May 13, 2010
The Federal Reserve had two big wins this week. At least their most recent win made some sense. Bloomberg BusinessWeek put it this way:
U.S. senators voted 90-9 yesterday to void a provision in regulatory-overhaul legislation that would have stripped the Fed of oversight of 5,000 banks with less than $50 billion in assets. A day earlier, senators rejected a measure to allow continuous congressional audits of Fed policies.
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Bernanke may now have a freer hand to decide when and how fast to unwind record monetary stimulus begun during the financial crisis, while being less vulnerable to criticism that the Fed favors large Wall Street financial institutions. The Senate votes also removed a threat to the 12 regional Fed banks from a provision that would have limited the supervision of many of them to a few banks or none at all.
The amendment to the financial reform bill allowing the 12 regional Federal Reserve banks to maintain oversight of banks with less than $50 billion in assets was a bipartisan effort by Senators Kay Bailey Hutchison (R-Texas) and Amy Klobuchar (D- Minnesota). The downside to the passage of this amendment is that it has provided the Fed with back-to-back legislative victories. One day earlier, Congressman Ron Paul’s “Audit the Fed” amendment was replaced by a rewritten, compromise amendment, sponsored by Senator Bernie Sanders. Senator Sanders is now being criticized for caving in to pressure exerted by President Obama, who opposed ongoing scrutiny of the Federal Reserve, under the pretext that continuous audits would interfere with the Fed’s purported “independence” in setting monetary policy. The Sanders compromise proposed a one-time audit of the Fed to uncover information including the loans made to financial institutions by the Fed in response to the financial crisis of 2008. The Sanders amendment was passed in a 96-0 vote. Subsequently, Senator David Vitter (R-Louisiana) proposed an amendment (#3760) containing the stronger language of Ron Paul’s H.R. 1207, allowing for repeated audits of the Fed. The Vitter amendment was defeated by 62 Senators opposing the measure, with only 37 Senators supporting it. You can see how each Senator voted here. Ultimately, the complete financial reform bill — S. 3217 (Restoring American Financial Stability Act of 2010) — will be subject to approval by the Senate and reconciliation with the House version (H.R. 4173) before it can be signed into law by the President.
On May 11, Congressman Ron Paul expressed his displeasure with the Sanders compromise in a statement from the floor of the House of Representatives. The New American website has the video and text of Congressman Paul’s statement here. Ron Paul emphasized that the Fed’s use of currency swaps to facilitate the bailout fund for the sovereign debt crisis in the European Union, has provided the latest example of the need for a continuous audit of the Fed’s activities:
The reason this is so disturbing is because of the current events going on in the financial markets. We are right now involved in bailing out Europe and especially bailing out Greece, and we’re doing this through the Federal Reserve. The Federal Reserve does this with currency swaps and they do this literally by giving loans and guarantees to other central banks, and they can even give loans to governments. So this is placing the burden on American taxpayers — not by direct taxation, but by expanding the money supply this is a tax on the American people because this will bring economic hardship to this country. And because we’ve been doing this for so many years the economic hardship is already here [and] we’ve been suffering from it.
But the problem comes that once you have a system of money where you can create it out of thin air there’s no restraint whatsoever on the spending in the Congress. And then the debt piles up and they get into debt problems as they are in Greece and other countries in Europe. And how they want to bail them out? With more debt. But what is so outrageous is that the Federal Reserve can literally deal in trillions of dollars. They don’t get the money authorized, they don’t get the money appropriated, they just create it and they get involved in bailing out their friends, as they have been doing for the last two years, and now they’re doing it in Europe. So, my contention is that they deserve oversight. Actually they deserve to be reined in where they can’t do what they’re doing.
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Now, what has this led to? It has led to tremendous pressure on the dollar. The dollar is the reserve currency of the world; we bail out all the banks and all the corporations. We’ve been doing it for the last couple years to the tune of trillions of dollars….
The real truth is that the dollar is very, very weak, because the only true measurement of the value of a currency is its relationship to gold. … In the last ten years, our dollar has been devalued 80 percent in terms of gold. That means, literally, that just means that we have printed way too much money, and right now we’re just hanging on, the world is hanging on to the fact that the dollar is still usable. …
So we face a very serious crisis. To me it is very unfortunate that we are not going to have this audit the Fed bill in the Senate. It has passed in the House, possibly we can salvage it in conference and make sure this occurs. But since the Federal Reserve is responsible for the business cycle and the inflation and for all the problems we have it is vital that we stand up and say, you know, its time for us to assume the responsibility because it is the Congress under the Constitution that has been authorized to be responsible for the value of the currency.
