W. Bush: At one point controlled the economy.
Rick Perry: Controls the winds!
Hide your wife, hide your kids, because Rick Perry will find them and give them jobs the Texas way, and then afterward he will eat pork tenderloin with them and shoot any coyotes that threaten them, including, but not limited to, Ben Bernanke. If you hand Rick Perry your purse, it will burst into flames. Rick Perry doesn’t hold purses! Wherever Rick Perry walks, thousands of jobs spring up at his feet! Once, Rick Perry visited New York City, and New York City apologized to him.
My point is, Rick Perry is nothing like George W. Bush. Rick Perry Facts have already sprung up on Twitter, but as fast as you can make up erroneous sayings, he is telling us that he is going to take care of coyotes, saying he loves the Second Amendment best of all the amendments (don’t tell the 10th Amendment that!) and blowing kisses to Mitt Romney (don’t tell the 10th Amendment that either).
If George W. Bush had done that, people would have thought it was sort of cute. When Rick Perry does that, it is a terrifying display of dominance that makes donors rush to his feet with piles of bullion.
The real difference is that Rick Perry is George W. Bush without all those sissified East Coast things that George W. Bush used to do, like “not wear cowboy boots everywhere” and “do rather poorly at an East Coast university.” “What do I need to go to the East Coast for?” Perry asks. “I can do that right here in Texas.”
1) Until I saw clips of him in the past two or three days, I hadn't realized how much watching and seeing Perry is just like having George W. Bush back in our living rooms. Maybe this will be an ingredient for strong conservative support. I can't imagine that any sophisticated Republican operative thinks it's a plus in winning 270 electoral votes. When Republicans ran against the first post-Nixon Democratic president, in 1980, they didn't try to find someone who looked and sounded like Tricky Dick.
2) Just after Sarah Palin was nominated three years ago, I argued that anyone who moves all at once from state-level to national-level politics is going to be shocked by the greater intensity of the scrutiny and the broader range of expertise called for. Therefore that person is destined to make mistakes; the question is how bad they will be. For Palin, they showed up in her disastrous first few interviews, especially with Katie Couric. Perry is getting his own introduction to this principle just now.
3) For the past few months, Democrats have had the suspicion that Republicans are playing a double or even triple-game in opposing the Obama Administration on spending and deficit issues. At the most principled levels, they're upholding their belief in a smaller government. At the next level down, they're trying to limit Obama's operational successes wherever they can. And, most cynical of all, they understand the idea of "the worse, the better." The surest path toward beating Obama next year is for the economy to stagnate or decline.
Perry's comments about Ben Bernanke cut through any such subtlety. If Bernanke "prints money" in the next 15 months, toward the end of forestalling a recession or preserving jobs, Perry would consider that "almost treasonous." This is the kind of thing you just don't hear from national-level politicians, and for a reason. (For starters: the punishment for treason is death.)
Obama looks better the more the Republican field displays its outlook and temperament. Romney looks better the more the anyone-but-Romney alternatives come into full view.
UPDATE:
Brad Delong of Berkeley, with whom I usually agree, somewhat snottily contends that Republicans have been saying this all the way along. When it comes to thwarting Obama, and playing the game of "the worse, the better," of course, as many people including me keep pointing out.
But when it comes to presidential candidates making accusations of treason, a capital offense, against (Republican-appointed) financial officials, unt-uh. That is obviously what I was talking about, and that is in fact new. As I am sure Delong will realize on second thought.
The Republican governor of Texas begins his presidential campaign by insinuating that a Federal Reserve decision to print more money would warrant violent retaliation
The video:
Texas Gov. Rick Perry ignited the first potential controversy of his fledgling presidential campaign Monday night with some violent words for Federal Reserve Chairman Ben Bernanke. "If this guy prints more money between now and the election," he said while campaigning in Iowa, "I dunno what y'all would do to him in Iowa but we would treat him pretty ugly down in Texas."
He followed up the "shocking" statement by saying that Bernanke would be committing a "treasonous" act if he approved another round of quantitative easing — in which the Federal Reserve creates electronic money to buy up corporate and government debt and keep borrowing costs down.
Treason is a punishable by death.
The reaction:
"This guy may be good for Texas," says Taylor Marsh at her blog, "but he'd be a disaster for America." Calling Bernanke treasonous for doing something that is the very essence of his job is "political knuckle-dragging" at its scariest. Perry didn't do his campaign any favors with this unpresidential threat, says James Fallows at The Atlantic, but any politician is "destined to make mistakes" when moving from state politics to the intense scrutiny of a national race.
