Location: New York
Author: IRA Staff
Date: Thursday, December 3, 2009
We start this issue of The Institutional Risk Analyst with a comment from our friend Martin Mayer, Guest Scholar of The Brookings Institution and author of various books about money and finance. The last sentence of Mayer's 2002 book, The Fed, reads:
"The tragedy for all of us would be if the Fed's and the Treasury's and the Congress's reverence for people who make a lot of money left us unprotected against some sudden revelation of the truth that becomes obvious only in hindsight, that a lot of them don't know what they're doing."
But of course the banksters know precisely what they are about. Mayer's comments on auditing the Fed are below, followed by our thoughts on the start of Ben Bernanke's Senate confirmation process. As this issue of The IRA goes to press, several members of the Senate have stated that they do not know if there are sufficient votes to confirm Bernanke for a second term as Fed Chairman.
Audit the Federal Reserve System
By Martin Mayer
Two weeks ago the House Banking Committee voted to authorize periodic audits of the Federal Reserve System by the Government Accountability Office, and outrage spread through the media about the Congress usurping the authority of the Fed.
The fact of the matter is that oversight of the Federal Reserve is part of the job description of the Congress. The Constitution of the United States empowers the Congress "to coin money [and] regulate the value thereof." When he was chairman of the House Bankng Committee in the 1950s, Wright Patman liked to say that the Constitution gave the Congress full power over money, "but we have farmed it out to the Federal Open Market Committee" in the Federal Reserve System.
Not everything said by Representative Ron Paul (R, TX) need be taken seriously, but on this subject he is right on the money. The much touted "independence" of the Fed is an independence from the executive, not the legislative branch.
The Fed can write its own budget without dictation from anyone for the practical reason that printing money is profitable and the central bank always shows a surplus. But under our system of government, the Congress can no more give the Fed full policy independence than the President can resign as commander-in-chief of the Army and Navy. The legally mandated twice-yearly "Humphrey/Hawkins" reports that the chairman of the Fed makes to the Congress are an expression of ultimate Congressional responsibility for monetary policy.
In this context, one probably should note that the Fed's oft-repeated concern about populist pressures for cheap money has always been eyewash. As Bray Hammond demonstrated in his Pulitzer Prize history of Banks and Money in the United States From the Revolution to the Civil War, it's the merchant class, the builders, the shadow bankers and the government who want inflation, while the farmers and workers want stable values for their earnings.
And right now more than monetary policy is involved. Over the course of the last year and a half, the Federal Reserve has created hundreds of billions of dollars and turned them over to the big banks and the big brokerage houses and the big insurance companies of American International Group. Some of the losses that have been and will be associated with these activities-especially those associated with AIG, Lehman Brothers and the government-sponsored enterprise Fannie Mae--are expenditures of the kind the Constitution says can be made only "in consequence of appropriations." The public defense of these activities is essentially an assertion that "we were right to panic."
Even those who approve the actions doubt the process. The Fed can no longer interpose its standard claim that secrecy is a necessary part of the mystique of central banking. The American people deserve to know the details of how these decisions were made. The Congress has not just the right but the obligation to audit them.
Meanwhile, our friends at www.zerohedge.com are conducting a public opinion poll as to whether Fed Chairman Ben Bernanke should be confirmed by the Senate for a second term as Chairman of the Board of Governors of the Federal Reserve System. So far, the "no" votes are running about 10:1 against Senate confirmation of Bernanke. We voted "no" in that poll and add the following thoughts on central bank independence in the Age of the Banksters.
Economists like to brag about their study of the Great Depression, as though merely going through the mainstream descriptions of the economic meltdown of the 1930s is sufficient qualification to be, say, Chairman of the Federal Reserve Board or head the Council of Economic Advisers. But judging by the performance of the current cast of characters in Washington, one wonders if our public servants so much studied the Depression years as they are merely imitating it, following a well worn political path of duplicity and stupidity all too typical in American financial history.
The trouble with most economists, you see, is that they ignore politics. For example, the years of comfortable republican misgovernance under George W. Bush bear close resemblance to the period of laissez faire following the progressive years of President Woodrow Wilson, which saw the creation of regulatory agencies such as the Federal Reserve and the Federal Trade Commission. But Wilson's liberal perspective was the exception to the rule.
In those days, as today, JPMorgan and the other New York banks mostly called the shots in Washington and caused members of Congress to jump through hoops of fire like trained dogs. Alan Greenspan finds a close political analog in Dick Crissinger, a banker and home town friend of former newspaper publisher Warren Harding who thought, like former Fed Chairman Greenspan and now Chairman Bernanke, that bankers were the perfect mechanisms to carry our public policy.
Paul Warburg, the partner of Kuhn, Loeb & Co who was the crucial member of the small group of Americans which crafted the political compromise that was the Federal Reserve System, was replaced by Crissinger on the Fed's Board. He and other Republican appointees then proceeded to move away from merely discounting bank notes and to the use of open market operations to feed the banks liquidity, as today. Crissinger and his cohorts delivered the Fed and the nation's financial policy entirely into the hands of Wall Street, turning the decentralized central bank into a tool of the big banks and, today, of their political cronies in Washington. So much for central bank independence!
