In the first issue of the Financial Analysts Journal of January 1945 the question “Should Security Analysts have a Professional Rating” was debated.

January 1945

Benjamin Graham (of Graham & Dodd fame) wrote in the affirmative.

Lucien O. Hooper (a founder of the Security Analysts Federation, and a vice president, director of research, and analyst of W.E. Hutton & Company) took the contrary point of view.

In time, Benjamin Graham’s point of view was adopted and the first CFA exams were held in June 1963.

However, some of Mr. Hooper’s initial objections are worth remembering.

Lucien Hooper’s objections

Although written 64 years ago, some of Mr. Hooper’s objections to the issuance of CFA credentials are relevant in light of the Crash of 2008.

He wrote:

Unless our employers, the investing public, or some government regulatory body force regimentation upon us, we earnestly desire to remain free from this unnecessary formalism.
It is not a matter of record that the Securities & Exchange Commission, the New York Stock Exchange, the Association of Stock Exchange Firms, or financial institutions have shown even an academic interest. It is not charged that the practices of the profession are honeycombed with abuses which need immediate and radical correction. Nor can it be contended that the mere establishment of the rating of Qualified Security Analyst (analogous to Certified Public Accountant) would make security analysts any more moral, more intellectually honest, less lazy, or more competent. Most analysts of experience will agree that laziness is our professions most virulent enemy.
The fourth deadly sin: sloth (Laziness)
So far as incompetence is concerned, every one of us knows that it more frequently is due to unwillingness to put in the required number of hours of work than to the lack of any formal education.
… the rating itself would be meaningless unless the rating authorities are able to enforce penalties. Lawyers are disbarred, doctors may have their licenses taken away, and a man who loses his C.P.A. rating often sacrifices an important part of his earning power.

No penalties for the lazy or incompetent

It is often recognized that failure of securities analysis and investment research was an aspect of the Crash of 2008. The analytical ability of the major credit rating agencies has been severely criticized by Congress. Failure of analysts to warn investors of problems with auction rate securities or insured municipal bonds have been noted.

No one was defrocked or burned ...

As the Crash evolved, leading investment banks confessed that they were unable to value billions of dollars of securities held in their own portfolios.

This clearly indicates a problems in the profession of “security analyst”.

However, not a single credentialed analyst lost his or her certification. The SEC imposed no penalties on S&P or Moody’s for sloppy work. As Lucien Hooper indicated three generations ago, the CFA credential is largely meaningless, measuring neither competence nor commitment to professional responsibilities.

In fact, the credential is useful mainly in getting a job and as a marketing gimmick to dress up a firm’s portfolio of analysts.

It is also the source of substantial income for the CFA Institute that runs the certification program for fat fees.

Will there be changes in the profession of security analyst?

It is unlikely that there will be any significant reform of the credentialed profession of “security analyst”. As Mr. Hooper pointed out, the value of credentials for this profession is questionable. This weakness is compounded when there is no ongoing discipline associated with continued certification.

No shortage of diploma mills ...

Furthermore, even if the CFA Institute were to raise standards of the profession, say by regular re-examinations or disciplinary actions for sloppy analysis (if that were even possible), there are many credential mills willing and able to churn out some combination of letters to attach to a person’s name to dress up a job resume.

Mr. Hooper seemed to suggest that anyone with above-average intelligence and a willingness to work hard at digging out information and thinking about the value of securities could do a better job than a credentialed analyst that succumbs to laziness, or whose time is devoted to trading securities or marketing chores, rather than research and analysis.

Security analysis requires not so much the possession of certain knowledge for which one might be tested, but rather the skill and determination to work hard at researching new areas, without predetermined conclusions or knowledge.

Between 1963, when the first CFAs were certified and the Crash of 2008, capital markets became increasingly complex, covering many more types of securities, institutions, jurisdictions, and instruments. Consequently, the work required to get the research job done properly today has increased considerably over the decades.

Furthermore, the traditional focus of a security analyst — financial statements and market prices — needs to expand to cover legal and operational aspects of complex instruments in exotic jurisdictions and circumstances, many, or even the majority, invented after certification may have been granted.

As indicated in the article, “British CFAs reject the Efficient Market Hypothesis“, elements in the curricula of analyst certification often fall behind the reality of today’s market.

Moving away from certification of knowledge

The lesson of the Crash of 2008 might be that future security analysts should be trained on-the-job, in actual research, with less emphasis on fixed curricula and studying for certification exams.

After all, if the structure and details of the market are constantly changing, with ever-increasing complexity, and if an analyst must be able, above all, to learn new things as one goes along, everyday, throughout his or her career, why not get right down to it, rather than waste time studying for exams on sterile topics?


In a lead op-ed editorial in the Wall Street Journal on July 21, 2020, Federal Reserve Chairman Ben Bernanke revealed the Fed’s exit strategy with regards to the inflationary effects of the Obama “spending is stimulus” packages and other government measure to contain the current crisis. This article is mandatory reading for anyone interested in the future of the US economy.

Sweeping up worthless currency: Hungary 1946
Sweeping up worthless currency: Hungary 1946

First of all, the Federal Reserve Bank does not foresee inflation as a problem in the immediate future:

As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period.

This seems to reflect the Carter-era mistake of confusing economic recovery (measured in terms of employment and business activity) with inflation.