Actually, this "hysteria is ridiculous," says Erick Erickson at Red State. Perry's language is no worse than anything scores of politicians have used to criticize Wall Street executives and blast their political opposition.
Forget, for a moment, the left's outrage over Rick Perry's comment last night that Federal Reserve Chair Ben Bernanke could be guilty of treason.
The more immediate political danger of the remark is within the context of the Republican race: Perry very much wants a mano-a-mano contest against Mitt Romney and the irresponsible suggestion of frontier justice for a respected Fed chair threatens that match-up.
Why?
Because Perry's comment is exactly the sort of misstep that will worry the many GOP donors on the sideline right now who chiefly want to beat President Obama. The quote reinforces their central fear about Perry — that he has a cowboy problem — and could prompt them to remain uncommitted.
And as long as there are big money types sitting on their wallet there remains the possibility that a Paul Ryan or Chris Christie could get in late and muddle the race. Perry looks a lot less formidable if he's fending off Michele Bachmann on the right and a Ryan or Christie on the center-right to get a clean shot at Romney.
As some conservatives have noted today, the Bernanke line probably won't hurt Perry with a conservative base that is radicalized at the moment. But, at this stage in the race, the Texan's audience isn't just activists. It's donors, also, and they are far more finicky when it comes to picking candidates.
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand.
Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.
The Committee currently anticipates that economic conditions--including of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
On Friday the U.S. ratings agency Standard & Poor's slapped the United States with a downgrade, demoting the country from a top-notch AAA credit rating to AA+. Although the nation's other two major agencies, Moody's Investor Service and Fitch Ratings, reaffirmed the United States' AAA credit rating, S&P's move triggered fear through the stock market, which on Monday had its worst day since the 2008 financial crisis.
S&P took further action on Monday, downgrading to AA+ the credit ratings of Fannie Mae, Freddie Mac and other entities linked to long-term U.S. debt.
In a statement Friday outlining their reasoning, S&P cited a shaky political climate in Washington, D.C., that nearly caused the country to default on its loans, the fact that $2 trillion in spending cuts under the final debt-ceiling/budget deal fall short of the $4 trillion needed to actually lower deficits in coming years and the refusal from congressional Republicans to raise tax revenues. Some excerpts:
"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.
" ... The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.
" ... Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.
If U.S. Treasury bond investors take heed of S&P's downgrade, they could demand higher interest rates from the government -- which would in turn cause interest rates to rise on all Americans. Yet despite the worries stirred up by such a worst-case-scenario "if," President Obama has taken a more reassuring position. In remarks on Monday, he maintained that U.S. treasuries are still the safest investment in the world and that the government is fully capable of paying its debt.
"Markets will rise and fall, but this is the United States of America," the president said. "No matter what some agency may say, we've always been and always will be a AAA country."
Obama agreed with S&P on one thing, though: Political gridlock has indeed kept the government from effectively managing its debt. "We knew from the outset that a prolonged debate over the debt ceiling -- a debate where the threat of default was used as a bargaining chip -- could do enormous damage to our economy and the world's," he said -- although without specifically calling out Republicans.
With that, he launched into his regular stump speech as of late, about solving the debt problem with measures beyond just spending cuts.
"Last week, we reached an agreement that will make historic cuts to defense and domestic spending. But there's not much further we can cut in either of those categories," he said. "What we need to do now is combine those spending cuts with two additional steps: tax reform that will ask those who can afford it to pay their fair share and modest adjustments to health care programs like Medicare."
So ... are we going to be OK or not? The Root spoke with Wilhelmina A. Leigh, senior research associate on economic security for the Joint Center of Political and Economic Studies about what the credit downgrade means for your finances, S&P's spotty track record on good judgment and whether this will give Congress the urgency it needs to seriously tackle the deficit.
The Root: Should S&P have downgraded the U.S. credit rating?
Wilhelmina A. Leigh: I'm not sure I can answer that question. I have to assume that S&P has a list of criteria that you have to meet for a certain rating, and that they made their assessment based on that. However, I'm also aware that before the rating was downgraded, there had been conversations between the Treasury Department and S&P about it.
S&P made a mistake in how they assessed what our debt would be by the year 2021 -- their math as off by $2 trillion. The Treasury Department pointed out that S&P's numbers were in error, and then it appears that S&P said, "Well, we're going to go ahead and [downgrade you] anyway." That could cast some doubt around S&P having looked carefully at whether the U.S. meets AAA criteria. If they decided to just do it based on erroneous data, that could put the downgrade in a different light.
