TheCenterLane.com

© 2008 – 2018 John T. Burke, Jr.

Keeping The Megabank Controversy On Republican Radar

Comments Off on Keeping The Megabank Controversy On Republican Radar

It was almost a year ago when Lou Dolinar of the National Review encouraged Republicans to focus on the controversy surrounding the megabanks:

“Too Big to Fail” is an issue that Republicans shouldn’t duck in 2012.  President Obama is in bed with these guys.  I don’t know if breaking up the TBTFs is the solution, but Republicans need to shame the president and put daylight between themselves and the crony capitalists responsible for the financial meltdown.  They could start by promising not to stock Treasury and other major economic posts with these, if you pardon the phase, malefactors of great wealth.

One would expect that those too-big-to-fail banks would be low-hanging fruit for the acolytes in the Church of Ayn Rand.  After all, Simon Johnson, former Chief Economist for the International Monetary Fund (IMF), has not been the only authority to characterize the megabanks as intolerable parasites, infesting and infecting our free-market economy:

Too Big To Fail banks benefit from an unfair, nontransparent, and dangerous subsidy scheme.  This isn’t a market.  It’s a government-backed distortion of historic proportions.  And it should be eliminated.

Last summer, former Kansas City Fed-head, Thomas Hoenig discussed the problems created by what he called, “systemically important financial institutions” – or “SIFIs”:

… I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism.  They are inherently destabilizing to global markets and detrimental to world growth.  So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.

So why aren’t the Republican Presidential candidates squawking up a storm about this subject during their debates?  Mike Konczal lamented the GOP’s failure to embrace a party-wide assault on the notion that banks could continue to fatten themselves to the extent that they pose a systemic risk:

When it comes to “ending Too Big To Fail” it actually punts on the conservative policy debates, which is a shame.  There’s a reference to “Explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy” but it is sort of late in the game for this level of vagueness on what we mean by “unwinding.”  That unwinding part is a major part of the debate.  Especially if you say that you want to repeal Dodd-Frank and put into place a system for taking down large financial firms – well, “unwinding” the biggest financial firms is what a big chunk of Dodd-Frank does.

Nevertheless, there have been occasions when we would hear a solitary Republican voice in the wilderness.  Back in November,  Jonathan Easley of The Hill discussed the views of Richard Shelby (Ala.), the ranking Republican on the Senate Banking Committee:

“Dr. Volcker asked the other question – if they’re too big to fail, are they too big to exist?” Shelby said Wednesday on MSNBC’s “Morning Joe.”  “And that’s a good question.  And some of them obviously are, and some of them – if they don’t get their house in order – they might not exist.  They’re going to have to sell off parts to survive.”

*   *   *

“But the question I think we’ve got to ask – are we better off with the bigger banks than we were?  The [answer] is no.”

This past weekend, Timothy Haight wrote an inspiring piece for the pro-Republican Orange County Register, criticizing the failure of our government to address the systemic risk resulting from the “too big to fail” status of the megabanks:

The concentration of assets in a few institutions is greater today than at the height of the 2008 meltdown.  Taxpayers continue to be at risk as large financial institutions have forgotten the results of their earlier bets.  Legislation may have aided members of Congress during this election cycle, but it has done little to ward off the next crisis.

While I am a champion for free-market capitalism, I believe that, in some instances, proactive regulation is a necessity.  Financial institutions should be heavily regulated due to the basic fact that rewards are afforded to the financial institutions, while the taxpayers are saddled with the risk.  The moral hazard is alive and well.

So far, there has been only one Republican Presidential candidate to speak out against the ongoing TBTF status of a privileged few banks – Jon Huntsman.  It was nice to see that the Fox News website had published an opinion piece by the candidate – entitled, “Wall Street’s Big Banks Are the Real Threat to Our Economy”.  Huntsman described what has happened to those institutions since the days of the TARP bailouts:

Taxpayers were promised those bailouts would be a one-time, emergency measure.  Yet today, we can already see the outlines of the next financial crisis and bailouts.

The six largest financial institutions are significantly bigger than they were in 2008, having been encouraged to snap up Bear Stearns and other competitors at bargain prices.

These banks now have assets worth over 66% of gross domestic product – at least $9.4 trillion – up from 20% of GDP in the 1990s.

