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Why is our banking system so far behind?

Why is our banking system so far behind? | Cultural Trendz |

Say you owe money to a friend. How do you pay?

If you live in the United States, your fastest option is probably withdrawing cash from an ATM. Another possibility is writing a check.

But even after the check gets deposited, the cash won’t be available for hours, or days.

You can also wire the money electronically. Incredibly, that option often takes the longest of all.

These slow, inefficient choices seem normal to Americans, because we’re used to them. But when you examine what’s happening in other countries, it becomes clear just how antiquated the U.S. payments system has become.

In the United Kingdom, you log into your online banking account, hit send, and the money arrives in your friend’s account within 10 seconds. In Sweden, you pick up your mobile phone, and the transaction takes only about six seconds to process. Even less wealthy countries like Mexico and South Africa have moved to near-real-time payments.

In contrast, the U.S. still relies on infrastructure that dates back to the 1970s. If you pay your cable TV bill online on a Thursday, the payment may not be completed until the following Monday.

So why have we fallen so far behind? The root of the problem, according to experts, is a lack of leadership. No one is really in charge of our payments system.

"You would need somebody like the Federal Reserve, somebody who is a neutral third party, with impeccable credentials, to show leadership and to set goals," says Gene Neyer, global product manager at FundTech, a company that has helped other countries move to near-real-time systems.

The good news is that the U.S. Federal Reserve recognizes the problem. Last autumn the central bank laid out a vision of the future for payments. That vision looks a lot like where Sweden already is today.

"Today, U.S. consumers can’t make a near-real-time payment in a convenient and cost effective way from any bank account to any other bank account," the Fed’s 13-page paper noted. "In a world where several other countries are moving to ubiquitous near-real-time retail payment systems, the U.S. payment system does not have this capability."

But the Fed, which historically has been wary of imposing mandates on banks, is trying not to come off as heavy-handed. And that cautious approach may make it harder to bring about change in the banking industry.

In the U.K. and some of the other countries that now have fast payment systems, the government required banks to make the upgrades.

"The banks were being bullied into doing it here," says Dave Birch, a U.K. payments consultant.

Already, the Fed’s vision is sparking signs of resistance from the biggest U.S. banks. A trade group representing the nation’s largest banks, the Clearing House, recently filed comments arguing that any overhaul should pay for itself – not just in the long run, but also in the short-term.

That’s setting a high bar for change, because banks will have to make sizable upfront investments to upgrade their computer systems.

Eventually, those investments could reach the break-even point, says Craig Tillotson, managing director of Britain’s Faster Payments Scheme. He notes that electronic payments are cheaper to process than checks.

But Tillotson argues that fast payments have other, less tangible benefits for the banking sector.

"I think you have to see this as an investment an industry makes to meet the needs of its customers," he says. "You have to ask the question of whether you want to be in the modern world, whether you want to stay at the heart of how consumers and business manage their finances and the flow of their money."

The holy grail of person-to-person payments is the ability to send money instantaneously to anyone else’s mobile phone number. In Sweden, that’s been reality for over a year now, since the rollout of a system known as "Swish."

The upgrades have brought Swedish consumers a lot of benefits, according to Lars Gunnstam, who heads the consortium of banks that runs Swish.

You can split a dinner bill while you’re still sitting in the restaurant. Or make a last-minute payment to your utility company. A food truck owner, who would otherwise waste a lot of time handling cash, can instead get paid via mobile phone.

"He can immediately see that he has received the money," explains Gunnstam, an executive at the Swedish bank Nordea. "And you can immediately shake hands and say, ‘Fine, done.’ That is very important if you do business out in the street."

To be fair, there is innovation happening here in the U.S., too. Services like Popmoney and Chase QuickPay allow you to send money to a friend over your mobile phone.

But in terms of fast payments, those services don’t even come close to linking every U.S. bank and credit union. That makes them a lot less useful than a near-real-time system that’s available to every bank.

"You must build a sector solution that’s open for everybody," Gunnstam says. "If you can secure that, it will be a success."

In Sweden, as consumers use the Swish payment system, "the social media, the blog world, has been extremely positive. And that is very unusual for a bank, I can promise you,” Gunnstam chuckles.

For U.S. banks, that kind of glowing PR is likely to be a long way off. Under the timeline established by the Federal Reserve, the desired completion date for the overhaul is still a decade away.

Vilma Bonilla's insight:

Near real time payment system in the U.S. ~ "In U.S., it takes days for a bank payment to clear. In foreign countries, it happens in seconds."

