Rube Reality

On Friday, Sept 26, the House Financial Services Committee held a full committee hearing on H.R. 1207. If you’re not familiar with this bill, it’s been introduced in every session of Congress by Ron Paul for over twenty years to audit the Federal Reserve. Before last year, it was largely ignored by the rest of Congress – times were good, so why worry about the Fed? The economic meltdown and the Fed’s actions since March of 2008 has changed that perception, even if only momentarily. Why the current interest? Because the Federal Reserve – a privately owned corporation who’s major shareholders are all in the shadows – went to Congress, along with their own man, Hank Paulson, with dire doomsday scenarios about the complete collapse of the economic system if a tax-payer funded bailout didn’t buy up toxic assets. The very next day after the bailout bill was passed, Hank Paulson told Congress that the money wasn’t going to be used to buy up toxic assets, it was going to be used to balloon the assets for these banks’ balance sheets – and in the end, it wasn’t $750 billion, it was $9.8 trillion, most of which is unaccounted for. To add insult to injury, Obama’s stimulus package came from that $9.8 trillion – loaned back to the taxpayers with interest.

The primary witness giving testimony was Scott Alverez, who is General Counsel to the Board of Governors of the Federal Reserve. I’ve never heard such Orwellian double-speak in my life. Here’s a man who can look Congress in the eye and say with a straight face – and a well polished passive-agressive routine – that in order for there to be transparency in the financial system and to have transparent, open banks, it’s necessary for the fed to do things in secret and without any oversight from any governmental agency.

Furthermore, Mr. Alavrez stated his belief (in a repetition of other Fed officials, including Ben Bernanke) that a GAO audit would hurt the Fed’s ability to effectively determine monetary policy and set interest rates. Let’s consider how well the Fed has done in their mission, which is to stabilize prices and keep everyone employed. Since 1913, when the Fed Reserve Act was passed and Congress abdicated their Congressional duty, the dollar has lost 96% of it’s purchasing power due to monetary inflation.  We’ve also had a Great Depression and several major recessions – all of which were accompanied by wide-scale unemployment. The boom/bust cycle the Fed was supposed to alleviate has continued over the last century, but as one Congressman pointed out during the hearing, the amplitude of that cycle has increased – i.e., the booms result in bigger bubbles, and correspondingly the busts result in more painful recessions and depressions.  The Fed Reserve has done such a poor job fulfilling their mission, that they had to have the taxpayers fund them to the tune of nearly 10 trillion dollars to fix the mess they created by pushing for deregulation and holding interest rates artificially low for so long – not to mention their role in unleashing derivatives on the world. It’s clear to me they’ve failed their mission – even with all the secrecy they’ve had. How could a GAO audit possibly hurt the Fed’s performance? The only way that comes to my mind is if they carry out their implied threats to Congress about wrecking the economy. Haven’t they already wrecked it?  Andrew Jackson heard the same threats from Nicholas Biddle (though Biddle was more direct), Jackson “killed the bank” anyway, Biddle contracted credit and caused a recession – and in the end, the power, economy and real wealth of the USA still expanded faster without any central bank then it has since the Fed Reserve Act was passed.

Another reason cited by Alverez for maintaining the secrecy is that borrowers who take money from the various Fed programs shouldn’t be stigmatized for borrowing that money. That’s funny, because when I go to a bank for a loan, I have to give the bank permission to run a credit report, which shows who I’ve borrowed money from. I can refuse the credit report, but the bank likely won’t lend me any money then. It’s only fair that a lender should know what kind of a credit risk I am, an argument I would have thought anybody in the Fed Reserve would agree with. Why then, especially if taxpayer money is involved, shouldn’t the largest firms on Wall Street, be subjected to the same scrutiny before that money is given to them? As publicly traded companies, they already have to report their financials.  Taking TARP money shouldn’t exempt them from their legal obligations, so if they’re not breaking the law they would be stigmatized anyway – as they should be in a free and open market economy. So whose privacy is the Federal Reserve really concerned about here?