In his classic 1933 book, The Mirrors of Wall Street, Clinton Gilbert noted that while the first Board of Governors of the Fed was comprised of people "distinguished by ability and character," by the time that Harding succeeded Wilson in the White House, the New York bankers led by the House of Morgan had captured the Federal Reserve Board.
Benjamin Strong left the Bankers Trust Company in 1914 to preside as Governor of the Federal Reserve Bank of New York and dominated the Fed's decentralized, "independent" Board. By the time WW I ended, the slogan "Return to Normalcy" succeeded the cries of war and the nation was, once again, more interested in ways to "turn the wheels of commerce and accelerate the movements of trade," wrote Gilbert, an apt parallel to the housing bubble of the past decade.
When members of Congress such as Rep. Barney Frank (D-MA) and Senator Chris Dodd (D-CT) kowtow to JPMorgan Chairman Jamie Dimon, and they do grovel so shamelessly, they are merely repeating the political dance performed by members of both parties for more than a century. When the public reacts in anger at the spectacle of the Congress bailing out the banksters, with the Treasury buying bank stock with public funds, and borrowed money at that, the initial reaction of Washington's criminal class is indifference.
It is only when the public mind is sufficiently focused on the comfortable and corrupt relationship between Washington and the banksters who run Wall Street, events like Enron and WorldCom, that change becomes possible. Such an opportunity presents itself with the nomination of Fed Chairman Ben Bernanke, whose rejection by the Senate would send a strong message to the White House and the electorate. But the single party state that is Washington would convulse with horror at such a deviation from the prepared script. We now are all "team players," you understand.
The Democratic electoral routs in NJ and VA may be precursors of an approaching seismic political event, but the warning may not yet be loud enough to get through the cocoon that surrounds the Obama White House. For reasons known only to the President, he has so far ignored the wise counsels of people like former Fed Chairman Paul Volcker and FDIC Chairman of Sheila Bair as to how to fix the problem with the zombie banks. Restructuring and recapitalization is the way to get banks lending again to the real economy and, perhaps, save President Obama's presidency from disaster. But so far the President prefers the counsel of the banksters, led by Bernanke, Dimon and Treasury Secretary Timothy Geithner.
The President is a "team player" in the language of the banksters, meaning that they tell the White House what policy is acceptable. A measure of Wall Street's brazen contempt for the public interest is shown by the large banks, led by JPMorgan and Goldman Sachs, as they fight even the most modest attempts to curtail their risk taking and increase transparency over the private markets for unregistered derivatives. And Ben Bernanke is at least tacitly supporting the large bank position in the legislative debate as he defends the role of the Fed is supervising these very same large banks.
When it comes to leadership in Washington on financial services policy, JPMorgan and Goldman Sachs have the floor to themselves and no one speaks for the public interest - not Ben Bernanke, not even the President. If Barrack Obama had the courage to resolve AIG and Citigroup using the fire of bankruptcy and liquidation to restore function to the financial markets, the economy would truly be on the mend, but most of the major banks would have new managers, directors and shareholders today. And we would no doubt also have a new Fed chairman whose term in office would have been confirmed by the Senate last year.
The bankers counsel extend and pretend; buy time and all will be well. And most bank regulators led by Ben Bernanke are now fully behind the banksters in terms of forbearance on bad loans and insolvent companies, further pushing out the arrival of a true economic rebound. Forebear on bad loans and keep printing money, say Bernanke and the banksters, and the economy eventually will come back. But indications are that just the opposite is occurring, namely deflation, falling revenue and rising unemployment, the direct result of zombie banks that cannot lend and managers who will not sell bad assets for fear of losing their employment.
The policy of extend and pretend championed by Ben Bernanke is a recipe for a lost decade a la the 1990s, only far worse. Whether you talk about bank loans or trade credit or vendor finance, there is none and the real economy is starving to death as a result. Chairman Bernanke and the banksters say that the way out of the crisis is slow healing, muddle along and let time salve the wounds that the large banks inflicted on us all. Using the tough medicine of restructuring and management change would help revive lending and the real economy sooner, but that would be inconvenient for the captains of the New York banks, who plan of playing record bonuses this winter as millions of Americans are without work.
There are a combination of internal and external factors working against a US economic recovery, but none are more pressing than the fact that most sources of credit for the real economy are sharply curtailed. Far from needing the help of the Congress to make the big banks get smaller, as some legislation now proposes, next year the question will be how to keep the US banking system from shrinking further in terms of assets and revenue. That is why we need a replacement for Ben Bernanke at the Fed.
But if we let the large banks continue to call the shots at the Fed and in Washington more generally, the only thing that is sure is that the US economy will at best stagnate in 2010 and beyond, and at worst continue to contract in terms of bank balance sheets, credit and employment. We need credible leadership at the Fed to lead the restructuring of the US banking system. Congress should reject the confirmation of Ben Bernanke and ask President Obama for a new candidate, a candidate with financial accumen rather than credentials as an economist. If the President fails this test of character and political judgment, then come 2012, Barrack Obama may be looking for work as well.
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