Audit the Fed Hearing: Alan Grayson

"Has the Fed tried to manipulate the stock market?"

Rep. Grayson made the Fed general counsel very uncomfortable in today's historic hearing.

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Curious Op-Ed Piece by a Board Member of Federal Reserve

Why now? Inquiring mind wants to know.

Kevin M. Warsh is a 39-year-old former VP of Morgan Stanley and a current member of the Board of Governors of the Federal Reserve. He wrote an op-ed piece for Wall Street Journal, which was posted on September 24 for September 25 publication.

It is hard to believe he is 39 years old, for he writes as enigmatically as 83-year-old Alan Greenspan speaks (or used to speak).

The Fed's Job Is Only Half Over
(Kevin M. Warsh, 9/25/09 Wall Street Journal)

"Recent media stories have chronicled in great detail the events of the last couple of years. A pair of conclusions might be fairly drawn from these early drafts of history. One is that the financial-market turmoil of the last year proved to be of significant consequence to the economy. The second is that the Federal Reserve distinguished itself from historical analogues by taking extraordinary actions to address risks to the economy. Commentators, however, tend to disagree as to whether the extraordinary actions undertaken were to the good or the detriment of the U.S. economy in the long-run."

With this not so attention-grabbing opening, he drools on about how the Federal Reserve has done a good job but that this is no time to "declare victory". And I'm thinking "OK, what is your point?"

Then, he delivers, sort of, one of the points [emphasis is mine]:

"It is unwise to prejudge the Federal Reserve's policy strategy—or to declare the victor or the vanquished—by the split time, however notable it might be. We are at a critical transition period, of still unknown duration, and we must prepare diligently for an uneven road race ahead. If policy is not implemented with skill and force and some sense of proportionality, the success of the overall endeavor could suffer."

He seems to me to be saying, in crude language, "Don't ask questions. Leave it us, or you will suffer a consequence of your meddling."

Then he mentions "policy makers". At first, I thought he means legislators. But as I read the article, I now think he means "policy makers" at the Federal Reserve, because he starts to talk in first person.

"It also means that policy makers should acknowledge the heightened costs of policy error. The stakes are high, in part, because the policy accommodation that requires timely removal as the economy rebounds is substantial. And our policy judgments will ultimately prove worthy of the accolades, and tender the ultimate rejoinder to our critics, if we rise to meet this heightened responsibility. I am confident we will."

Tender the ultimate rejoinder to our critics? (He talks like Edward IV or his brother Richard III, last king of the House of York.) Is he challenging the supporters of H.R. 1207 (audit the Fed), which is slated to be introduced in the House Financial Services Committee on September 25?

A curious part comes in the last three paragraphs:

"In this environment, market participants and policy makers alike should steer clear of ironclad policy prescriptions. Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities."

Is he saying that the Fed will drain the liquidity sooner and faster than it becomes necessary? Even if that could threaten the market crash and economic crash? (Maybe that's why he, in the preceding paragraphs, cites history full of unintended and unfortunate policy errors?)

""Whatever it takes" is said by some to be the maxim that marked the battle of the last year. But, it cannot be an asymmetric mantra, trotted out only during times of deep economic and financial distress, and discarded when the cycle turns. If "whatever it takes" was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Federal Reserve's institutional credibility. The asymmetric application of policy ultimately could cause the innovative policy approaches introduced in the past couple of years to lose their standing as valuable additions in the arsenal of central bankers."

This to me is the most curious remark. The Fed would do "whatever it takes" at a recovery stage "to ensure the Federal Reserve's institutional credibility". The Fed would do it, not that it is necessary or it would help the recovery, but to ensure its credibility. Also the next sentence is interesting. He seems to be saying that if the Fed doesn't do "whatever it takes" in the recovery stage, it would lose those valuable weapons - various lending programs, buying securities that are not allowed by the Fed's charter (i.e. agency bonds and MBS), owning stakes in a private business (AIG), creating SIVs (Maiden Lane LLCs), "whatever it took".

"For those of us at the Federal Reserve, the task ahead involves longer days, but, in all likelihood, fewer weekends. While the undertaking is as challenging as any we faced in the preceding period, it is exceptionally well suited to the Federal Reserve's comparative advantages of deliberation, dispassion, and a determination to make judgments based on the long-term interests of the U.S. economy."