TR: S&P's past mistakes also include AAA ratings provided for Enron, Lehman Brothers and the subprime junk mortgages that triggered the 2008 financial crisis ...
WAL: I think, in some ways, they may have done this as a way to try to clear up their own bad image -- to make it seem like, "This country screwed up, but we're on top of things."
TR: There have been some foreboding suggestions that the S&P credit downgrade means that our standing in the bond market will plummet, causing creditors to turn away from U.S. Treasury bonds and hike up our interest rates. Is that an accurate forecast?
WAL: I don't know that S&P has that much power. If the other rating services, Moody's and Fitch, followed suit, then I would say that we should be very, very concerned. I think what happens from here depends on what the other rating services do.
In the meantime, President Obama is correct that U.S. Treasury bond is one of the most stable, if not the most stable, investment that can presently be made. Our standing in the bond market is still very good, even though the stock markets have gone a little crazy. But there are so many uncertainties, and that's the bottom line here. If the U.S. were facing its challenges, and there weren't ongoing problems in the rest of the world, like in the European markets, then I don't think people would be as jittery about it.
TR: Do you think that more credit rating agencies will follow suit?
WAL: My sense is that if they were going to, they would have done it by now. Moody's, for example, mentioned earlier that they were monitoring the [debt ceiling negotiations] very closely, and I think enough time has passed for them to have looked at how that situation was handled and have made their assessment. So far they haven't acted.
TR: President Obama suggested that the downgrade will light a fire under lawmakers on the joint "super committee" to get serious about taking a balanced approach that combines budget cuts with raising tax revenues. Do you think this stands to make a difference in our gridlocked political discourse around the deficit?
WAL: When I heard that S&P had downgraded the U.S. credit rating, I thought, Maybe this will jolt Congress into realizing that this is more serious than just saying, "Oh, we can pay off our interest but we don't have to pay off the principal." I mean, something has to wake these folks up. It's like cutting away bone and flesh without adding anything. You just can't solve the problem that way.
TR: What if Democrats and Republicans are unable to bridge their differences on that issue? Is there any other way to get the economy growing, or are we just stuck?
WAL: The only two general ways that I know to do that are to cut spending, and the other is to raise taxes. The form that doing either one of those takes will make all the difference. Hopefully, whatever package they come up with will have in it enough of a stimulating effect, so that the economy can move forward. It's not going to be pleasant for many people, but if they can do it in a way where people can see progress, economic growth and a light at the end of the tunnel, then that amounts to something.
Sources: ABC News, AP, Fox News, Huffington Post, PBS, The Root, Yahoo News, Youtube
President Barack Obama and congressional negotiators will have to shift the focus of their negotiations to increasing the federal debt ceiling if they fail to make significant progress by Friday toward a comprehensive deficit reduction deal that would cut spending and raise taxes, White House Press Secretary Jay Carney said Thursday.
Obama had told negotiators Wednesday that he had set Friday as a deadline to decide whether a broad agreement on debt reduction is feasible, Democratic officials said.
The president was scheduled to meet behind closed doors at the White House with top congressional leaders on Thursday afternoon -- the fifth straight day of talks.
Administration officials have warned that a failure to raise the current $14.3 trillion debt ceiling by August 2 could trigger a partial default. If Washington lacks the money to pay its bills, interest rates could skyrocket and the value of the dollar could decline, among other things.
The seriousness of the situation was reinforced Wednesday when Moody's Investors Services -- a major rating agency -- said it would put the sterling bond rating of the United States on review for possible downgrade. Moody's said it initiated the review because of "the rising possibility" that Congress will fail to raise the debt ceiling in time.
A default "would be a calamitous outcome," Federal Reserve Chairman Ben Bernanke told members of the Senate Banking Committee on Thursday. "It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy."
In addition, Bernanke said, "it would be a self-inflicted wound."
Obama warned earlier this week he could not guarantee that older Americans will receive their Social Security checks next month if a deal is not reached. GOP leaders accused the president of using scare tactics.
For their part, Republicans continued to oppose Obama's call for increased tax revenue to be part of a deficit reduction deal, and promised Thursday to renew the GOP's push for a balanced budget amendment to the Constitution, arguing that it's necessary to achieve fiscal stability. Votes in Congress on the measure are expected next week.
"We refuse to let this president use the threat of a debt limit deadline to get us to cave on tax hikes or phony spending cuts," said Senate Minority Leader Mitch McConnell, R-Kentucky. "It's time to make it clear to the American people where the two parties stand in this debate. Either you're with the president and his vision of a government that continues to live beyond its means, or you're with those of us who believe Washington needs some strong medicine."