According to Mr Alvarez, the Fed will loan money to anyone so long as they feel confident (as in “more than 51%” confident) they’ll be paid back – and if they feel confident, they don’t need to have those loans secured by anything. So the worst credit risk in the world – a Wall Street bank that’s been run into the ground because they over-leveraged themselves on their overvalued sub-prime assets – can get tax-payer money from the Fed Reserve, in secret, with no collateral! I wonder how those banks report this on the balance sheet without mentioning where those assets came from?  In short, Mr. Alvarez believes the Fed has the right to increase the country’s debt by $10 trillion in secret and without any oversight – and Ben Bernanke has stated the same belief. Apparently they don’t believe spending that much taxpayer money has any political ramifications, which leads me to question their sanity.

Let’s assume the Fed has actually done a good job over the last 96 years. How would an audit harm their ability to do their job? The claim made by both the Fed Reserve and most of Washington officialdom (including Barney Frank), is that the market could be manipulated by knowledge of the Fed’s Trades, and so they should at least be kept secret for a temporary time – anything from one month to five years depending on which political blowhard is running their mouth. The entire Financial Services committee seems to agree with this, but I don’t. Firstly, how would anyone profit from what would be publicly available knowledge that anyone can get? You can’t do illegal insider trading based on what you saw on the TV news last night. Secondly, any trade I as an individual have executed (and even any movement of money between say, my checking and savings account) is also subject to review under the Patriot Act, and in certain conditions a “Suspicious Activity Report” (SAR) has to be filed with the Treasury Dept. Simply moving to another state and changing the address on your account will trigger an SAR! Why is everyone in this country except the Federal Reserve required to have their trades disclosed to the government? Even when a CEO makes a multi-million dollar trade in his own company, that trade must be reported publicly to the SEC as an “insider trade” within days – and public knowledge of those trades has never hurt the market. Why should the Federal Reserve, especially now that they are involved directly with taxpayer-funded bailouts, not be subject to the same scrutiny as the rest of us?

An interesting surprise for me was a Democrat from Florida named Alan Grayson.  While the questions he’s asking are simple and aren’t new, the matter in which he questions people from the Fed puts a smile on my face and makes me want to cheer. I’m not so sure he isn’t potentially a demagogue witch-hunter, similar to McCarthy – but he’s simply looking for honest answers so far and not putting up with the Fed’s typically dissembling ways, so for now at least, more power to him! Barney Frank, on the other hand, is a proven demagogue who, even on a bi-partison bill with 290 cosponsors, still ran this hearing with an obvious bias to his party and their agendas. He seems to support this bill as part of a larger regulatory reform package – which makes no sense to me. How can Congress say what needs to be reformed with the Fed Reserve until a real audit is performed?

Robert Kuttner testified before Frank’s Financial Services Committee in Oct 2007 “Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s.” Maybe I missed it, but I don’t see that Frank has any interest whatsoever in putting Glass-Steagall back in place, and based on his reactions to events in the governmental housing agencies that are his favorite pet projects, I expect whatever regulatory “reform” he comes up with will prove to be as useful as a band-aid being applied where a tourniquet is needed.

The Fed bailing out it’s chosen few has introduced a far bigger problem with “moral hazard” than the Fed clearly wants to admit. When the government allowed Goldman and Morgan to “change” from “independent investment banks” to “bank holding companies” (a move made possible by the revocation of Glass-Stegall) those firms were then in a position to take bailouts. (Lehman Bros. was not allowed to make this change, and so they weren’t bailed out and failed as a business).  This is from the N.Y. Times report on this story (bolded emphasis mine):

“While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with…access to permanent liquidity and funding,” Lloyd C. Blankfein, Goldman Sachs’s chairman and chief executive, said in a statement Sunday night. “We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources.”

John J. Mack, Morgan Stanley’s chairman and chief executive, issued a statement that said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position – with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace. It also offers the marketplace certainty about the strength of our financial position and our access to funding.”

The two men who chair the boards and run these companies view their new companies’ new status as holding companies as a good thing because they can expect to be funded and/or bailed out whenever it’s necessary.  These statements were made before the Congressional bailout, and they go to show that moral hazard is a far larger issue to be dealt with than the Federal Reserve is admitting, for the simple reason that these companies’ beliefs about “permanent funding” became established fact with the bailout – the precedent’s been set. The Fed’s position on moral hazard since March of 2008 has steadily been that it’s an issue of concern, but they’re aware of and will deal with it – in fact, they’re so confident in what they’re doing they have managed to convince Obama they should have more regulatory power.  I’d like to know when they’re going to deal with moral hazard, and I’d like to know how, when they, in their position of leadership in the banking community, aren’t setting a good example to follow by continuing to insist on secrecy?