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The Audacious Pragmatist

The Audacious Pragmatist | Cultural Trendz |

SHORTLY before Ben S. Bernanke was nominated as chairman of the Federal Reserve in 2005, he paid a return visit to Stanford, where he started his academic career in 1979. In a speech, he recalled that he and his wife, Anna, had rented a house with friends because he was certain that local real estate prices would fall. Instead, prices in the Bay Area doubled, then doubled again.

“Since then,” Mr. Bernanke told his audience, “I’ve developed a view that central bankers should not try to determine fundamental values of assets.”

Indeed, Mr. Bernanke’s academic work, largely at Princeton, helped shape the conventional wisdom that central banks couldn’t spot asset bubbles and shouldn’t try to pop things that looked like bubbles. In his first speech as a Fed governor in 2002, he reiterated that trying to judge the sustainability of rapid increases in housing or stock prices was “neither desirable nor feasible.”

Over the next several years, he said repeatedly that he saw no clear evidence of a housing bubble. And in 2004, the Bernankes paid a hefty $839,000 for a town house on Capitol Hill in Washington.

It took a great recession to change his mind. The recession, prompted by the collapse of the housing bubble that Mr. Bernanke — and most other experts — failed to see coming, ended an era of minimalism in central banking. And there is no better marker than the views of Mr. Bernanke, the world’s most influential central banker, who now argues that the Fed needs to consider a range of previously unthinkable actions, including trying to pop bubbles when necessary, because sometimes the cost of doing nothing is worse.

Mr. Bernanke, who plans to step down in January after eight years as Fed chairman, will be remembered for helping to arrest the collapse of the financial system in 2008. This shy, methodical economist who had been expected to serve as the keeper of Alan Greenspan’s flame — to preserve the Fed’s hard-won success in moderating inflation — emerged under pressure as perhaps the most innovative and daring leader in the Fed’s history.

But what Mr. Bernanke did after the crisis may prove to have even more enduring influence. For almost three decades, the Fed focused on moderating inflation in the belief that this was the best and only way to help the economy. In the wake of the crisis, Mr. Bernanke forged a broader vision of the Fed’s responsibilities, starting experimental, incomplete campaigns to reduce unemployment and to prevent future crises.

The Bernanke Fed has failed to fully achieve its goals. Growth is still tepid, unemployment still too high, inflation still too low. Some critics continue to warn — so far, incorrectly — that its efforts will unleash inflation or destabilize financial markets.

Yet many of the Fed’s experiments are already being emulated by other central banks. And Mr. Bernanke’s many admirers say it is hard to imagine that anyone else could have done more under the circumstances to restore the economy. Fortunately, they say, his lifelong study of central banking under stress meant that he not only knew the available options but also understood that those options weren’t enough. And he had the credibility necessary to persuade a hidebound institution to change quickly.

“It’s hard to say that the Fed has accomplished what could have or should have been accomplished,” said Michael Woodford, an economist at Columbia University. “Yet in the context of the difficulty of the challenges, the likelihood is that few other central bankers could have been as bold as Ben has been.”

Throwing Stuff at the Wall

Mr. Bernanke was a rising star at Princeton in 1994 when he persuaded 953 people to elect him to a second job — as a member of the Montgomery Township Board of Education. “I did think he was a little crazy” to add that second role, said Mark Gertler, a New York University economist who was a frequent academic collaborator with Mr. Bernanke during the 1990s.

But the move was instead an early sign of Mr. Bernanke’s restlessness with the theoretical world of academia and his nascent interest in public service. And the experience helped to prepare him for larger things.

For six years, he spent several nights a month in the library of the local high school, usually dressed in a sport coat with elbow patches, calmly contributing to heated debates about building new schools in his rapidly growing community.

“When I met him he was shy and awkward,” Professor Gertler said. “It developed his ability to moderate meetings and interact with people.”

It is obligatory to say that Ben Shalom Bernanke was born in 1953 in Augusta, Ga., was raised in one of the few Jewish families in the small town of Dillon, S.C., and went to Harvard at the urging of friends despite the uneasiness of his parents.

But the trajectory of his adult life really began to take shape at the Massachusetts Institute of Technology, where his doctoral adviser, Stanley Fischer, introduced him to the work of Milton Friedman and Anna Schwartz on the causes of the Great Depression of the 1930s. In Mr. Bernanke’s Fed office hangs an old photograph of four central bankers who, through their failures in office, helped to make that depression so great.