Others said the whole debate is a sad reflection of an increasingly dysfunctional political process.
"I am very disappointed in the United States Senate," said Sen. Bob Corker, R-Tennessee. "I am very disappointed in the White House. I am very disappointed in all of us. I am very disappointed in the childish behavior that this body has continued to exude over the course of this entire year."
The Democratic message Thursday was that a few Republicans spurred by the conservative tea party movement were preventing the possibility of a major agreement that could help address mounting federal deficits over the next decade and clear the way for Congress to increase the debt ceiling.
Such a deal is a "holy grail," Carney told reporters, adding that it is "right here within reach. It's on the table. You just have to reach for it and grasp it and be willing to compromise to do it."
Wednesday's negotiations ended on a tense note. Obama said the extended political wrangling and apparent lack of progress confirmed what the public considers to be the worst of Washington, according to Democratic sources familiar with the talks who spoke on condition of not being identified.
"This could bring my presidency down," sources quoted Obama as saying in reference to his pledge to veto any short-term extension of the debt ceiling -- a move suggested by House Majority Leader Eric Cantor, R-Virginia. But "I will not yield on this," the president added.
Obama has insisted on one deal that will raise the amount of money the government can borrow to sufficient levels to last through 2012 -- after his campaign for re-election.
According to Cantor, Obama became "very agitated" on the state of the talks and said "something's gotta give."
Obama called for Republicans to compromise on either their insistence that a debt-ceiling hike must be matched dollar-for-dollar by spending cuts or on their opposition to any kind of tax increase, Cantor said.
"And he said to me, 'Eric, don't call my bluff.' He said 'I'm going to the American people with this,'" Cantor quoted Obama as saying.
"I was somewhat taken aback," Cantor said.
Democratic sources provided a different take on the exchange, saying Obama cut off Cantor at the end of the two-hour meeting after the GOP leader dumped his previously held position against a short-term extension.
Senate Majority Leader Harry Reid, D-Nevada, said Thursday that "Cantor has shown he shouldn't even be at the table, and Republicans agree he shouldn't be at the table."
Reid is "frustrated," Cantor replied. But "we're going to abide by our principles."
For his part, Speaker John Boehner, R-Ohio, downplayed reports of a split between himself and Cantor. Analysts have speculated that Cantor, viewed in some circles as more conservative than Boehner, may be using the crisis to undermine GOP support for the speaker.
"We're in the foxhole" together, Boehner told reporters. "I'm glad Eric's there."
With time dwindling down, Democrats and Republicans remain at sharp odds over how to proceed. Obama has indicated a preference for a "grand bargain" that would save up to $4 trillion over the next decade through a combination of spending cuts, raising taxes on the wealthiest Americans and reforming politically popular entitlement programs such as Medicare and Medicaid.
GOP leaders remain adamantly opposed to any tax hikes, arguing that increasing the burden on "job creators" now would derail what has already proven to be, at best, a shaky economic recovery.
Reid confirmed Thursday that he and McConnell are working on a possible debt ceiling measure that could come up in the event the broader negotiations fail to reach agreement. It is based in part on a plan McConnell unveiled this week that would set up three short-term increases in the debt ceiling while at the same time registering the disapproval of Congress for such a move.
McConnell's proposal would give Obama power to raise the debt ceiling by a total of $2.5 trillion, but also would require three congressional votes on the issue before the 2012 general election.
Some congressional Democrats have promised to consider the plan, despite Obama's opposition to any short-term extension. However, some conservatives have said the McConnell plan amounts to a capitulation to the Democrats.
McConnell asserted Wednesday his proposal became necessary because an acceptable deficit reduction deal was proving unattainable and the country has to avoid a default that would be "bad for Republicans."
"If we were to go into default ... the practical effect of that will be to allow the president to make us co-owners of a bad economy," McConnell said in a radio interview.
Boehner refused to dismiss McConnell's plan Thursday, calling it a fallback option that "may be worthy at some point." The day before, Cantor signaled opposition to the proposal, but he stood next to Boehner when the House speaker spoke about the plan Thursday.
Consideration of a fallback option has gained more attention over the last couple of days in part because of the GOP's refusal to budge on taxes.
At the heart of Obama's call for more tax revenue would be allowing tax cuts from the Bush presidency to expire at the end of 2012 for families making more than $250,000. His plan would keep the lower tax rates for Americans who earn less.
