When the severe financial panic struck the United States in 2008, it was absolutely essential that the nation's central bank, the Federal Reserve, preserve the nation's payment system. The payment system includes bank accounts, especially those guaranteed by the government such as commercial bank accounts and money market accounts that have federal insurance, a liability of the taxpayers. The payment system includes the operation and security of digital transfers of funds.
That should not mean that the Federal Reserve is authorized make loans to any individuals, partnerships and corporations with the approval of as few as two unelected bureaucrats. It should not mean that these few unelected officials face no required checks or balances. It should not mean that Federal Reserve officials need no detailed source records, nor, if they do exist, should they destroy them, a policy they began in 1995. There should be full individual accountability for each of the Fed's unelected officials who have immense power over the economy.
Only two unelected bureaucrats at the Federal Reserve can decide who can receive trillions of dollars of loans without even consulting Congress. The Board of Governors of the Federal Reserve (not the Fed's other policy committee, the Federal Open Market Committee) has the immense power to bypass the congressional appropriation process to make loans to individuals, partnerships and corporations that are "unable to secure adequate credit accommodations from other banking institutions" provided there are "unusual and exigent circumstances."
Before 2002, at least five of the seven Fed governors had to authorize the action. (Section 13-3 of the Federal Reserve Act). In 2001 the law was amended after the 9/11 terrorist attacks so that if there are less than five governors in office these loan powers could be authorized by a "unanimous vote of all available members then in office -- if at least 2 members are available." [11/26/01 (115 Stat. 333)]
Consider a few of the many past events at the Federal Reserve that I have described in Deception and Abuse at the Fed (U.T. Press, 2008 )and on The Huffington Post leading up to the $3.3 trillion insider trading exposed last week. They can be described as corrupt practices that do not belong in the government of our great democratic nation.
For 17 years the Federal Reserve lied that it had no transcripts of one of its two policy making committees. The 17-year lie ended in 1994 during a congressional investigation by House Banking Committee Chairman Henry B., Gonzalez. Fed personnel were forced to end the lie and show me the 17 years of neatly typed transcripts around the corner from Fed Chairman Alan Greenspan's office.
The Fed again began issuing the transcripts with a ridiculously long lag of five years. Then in 1995 the Greenspan Fed voted (without any record of how each unelected bureaucrat voted) to destroy the source transcripts and send only the edited records to the National Archives and Records Administration where they are stored for 30 years. Donald Kohn, who became the Vice Chairman of the Fed's Board of Governors, answered a letter I had sent to Fed Chairman Greenspan. Kohn said that the destruction of the the source records was considered legal.
Almost immediately after Alan Greenspan became chairman of the Fed in August 1987 he was confronted with a stock market crash. Stock market prices reached their peak in August and then fell with a 22.6 percent drop occurring in one day, October 19, 1987. Seven years later the Greenspan Fed, under pressure from a Gonzalez investigation and a series of hearings, sent Congress the long list of FOMC phone conference call transcripts from 1976 to 1993.
The Greenspan Fed may have correctly handled the liquidity problems associated with the stock market crash. The cautionary word "may" is appropriate because the Fed reported to the Congress that transcripts of eight consecutive "FOMC Telephone Conference Calls" following the crash are listed as "no transcript" (October 21, 22, 23, 26, 27, 28, 29, and 30). What did the individual FOMC members advise during this period? Did their individual views reflect skill in conducting the Fed's operations? What could we have learned for dealing with future crashes that were never sent to the Congress?
A Russian default crisis caused a large hedge fund in the United States, Long-Term Capital Management, to collapse in 1998. When LTCM failed -- it lost $4.6 billion in four months -- the Greenspan Fed thought that this was potentially so harmful to financial markets that it required Fed intervention. Working from the offices of the New York Fed Bank, the Fed orchestrated a bailout by private sector banks. Greenspan could not or would not tell Congress the details of the bailout apparently because the nation's central bank produced no detailed public records of its actions. Hundreds of lawyers and many large financial firms were evidently involved in this operation. The London edition of the Financial Times reported:
For more than three hours, members of the House Banking Committee lined up to condemn last week's bailout of Long-Term Capital Management. From both sides of the political debate, members attacked the operation as -- at best -- an indictment of the central bank's poor scrutiny of the US financial system, and -- at worst -- a piece of crony capitalism in which Mr. Greenspan and his senior colleagues were protecting the well fed princes of American banking. (10/03/98)
$4.6 billion is less than a rounding error compared to the $3.3 trillion of Federal Reserve loans it has been forced to expose. Senator Bernie Sanders and Congressman Ron Paul led the efforts to pass an audit bill of the Fed activities during the recent economic and financial crisis. Senator Sanders' amendment to the Dodd-Frank Reform bill for an audit of the Fed's transactions during the present recession passed on a vote of 96 to 0 in the Senate on May 11, 2010.
This was strong bipartisan support for complete records from the Federal Reserve. The Fed had fought the audit and along with many people waved its banner of independence from politics which means protect us from individual accountability. (See Chapter 10 in my book, Deception and Abuse at the Fed: The Myth of Political Virginity.)
Valuable exploitable inside information was hidden by the most powerful peacetime bureaucracy in the United States that secretly transacted $3.3 trillion loans during the current economic turmoil. Initial records indicate a vast array of private firms and some individuals who may have benefited from these loans. I previously described exploitable inside information problems in the Fed's foreign currency operations. Greenspan informed Gonzalez it would be ignored.
There must be checks and balances for the Fed's activities. The complete source records and transcripts of the Fed meetings that led to the $3.3 billion in loans should be made available in a timely manner. During a crisis they should inform members of the banking committees in the House and Senate that have security clearance. If the CIA can inform Congress, why should the Fed be exempt?
Some details of the $3.3 trillion dollars in 21,000 Fed loans had been exposed in the media when Chairman Ben Bernanke was interviewed on 60 Minutes on Dec. 5. Surely he knew his statement denying the expansion of the money supply would be misleading in a time when clarity is needed about the Fed's immense worldwide loan activity: "One myth that's out there is that what we're doing is printing money," he said. "We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way."
True, the money supply (M2: primarily currency, coin, checking accounts and consumer time, savings, and money market accounts) grew by 3.3 percent in the 12 months prior to November 2010. However, the monetary base (currency, coin and bank reserves) rose from $800 billion in August 2008 to $1.9 trillion in November 1, 2010 (2.3 times larger).
Chairman Bernanke, your Fed is "printing money." The banks are holding nearly fifty percent of the nearly $2 trillion of the exploding monetary base your bureaucracy has put into circulation instead of lending it to commercial businesses and buying other income earning assets? The bureaucracy you lead is paying the banks interest on the money it holds as reserves, an incentive to immobilize their excess reserves. See: "Malpractice at the Bernanke Federal Reserve."
The Fed receives interest from the U.S. Treasury on the large amount of securities the Fed already has purchased, and that is the taxpayers' money. It sends the interest it does not use back to Treasury to reduce the "recorded" deficit. The interest sent to the banks is being paid by the taxpayers.
The members of the Board of Governors have 14-year terms (unless they are filling an unexpired term) and can only be removed by impeachment, which has never happened. That is a longer term than is needed to insure some short-term independence for their vote on monetary policy. This is not true for the presidents of the 12 district Fed banks, five of whom vote on monetary policy. The presidents of the 12 Fed banks should have their credentials and views aired in public during Senate confirmation hearings. They should not be serving if they have massive conflicts of interest. The present method of selecting these presidents internally by boards of directors, two thirds of whom are elected by the banks they will regulate, places them in massive conflicts of interest, as I have described.