Mr. Fischer also inculcated the view that government, in moderation, could improve economic outcomes — a pragmatic middle ground in the wars between the Keynesian belief in active management and the hands-off absolutism of rational expectations theory. Mr. Bernanke is a pragmatist by nature. A baseball fan, he cheered for the Boston Red Sox until the Nationals came to Washington in 2005. He now attends Nationals games regularly.

In 2002, when Glenn Hubbard, then chairman of President George W. Bush’s Council of Economic Advisers, called to gauge his interest in becoming one of the Fed’s seven governors, Mr. Bernanke jumped at the chance. He had expected to be an “academic lifer” — he still seems most comfortable when talking with college students — but he found that he liked the practical challenges and potential impact of public service.

After his nomination was announced, he sent an e-mail to some former colleagues on the school board, according to Laurie Navin, one of the recipients.

Mr. Bernanke related that President Bush had asked him whether he had ever served in an elected position.

“It may mean nothing here, but I served on my local school board,” Mr. Bernanke said he told the president. “And Bush said: ‘It’s good enough for me. You’re in.’ ”

Three years later, Mr. Bush made Mr. Bernanke the first modern Fed chairman who had ever held elective office.

In his public speeches during his time as a governor, Mr. Bernanke gave a two-year master class on monetary policy, reinforcing the perception that he had the intellectual heft to succeed Mr. Greenspan. But Mr. Bernanke won the job in part by impressing Mr. Bush in a different way, according to people briefed on the selection process.

During a brief stint in the White House as an economic adviser, Mr. Bernanke had distinguished himself by his willingness to answer the president’s questions by saying, “We don’t really know, but here’s how I think about it.”

As the financial system began to fall apart on his watch, it became clear that Mr. Bernanke had other valuable qualities: an ability to remain calm under pressure and a deep historical understanding of economic crises. Shortly after joining the Fed in 2002, he promised Mr. Friedman and Ms. Schwartz that the central bank would not repeat its mistakes of the 1930s.

“You’re right, we did it,” he said at the time. “We’re very sorry. But thanks to you, we won’t do it again.”

Now he urged his colleagues and staff members to set aside their habitual care and find new ways for the Fed to pump money into the financial system. Mr. Bernanke sometimes invoked President Franklin D. Roosevelt’s marching orders to throw a lot of stuff at the wall and see what stuck.

“We rolled out 12 new products in 12 months,” recalled the former Fed governor Kevin Warsh, who worked closely with Mr. Bernanke during the crisis period. “The Federal Reserve hadn’t rolled out a single new product in a generation. But he said the Fed had to operate fundamentally differently to get through this. Because Ben was in some ways the dean of the academy in monetary policy, he realized how little we knew.”

Mr. Bernanke said later that the crisis in the fall of 2008 was “the worst financial crisis in global history, including the Great Depression.” He had not seen it coming; he had done nothing to soften the initial impact. But he kept his promise to Mr. Friedman and Ms. Schwartz.

It was a monumental achievement. It was also incomplete. Almost eight million Americans had lost their jobs.

Constrained by Reality

There was a time when Mr. Bernanke seemed to know exactly how a central bank should jolt a country out of an economic malaise.

In a swaggering 1999 paper, he accused Japan’s central bank of lacking the will to take obvious steps to revive that nation’s economy. One prescription, which earned him the nickname “Helicopter Ben,” was that the Bank of Japan should agree to offset a large tax cut by buying an equivalent amount of government debt, a strategy that Mr. Bernanke compared to a “helicopter drop of newly printed money.”

The point, which he repeated at his first meeting of the Fed’s policy-making committee in 2002, was that central banks had plenty of ways to stimulate growth even after flooring the gas by cutting short-term rates to zero.

“I’m not one who worries about zero bounds,” Mr. Bernanke declared.

Yet in the five years since the Bernanke Fed hit that zero bound in December 2008, it has not taken the drastic steps that Mr. Bernanke recommended to Japan. Instead, it has relied on two of what Mr. Bernanke once described as the least potent options available to a central bank: declaring that the Fed intends to keep short-term rates near zero until unemployment declines, and “quantitative easing” — buying large quantities of Treasury securities and mortgage-backed securities to accelerate job growth.

“During the crisis, it was clear that they were pulling out all of the stops to try to find a solution, and once the financial system stabilized and the problem was merely 10 percent unemployment, then they moved more slowly,” said Laurence Ball, an economist at Johns Hopkins University, who wrote in a 2012 paper that Mr. Bernanke has lacked the courage of his convictions.