Obama noted earlier this week he is not looking to raise any taxes until 2013 or later. In exchange, Obama said, he wants to ensure that the current progressive nature of the tax code is maintained, with higher-income Americans assessed higher tax rates.
Republicans continue to insist such a move would be economically disastrous.
At the heart of the GOP resistance is a bedrock principle pushed by conservative crusader Grover Norquist against any kind of tax increase. A pledge pushed by Norquist's group, Americans for Tax Reform, has been signed by more than 230 House members and 40 senators, almost all of them Republicans.
On the heels of a disappointing jobs report, the country's top economist told 60 Minutes the outlook isn't much brighter.
"At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate," Federal Reserve Chairman Ben Bernanke told 60 Minutes in an interview that aired Sunday night.
The 60 Minutes broadcast comes just a couple days after the government released a jobs report bringing two downbeat surprises: the economy added only 39,000 jobs in November and the unemployment rate rose to 9.8%.
Stubbornly high unemployment is one reason Bernanke is standing by the Fed's recent controversial decision to initiate a $600 billion bond-buying program, its second round of so-called quantitative easing or QE2. It is meant to stimulate the economy by keeping interest rates low and encouraging consumers to spend more and businesses to create jobs.
But the plan has drawn a major backlash from both conservatives and global leaders over the past month. Critics argue the policy of low interest rates will feed long-term inflation, artificially devalue the dollar and create asset bubbles.
While Bernanke doesn't address all those topics in the interview, he does stand strong against his critics in three main ways.
He says long-term inflation fears are "way overstated," and the Fed is not just "printing money." Plus, while critics are pointing out QE2's risks left and right, they are not weighing the risks of "not acting," Bernanke said.
Responding to a question about the possibility of additional quantitative easing, Bernanke said: "Oh, it's certainly possible. And again, it depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks." He added that it "doesn't seem likely" that there will be a double-dip recession.
Bernanke also said he's "100%" confident in the Fed's ability to control long-term inflation. "We could raise interest rates in 15 minutes if we have to," he said. "That time is not now."
As Congress debates extending the Bush tax cuts and implementing budget cuts to slash the national deficit, Bernanke also stressed the importance of Congress and the White House doing more to help the recovery.
While the Federal Reserve can help the economy through monetary policy -- keeping interest rates low -- decisions on taxes and spending, or so-called fiscal policy, are left up to lawmakers.
"We don't want to take actions this year that will affect this year's spending and this year's taxes in a way that will hurt the recovery. That's important," Bernanke said. "But that doesn't stop us from thinking now about the long-term structural budget deficit."
He also called the tax code "inefficient."
"By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest," he said.
Bernanke last appeared on 60 Minutes in March 2009 to defend the government's actions during the financial crisis, including its decision to let Wall Street firm Lehman Brothers fail while at the same time stepping in to save insurance giant American International Group.
Television interviews with the chairman are rare, and his second 60 Minutes appearance seems to mark the Fed's efforts to communicate its reasons behind QE2 more clearly to the public. Bernanke also took to writing an op-ed in the Washington Post last month, to defend the bank's decision.
Bank of America Corp., Wachovia Corp. and Wells Fargo & Co. were among the top borrowers from the Term Auction Facility, one of the Federal Reserve's first and longest-lasting efforts to combat the financial crisis.
Bank of America had three loans for $15 billion each outstanding from the facility as of Jan. 15, 2009, while Wells Fargo had three loans for $15 Billion each on Feb. 26, 2009, according to documents released Wednesday by the Fed to comply with orders from Congress to identify recipients of emergency aid.
Charlotte-based Wachovia, which agreed to be bought by Wells Fargo at the peak of the financial crisis in fall 2008, was one of the first banks to tap the program in December 2007. It took out its last loan in February 2009. Other N.C. banks that used the program included Winston-Salem-based BB&T Corp. and Raleigh-based RBC Bank.
Fed Chairman Ben Bernanke created the TAF in December 2007 to let banks obtain cheaper funding without risking the stigma of loans from the central bank's discount window. Under the program, banks bid for Fed loans at a rate determined through auctions. Borrowing peaked at $493.1 billion in March 2009 and began declining until the TAF closed in April 2010.
Because the program lent to banks, the Fed didn't invoke an emergency legal clause allowing borrowing by nonbanks in "unusual and exigent circumstances." The central bank used the provision in 2008 to set up loan facilities for investment banks, money-market mutual funds and corporations.
"The funding and guarantee programs were an example of a successful government initiative at no taxpayer expense," said Bob Stickler, a spokesman for Charlotte-based Bank of America. "The programs enabled the U.S. financial system to continue to operate, preventing a recession from becoming much more severe."