Flawed dependence on “managing” depository reserve balances

The most powerful tool that a central bank has to sop up money created by excessive government spending is to increase mandatory, non-interest-bearing reserve requirements of depository institutions. This method has the potential of effectively “sterilizing” money that the government deposits in bank accounts in payment of imprudent Congressional spending, while reducing interest charges on government deficits.

In the United States, however, in response to lobbying of the banking industry, plus regulatory confusion between banking and the securities market, the Federal Reserve’s powers in this area have been dramatically reduced.

  1. Most “bank deposits” are now with money market funds, rather than banks, thereby escaping Federal Reserve control. (See: Money Market Funds will tell us when inflation is here. )
  2. Since the early 1990s, mandatory bank reserves have fallen sharply. In 1990, reserve requirements on large time deposits were eliminated. In 1992, reserve requirements on transaction accounts were reduced. Banks have introduced “sweep accounts” which automatically transfer funds from regular deposit accounts to time deposits or money market funds, both exempt from reserve requirements.
  3. The largest portion of mandatory reserve requirements that now remain are relative to vault cash or purely operational needs of banks, having little effect on the money supply.

For the Federal Reserve to effect changes that would restore its powers to neutralized excess government spending, it would need to go before Congress and obtain such authority. There are four formidable barriers to restoring such powers:

  1. Opposition from the powerful banking lobby.
  2. Opposition from factions seeking to reduce Federal Reserve power in general.
  3. Opposition from undeclared factions favoring “easy money” and currency devaluation as a means of reducing debt burdens on a profligate population.
  4. Opposition from the securities industry and securities regulators who will fight to keep money market funds away from the powers of the Federal Reserve.

Perhaps recognizing the impracticality of having anti-inflationary powers restored by Congress, Chairman Bernanke has focused on using the newly granted powers of paying interest on bank reserve requirements as a means of controlling the money supply.

In other words, Bernanke has effectively taken “The Nuclear Option” off the table as a tool to fight inflation. (See: How the US may avoid inflation: The Nuclear Option. )

Bernanke’s false hope: fiddling interest rates on bank reserves

According to Chairman Bernanke’s WSJ article, the primary inflationary threat comes from excess bank deposit with the Federal Reserve resulting from government actions taken to stimulate the economy in the early stages of the crisis.

These emergency reserve-producing actions consist of such things as the Fed acquiring securities and loans from banks to provide liquidity support in the immediate crisis. Such amounts on the Fed balance sheet are now more than $800 billion above “normal” levels. Of course, these balances must be worked off.

However, most of the Obama “spending is stimulus” measures have not yet reached the stage where funds have been disbursed. As this happens, money will enter the banking system and will be swept into money market funds and time deposits, exempt from Fed banking reserve requirements. Money market funds in particular are a parallel banking system outside of Fed control. With no reserve requirements, while presenting all the features of demand deposits, these funds have the potential to be highly inflationary due to the “multiplier effect”.

Chairman Bernanke’s plan is to use the newly granted power of paying interest on bank reserve requirements as a sort of free market enticement that will attract bank reserves to federal control. This, of course, has an obvious, glaring disadvantage compared to traditional mandatory non-interest bearing reserve deposits — the interest paid by the government will add to the government debt burden at a compound rate.

Increasing the interest rate on federal reserve deposits will contribute to higher interest rates throughout the economy — a typical effect of inflation, while increasing the cost of doing business — a measure to reduce economic activity. In other words, a recipe for stagflation.

Another problem with Bernanke’s formula is that unless the Fed takes decisive, believable actions against inflation, primary buyers of government securities — holders of debt representing the accumulated trade deficit — will shun government securities and move into non-financial assets. (See: How long will it take to work off the US trade deficit?)

Finally, the Bernanke formula seems to ignore the fact that interest rates are not the sole, or even primary determinant of money flows in an inflationary environment. In an open, global economy, funds will flow out of the United States to economies with stronger currencies.

Of course, before we get to the point that inflation begins to kick in, management of the Federal Reserve may change — for better or worse. Furthermore, with the popularity of the Obama administration teetering over reactions to the “spending is stimulus”, “cap and trade”, and Obamacare packages, there is no assurance that current policies, for better or worse, will persist.

These are trying times.


The theater of the absurd where US monetary policy is played out reached the height of the ridiculous when, on July 2, 2020, the Federal Reserve issued a press release advising the public to check with their banks to see the terms and conditions under which a bank may accept for deposit the “registered warrants” (IOUs) of the now insolvent State of California.

Note: the Federal Reserve did not prohibit banks from receiving California IOUs as “legal tender” for deposit, nor insist that banks, if they wished to help clients, simply buy the bills as securities, at a discount reflecting the time value of money and risk. Nor did the Federal Reserve clarify whether California IOUs on “deposit” would be subject to FDIC guarantees.

According to the Los Angeles Times, Bank of America, Wells Fargo, Chase, City National, Union Bank, and other big banks were accepting IOUs issued by the State of California for deposit.

Of course, the Federal Reserve allows banks to receive Federal IOUs (Federal Reserve Certificates, aka “money”) for deposit, so why not State of California IOUs?

Speaker Nancy Pelosi, Representative Henry Waxman, and Senator Barbara Boxer (of “don’t-call-me-ma’am” fame), representing the State of California, were silent on the matter.


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