Mr. Bernanke has said that critics misunderstand the context of his writings. He was arguing that central banks always have the power to prevent deflation, as the Fed has done in recent years. He did not initially embrace the idea that the Fed should act with comparable force to spur job creation. That case was made by others, including Charles Evans, the president of the Federal Reserve Bank of Chicago, who called for officials to act as if their hair were on fire.

But even as he grew increasingly concerned about unemployment, and pressed for stronger action, friends and colleagues say Chairman Bernanke found himself constrained in ways that Professor Bernanke did not anticipate, and that his academic critics still don’t seem to appreciate: by political realities, internal opposition and a heightened awareness of consequences.

Several of his most potent prescriptions, like the helicopter drop, require the cooperation of fiscal authorities. But Congress in recent years has shown little interest in helping to stimulate the economy. Instead, the Fed’s efforts have been undermined by repeated rounds of federal spending cuts.

The Fed has also struggled to anticipate those cuts — one reason that its stimulus campaign was only slowly expanded to its present scale. Mr. Bernanke has acknowledged that the Fed did not do enough in the first years after the crisis.

Perhaps most important, internal resistance has increased with each expansion of the Fed’s stimulus campaign as officials fret that the economic benefits are shrinking even as the chances increase that something will go wrong.

“He came in as a brilliant academic — a very smart guy with a very deep background in monetary economics — but it was as an academic,” said Donald Kohn, who served as the Fed’s vice chairman under Mr. Bernanke until 2010. “And one of the things that necessarily happens to you when academic theory meets the real world is you become more aware of the limitations of the theory and the models and how you need to operate in the real world that may not function the way your models suggest that it should function.”

Mr. Kohn added that, in his view, Mr. Bernanke rose to these challenges.

Last autumn, after months of quiet campaigning, Mr. Bernanke won support for two experiments that made job creation the clear focus of Fed policy. The Fed announced in September that it would buy $40 billion a month in mortgage bonds until the labor market outlook improved “substantially.” In December, it said it would hold short-term rates near zero at least so long as the jobless rate remained above 6.5 percent.

Mr. Bernanke spoke of the Fed’s “grave concern” about unemployment, a problem that he said should concern every American.

But many of the officials who supported the program did so tentatively, and their growing unease drove the decision for Mr. Bernanke to announce in June that the Fed intended to reduce its bond-buying before the end of the year.

Central Bank Straight Talk

On an unusually warm day in January 2012, Mr. Bernanke walked into a room filled with reporters, sat down behind a desk dressed with the Fed board of governors seal and announced that the Fed wanted inflation to be about 2 percent a year — the first time the Fed had detailed its economic objectives so specifically.

It was a moment of his own construction. For two decades, he had been perhaps the foremost proponent of the idea that central banks could increase the power of their actions by speaking clearly about their intentions.

As a member of the board of governors, he argued publicly for the Fed to adopt an inflation target despite the opposition of Mr. Greenspan, the powerful chairman, who believed that talking about the future would constrain the Fed’s flexibility.

Mr. Greenspan had quickly marginalized other academics sent to the Fed to counterbalance his dominance, but his impending retirement made it necessary to talk about other ways of running the Fed, and Mr. Bernanke carefully presented his approach as a method of bottling Mr. Greenspan’s magic.

That was merely politic. Mr. Bernanke believed that making the Fed more predictable would improve its performance. He wanted it to spend more time operating on autopilot. He wanted to reduce the chairman’s importance.

“The thing I think he’ll be known for, if it lasts, is depersonalizing the institution,” Professor Gertler said. “The idea is that the Fed has a systematic response to the economy. It’s not the hunch of the chairman; it’s communicating to the public clear rules of thumb for monetary policy.”

Yet by the time Mr. Bernanke was able to achieve his goal, his purpose had changed. Stabilizing inflation, which he described in his first speech as Fed chairman as the primary goal of monetary policy, no longer seemed enough. Indeed, announcing the target seemed to make it easier for the Fed to suggest that it wouldn’t mind if inflation rose a little above 2 percent during its campaign to spur job creation.

Paradoxically, by emphasizing communication through innovations like regular news conferences, which he introduced in April 2011, Mr. Bernanke in some ways increased the chairman’s role rather than submerging it in the institution. And the emphasis on transparency remains more popular with academics than with policy makers whose roots are in the markets.

Paul A. Volcker, the former Fed chairman, has argued that transparency can encourage investors to become overconfident about the path of policy, resulting in undue risk-taking, basically because people aren’t very good at minding the difference between a forecast and a promise.