Wells Fargo spokeswoman Mary Eshet declined to comment.
In another program, Bank of America and Merrill Lynch & Co. sold $22.9 billion of commercial paper to the Fed in October 2008, days after the two companies received $25 billion in U.S. bailout funds.
The Fed bought $7.96 billion of three-month notes from Merrill on Oct. 27, then purchased $14.9 billion from Bank of America two days later, according to data on the Commercial Paper Funding Facility.
Investor demand for commercial paper, an unsecured short- term loan typically issued to finance inventories and accounts receivable, evaporated in mid-2008 amid concern that the largest U.S. banks might fail.
The purchases add to the tally of bailouts for Bank of America, the biggest U.S. lender by assets, which took a total of $45billion from the Troubled Asset Relief Program. That included an extra $20 billion after losses surged at Merrill Lynch, which it agreed to buy in September 2008.
Bank of America has "repaid, with interest, all of the borrowings except some of those whose terms have not expired," Stickler, the bank spokesman, said.
Lifting the veil on its $3 trillion emergency rescue of the financial industry, the Federal Reserve Wednesday revealed the names of U.S. and foreign banks that benefited hugely from nearly a dozen programs to stem panic and keep money moving.
The 21,000 transactions show that the Fed not only stretched the limits of its authority by lending tens of billions of dollars to Goldman Sachs and other giants of Wall Street, but that it also aided British, German and French banks, other big businesses and smaller banks from Puerto Rico to North Carolina and Washington state.
In some instances, the Fed made loans to banks that were in shaky condition, even lending to investment firm Lehman Bros. on the brink of its 2008 bankruptcy.
Defending themselves against mounting Republican criticism over the Fed's contribution to the rising national debt, officials at the central bank said the data proves that they acted responsibly during the crisis. They said most of the loans have been repaid, and taxpayers have suffered no credit losses.
The Fed's actions were taken as large global investment banks were operating outside the direct reach of regulators. Economists have widely praised Fed Chairman Ben Bernanke for saving the global economy with bold, unprecedented actions that saved investment banks and thawed frozen credit markets.
But anger that the Fed helped Wall Street while Main Street struggled fueled a backlash against the Fed, and many newly elected members of Congress campaigned on platforms to rein in the central bank's freedom to act independently.
Some experts said the newly released data probably would give critics new fodder.
Disclosure of all the loans to big banks "could be interpreted as actions to protect the connected, and the Fed has to be nervous about that," said Vincent Reinhart, who directed the Fed's Division of Monetary Affairs from 2001 to 2007."If you want to channel voter anger, there's got to be stuff in that document drop."
The data revealed that the Fed made massive loans to Charlotte-based Bank of America and the firms it acquired, including Wall Street investment bank Merrill Lynch. Investment bank Morgan Stanley, which sustained big losses in the subprime mortgage market, borrowed up to $47.6 billion in late September 2008 under a Fed overnight loan program for major securities dealers, the data showed.
Goldman Sachs, the goliath of Wall Street, faced months of controversy over its receipt of more than $43 billion in federal aid. Wednesday's data showed, however, that Goldman also borrowed up to $24 billion under the program for dealers in fall 2008 and got an additional $7.5 billion from the Fed for its unmarketable securities.
Goldman spokesman Michael DuVally said that, at a time when "many of the U.S. funding markets were clearly broken ... the Federal Reserve took essential steps to fix these markets, and its actions were successful."
Citigroup, beneficiary of a massive Treasury Department bailout, held up to $18.6 billion in loans under the Fed program for primary dealers, while Bank of America's securities division borrowed up to $11 billion. Merrill, acquired late that year by Bank of America, had loans totaling up to $27.5 billion in mid-October 2008.
Bank of America spokesman Bob Stickler called the Fed programs "an example of a successful government initiative at no taxpayer expense."
"The programs helped our customers such as borrowers, auto dealers, depositors and money market fund investors continue to do business as usual despite virtually unprecedented disruptions in the financial markets," Stickler said.
Peak lending under each of the programs combined to total $3.3 trillion, though the Fed said much less was extended at any one time. Still on the Fed's books are more than $1 trillion in securities backed by home mortgages.
The data drop came at the last moment before a congressional deadline for disclosure, adopted as part of a revamp of financial regulation by Congress earlier this year called the Dodd-Frank Act. The Fed, an independent and autonomous agency, successfully skirted attempts to require that it be audited, and the information released did not answer all questions about the Fed's activities.