At the Financial Times, John Taylor pointed out that not only is the Fed’s decision to provide currency swaps a bad idea – it might actually aggravate the EU’s problems:
Making matters worse for the future of monetary policy is the Fed’s active participation in the European bail-out. The US central bank agreed to provide loans – technically called swaps – to the ECB so that the ECB can more easily make dollar loans in the European markets. In order to loan dollars to the ECB, the Fed will have to increase the size of its own balance sheet. Such swap loans were made to the ECB back in December 2007, but they did not help end the crisis or prevent the panic of autumn 2008. Instead, they merely delayed inevitable action to deal with deteriorating bank balance sheets, thereby making the panic worse.
Was it necessary for the Fed to participate in the European bail-out? At least as evidenced by quantitative measures such as the spread between 3-month Libor and the overnight index swap (OIS), the funding problem in the interbank markets is far less severe now than in December 2007. The international loans also raise questions about the Fed’s independence at a time when many in Congress are calling for a complete audit of the Fed. Even though monetary policy does not warrant such an audit, extraordinary measures such as the loans to the ECB do. By taking these extraordinary measures, the Fed is losing some of its independence as well as adding to the perception that the ECB is losing its independence.
At some point, everyone will be forced to admit that “Fed independence” is a myth.
Banking Lobby Tools In Senate Subvert Reform
May 20. 2010
The financial pseudo-reform bill is being exposed as a farce. Thanks to its tools in the Senate, the banking lobby is on the way toward defeating any significant financial reform. Although Democrats in the Senate (and the President himself) have been posing as reformers who stand up to those “fat cat bankers”, their actions are speaking much louder than their words. What follows is a list of the Senate Democrats who voted against both the Kaufman – Brown amendment (to prevent financial institutions from being “too big to fail”) as well as the amendment calling for more Federal Reserve transparency (sponsored by Republican David Vitter to comport with Congressman Ron Paul’s original “Audit the Fed” proposal – H.R. 1207 – which was replaced by the watered-down S. 3217 ):
Akaka (D-HI), Baucus (D-MT), Bayh (D-IN), Bennet (D-CO), Carper (D-DE), Conrad (D-ND), Dodd (D-CT), Feinstein (D-CA), Gillibrand (D-NY), Hagan (D-NC), Inouye (D-HI), Johnson (D-SD), Kerry (D-MA), Klobuchar (D-MN), Kohl (D-WI), Landrieu (D-LA), Lautenberg (D-NJ), Lieberman (ID-CT), McCaskill (D-MO), Menendez (D-NJ), Nelson (D-FL), Nelson (D-NE), Reed (D-RI), Schumer (D-NY), Shaheen (D-NH), Tester (D-MT), Udall (D-CO) and Mark Warner (D-VA).
I wasn’t surprised to see Senator Chuck Schumer on this list because, after all, Wall Street is located in his state. But how about Senator Claire McCaskill? Remember her performance at the April 27 hearing before the Senate Permanent Subcommittee on Investigations? She really went after those banksters – didn’t she? Why would she suddenly turn around and support the banks in opposing those two amendments? I suppose the securities and investment industry is entitled to a little payback, after having given her campaign committee $265,750.
I was quite disappointed to see Senator Amy Klobuchar on that list. Back on June 19, 2008, I included her in a piece entitled “Women to Watch”. Now, almost exactly two years later, we are watching her serve as a tool for the securities and investment industry, which has given her campaign committee $224,325. On the other hand, another female Senator whom I discussed in that same piece, Maria Cantwell of Washington, has been standing firm in opposing attempts to leave some giant loopholes in Senator Blanche Lincoln’s amendment concerning derivatives trading reform. The Huffington Post described how Harry Reid attempted to use cloture to push the financial reform bill to a vote before any further amendments could have been added to strengthen the bill. Notice how “the usual suspects” – Reid, Chuck Schumer and “Countrywide Chris” Dodd tried to close in on Cantwell and force her capitulation to the will of the kleptocracy:
Russ Feingold’s criticisms of the bill were consistent with those voiced by economist Nouriel Roubini (often referred to as “Doctor Doom” because he was one of the few economists to anticipate the scale of the financial crisis). Barbara Stcherbatcheff of CNBC began her report on Dr. Roubini’s May 18 speech with this statement:
The current mid-term primary battles have fueled a never-ending stream of commentary following the same narrative: The wrath of the anti-incumbency movement shall be felt in Washington. Nevertheless, Dylan Ratigan seems to be the only television commentator willing to include “opposition to financial reform” as a political liability for Congressional incumbents. Yves Smith raised the issue on her Naked Capitalism website with an interesting essay focused on this theme:
Her must-read analysis of the “head fakes” going on within the financial reform wrangling concludes with this thought:
As always, it’s up to the voting public with the short memory to unseat those tools of the banking lobby. Our only alternative is to prepare for the next financial crisis.