*   *   *

The Obama and Romney plan simply appears to be to cross our fingers and hope no Too-Big-To-Fail banks fail on their watch – a stunning lack of leadership on such a critical economic issue.

As president, I will break up the big banks, end future taxpayer bailouts, and restore capitalist principles – competition and creative destruction – to our financial sector.

As of this writing, Jon Huntsman has been the only Presidential candidate – including Obama – to discuss a proposal for ending the TBTF situation.  Huntsman has tactfully cast Mitt Romney in the role of the “Wall Street status quo” candidate with himself appearing as the populist.  Not even Ron Paul – with all of his “anti-bank” bluster, has dared approach the TBTF issue (probably because the solution would involve touching his own “third rail”:  regulation).  Simon Johnson had some fun discussing how Ron Paul was bold enough to write an anti-Federal Reserve book – End the Fed – yet too timid to tackle the megabanks:

There is much that is thoughtful in Mr. Paul’s book, including statements like this (p. 18):

“Just so that we are clear: the modern system of money and banking is not a free-market system.  It is a system that is half socialized – propped up by the government – and one that could never be sustained as it is in a clean market environment.”

*   *   *

There is nothing on Mr. Paul’s campaign website about breaking the size and power of the big banks that now predominate (http://www.ronpaul2012.com/the-issues/end-the-fed/).  End the Fed is also frustratingly evasive on this issue.

Mr. Paul should address this issue head-on, for example by confronting the very specific and credible proposals made by Jon Huntsman – who would force the biggest banks to break themselves up.  The only way to restore the market is to compel the most powerful players to become smaller.

Ending the Fed – even if that were possible or desirable – would not end the problem of Too Big To Fail banks.  There are still many ways in which they could be saved.

The only way to credibly threaten not to bail them out is to insist that even the largest bank is not big enough to bring down the financial system.

It’s time for those “fair weather free-marketers” in the Republican Party to show the courage and the conviction demonstrated by Jon Huntsman.  Although Rick Santorum claims to be the only candidate with true leadership qualities, his avoidance of this issue will ultimately place him in the rear – where he belongs.


 

wordpress stats

Federal Reserve Bailout Records Provoke Limited Outrage

Comments Off on Federal Reserve Bailout Records Provoke Limited Outrage

On December 3, 2009 I wrote a piece entitled, “The Legacy of Mark Pittman”.  Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.

The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling in August of 2009 by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions (which sought loans at the Fed’s discount window) to compete for business.  The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis.  The Federal Reserve appealed Judge Preska’s decision, taking the matter before the United States Court of Appeals for the Second Circuit.  The Fed’s appeal was based on Exemption 4 of the Freedom of Information Act, which exempts trade secrets and confidential business information from mandatory disclosure.  The Second Circuit affirmed Judge Preska’s decision on the basis that the records sought were neither trade secrets nor confidential business information because Bloomberg requested only records generated by the Fed concerning loans that were actually made, rather than applications or confidential information provided by persons, firms or other organizations in attempt to obtain loans.  Although the Fed did not attempt to appeal the Second Circuit’s decision to the United States Supreme Court, a petition was filed with the Supreme Court by Clearing House Association LLC, a coalition of banks that received bailout funds.  The petition was denied by the Supreme Court on March 21.

Bob Ivry of Bloomberg News had this to say about the documents produced by the Fed as a result of the suit:

The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion.  Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.

As government officials and news reporters continue to review the documents, a restrained degree of outrage is developing.  Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy.  He is also a longtime adversary of the Federal Reserve, and author of the book, End The Fed.  A recent report by Peter Barnes of FoxBusiness.com said this about Congressman Paul:

.   .   .   he plans to hold hearings in May on disclosures that the Fed made billions — perhaps trillions — in secret emergency loans to almost every major bank in the U.S. and overseas during the financial crisis.

*   *   *

“I am, even with all my cynicism, still shocked at the amount this is and of course shocked, but not completely surprised, [that] much [of] this money went to help foreign banks,” said Rep. Ron Paul (R-TX),   .   .   .  “I don’t have [any] plan [for] legislation …  It will take awhile to dissect that out, to find out exactly who benefitted and why.”

In light of the fact that Congressman Paul is considering another run for the Presidency, we can expect some exciting hearings starring Ben Bernanke.

