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Banksters Live Up to the Nickname

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Matt Taibbi has done it again.  His latest article in Rolling Stone focused on the case of United States of America v. Carollo, Goldberg and Grimm, in which the Obama Justice Department actually prosecuted some financial crimes.  The three defendants worked for GE Capital (the finance arm of General Electric) and were involved in a bid-rigging conspiracy wherein the prices paid by banks to bond issuers were reduced (to the detriment of the local governments who issued those bonds).

The broker at the center of this case was a firm known as CDR.  CDR would be hired by a state or local government which was planning a bond issue.  Banks would then submit bids which are interest rates paid to the issuer for holding the money until payments became due to the various contractors involved in the project which was the subject of the particular bond.  The brokers would tip off a favored bank about the amounts of competing bids in return for a kickback based on the savings made by avoiding an unnecessarily high bid.  In the Carollo case, the GE Capital employees were supposed to be competing with other banks who would submit bids to CDR.  CDR would then inform the bidders on how to coordinate their bids so that the bid prices could be kept low and the various banks could agree among themselves as to which entity would receive a particular bond issue.  Four of the banks which “competed” against GE Capital in the bidding were UBS, Bank of America, JPMorgan Chase and Wells Fargo.  Those four banks paid a total of $673 million in restitution after agreeing to cooperate in the government’s case.

The brokers would also pay-off politicians who selected their firm to handle a bond issue.  Matt Taibbi gave one example of how former New Mexico Governor Bill Richardson received $100,000 in campaign contributions from CDR.  In return, CDR received $1.5 million in public money for services which were actually performed by another broker – at an additional cost.

Needless to say, the mainstream news media had no interest in covering this case.  Matt Taibbi quoted a remark made to the jury at the outset of the case by the trial judge, Harold Baer:  “It is unlikely, I think, that this will generate a lot of media publicity”.  Although the judge’s remark was intended to imply that the subject matter of the case was too technical and lacking in the “sex appeal” of the usual evening news subject, it also underscored the aversion of mainstream news outlets to expose the wrongdoing of their best sponsors:  the big banks.

Beyond that, this case exploded a myth – often used by the Justice Department as an excuse for not prosecuting financial crimes.  As Taibbi explained at the close of the piece:

There are some who think that the government is limited in how many corruption cases it can bring against Wall Street, because juries can’t understand the complexity of the financial schemes involved.  But in USA v. Carollo, that turned out not to be true.  “This verdict is proof of that,” says Hausfeld, the antitrust attorney.  “Juries can and do understand this material.”

One important lesson to be learned from the Carollo case is a simple fact that the mainstream news media would prefer to ignore:  This is but one tiny example of the manner in which business is conducted by the big banks.  As Matt Taibbi explained:

The men and women who run these corrupt banks and brokerages genuinely believe that their relentless lying and cheating, and even their anti-competitive cartel­style scheming, are all legitimate market processes that lead to legitimate price discovery.  In this lunatic worldview, the bid­rigging scheme was a system that created fair returns for everyone.

*   *   *

That, ultimately, is what this case was about.  Capitalism is a system for determining objective value.  What these Wall Street criminals have created is an opposite system of value by fiat. Prices are not objectively determined by collisions of price information from all over the market, but instead are collectively negotiated in secret, then dictated from above

*   *   *

Last year, the two leading recipients of public bond business, clocking in with more than $35 billion in bond issues apiece, were Chase and Bank of America – who combined had just paid more than $365 million in fines for their role in the mass bid rigging. Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again.  Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.

By now we are all familiar with the “revolving door” principle, wherein prosecutors eventually find themselves working for the law firms which represent the same financial institutions which those prosecutors should have dragged into court.  At the Securities and Exchange Commission, the same system is in place.  Worst of all is the fact that our politicians – who are responsible for enacting laws to protect the public from such criminal enterprises as what was exposed in the Carollo case – are in the business of lining their pockets with “campaign contributions” from those entities.  You may have seen Jon Stewart’s coverage of Jamie Dimon’s testimony before the Senate Banking Committee.  How dumb do the voters have to be to reelect those fawning sycophants?

Yet it happens  .  .  .  over and over again.  From the Great Depression to the Savings and Loan scandal to the financial crisis and now this bid-rigging scheme.  The culprits never do the “perp walk”.  Worse yet, they continue on with “business as usual” partly because the voting public is too brain-dead to care and partly because the mainstream news media avoid these stories.  Our political system is incapable of confronting this level of corruption because the politicians from both parties are bought and paid for by the banking cabal.  As  Paul Farrell of MarketWatch explained:

Seriously, folks, the elections are relevant.  Totally.  Oh, both sides pretend it matters.  But it no longer matters who’s president.  Or who’s in Congress.  Money runs America.  And when it comes to the public interest, money is not just greedy, but myopic, narcissistic and deaf.  Money from Wall Street bankers, Corporate CEOs, the Super Rich and their army of 261,000 highly paid mercenary lobbyists.  They hedge, place bets on both sides.  Democracy is dead.

Why would anyone expect America to solve any of its most pressing problems when the officials responsible for addressing those issues have been compromised by the villains who caused those situations?


 

Keeping The Megabank Controversy On Republican Radar

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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.


