From: The Honorable Alan Grayson
Bring Some Accountability to the Federal Reserve
Letter endorsed by:
Dean Baker, Center for Economic Policy Research
James K. Galbraith, University of Texas and Senior Scholar of the Levy Economics Institute
Bob Borosage, co-director, Campaign for America's Future
Tyler Durden, Zero Hedge
Bill Black, Associate Professor of Economics and Law University of Missouri-Kansas City
Jane Hamsher, Firedoglake
Glenn Greenwald, Salon
A New Way Forward
I write to ask you to co-sponsor HR 1207, the Federal Reserve Transparency Act, which would give the Government Accountability Office the authority to audit the Federal Reserve and its member components, and require a report to Congress by the end of 2010.
The Federal Reserve System operates as the central bank for the United States, managing the economy’s money supply and overseeing the banking system. Until recently, the Fed has not picked winners and losers when distributing money, nor has it brought credit risk onto its balance sheet. It has slowed or stimulated the economy by raising or lowering interest rates. Since March 2008, however, the Fed has resorted to using its emergency powers to pick winners and losers, and to take massive credit risk onto its books. Since last September, the Fed’s balance sheet has expanded from around $800 billion to over $2 trillion, not including off-balance sheet liabilities it has guaranteed for Citigroup, AIG, and Bank of America, among others. The bank is also ‘monetizing’ the debt of the United States Government by purchasing massive amounts of agency and Treasury bonds. An audit is the first step in bringing this unaccountable system under the control of the public, whose money it prints and disseminates at will.
The Federal Reserve is an odd entity, a public-private chimera that controls the US monetary system and supervises the banking system. The system is governed by a Board of Governors, with twelve regional reserve banks that serve a supporting role. While the Governors are appointed by the President with confirmation by the Senate, the regional Reserve Banks have boards of directors chosen primarily by private banking institutions. Right now, for instance, the CEO of JP Morgan, Jamie Dimon, serves on the Board of Directors of the New York Federal Reserve Bank, as did Goldman Sachs Director Stephen Friedman.
This creates striking conflicts of interest and unseemly appearances in the management of what is ultimately the public’s money. Consider:
- JP Morgan’s CEO was a board member of the New York Fed even as he negotiated on behalf of JP Morgan with the New York Fed for a $29 billion bridge loan to allow his company to take over Bear Stearns.
- New York Fed and Goldman Sachs board member Stephen Friedman purchased 37,300 shares of Goldman Sachs stock in December at the same time as Goldman received permission to convert to a bank holding company regulated by the Federal Reserve. Friedman at the time was also overseeing the selection of a New York Federal Reserve President to replace Tim Geithner, and the New York Fed ended up hiring another alumni from Goldman Sachs.
- According to the bank’s website, the two “class B” directorships of the New York Fed that are supposed to represent the public are vacant.
- Enron’s Jeff Skilling was on the board of the Dallas Federal Reserve Bank.
Criticism of banker influence and control of our monetary system is not new. However, the urgency of the financial crisis and the actions of the Fed picking investment bank winners and losers have changed the nature of the criticism. The Senate just passed a non-binding resolution requiring more transparency at the Federal Reserve in its Budget Resolution.
Still, neither the GAO nor the Federal Reserve Inspector General has audited the books of the Federal Reserve or its regional banks. The Financial Services Subcommittee on Oversight and Investigations held a recent hearing with Federal Reserve Inspector General Elizabeth Coleman. In that hearing, Coleman could not tell me who had received over a trillion dollars in Fed lending, what kind of losses the bank had suffered on its $2 trillion portfolio, appeared unaware that the Fed engages in trillions of dollars in off-balance-sheet commitments, and was not investigating the role of the Fed in allowing the collapse of Lehman Brothers. Coleman’s responses were so remarkable that when the video of this exchange was put on Youtube, it was watched more than 350,000 times.
Furthermore, the Federal Reserve has refused multiple inquiries from both the House and the Senate to disclose who is receiving trillions of dollars from the central banking system. The Federal Reserve has redacted the central terms of the no-bid contracts it has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to leverage the Treasury’s balance sheet. With discussions of allocating even more power to the Federal Reserve as the ‘systemic risk regulator’ of the credit markets, more oversight over the central bank’s operations is clearly necessary.
The net effect of recent actions has been to isolate financial policy-making entirely from democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance sheet to spend money it cannot get appropriated from Congress. The public does not know where trillions of its dollars are going, and so has no meaningful control over the currency or this unappropriated “budget”. The extraordinary size of these lending facilities combined, the extreme secrecy, and the private influence is a dangerous seizure of Congress’s constitutional prerogative to appropriate public monies and control the currency.
An audit of the Federal Reserve may not be sufficient to control this sprawling system or bring it back into balance, but it is a start. The public has a right to know to whom the US government is lending trillions of dollars. Dancing around this issue with technocratic terms like ‘increasing liquidity’ is preventing a full and long overdue public debate on the role of the Federal Reserve and the influence of private banking interests in the governing of our economy. I encourage my colleagues to support H.R. 1207, so that we can bring some transparency to our banking system and allow the public to have a real debate over the fundamental direction of our nation’s political economy.