In yesterday’s post, I discussed the origins of the Federal Reserve System. In an interview, Jane D’Arista, who served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives and as a principal analyst in the international division of the Congressional Budget Office, explains what is wrong with the current Fed system and how it came to be dominated by private banking interests.
Congressman Ron Paul and Senator Bernie Sanders (I-Vermont) have been pushing for the Fed be ‘audited’, i.e., that the books of the Federal Reserve be opened for public scrutiny, and as a result of their efforts the recent Wall Street reform bill has provisions that open a window into how the Fed operates. It has forced the Fed to reveal, for the first time, its own role in the emergency bailout of 2008.
Matt Taibbi discusses what has been revealed. It is the usual story of the oligarchy looting the public treasury.
The audit of the Fed was undertaken because Bernie and a few other members of congress fought very hard during the Dodd-Frank regulatory reform debate to force open Ben Bernanke’s books, and as a result we now know the staggering details of the secret bailout era. We know that Citigroup received $1.6 trillion in loans, and Morgan Stanley $2 trillion, and Goldman Sachs – the same Goldman Sachs that bragged about how quickly it paid back its $10 billion TARP bailout – over $600 billion. We know that hedge fund billionaires who moved their corporate addresses to the Cayman Islands to avoid U.S. taxes were rewarded by their buddies in government with huge Fed loans; we know that the U.S. government likewise has been extending massive loans to a variety of Japanese car companies at a time when many American auto workers in Detroit have seen their wages cut in half, to $14 an hour. There’s that and there’s more on the outrage front, and we know it all because Sanders kicked and screamed and stamped his feet about Fed secrecy until just enough other members of the Senate decided to go along with him.
Financial analyst Pam Martens points out what a major role the Fed played in bailing out the big financial institutions, showing the power of the oligarchy. Behind closed doors, the Fed shoveled out $ 9 trillion of taxpayer money to private financial institution, far exceeding the publicly revealed amounts. She warns us to expect more revelations in the coming months.
A careful review of these data makes it highly likely the GAO will be releasing some startling findings come next July 2011. That’s when the American people will have a much clearer picture of how the Federal Reserve shoveled taxpayer money to Wall Street by the trillions. As a result of Senator Sanders’ legislative efforts, the Government Accountability Office (GAO) is to complete an audit by next summer of the Fed’s lending programs during the financial crisis.
The data starkly show a comatose Wall Street being resuscitated with whatever financial might the Federal Reserve could pump into its tangled web of funding vehicles. It also points to how the Fed was dispersing sums which dwarfed the U.S. Treasury’s $700 billion TARP (Troubled Asset Relief Program) bailout program while allowing the TARP to take the media heat for obscene funding of Wall Street.
Martens describes the incestuous relationships between the White House, the Fed and the financial sector, all working behind the scenes and using taxpayer money to benefit themselves. All the financial shenanigans that caused the crisis were due to these financial institutions finagling their assets to get record profits on paper that in turn resulted in their top executives getting huge remunerations and bonus packages. And when the system crashed, the Fed and the government bailed them out so that now they are still paying themselves huge bonuses while unemployment seems to be at 10% (officially) and 20% (unofficially) for the indefinite future.
The Fed was not bailing out not just US banks but banks worldwide, leading Sanders to ask, “Has the Federal Reserve Become the Central Bank of the world?”
When AIG was bailed out out in Sept. 2008 and immediately passed on huge sums to overseas counterparties, including Société Générale (France) and Deutsche Bank (Germany), there was a public uproar. The Fed data out today confirms what many suspected. This back-door bailout of foreign banks was just the tip of the iceberg. The Fed data covers 13 programs amounting to some $3.3 trillion in loans. We could only look at a few, but in every program examined, foreign banks were huge beneficiaries of a taxpayer-funded lifeline.
To see how far things are out of whack, if you ask anyone on the street how the economy is they will likely say it is terrible. Almost all of us are aware of people who are out of work and see little hope of finding anything soon. The rate of new job creation is terrible. Houses are being foreclosed and food banks are finding it hard to meet the demand. And yet, the stock market has soared since the 2008 crisis. All these are signs of an economy that is careering out of control.
In defense of the Fed, at the time when the loans were made, it was facing a situation where the economy was collapsing, and really fast. It was like a house burning: first, you put out the fire, and only afterwards you start the legal proceedings to convict the arsonist. So, the Fed was faced with the need for an urgent response.
The appropriate course of action is to put banks under time-limited receivership. Receivership is the only legal solution, and it worked well during previous financial crises, such as the great depression and the S&L crisis of the ’80s. Receivership is a true free market solution because it is basically a method to handle bankruptcy smoother than, say, chapter 11 (it is only appropriate for banks, however). The problem is that once a bank is in receivership, its governing bodies (CEO, etc) are sacked, and the government has access to all the bank books, including complete documentation of illegal or unethical practices. Hence, the only lawful solution was not really viable.
However, receivership is beyond the scope of Feds action (the FDIC and the Treasury are responsible for handling bank failures). So, here is the conundrum at the Fed. The rest of the government is asleep at the wheel (or … it knows very well what it is not doing, depending on your interpretation of the facts). The Fed has only two possible remedial actions: let the economy crash into Great Depression II, or print loads of fresh money and loan it to the banks. In the end, the Fed chose the latter, but in reality they were really cornered into it by the inactivity of our elected officials. Further, this actions caused no end of trouble to the Feds. Mano pointed out some responses in the House and in the Senate. Additionaly, the Fed has effectively favored banks over other institutions. They have loaned to banks freshly printed money on questionable real-estate collateral, but they did not make any loan to, say, Chrysler, on their questionable collateral. But, the Fed is not supposed to play favors (they are supposed to take in only high-quality collateral, such as Treasuries). Thus, the Fed independence has come under questioning.
In summary, the Feds was cornered into these questionable actions by the (intentional?) sloth of our elected officials, and has paid a political price for it. The real failure of the Feds is completely different: they failed their regulatory function during the period leading up to the crisis. But, this is another story, and this comment is already long as it is.