Alverez was asked by Grayson if the Fed Reserve has ever manipulated the stock market. Alvarez refused to admit the Fed “manipulates” but he did say the Fed “participates” indirectly through dealers. Where’s the line that separates “participating” in a market from “manipulating” the market, especially in light of the Federal Reserve’s responsibility to set the country’s monetary policies and the power they’ve been granted to do so? Greater authority should come with greater accountability, and the Fed’s entire case against a GAO audit seems to rest with arguing the opposite. In Friday’s hearing in fact, the case was made that the Fed Reserve can’t be independent without privacy. I can’t see any reason they must be independent. Regardless, as I have no guaranteed privacy since the Patriot Act was passed, by the Fed’s argument I also have no guaranteed independence. If this is a democracy as I’m continually being told by the political leadership of this country, then the Fed Reserve should have the same amount of privacy and independence as I do. Really, what’s the big deal? If the Fed Reserve has done no wrong, then they should have nothing to hide, right?

In reality, I can think of plenty of things they’d want hidden that are already right in plain sight. For example, Alvarez, during Grayson’s questioning, explained that the Fed will execute trades through Primary Dealers in their attempts to manipulate interest rates in order to fulfill their charter. He mentioned J.P. Morgan as one of those dealers and said the full list is on the Fed’s web site. It sure is, the latest of which is here. On this list, you will find, among others, J. P. Morgan Securities Inc., and Goldman, Sachs & Co. These are the two companies mentioned in the N.Y. Times article – and their status as Federal Reserve Primary Dealers hasn’t changed in the period since they changed their status to “bank holding companies” and took taxpayer-funded bailout money, despite the capital requirements alone for being a Primary Dealer. Just how many conflicts of interest will it take before Congress passes some real reform? Forget this New Economy bullshit that Wall Street loves to spout already – isn’t it apparent by now that it’s all just recycled Ponzi schemes with new technology!

Grayson asked Bernanke in a July hearing about $1/2 trillion in loans to foreign central banks, and was told by Bernanke that it was a coincidence that the dollar had gone up in value by 30% at the same time. A quick history lesson (of the type Barney Frank will never give at the start of a hearing): These central bankers have financed all the major wars – and more importantly the dictatorial leaders that started or led them – of the last 200 years. That includes Napoleon, Lenin, Stalin, Hitler, Mussolini, and Mao – and of course both political parties here in all of their usually misguided endeavors.  Today in 2009, when Ron Paul’s bill will strike a measure from current law that says Fed Reserve “transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization” can’t be audited, the public figures of the Federal Reserve all have the gall to stand up and say they need their privacy and that GAO scrutiny of their policy-making would politicize monetary policy. This is brazen as it gets: these people who clearly have NO national loyalties have taken trillions in taxpayer money (which has been – and is still being – used in a fire-sale redistribution of wealth and will at some point in the near future drive inflation), have held interest rates at artificial lows for nearly two decades to help various political figures and campaigns, have enabled the U.S. government to run budget deficits for over 50 years straight, and are financing foreign banks and governments behind closed doors, and these people have the nerve to say they aren’t politicized already?

An organization that has always been as secretive as the Federal Reserve has been, and who reacts in such a defensive matter over a simple audit (as Ron Paul lectured Alverez at one point, it’s silly to believe GAO audits set policy), will drive conspiracy theories, whether true or not, and this was pointed out to Alverez at one point. Even if all the decision-making at the Federal Reserve is always done with the most pure and noble of intentions, maintaining so much secrecy promotes social unrest, and doing so is therefore a political act in and of itself.  As the various members of the Federal Reserve have themselves said, it would be a bad thing if their institution was politicized. How can the Federal Reserve then, with any reasonable argument, continue to stand against any reform that might come from an audit, much less the audit itself?

Tags: Alan Grayson, Bailouts, Barney Frank, Ben Bernanke, Federal Reserve, Glass-Steagall, H.R. 1207, Ron Paul, Scott Alverez

This entry was posted on Wednesday, September 30th, 2009 at 18:29 and is filed under Politics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.