 

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An Army Of Lobbyists For The Middle Class

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Federal Reserve Chairman, Ben Bernanke appeared before the Senate Banking Committee this week to testify about the Fed’s monetary policy.  Scot Kersgaard of The American Independent focused our attention on a five-minute exchange between Colorado Senator Michael Bennett and The Ben Bernank, with an embedded video clip.  Senator Bennett asked Bernanke to share his opinions concerning the recommendations made by President Obama’s bipartisan deficit commission.  Bernanke initially attempted to dodge the question with the disclaimer that the Fed’s authority extends to only monetary policy rather than fiscal policy – such as the work conducted by the deficit commission.  If Congressman Ron Paul had been watching the hearing take place, I’m sure he had a good, hard laugh at that statement.  Nevertheless, Bernanke couldn’t restrain himself from concurring with the effort to place the cost of Wall Street’s larceny on the backs of middle-class taxpayers.

The chant for “entitlement reform” continues to reverberate throughout the mainstream media as it has for the past year.  Last May, economist Dean Baker exposed this latest effort toward upward wealth redistribution:

Emboldened by the fact that none of them have gone to jail for their role in the financial crisis, the Wall Street gang is now gunning for Social Security and Medicare, the country’s most important safety net programs. Led by investment banker Pete Peterson, this crew is spending more than a billion dollars to convince the public that slashing these programs is the only way to protect our children and grandchildren from poverty.

A key propaganda tactic used by the “entitlement reform” crusaders is to characterize Social Security as an “entitlement” even though it is not (as I discussed here).  Phil Davis, avowed capitalist and self-described “serial entrepreneur”, wrote a great essay, which refuted the claim that Social Security is “broken” while explaining why it is not an “entitlement”.  Unfortunately, there are very few politicians who are willing to step forward to provide the simple explanation that Social Security is not an entitlement.  Senator Richard Blumenthal (D-Conn.) recently made a statement to that effect before a senior citizens’ group in East Haven, Connecticut – without really providing an explanation why it is not an entitlement.  Susan Feiner wrote a great commentary on the subject last fall for womensenews.org.  Here is some of what she said:

Moreover, Social Security is not an entitlement program as it’s paid for entirely by payroll taxes.  It is an insurance program, not an entitlement. Not one penny of anyone’s Social Security comes out of the federal government’s general fund.

Social Security is, by law, wholly self-financing.  It has no legal authority to borrow, so it never has.

If this incredibly successful and direly needed program hasn’t ever borrowed a dime, why is the president and his hand-picked commissioners putting Social Security cuts (and/or increases in the retirement age) in the same sentence as deficit reduction?

The attempt to mischaracterize Social Security as an “entitlement” is not a “Right vs. Left” dispute —  It’s a class warfare issue.  There have been commentaries from across the political spectrum emphasizing the same fact:  Social Security is not an “entitlement”.  The assertion has appeared on the conservative patriotsteaparty.net website, the DailyKos on the Left and in a piece by independent commentator, Marti Oakley.

The battle for “entitlement reform” is just one front in the larger war being waged by Wall Street against the middle class.  Kevin Drum discussed this conflict in a recent posting at his Plutocracy Now blog for Mother Jones:

It’s about the loss of a countervailing power robust enough to stand up to the influence of business interests and the rich on equal terms.  With that gone, the response to every new crisis and every new change in the economic landscape has inevitably pointed in the same direction.  And after three decades, the cumulative effect of all those individual responses is an economy focused almost exclusively on the demands of business and finance.  In theory, that’s supposed to produce rapid economic growth that serves us all, and 30 years of free-market evangelism have convinced nearly everyone — even middle-class voters who keep getting the short end of the economic stick — that the policy preferences of the business community are good for everyone.  But in practice, the benefits have gone almost entirely to the very wealthy.

One of my favorite commentators, Paul Farrell of MarketWatch made this observation on March 1:

Wall Street’s corrupt banks have lost their moral compass … their insatiable greed has become a deadly virus destroying its host nation … their campaign billions buy senate votes, stop regulators’ actions, manipulate presidential decisions.  Wall Street money controls voters, runs America, both parties.  Yes, Wall Street is bankrupting America.

Wake up America, listen:

  • “Our country is bankrupt.  It’s not bankrupt in 30 years or five years,” warns economist Larry Kotlikoff, “it’s bankrupt today.”
  • Economist Peter Morici:  “Capitalism is broken, America’s government is two bankrupt political parties bankrupting the country.”
  • David Stockman, Reagan’s budget director:  “If there were such a thing as Chapter 11 for politicians” the “tax cuts would amount to a bankruptcy filing.”
  • BusinessWeek recently asked analyst Mary Meeker to run the numbers.  How bad is it? America really is bankrupt, with a “net worth of a negative $44 trillion.” Bankrupt.

And it will get worse.  Unfortunately, nothing can stop America’s self-destructive Wall Street bankers.  They simply do not care that their “doomsday capitalism” is destroying themselves from within, and is bankrupting America too.

On February 21, I quoted a statement made by bond guru Bill Gross of PIMCO, which included this thought:

America requires more than a makeover or a facelift.  It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system.  It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola.

That essay by Bill Gross became the subject of an article by Terrence Keeley of Bloomberg News.  Mr. Keeley’s reaction to the suggestions made by Bill Gross was this:

To redeem Wall Street’s soul, radical solutions are clearly needed, but advocating the eradication of profit-based markets that have served humanity well on balance without a viable replacement is fanciful. Gross deserves an “A” for intent — but something more practical than a “heart transplant” is required to restore trust and efficacy to our banking system.