Senator Bernie Sanders of Vermont became an unlikely ally of Ron Paul in their battle to include an “Audit the Fed” provision in the financial reform bill.  Senator Sanders was among the many Americans who were stunned to learn that Arab Banking Corporation used a New York branch to get 73 loans from the Fed during the 18 months after the collapse of Lehman Brothers.  The infuriating factoid in this scenario is apparent in the following passage from the Bloomberg report by Bob Ivry and Donal Griffin:

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday.  In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Ivry and Griffin provided this reaction from Bernie Sanders:

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The best critique of the Fed’s bailout antics came from Rolling Stone’s Matt Taibbi.  He began his report this way:

After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds.  And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size – a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

As Matt Taibbi began discussing what the documents produced by the Fed revealed, he shared this reaction from a staffer, tasked to review the records for Senator Sanders:

“Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont.  “Every one of these transactions is outrageous.”

In case you are wondering just how “outrageous” these transactions were, Mr. Taibbi provided an outrageously entertaining chronicle of a venture named “Waterfall TALF Opportunity”, whose principal investors were Christy Mack and Susan Karches.  Susan Karches is the widow of Peter Karches, former president of Morgan Stanley’s investment banking operations.  Christy Mack is the wife of John Mack, the chairman of Morgan Stanley.  Matt Taibbi described Christy Mack as “thin, blond and rich – a sort of still-awake Sunny von Bulow with hobbies”.  Here is how he described Waterfall TALF:

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility.  But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.”  If you want to learn how the shadow budget works, follow along.  This is what welfare for the rich looks like.

The venture would have been more aptly-named, “TALF Exploitation Windfall Opportunity”.  Think about it:  the Mack-Karches entity was contrived for the specific purpose of cashing-in on a bailout program, which was ostensibly created for the purpose of preventing a consumer credit freeze.

I was anticipating that the documents withheld by the Federal Reserve were being suppressed because – if the public ever saw them – they would provoke an uncontrollable degree of public outrage.  So far, the amount of attention these revelations have received from the mainstream media has been surprisingly minimal.  When one compares the massive amounts squandered by the Fed on Crony Corporate Welfare Queens such as Christy Mack and Susan Karches ($220 million loaned at a fraction of a percentage point) along with the multibillion-dollar giveaways (e.g. $13 billion to Goldman Sachs by way of Maiden Lane III) the fighting over items in the 2012 budget seems trivial.

The Fed’s defense of its lending to foreign banks was explained on the New York Fed’s spiffy new Liberty Street blog:

Discount window lending to U.S. branches of foreign banks and dollar funding by branches to parent banks helped to mitigate the economic impact of the crisis in the United States and abroad by containing financial market disruptions, supporting loan availability for companies, and maintaining foreign investment flows into U.S. companies and assets.

Without the backstop liquidity provided by the discount window, foreign banks that faced large and fluctuating demand for dollar funding would have further driven up the level and volatility of money market interest rates, including the critical federal funds rate, the Eurodollar rate, and Libor (the London interbank offered rate).  Higher rates and volatility would have increased distress for U.S. financial firms and U.S. businesses that depend on money market funding.  These pressures would have been reflected in higher interest rates and reduced bank lending, bank credit lines, and commercial paper in the United States.  Moreover, further volatility in dollar funding markets could have disrupted the Federal Reserve’s ability to implement monetary policy, which requires stabilizing the federal funds rate at the policy target set by the Federal Open Market Committee.

In other words:  Failure by the Fed to provide loans to foreign banks would have made quantitative easing impossible.  There would have been no POMO auctions.  As a result, there would have been no supply of freshly printed-up money to be used by the proprietary trading desks of the primary dealers to ramp-up the stock market for those “late-day rallies”.  This process was described as the “POMO effect” in a 2009 paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

Thanks for the explanation, Mr. Dudley.


wordpress stats


Libertarian Accuses Socialist Of Selling Out

Comments Off on Libertarian Accuses Socialist Of Selling Out

Quite a bit has been written about the Federal Reserve’s December 1 release of documents revealing the details of its bailouts to those business entities benefiting from the Fed’s eleven emergency lending programs initiated as a result of the 2008 financial crisis.  When you consider the fact that those documents concern over 21,000 transactions, all the attention should come as no surprise.