Independent Sen. Bernie Sanders of Vermont, who succeeded in inserting the transparency requirement in the massive bill, cited Bernanke Wednesday for refusing to open the books.
"Today ... we finally learn the truth - and it is astounding," Sanders said in a statement. "We now know that Fed loaned trillions of dollars at zero or near-zero interest rates not only to the largest financial institutions in this country, but also to many of our largest corporations - including GE, McDonalds and Verizon. Most surprising, the Fed also lent huge sums of money to foreign private banks and corporations."
Reinhart, now a senior researcher with the free market-leaning American Enterprise Institute, said the growing size of the Fed's balance sheet suggested as much.
However, he said, "when you see the number of loans being rolled over day after day (by big Wall Street investment banks), it's pretty striking."
He pointed to Bank of America, which borrowed up to $15 billion under the Term Auction Facility that provided short-term loans at rates lower than what was available in the panicked marketplace.
"Bank of America had lots of really lowly rated securities as its collateral," said Reinhart, who added that the amount of loans being rolled over suggests a subsidy involved to keep Wall Street from fracturing further.
The government also told Bank of America to take $45billion to shore up its balance sheet, which the bank later repaid.
Small banks also were helped under the Term Auction Facility, which doled out $493 billion in one- to three-month loans.
For example, the Cascade Bank of Everett, Wash., borrowed up to $162 million from the program between Valentine's Day 2008 and last January. Lars Johnson, who worked at the bank and is now chief financial officer of the Washington Business Bank in Olympia, Wash., said the loans "helped the banking system in general."
"It took pressure off us, knowing it was there," he said. "You could use it in the shorter term or the longer term."
The Federal Reserve is about to take a huge risk in hopes of getting the economy steaming along again. Nobody is sure it will work, and it may actually do damage.
The Fed said Wednesday it is committing to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling U.S. economy.
Economists call it "quantitative easing." It gets the name "QE2" — like the ship — because this would be the second round. The Fed spent about $1.7 trillion from 2008 to earlier this year to take bonds off the hands of banks and stabilize them.
Here's how it's supposed to work this time: The Fed buys Treasury bonds from banks, providing them cash to lend to customers. Buying so many bonds also lowers interest rates because demand for Treasurys leads to higher prices and lower yields. Interest rates are linked to yields. Lower rates encourage people to borrow money for a mortgage or another loan.
At the same time, lower interest rates make relatively safe investments like bonds and cash less appealing, so companies and investors take the cash and buy equipment or other investments, like stocks. The S&P 500 takes off and Americans celebrate with a shopping spree. Businesses see a rise in sales and begin hiring again, and a virtuous cycle of more spending and more hiring ensues.
But many analysts and even supporters of the plan see dangers. It could make the weak dollar even weaker and lead to trade disputes with other countries. It could lead bond traders to believe that higher inflation is on the way, and they could derail the Fed's efforts by pushing rates higher. Many investors argue that it may create bubbles as hedge funds and other speculators borrow cheaply and make even bigger bets on stocks, commodities and markets in developing countries like Brazil.
"It's a desperate act," says Jeremy Grantham, co-founder of the investment firm GMO. Grantham says it's a clear message from the Fed to the rest of the world: "The U.S. doesn't care if the dollar weakens."
Here is a look at the ways the Fed's strategy could backfire:
Dollar drop
As word trickled out over recent months that the Fed was planning a new round of bond purchases, the dollar sank. It hit a 15-year low to the Japanese yen Nov. 1. Why? In the simplest terms, a country that cuts interest rates makes its currency less attractive to the worlds' investors. The interest rate is also the investors' yield, the payout they receive. When that yield falls, the world's banks move their money into countries with higher rates. They may exchange U.S. dollars for Australian dollars then invest the money in higher-paying Australian bonds.
"The Fed aims to push up the prices of stocks, bonds, real estate, and you name it," says Bill O'Donnell, head of U.S. government bond strategy at the Royal Bank of Scotland. "Everything is going to go up but the dollar."
A drop in the dollar can help companies like Ford that sell their products abroad. When the dollar weakens against the euro, for example, one euro buys more dollars than before. Foreign customers notice the price of the Explorer they've been eyeing is lower in their currency, yet Ford still pockets the same number of dollars for every sale.
The downside is that a weakened dollar pinches people in the U.S. because anything produced in other countries becomes more expensive, like oranges from Spain or toys from China.
"Look around you," says Thomas Atteberry, a fund manager at First Pacific Advisors. "How many things can you find that were made in the U.S.A?"