*   *   *

But an economy based on something other than profit risks misery and injustice of another sort.  The antibodies now needed aren’t those that negate profitability.  Rather, they are the ones that bind financial engineering to value creation and advancement of society.

Perhaps the most constructive solution to the problem is my suggestion from February 10:  Recruit and employ an army of lobbyists to represent and advance the interests of the middle class on Capitol Hill.  Some type of non-partisan, “citizens’ lobby” could be created as an online community.  Once its lobbying goals are developed and articulated, an online funding drive would begin.  The basic mission would be to defend middle-class taxpayers from the tyranny of the plutocracy that is destroying not just the middle class – but the entire nation.  Fight lobbyists with lobbyists!


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The Poisonous Bailout

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June 10, 2010

The adults in the room have spoken.  The Congressional Oversight Panel – headed by Harvard Law School professor Elizabeth Warren – created to oversee the TARP program, has just issued a report disclosing the ugly truth about the bailout of AIG:

The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace.

Note the present tense in that statement.  Not only did the bailout have a poisonous effect on the marketplace at the time –it continues to have a poisonous effect on the marketplace.  The 300-page report includes the reason why the AIG bailout continues to have this poisonous effect:

The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them.

And that, dear readers, is precisely what the concept of “moral hazard” is all about.  It is the reason why we should not continue to allow financial institutions to be “too big to fail”.  Bad behavior by financial institutions is encouraged by the Federal Reserve and Treasury with assurance that any losses incurred as a result of that risky activity will be borne by the taxpayers rather than the reckless institutions.  You might remember the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009:

.  .  .   you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail.  Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out.  In short, you are the definition of moral hazard.

With particular emphasis on the AIG bailout, this is what Senator Bunning said to Bernanke:

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton.  First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio.  Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated.  Well, according to the TARP Inspector General, it turns out the Fed was not concerned about the financial condition of the credit default swaps partners when you decided to pay them off at par.  In fact, the Inspector General makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank’s offer to take a haircut was declined.  I can only think of two possible reasons you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up U.B.S. on their offer of a haircut.  Sadly, those two reasons are incompetence or a desire to secretly funnel more money to a few select firms, most notably Goldman Sachs, Merrill Lynch, and a handful of large European banks.

Hugh Son of Bloomberg BusinessWeek explained how the Congressional Oversight Panel’s latest report does not have a particularly optimistic view of AIG’s ability to repay the bailout:

The bailout includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Department and up to $52.5 billion to buy mortgage-linked assets owned or backed by the insurer through swaps or securities lending.

AIG owes about $26.6 billion on the credit line and $49 billion to the Treasury.  The company returned to profit in the first quarter, posting net income of $1.45 billion.

‘Strong, Vibrant Company’

“I’m confident you’ll get your money, plus a profit,” AIG Chief Executive Officer Robert Benmosche told the panel in Washington on May 26.  “We are a strong, vibrant company.”

The panel said in the report that the government’s prospects for recovering funds depends partly on the ability of AIG to find buyers for its units and on investors’ willingness to purchase shares if the Treasury Department sells its holdings.  AIG turned over a stake of almost 80 percent as part of the bailout and the Treasury holds additional preferred shares from subsequent investments.

“While the potential for the Treasury to realize a positive return on its significant assistance to AIG has improved over the past 12 months, it still appears more likely than not that some loss is inevitable,” the panel said.

Simmi Aujla of the Politico reported on Elizabeth Warren’s contention that Treasury and Federal Reserve officials should have attempted to save AIG without using taxpayer money:

“The negotiations would have been difficult and they might have failed,” she said Wednesday in a conference call with reporters.  “But the benefits of crafting a private or even a joint public-private solution were so superior to the cost of a complete government bailout that they should have been pursued as vigorously as humanly possible.”

The Treasury and Federal Reserve are now in “damage control” mode, issuing statements that basically reiterate Bernanke’s “panic” excuse referenced in the above-quoted remarks by Jim Bunning.

The release of this report is well-timed, considering the fact that the toothless, so-called “financial reform” bill is now going through the reconciliation stage.  Now that Blanche Lincoln is officially the Democratic candidate to retain her Senate seat representing Arkansas – will the derivatives reform provisions disappear from the bill?  In light of the information contained in the Congressional Oversight Panel’s report, a responsible – honest – government would not only crack down on derivatives trading but would also ban the trading of “naked” swaps.  In other words:  No betting on defaults if you don’t have a potential loss you are hedging – or as Phil Angelides explained it:  No buying fire insurance on your neighbor’s house.  Of course, we will probably never see such regulation enacted – until after he next financial crisis.



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Elizabeth Warren To The Rescue

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March 4, 2010

We reached the point where serious financial reform began to look like a lost cause.  Nothing has been done to address the problems that caused the financial crisis.  Economists have been warning that we could be facing another financial crisis, requiring another round of bank bailouts.  The watered-down financial reform bill passed by the House of Representatives, HR 4173, is about to become completely defanged by the Senate.

The most hotly-contested aspect of the proposed financial reform bill — the establishment of an independent, stand-alone, Consumer Financial Protection Agency — is now in the hands of “Countrywide Chris” Dodd, who is being forced into retirement because the people of Connecticut are fed up with him.  As a result, this is his last chance to get some more “perks” from his position as Senate Banking Committee chairman.  Back on January 18, Elizabeth Warren (Chair of the Congressional Oversight Panel and the person likely to be appointed to head the CFPA) explained to Reuters that banking lobbyists might succeed in “gutting” the proposed agency:

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.