The two individuals who seem to have benefited the most from this event are Congressman Ron Paul and Senator Bernie Sanders.  The two became unlikely allies in their battle to include an “Audit the Fed” provision in the financial reform bill.  Ron Paul, the Libertarian Republican from Texas (considered the “Godfather of the Tea Party movement”) authored the book, End The Fed.  Congressman Paul sponsored the original “Audit the Fed” proposal in the House of Representatives – H.R. 1207.  Bernie Sanders, who describes himself as a democratic socialist, sponsored the watered-down “Audit the Fed” bill — S. 3217 — which replaced Congressman Paul’s version in what finally became known as the Restoring Financial Stability Act of 2010.

A recent article in The Wall Street Journal by Maya Jackson Randall recalled the backstory of how the Sanders proposal was incorporated into the financial reform bill:

Under pressure from the Obama administration, Mr. Sanders, who has described himself as a democratic socialist, made last-minute changes to his proposal; it doesn’t require audits of monetary policy, and it doesn’t require disclosure of the names of banks that use the discount window.

An unhappy Paul, a long-time Fed critic, said Mr. Sanders had “sold out.”

Who would have ever thought that a Libertarian Republican would, one day, accuse a democratic socialist of “selling out” on a bill to regulate the financial industry?

With the Republicans’ becoming the majority party in the House, the numerous committee chairmanships will now pass from the Democrats to the GOP for the 112th Congress.  Although quite a bit of concern has been expressed by liberal pundits that the banking lobby will now have unfettered control over Congress, many banking industry lobbyists are sweating over the fact that Ron Paul will be the likely Chairman of the House Financial Services Committee.  That fear and the efforts by ranking Republicans to assuage that dread were discussed in a recent article by Phil Mattingly and Robert Schmidt for Bloomberg BusinessWeek:

Five GOP leadership aides, speaking anonymously because a decision isn’t final, say incoming House Speaker John Boehner has discussed ways to prevent Paul from becoming chairman or to keep him on a tight leash if he does.  If Boehner, who will help determine who gets to chair subcommittees as early as Dec. 8, rejects Paul, he may have to contend with thousands of grassroots supporters and dozens of younger lawmakers who see Paul as a hero.  Boehner, through a spokesman, declined to comment.  “A lot of the older members probably think Ron is a little bit out of step,” says Representative Bill Posey, a Florida Republican and unabashed Paul fan.  “The depth of his knowledge on monetary policy, his understanding of it all, is second to none.”

Nevertheless, Ron Paul accused a socialist of  “selling out” by capitulating to the pressure exerted by the banking lobby through its puppet – the Obama administration.  His use of such a reproach demonstrates that Congressman Paul cannot be trusted to make certain that the House Financial Services Committee serves as a tool of the banking lobby.  Beyond that, the extreme, partisan elements of the Republican Party cannot depend on Congressman Paul to “follow the script” written to portray Obama as the socialist.

As the Bloomberg BusinessWeek article pointed out, any efforts to deprive Congressman Paul of this chairmanship will guarantee some serious blowback from the Tea Party ranks as well as the other supporters of Ron Paul.  John Boehner is in a serious double-bind here.  If he allows Paul to assume the chairmanship, Boehner’s anticipated efforts to keep Paul “on a tight leash” should provide some good entertainment.


wordpress visitor


Well-Deserved Scrutiny For The Fed

Comments Off on Well-Deserved Scrutiny For The Fed

In the wake of the 2010 elections, it’s difficult to find a pundit who doesn’t mention the Tea Party at least once while discussing the results.  This got me thinking about whether the man referred to as “The Godfather” of the Tea Party movement, Congressman Ron Paul (father of Tea Party candidate, Senator-elect Rand Paul) will become more influential in the next Congress.  More important is the question of whether Ron Paul’s book, End The Fed will be taken more seriously – particularly in the aftermath of the Fed’s most recent decision to create $600 billion out of thin air in order to purchase even more treasury securities and mortgage-backed securities by way of the recently-announced, second round of quantitative easing (referred to as QE2).

The announcement by the Federal Open Market Committee to proceed with QE2 drew immediate criticism.  The best rebuke against QE 2 came from economist John Hussman, whose Weekly Market Comment – entitled, “Bubble, Crash, Bubble, Crash, Bubble …” was based on this theme:

We will continue this cycle until we catch on.  The problem isn’t only that the Fed is treating the symptoms instead of the disease.  Rather, by irresponsibly promoting reckless speculation, misallocation of capital, moral hazard (careless lending without repercussions), and illusory “wealth effects,” the Fed has become the disease.