Blowing bubbles
Buying bundles of Treasurys knocks down interest rates, making borrowing cheap. But it also motivates investors to move out of safe investments into riskier ones in search of better returns. The stock market, for instance, rises in value and everyone with some of their savings in stocks feels wealthier. Ideally, it produces what what economists call a "wealth effect": People who feel better off spend more.
The problem, according to some critics, is that cheap borrowing costs and buoyant markets make a fertile environment for bubbles, which eventually pop. "The effort to help the economy sets up another more dangerous bubble," says Grantham, who warned of Japan's surging real estate and stock markets in the 1980s, soaring Internet stocks in the 1990s and the housing market in the 2000s.
Stocks in developing countries are a likely candidate for the next bubble. Cash from Europe and the U.S. has plowed into emerging markets, such as Brazil and Chile, since the financial crisis, largely because these countries have less debt and faster economic growth than in the developed world.
Another concern: Hedge funds borrowing cheap money can magnify their bets, taking a loan at 2 percent to buy a security that's rising 10 percent. They sell the security, pay off the bank and pocket the rest. That's true whenever interest rates remain low. Falling rates allow speculators to borrow larger amounts. In the extreme, losses from hedge funds and other borrowers can put their banks at risk and leave governments to clean up the mess.
The game only works as long as the investment keeps climbing. When the bubble breaks, the fallout can devastate an economy.
"I think bubbles are the main villain in this piece," Grantham says.
Cheap debt provided the fuel for the housing bubble, allowing home buyers to take out larger loans on the belief that somebody else would buy the house at a higher price. Fed chief Ben Bernanke's answer, Grantham said, is to start the cycle over again by blowing a new bubble. "All they can do is replace one bubble with another one," he said.
In its latest move to jump start the sluggish recovery, the Federal Reserve announced it will pump billions into the economy.
The central bank will buy $600 billion in long-term Treasuries over the next eight months, the Fed said Wednesday. The Fed also announced it will reinvest an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments.
The bond purchases aimed at stimulating the economy -- a policy known as quantitative easing -- will total up to $900 billion and be completed by the end of the third quarter of 2011.
Ever since the Fed first signaled back in August that it was considering a second round of monetary stimulus, dubbed QE2, investors have been preoccupied with speculating on how much the Fed would buy.
Now the verdict is in, and is roughly in line with forecasts. Mainstream estimates had predicted a total between $500 billion and $1 trillion.
"It was all largely as expected," said Calvin Sullivan, chief strategy officer at Morgan Keegan. "The markets are responding as one would expect."
Stocks seesawed between gains and losses, as investors digested the news. The real surprise was in the bond market, where yields on the longer term 10-year and 30-year rose, after traders realized the Fed's plan called for 91% of its purchases at shorter maturities than expected. Read the Fed statement
The Fed also reiterated its bearish view on the stalling economy, saying "the pace of recovery in output and employment continues to be slow."
Amid sluggish consumer spending, businesses have been reluctant to hire and the economy has grown at a snail's pace. At the same time, inflation is dangerously low, causing some economists to warn that the United States may even be flirting with deflation -- a debilitating drop-off in prices and demand.
The Fed has already kept the federal funds rate, a benchmark for interest rates on a variety of consumer and business loans, at historic lows near zero since December 2008. The Fed said Wednesday that it would continue to hold the rate at "exceptionally low levels" for an "extended period."
The federal funds rate is the central bank's key tool to spur the economy and a low rate is thought to encourage spending by making it cheaper to borrow money.
When already low rates failed to get consumers and businesses to spend, the Fed decided to resort to the more unconventional tool of quantitative easing, to lower interest rates even further.
But critics of QE2, including some Fed members, believe that too much monetary stimulus might lead to runaway inflation that could derail the economy, or future asset bubbles that could endanger economic stability over the long term.
The most outspoken voting member of the Fed, Kansas City Fed President Thomas Hoenig, was once again the lone dissent among policymakers, saying he believed the risks of additional securities purchases outweighed the benefits.
Other opponents have argued that it simply won't work. The Fed already made nearly $2 trillion in similar purchases during the Great Recession, and current low interest rates have not jolted spending, they say.
"I don't think this is going to make any difference at all," said Paul Ashworth, senior U.S. economist with Capitol Economics, who feels the plan is too small. "This is a slippery slope. Once you're on it, it's very hard to get off."
He predicts a repeat of what happened with the first round of quantitative easing two years ago. The Fed initially announced a $600 billion program in November 2008, but then four months later, increased that to $1.8 trillion, when it wasn't enough.
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