*   *   *

Consumer protection is relatively simple and could easily be fixed, she said.  The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

The latest effort to sabotage the proposed CFPA involves placing it under the control of the Federal Reserve.  As Craig Torres and Yalman Onaran explained for Bloomberg News:

Putting it inside the Fed, instead of creating a standalone bureau, was a compromise proposed by Senator Bob Corker, a Tennessee Republican, and Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.

*   *   *

Banking lobbyists say the Fed’s knowledge of the banking system makes it well-suited to coordinate rules on credit cards and other consumer financial products.

*   *   *

The financial-services industry has lobbied lawmakers to defeat the plan for a consumer agency.  JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” on a December conference call with analysts.

Barry Ritholtz, author of Bailout Nation, recently discussed the importance of having an independent CFPA:

Currently, there are several proposals floating around to change the basic concept of a consumer protection agency.  For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic.  Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance — they failed to do their duty.

The Fed is the wrong agency for this.

In an interview with Ryan Grim of The Huffington Post, Congressman Barney Frank expressed a noteworthy reaction to the idea:

“It’s like making me the chief judge of the Miss America contest,” Frank said.

On Tuesday, March 2, Elizabeth Warren spent the day on the phone with reform advocates, members of Congress and administration officials, as she explained in an interview with Shahien Nasiripour of The Huffington Post.  The key point she stressed in that interview was the message:  “Pass a strong bill or nothing at all.”  It sounds as though she is afraid that the financial reform bill could suffer the same fate as the healthcare reform bill.  That notion was reinforced by the following comments:

My first choice is a strong consumer agency  . . .  My second choice is no agency at all and plenty of blood and teeth left on the floor.

*   *   *

“The lobbyists would like nothing better than for the story to be the [proposed] agency has died and everyone has given up,” Warren said.  “The lobbyists’ closest friends in the Senate would like nothing better than passing an agency that has a good name but no real impact so they have something good to say to the voters — and something even better to say to the lobbyists.”

Congratulations, Professor Warren!  At last, someone with some cajones is taking charge of this fight!

On Wednesday, March 3, the Associated Press reported that the Obama administration was getting involved in the financial reform negotiations, with Treasury Secretary Geithner leading the charge for an independent Consumer Financial Protection agency.  I suspect that President Obama must have seen the “Ex-Presidents” sketch from the FunnyOrDie.com website, featuring the actors from Saturday Night Live portraying former Presidents (and ghosts of ex-Presidents) in a joint effort toward motivating Obama to make sure the CFPA becomes a reality.  When Dan Aykroyd and Chevy Chase reunited, joining Dana Carvey, Will Ferrell and Darryl Hammond in promoting this cause, Obama could not have turned them down.



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Taking The Suckers For Granted

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January 21. 2010

In the aftermath of Coakley Dokeley’s failed quest to replace Teddy Kennedy as Senator of Massachusetts, the airwaves and the blogosphere have been filled with an assortment of explanations for how and why the Bay State elected a Republican senator for the first time in 38 years.  I saw the reason as a simple formula:  One candidate made 66 campaign appearances while the other made 19.  The rationale behind the candidate’s lack of effort was simple:  she took the voters for granted.  This was the wrong moment to be taking the voters for chumps.  At a time when Democrats were vested with a “supermajority” in the Senate, an overwhelming majority in the House and with control over the Executive branch, they overtly sold out the interests of their constituents in favor of payoffs from lobbyists.  Obama’s centerpiece legislative effort, the healthcare bill, turned out to be another “crap sandwich” of loopholes, exceptions, escape clauses and an effective date after the Mayan-prophesized end of the world.  Obama’s giveaway to Big Pharma was outdone by Congressional giveaways to the healthcare lobby.

The Democrats’ efforts to bring about financial reform are now widely viewed as just another opportunity to rake in money and favors from lobbyists, leaving the suckers who voted for them to suffer worse than before.  Coakley Dokeley made the same mistake that Obama and most politicians of all stripes are making right now:  They’re taking the suckers for granted.  That narrative seems to be another important reason why the Massachusetts senatorial election has become such a big deal.  There is a lesson to be learned by the politicians, who are likely to ignore it.

Paul Farrell recently wrote an open letter to President Obama for MarketWatch, entitled:  “10 reasons Obama is now failing 95 million investors”.  In his discussion of reason number five, “Failing to pick a cast of characters that could have changed history”, Farrell made this point:

Last year many voted for you fearing McCain might pick Phil Gramm as Treasury secretary.  Unfortunately, Mr. President, your picks not only revived Reaganomics under the guise of Keynesian economics, you sidelined a real change-agent, Paul Volcker, and picked Paulson-clones like Geithner and Summers.  But worst of all, you’re reappointing Bernanke, a Greenspan clone, as Fed chairman, an economist who, as Taleb put it, “doesn’t even know he doesn’t understand how things work.”  And with that pick, you proved you also don’t understand how things work.