One issue raised by Mr. Hussman – which should resonate well with supporters of the Tea Party – concerns the fact that the Fed is undertaking an unconstitutional exercise of fiscal policy (rather than monetary policy) most notably by its purchase of mortgage-backed securities:

In this example, the central bank is not engaging in monetary policy, but fiscal policy.  Creating government liabilities to acquire goods and assets, unless those assets are other government liabilities, is fiscal policy, pure and simple.

Hussman’s analysis of how the “the economic impact of QE2 is likely to be weak or even counterproductive” was best expressed in this passage:

We are betting on the wrong horse.  When the Fed acts outside of the role of liquidity provision, it does more harm than good. Worse, we have somehow accepted a situation where the Fed’s actions are increasingly independent of our democratically elected government.  Bernanke’s unsound leadership has placed the nation’s economic stability on two pillars:  inflated asset prices, and actions that – in Bernanke’s own words – should be “correctly viewed as an end run around the authority of the legislature” (see below).

The right horse is ourselves, and the ability of our elected representatives to create an economic environment that encourages productive investment, research, development, infrastructure, and education, while avoiding policies that promote speculation, discourage work, or defend reckless lenders from experiencing losses on bad investments.

On November 6, another brilliant critique of the Fed came from Ashvin Pandurangi (a/k/a “Ash”) of the Simple Planet website.  His essay began with a reminder of what the Fed really is:

The most powerful, influential economic policy-making institution in the country, the Federal Reserve (“Fed”), is an unelected body that is completely unaccountable to the people.

*   *   *

The Fed, by its own admission, is an independent entity within the government “having both public purposes, and private aspects”.  By “private aspects”, they mean the entire operation is wholly-owned by private member banks, who are paid dividends of 6% each year on their stock.  Furthermore, the Fed’s decisions “do not have to be ratified by the President or anyone else in the executive or legislative branch of government” and the Fed “does not receive funding appropriated by Congress”.  In 1982, the Ninth Circuit Court of Appeals confirmed this view when it held that “federal reserve banks are not federal instrumentalities … but are independent, privately owned and locally controlled corporations”.

As we all know:  “Absolute power corrupts absolutely”.  At the end of his essay, Ash connected the dots for those either unable to do so or unwilling to face an ugly reality:

In the last two years, the almighty Fed has printed trillions of dollars in our name to buy worthless mortgage assets from “too big to fail” banks.  It has lent these banks our hard-earned money at about 0% interest, so they could lend our own money back to us at 3%+.  These banks also used our free money to ramp equity and commodity markets, which mostly benefited the top 1% of our population who owns 43% of financial wealth [2], and conveniently, also owns the Fed.  The latter has kept interest rates at next to nothing to punish savers and encourage speculation, making everything less affordable for average Americans who have seen their wages stay the same, decrease or disappear.  What’s left standing is the perniciously powerful, highly secretive and entirely unaccountable Fed, who now epitomizes the state of American democracy.

At least we still have freedom of speech!  As part of the Fed’s roll-out of QE2, Chairman Ben Bernanke found it necessary to write a public relations piece for The Washington Post – perhaps as an apology.  Stock market commentator Bill Fleckenstein had no trouble ripping Bernanke’s article to shreds:

Bernanke goes on to say:  “Although low inflation is generally good, inflation that is too low can pose risks to the economy — especially when the economy is struggling.  In the most extreme case, very low inflation can morph into deflation.”

Oh, yeah?  Says who?  I have not seen any instance where a “too low” inflation rate led to deflation.  When deflation is caused by new inventions or increased productivity (or in the old days, bumper crops), which we might term “good” deflation, it was not a consequence of too little inflation; it was due to progress.  Similarly, the “bad” deflation isn’t created via inflation that is too low; it tends to come from burst bubbles.  In other words, misguided policies, not low inflation, are the cause of deflation.

Because the timing of the Fed’s controversial move to proceed with QE2 dovetails so well with the “energizing” of the Tea Party movement, it will be interesting to observe whether life will become more uncomfortable for Chairman Bernanke.  A recent article by Joshua Zumbrun of Bloomberg News gave us this hint:

Six out of 10 self-identified Tea Party supporters who said they were likely to vote supported overhauling or abolishing the Fed, according to a Bloomberg News national poll conducted Oct. 7-10.