When Mr. Bernanke sought earlier this year to shake some speculative excess from financial markets by announcing that the Fed intended to reduce the volume of its bond purchases, some argued that he was being forced to fix a problem created by his own communications policy.

“I think transparency in central banking is kind of like truth-telling in everyday life,” Mr. Bernanke said in response. “You’ve got to be consistent about it.”

In the weeks after his initial remarks, Mr. Bernanke and other Fed officials made the same points over and over again until they felt that they had been heard. If the Fed pulled back later this year, they said, it would be doing so only because it was finally starting to achieve its goals.

‘I’m Sure You’ll Miss Us’

Mr. Bernanke told The New York Times in the spring of 2010 that he had accepted a second term as Fed chairman for two reasons.

“First I wanted to see through the process of financial regulatory reform, which will have long-lasting impacts on our economy,” he said. “Second, I felt that I could play a useful role in managing the exit from our extraordinary policies, including our highly accommodative monetary policies.”

As he prepares to step down, the work of regulatory reform is a long way from finished and the Fed’s exit remains entirely in the future.

Nonetheless, Mr. Bernanke is already starting to let the weight of the last eight years slip from his shoulders. In June, he delivered a lighthearted baccalaureate address at Princeton, looking more comfortable wearing medieval robes in a Gothic chapel than he has often looked in new suits.

“I wrote recently to inquire about the status of my leave from the university,” he joked, “and the letter I got back began, ‘Regrettably, Princeton receives many more qualified applicants for faculty positions than we can accommodate.’ ”

In July, Mr. Bernanke did not bother suppressing a snort of laughter when a senator, thanking him for his service at what may well have been his last Congressional hearing as the Fed chairman, added, “And I’m sure you’ll miss us.”

And, this past week, he skipped the annual late-summer gathering of central bankers at Jackson Hole, Wyo., where he had spoken in each previous year of his chairmanship.

“It really seemed that the burden of dealing with the crisis, just the way he would carry himself when you would see him, it looked like a tremendous weight,” Professor Woodford said of Mr. Bernanke.

“And I hope that either because the economy recovers or he can hand off his job to someone else, I’m hoping that he does indeed become much more lighthearted again.”

And who knows? Someday, he might even be able to sell his town house for a profit.

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Fed releases plan to curb banks' physical commodity activities

Fed releases plan to curb banks' physical commodity activities | Cultural Trendz |

WASHINGTON — The Federal Reserve Board unveiled a concept proposal Tuesday outlining how it plans to limit banks' activities in physical commodities, a day ahead of a Senate subcommittee hearing devoted to the issue.

The central bank, which is responsible for supervising the largest financial institutions in the country, is weighing whether it should extend limits that would reduce a bank's stake as well as how much institutions can trade in certain commodities.

"The board is considering whether additional restrictions would help ensure that physical commodities activities authorized for financial holding companies are conducted in a safe and sound manner and do not pose a threat of financial stability," the agency said in a press release.

On Wednesday, Michael Gibson, direction of the division of banking supervision and regulation at the Fed, will appear to speak on this issue before the Senate Banking financial institutions subcommittee, which is chaired by Sen. Sherrod Brown, D-Ohio.

Gibson will be joined by Vince McGonagle, director of the division of market oversight for the Commodity Futures Trading Commission and Norman Bay, director of the office of enforcement for the Federal Energy Regulatory Commission.

At this stage, the Fed is only soliciting comments from stakeholders before deciding how to proceed on this issue. "After reviewing the comments, the board will consider what further action, including a rulemaking, is warranted," the agency said.

The Fed is asking the public to weigh in on a variety of issues, including the risks that physical commodity activities can pose to banks' soundness, potential conflicts of interest by firms engaging in physical commodity activities and possible risks and benefits of regulators imposing additional capital requirements on those firms.

The deadline to file comments is March 15.

U.S. financial institutions have already begun trying to exit the physical commodities business given regulatory investigations and potential rule changes. In July, JPMorgan Chase & Co. announced its sale of its commodities business to potential buyers. Morgan Stanley has also reportedly been in talks to sell its commodities-trading division as well.

Brown immediately criticized the Fed's action as a "step forward" but "still overdue and insufficient."

"Each day that we wait to rein in these activities means that end users and consumers will pay higher commodity and energy prices, and taxpayers will continue to be exposed to excessive risks at 'too big to fail' banks," said Brown, who first held a hearing on the issue last July, in a press release.

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