Another former Obama supporter, Mort Zuckerman, editor-in-chief of U.S. News and World Report and publisher of the New York Daily News, wrote a piece for The Daily Beast, examining Obama’s leadership shortcomings:

In the campaign, he said he would change politics as usual.  He did change them.  It’s now worse than it was.  I’ve now seen the kind of buying off of politicians that I’ve never seen before.  It’s politically corrupt and it’s starting at the top.  It’s revolting.

*   *   *

I hope there are changes.  I think he’s already laid in huge problems for the country.  The fiscal program was a disaster.  You have to get the money as quickly as possible into the economy.  They didn’t do that.  By end of the first year, only one-third of the money was spent.  Why is that?

He should have jammed a stimulus plan into Congress and said, “This is it.  No changes.  Don’t give me that bullshit.  We have a national emergency.”  Instead they turned it over to Harry Reid and Nancy Pelosi who can run circles around him.

As for the Democrats’ pre-sabotaged excuse for “financial reform”, the fate of the Consumer Financial Protection Agency is now in the hands of “Countrywide Chris” Dodd, who is being forced into retirement because the people of Connecticut are fed up with him.  As a result, this is his last chance to get some more “perks” from his position as Senate Banking Committee chairman.  Elizabeth Warren, the person likely to be appointed to head the CFPA, explained to Reuters that banking lobbyists might succeed in “gutting” the proposed agency:

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.

*   *   *

Consumer protection is relatively simple and could easily be fixed, she said.  The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

Setting up the CFPA is largely a matter of stripping the Fed and other agencies of their consumer protection duties and relocating them into a new agency.

With all the coverage and expressed anticipation that the Massachusetts election will serve as a “wake-up call” to Obama and Congressional Democrats, not all of us are so convinced.  Edward Harrison of Credit Writedowns put it this way:

But, I don’t think the President gets it.  He is holed up in the echo chamber called the White House.  If the catastrophic loss in Massachusetts’ Senate race and the likely defeat of his health care reform bill doesn’t wake Obama up to the realities that he is not in Roosevelt’s position but in Hoover’s, he will end as a failed one-term President.

I agree.  I also believe that the hubris will continue.  Why would any of these politicians change their behavior?  The “little people” never did matter.  They exist solely to be played as fools.  They are powerless against the plutocracy.  Right?



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A 9-11 Commission For The Federal Reserve

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January 7, 2010

After the terrorist attacks of September 11, 2001, Congress passed Public Law 107-306, establishing The National Commission on Terrorist Attacks Upon the United States (also known as the 9-11 Commission).  The Commission was chartered to create a full and complete account of the circumstances surrounding the September 11, 2001 terrorist attacks, including preparedness for and the immediate response to the attacks.  The Commission was also mandated to provide recommendations designed to guard against future attacks.  The Commission eventually published a report with those recommendations.  The failure to implement and adhere to those recommendations is now being discussed as a crucial factor in the nearly-successful attempt by The Undiebomber to crash a jetliner headed to Detroit on Christmas Day.

On January 3, 2010, Federal Reserve Chairman Ben Bernanke gave a speech at the Annual Meeting of the American Economic Association in Atlanta, entitled: “Monetary Policy and the Housing Bubble”.  The speech was a transparent attempt to absolve the Federal Reserve from culpability for causing the financial crisis, due to its policy of maintaining low interest rates during Bernanke’s tenure as Fed chair as well as during the regime of his predecessor, Alan Greenspan.  Bernanke chose instead, to focus on a lack of regulation of the mortgage industry as being the primary reason for the crisis.

Critical reaction to Bernanke’s speech was swift and widespread.  Scott Lanman of Bloomberg News discussed the reaction of an economist who was unimpressed:

“It sounds a little bit like a mea culpa,” said Randall Wray, an economics professor at the University of Missouri in Kansas City, who was in Atlanta and didn’t attend Bernanke’s speech. “The Fed played a role by promoting the most dangerous financial innovations used by institutions to fuel the housing bubble.”

Nomi Prins attended the speech and had this to say about it for The Daily Beast:

But having watched his entire 10-slide presentation (think: Economics 101 with a political twist), I had a different reaction: fear.

My concern is straightforward:  Bernanke doesn’t seem to have learned the lessons of the very recent past.  The flip side of Bernanke’s conclusion — we need stronger regulation to avoid future crises — is that the Fed’s monetary, or interest-rate, policy was just fine.  That the crisis that brewed for most of the decade was merely a mistake of refereeing, versus the systemic issue of mega-bank holding companies engaged in reckless practices, many under the Fed’s jurisdiction.

*   *   *

Meanwhile, justifying past monetary policy rather than acknowledging the real-world link between Wall Street practices and general economic troubles suggests that Bernanke will power the Fed down the path of the same old mistakes.  Focusing on lending problems is important, but leaving goliath, complex banks to their worst practices (albeit with some regulatory tweaks) is to miss the world as it is.

As the Senate takes on the task of further neutering the badly compromised financial reform bill passed by the House (HR 4173) — supposedly drafted to prevent another financial crisis — the need for a better remedy is becoming obvious.  Instead of authorizing nearly $4 trillion for the next round of bailouts which will be necessitated as a result of the continued risky speculation by those “too big to fail” financial institutions, Congress should take a different approach.  What we really need is another 9/11-type of commission, to clarify the causes of the financial catastrophe of September 2008 (which manifested itself as a credit crisis) and to make recommendations for preventing another such event.