The article made note of the fact that Ron Paul’s ill-fated effort to Audit the Fed (HR 1207) received bipartisan support:

“You had a really strange alliance last year that supported the audit of the Fed and that may come back into play,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

Here’s to bipartisanship!


wordpress visitor


More Heat For The Federal Reserve

Comments Off on More Heat For The Federal Reserve

October 5, 2009

On Thursday, October 1, Federal Reserve chairman Ben Bernanke testified before the House Financial Services Committee.  That event demonstrated how the Fed has fallen into the crosshairs of critics from both ends of the political spectrum.  A report in Friday’s Los Angeles Times by Jim Puzzanghera began with the point that the Obama administration has proposed controversial legislation that would expand the Fed’s authority, despite bipartisan opposition in a Congress that is more interested in restricting the Fed’s influence:

Worried about the increased power of the complex and mysterious Fed, and upset it did not do more to prevent the deep recession, Capitol Hill has focused its anger over the financial crisis and its aftermath on the central bank.  The Fed finds itself at the center of a collision of traditional political concerns – conservatives’ fears of heavy-handed government intervention in free markets, and liberals’ complaints of regulators who favor corporate executives over average Americans.

More than two-thirds of the House of Representatives has signed on to a bill that would subject the central bank to increased congressional oversight through expanded audits.  A key senator wants to strip the Fed of its authority to regulate banks.  And the chairman of the House Financial Services Committee wants to rein in the Fed’s emergency lending power, which it used to help engineer the sale of Bear Stearns Cos. and bailout American International Group Inc.

The article noted the observation of Jaret Seiberg, a financial policy analyst with Concept Capital’s Washington Research Group:

“The Fed is running into unprecedented opposition on Capitol Hill,” he said.

“In the Senate, there’s open hostility toward any expansion of the Federal Reserve’s authority.  And in the House, you certainly have Republicans looking to focus the Fed solely on monetary policy and strip it of any larger role in financial regulation.”

Mr. Puzzanghera’s report underscored how the Fed’s interventions in the economy during the past year, which involved making loans (of unspecified amounts) and backing commercial transactions, have drawn criticism from both sides of the aisle.  The idea of expanding the Fed’s authority to the extent that it would become a “systemic risk regulator” has been criticized both in Congress and by a former member of the Federal Reserve Board of Governors:

House Republicans want to scale back the Fed’s power so the bank focuses on monetary policy.  And many have opposed the administration’s proposal to give the Fed the new role of supervising large financial institutions, such as AIG, that are not traditional banks but pose a risk to the economy if they fail.

“I’m not alone with my concerns about the Fed as a systemic regulator,” said Rep. Scott Garrett (R-N.J.).  Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) has similar concerns, as do others on his panel.  In fact, Dodd has proposed stripping the Fed of all of its bank oversight functions as part of his plan for creating a single banking regulatory agency.

Former Fed Gov. Alice M. Rivlin also said it would be a mistake to increase the Fed’s regulatory powers because it would distract from the central bank’s monetary policy role.

“Do we want to augment the regulatory authority of the Fed?      . . .  My answer is no,” said Rivlin, a senior fellow at the Brookings Institution.  “My sense is many people would be nervous about that augmentation.”

The colorful Democratic chairman of the House Financial Services Committee, Barney Frank, recently published a report card on the committee’s website, criticizing the Fed’s poor record on consumer protection.  The report card contrasted what Congressional Democrats had done to address various issues (categorized under the heading:  “Democrats Act”) with what the Fed has or has or has not done in dealing with those same problems.

Meanwhile, Republican Congressman Ron Paul of Texas, is making the rounds, promoting his new book:  End The Fed.  A recent posting at The Daily Bail website includes a YouTube video of Ron Paul at a book signing in New York, which resulted in a small parade over to the New York Fed.  Although the Daily Bail piece reported that Paul’s book had broken into the top ten on Amazon’s list of bestsellers — as I write this, End The Fed is number 15.  I would like to see that book continue to gain popularity.  Perhaps next time Chairman Bernanke testifies before a committee, he will know that something more than his own job is on the line.  It would be nice to see him make history as the last Chairman of the Federal Reserve.



wordpress visitor