David Leonhardt of The New York Times explained that Greenspan and Bernanke failed to realize that they were inflating a housing bubble because they had become “trapped in an echo chamber of conventional wisdom” that home prices would never drop.  Leonhardt expressed concern that allowing the Fed chair to remain in such an echo chamber for the next bubble could result in another crisis:

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along.  A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail.  If he doesn’t volunteer such an accounting, Congress could request one.

In the future, a review process like this could become a standard response to a financial crisis.  Andrew Lo, an M.I.T. economist, has proposed a financial version of the National Transportation Safety Board — an independent body to issue a fact-finding report after a crash or a bust.  If such a board had existed after the savings and loan crisis, notes Paul Romer, the Stanford economist and expert on economic growth, it might have done some good.

Barry Ritholtz, author of Bailout Nation, argued that Bernanke’s failure to understand what really caused the credit crisis is just another reason for a proper investigation addressing the genesis of that event:

Unfortunately, it appears to me that the Fed Chief is defending his institution and the judgment of his immediate predecessor, rather than making an honest appraisal of what went wrong.

As I have argued in this space for nearly 2 years, one cannot fix what’s broken until there is a full understanding of what went wrong and how.  In the case of systemic failure, a proper diagnosis requires a full understanding of more than what a healthy system should look like.  It also requires recognition of all of the causative factors — what is significant, what is incidental, the elements that enabled other factors, the “but fors” that the crisis could not have occurred without.

Ritholtz contended that an honest assessment of the events leading up to the credit crisis would likely reveal a sequence resembling the following time line:

1.  Ultra low interest rates led to a scramble for yield by fund managers;

2.  Not coincidentally, there was a massive push into subprime lending by unregulated NONBANKS who existed solely to sell these mortgages to securitizers;

3.  Since they were writing mortgages for resale (and held them only briefly) these non-bank lenders collapsed their lending standards; this allowed them to write many more mortgages;

4.  These poorly underwritten loans — essentially junk paper — was sold to Wall Street for securitization in huge numbers.

5.  Massive ratings fraud of these securities by Fitch, Moody’s and S&P led to a rating of this junk as Triple AAA.

6.  That investment grade rating of junk paper allowed those scrambling bond managers (see #1) to purchase higher yield paper that they would not otherwise have been able to.

7.  Increased leverage of investment houses allowed a huge securitization manufacturing process; Some iBanks also purchased this paper in enormous numbers;

8.  More leverage took place in the shadow derivatives market.  That allowed firms like AIG to write $3 trillion in derivative exposure, much of it in mortgage and credit related areas.

9.  Compensation packages in the financial sector were asymmetrical, where employees had huge upside but shareholders (and eventually taxpayers) had huge downside.  This (logically) led to increasingly aggressive and risky activity.

10.  Once home prices began to fall, all of the above fell apart.

As long as the Federal Reserve chairman keeps his head buried in the sand, in a state of denial or delusion about the true cause of the financial crisis, while Congress continues to facilitate a system of socialized risk for privatized gain, we face the dreadful possibility that history will repeat itself.



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Lacking Reform

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January 4, 2010

David Reilly of Bloomberg News did us all a favor by reading through the entire, 1,270-page financial reform bill that was recently passed by the House of Representatives.  The Wall Street Reform and Consumer Protection Act (HR 4173) was described by Reilly this way:

The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.

After reading the bill, David Reilly wrote a commentary piece for Bloomberg entitled:  “Bankers Get $4 Trillion Gift from Barney Frank”.  Reilly seemed surprised that banks opposed this legislation, emphasizing that “they should cheer for its passage by the full Congress in the New Year” because of the bill’s huge giveaways to the banking industry and Wall Street.  Here are some of Reilly’s observations on what this bill provides:

—  For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system.  Admitting you have a problem, as any 12-stepper knows, is the crucial first step toward recovery.

— Instead, it supports the biggest banks.  It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes.  So much for “no-more-bailouts” talk.  That is more than twice what the Fed pumped into markets this time around.  The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

— Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.”   Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.

More Bailouts

— The bill also allows the government, in a crisis, to back financial firms’ debts.  Bondholders can sleep easy  — there are more bailouts to come.

— The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.

— Don’t worry, this time regulators will have better tools.  Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.

— This group, among its many powers, can restrict the ability of a financial firm to trade for its own account.  Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”

My favorite passage from Reilly’s essay concerned the proposal for a Consumer Financial Protection Agency:

— The bill isn’t all bad, though.  It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP.  And the first director gets the cool job of designing a seal for the new agency.  My suggestion:  Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.

The cover story for the December 30 edition of Business Week explained how this bill became so badly compromised.  Alison Vekshin and Dawn Kopecki wrote the piece, explaining how the New Democrat Coalition, which “has 68 fiscally conservative, pro-business members who fill 15 of the party’s 42 seats on the House Financial Services Committee” reshaped this bill.  The New Democrats fought off proposed changes to derivatives trading and included an amendment to the Consumer Financial Protection Agency legislation giving federal regulators more discretion to override state consumer protection laws than what was initially proposed.  Beyond that, “non-financial” companies such as real estate agencies and automobile dealerships will not be subject to the authority of the new agency.  The proposed requirement for banks to offer “plain-vanilla” credit-card and mortgage contracts was also abandoned.

One of my pet peeves involves Democrats’ claiming to be “centrists” or “moderates” simply because they enjoy taking money from lobbyists.  Too many people are left with the impression that a centrist is someone who lacks a moral compass.  The Business Week story provided some insight about how the New Democrat Coalition gets … uh … “moderated”:

Since the start of the 2008 election cycle, the financial industry has donated $24.9 million to members of the New Democrats, some 14% of the total funds the lawmakers have collected, according to the Center for Responsive Politics.  Representative Melissa Bean of Illinois, who has led the Coalition’s efforts on regulatory reform, was the top beneficiary, with donations of $1.4 million.

As the financial reform bill is being considered by the Senate, the U.S. Chamber of Commerce has stepped up its battle against the creation of a Consumer Financial Protection Agency.  The Business Week article concluded with one lawmaker’s perspective:

“My greatest fear for the last year has been an economic collapse,” says Representative Brad Miller (D-N.C), who sits on Frank’s House Financial Services Committee.  “My second greatest fear was that the economy would stabilize and the financial industry would have the clout to defeat the fundamental reforms that our nation desperately needs.  My greatest fear seems less likely … but my second greatest fear seems more likely every day.”

The dysfunction that preserves this unhealthy status quo was best summed up by Chris Whalen of Institutional Risk Analytics:

The big banks pay the big money in Washington, the members of Congress pass new laws to enable the theft from the public purse, and the servile Fed prints money to keep the game going for another day.

As long as Congress is going through the motions of passing “reform” legislation, they should do us all a favor and take on the subject of lobbying reform.  Of course, the chances of that ever happening are slim to none.



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Turning Up The Heat

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December 21, 2009

By now you should be aware of the fact that for his 56th birthday, Federal Reserve chairman Ben Bernanke was named Time magazine’s “Person of the Year”.  Were the folks at Time so arrogant as to believe that this honor would insure the confirmation of Bernanke to a second term as chairman of the Federal Reserve?  More than a few commentators expressed the view that Time’s “Person of the Year” award might actually jeopardize Bernanke’s chance at confirmation.  For example, take a look at what Mike Shedlock (a/k/a Mish) had to say:

That Bernanke is on the cover of Time Magazine means one thing “Bernanke’s Time Is Limited” He is on his way out.  And that is good news.

*   *   *

The quicker this blows up, the quicker we can recover.  And knowing what we know about Time Magazine, Central Banking will blow up sooner rather than later.  Moreover, Bernanke will not be part of the solution, and that is a good thing.

I thank Time Magazine for the information and their kiss of death warning. However, I must also remind readers that Stalin made the cover twice, so immediate results just might be expecting too much.

When Bernanke was grilled by the Senate Banking Committee during the confirmation hearing on December 3, Senator Jim Bunning of Kentucky gave him a magnificent pummeling, most notable for the assertion:  “You are the definition of a moral hazard!”  My only criticism of Bunning’s diatribe was that he should have said:  “You are the personification of a moral hazard” or “You are the epitome of a moral hazard”  —  otherwise, it was perfect.  If that weren’t enough, Senator Bunning demanded that Bernanke answer seventy written questions submitted by Bunning himself.  Those of you who have ever been a party to a lawsuit might recall having to provide signed answers to written interrogatories.  Most jurisdictions place a limit on the number of such interrogatories to the extent of approximately 35.  Senator Bunning propounded twice that many to Bernanke and the nominee answered all of them.  Don Luskin of Smart Money analyzed one of these answers in a way that underscored the necessity of removing Bernanke from the Fed chairmanship.

On December 18, Victoria McGrane reported for Politico that the Bernanke nomination “could be in more trouble than previously thought”.  Although the Senate Banking Committee voted to confirm the nomination, ultimately the entire Seante must vote on the matter.  The fact that six Republicans and one Democrat from the Banking Committee voted against the nomination was portrayed as an ominous signal, casting doubt on the likelihood of confirmation.  Ms. McGrane discussed the reaction to the confirmation hearings expressed by Brian Gardner, a bank analyst for Keefe, Bruyette and Woods:

Two aspects of the two-hour debate that preceded the committee vote struck Gardner as worrisome for Bernanke:  the unenthusiastic — even apologetic — tone from some of the senators who voted yes and a dispute over the Fed’s refusal to release documents about the bailout of insurance giant American International Group to senators on the committee.

The article explained that the AIG bailout documents were available for review by “some banking committee staffers” although the documents have been withheld by the Fed from individual senators and the public, based on the Fed’s claim that the documents are “protected”.

This is apparently an assertion by the Fed that there is some sort of privilege protecting the AIG bailout documents from disclosure.  Nevertheless, if the fight over these records ever gets before a court, it is likely that production of the documents would be compelled, since any claim of privilege was waived once the Fed allowed the “banking committee staffers” to review the items.

The Politico report noted the significance of this matter:

That spat could have legs, Gardner said, and if it resonates with a public already fuming at the Fed, it could sway the votes of yes-leaning senators.

The battle over the AIG bailout documents was also the subject of an opinion piece in the December 19 edition of The New York Times, written by Eliot Spitzer, Frank Partnoy and William Black.  Here’s some of what they had to say:

No doubt, some of the e-mail messages contain privileged conversations among lawyers.  Others probably include private information that is irrelevant to A.I.G.’s role in the crisis. But the vast majority of these documents could be made public without legal concern.  So why haven’t the Treasury and the Federal Reserve already made sure the public could see this information?  Do they want to protect A.I.G., or do they worry about shining too much sunlight on their own performance leading up to and during the crisis?

What will these e-mails reveal about the actions of Ben Bernanke and “Turbo” Tim Geithner during the AIG bailout phase of the financial crisis?  Were laws violated or do they simply exhibit some poor decision-making and cronyism?

Most of us are now getting ready for the coldest month of the year – but for Ben Bernanke, the heat is being turned up  —  full blast.



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The Federal Reserve Is On The Ropes

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November 23, 2009

Last February, Republican Congressman Ron Paul introduced HR 1207, the Federal Reserve Transparency Act of 2009, by which the Government Accountability Office would be granted authority to audit the Federal Reserve and present a report to Congress by the end of 2010.  On May 21, Congressman Alan Grayson, a Democrat from Florida, wrote to his Democratic colleagues in the House, asking them to co-sponsor the bill. The bill eventually gained over 300 co-sponsors.  By October 30, Congressman Mel Watt, a Democrat from North Carolina, basically “gutted” the bill according to Congressman Paul, in an interview with Bob Ivry of Bloomberg News.  Watt subsequently proposed a competing measure, which was aided by the circulation of a letter by eight academics, who were described as a “political cross-section of prominent economists”.  Ryan Grim of The Huffington Post disclosed on November 18 that the purportedly diverse, independent economists were actually paid stooges of the Federal Reserve:

But far from a broad cross-section, the “prominent economists” lobbying on behalf of the Watt bill are in fact deeply involved with the Federal Reserve.  Seven of the eight are either currently on the Fed’s payroll or have been in the past.

After HR 1207 had been undermined by Watt, an amendment calling for an audit of the Federal Reserve was added as amendment 69B to HR3996, the Financial Stability Improvement Act of 2009.  The House Finance Committee voted to approve that amendment on November 19.  This event was not only a big win for Congressmen Paul and Grayson — it also gave The Huffington Post’s Ryan Grim the opportunity for a “victory lap”:

In an unprecedented defeat for the Federal Reserve, an amendment to audit the multi-trillion dollar institution was approved by the House Finance Committee with an overwhelming and bipartisan 43-26 vote on Thursday afternoon despite harried last-minute lobbying from top Fed officials and the surprise opposition of Chairman Barney Frank (D-Mass.), who had previously been a supporter.

*   *   *

“Today was Waterloo for Fed secrecy,” a victorious Grayson said afterwards.

Scott Lanman of Bloomberg News pointed out that this battle was just one of many legislative onslaughts against the Fed:

The Fed’s powers and rate-setting independence are under threat on several fronts in Congress.  Separately yesterday, the Senate Banking Committee began debate on legislation that would strip the Fed of bank-supervision powers and give lawmakers greater say in naming the officials who vote on monetary policy.

*   *   *

Paul and other lawmakers have accused the Fed of lax oversight of banks and failing to avert the financial crisis.

Federal Reserve Chairman Ben Bernanke is feeling even more heat because the Senate Banking Committee will begin hearings concerning Bernanke’s reappointment as Fed Chair.  The hearings will begin on December 3, the same day as President Obama’s jobs summit.  Senate Banking Committee chair, Chris Dodd, revealed to videoblogger Mike Stark that Bernanke’s reappointment is “not necessarily” a foregone conclusion.

Let’s face it:  the public has finally caught on to the fact that the mission of the Fed is to protect the banking industry and if that is to be accomplished at the public’s expense — then so be it.  Back at The Huffington Post, Tom Raum explained how this heightened awareness of the Fed’s activities has resulted in some Congressional pushback:

Many lawmakers question whether the Fed’s money machine has mainly benefited financial markets and not the broader economy.  Lawmakers are also peeved that the central bank acted without congressional involvement when it brokered the 2008 sale of failed investment bank Bear Stearns and engineered the rescue of insurer American International Group.

Tom Raum echoed concern about the how the current increase in “anti-Fed” sentiment might affect the Bernanke confirmation hearings:

Should Bernanke be worried?

“Not only should be worried, he’s clearly ratcheted up his game in terms of his communications with Congress,” said Norman Ornstein, a senior fellow at the American Enterprise Institute.

Ornstein said the Fed bashing this time is different from before, with “a broader base of support.  And it’s coming from people who in the past would not have hit the Fed.  There’s a lot of populist anger out there — on the left, in the center and on the right.  And politicians are responsive to that.”

Populist anger with the Fed will certainly change the way history will regard former Fed chairman, Alan Greenspan.  Fred Sheehan’s new book:  Panderer to Power:  The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, could not have been released at a better time.  At his blog, Sheehan responded to five questions about Greenspan, providing us with a taste of what to expect in the new book.  Here is one of the interesting points, demonstrating how Greenspan helped create our current crisis:

The American economy’s recovery from the early 1990s was financial.  This was a first.  The recovery was a product of banks borrowing, leveraging and lending to hedge funds.  The banks were also creating and selling complicated and very profitable derivative products.  Greenspan needed the banks to grow until they became too-big-to-fail.  It was evident the “real” economy — businesses that make tires and sell shoes — no longer drove the economy.  Thus, finance was given every advantage to expand, no matter how badly it performed.  Financial firms that should have died were revived with large injections of money pumped by the Federal Reserve into the banking system.

It’s great to see Congress step up to the task of exposing the antics of the Federal Reserve.  Let’s just hope these efforts meet with continued success.



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