In 1913 when the Federal Reserve System was born, one ounce of gold was US$18.92. Today, one ounce of gold is $996. US dollar's purchasing power as measured by gold has dropped 95% since the Fed came into being. And that is the long-term interest of the U.S. economy?

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Fed Rejects Geithner Request for Study of Governance, Structure

and Ben Bernanke (after successfully campaigning for the second term) has been pushing his organization (Federal Reserve) hard as ready and fit to be THE regulator of the financial life of the entire nation (if not the world) and himself at its head to preside over commercial banks, investment banks, hedge funds, community banks and credit unions, insurance firms, credit card issuers, mortgage companies, and oh by the way consumers? Does that make sense to you?

Fed Rejects Geithner Request for Study of Governance, Structure
(9/21/09 Bloomberg)

"Sept. 21 (Bloomberg) -- The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.

"The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”

"Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and “propose any changes to the Fed’s governance and structure.”

"“It is not obvious at all why that is a Treasury responsibility or even appropriate why the Treasury would undertake that kind of study,” said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey, and a former Atlanta Fed research director. “The Fed was created by Congress and it is not part of the executive branch.”" [emphasis is mine]

Aha.

The Federal Reserve Act was indeed passed by Congress two days before the Christmas Eve in 1913 and signed into law by President Woodrow Wilson the next day. Needless to say, not all Congressmen and Senators were in town. It is indeed NOT part of the executive branch, it is not part of any branch of the government. It is a PRIVATE banking cartel owned by the member banks.

Particularly since September 2008 the Federal Reserve has been inseparable from the Treasury Department in executing the financial rescue plans, almost without any oversight. It has been acting as if they were part of the government. Now they want to hide behind Congress?


Not so fast. Here comes H.R. 1207, the bill by Congressman Ron Paul to audit the Fed. The bill has 290 co-sponsors as of today and Barney Frank, chairman of the House Banking Committee has said there will be a committee hearing on September 25, according to the Bloomberg article.

A very good summary of the structure of the current Federal Reserve System and how it is governed has recently been presented by person from an unexpected quarter, by the way: Neil Barofsky, special inspector general of Treasury Department to oversee the TARP program. The July 21, 2009 quarterly report to Congress from his office has a concise summary of the Federal Reserve System, from page 130 to page 136, including the table summarizing various loan schemes created by the Fed.

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Barney Frank Says Ron Paul's Audit the Fed Bill Will Pass In October

That's the bill H.R. 1207, which now has 282 co-sponsors in the House. Barney Frank, answering the question in his townhall meeting, says he wants to curtail the power of the Federal Reserve, and that the bill will probably pass in October.

The video was posted on Mish's Global Economic Analysis. (Transcription is probably by Mish.)

Barney Frank:

I have been pushing for more openness from the Fed. I want to restrict the powers of the Federal Reserve. First of all, the Fed will be the major losers of power if we are successful, as I believe we will be, setting up a financial product protection commission.

The Federal Reserve is now charged with protecting consumers. They were supposed to do subprime mortgage restrictions.

Congress in 1994 gave the Fed powers to ban subprime mortgages. Alan Greenspan refused to do it. They had the power to ban credit card abuses. Under Greenspan they did nothing. Under Bernanke they started but only after Congress acted.

That's one of the reasons why in the new consumer protection agency, we will take away from the Federal reserve the power to go consumer protection.

Secondly, they have has since 1932 a right under Herbert Hoover to intervene in the economy whenever they could. Last September, the Federal Reserve they were going to advance $82 billion to AIG.

I was kind of surprised and said Mr Bernanke do you have $82 billion? Mr. Bernanke replied I have $800 billion and under section 13.3 of the Federal Reserve Act they can lend anything they want.

We are going to curtail that lending power. We are going to put some restrictions on it.

Finally we will subject them to a complete audit. I have been working with Ron Paul, who is the main sponsor of that bill. He agrees that we don't want to have the audit appear as if influences monetary policy as that would be inflationary.

One of the things the audit will show you is what the Federal Reserve buys itself. And that will be made public, but not instantly because if it was made instantly people would be trading off it, so the data would be released after a time period of several months, enough time so it will not be market sensitive.

This will probably pass in October.

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Bernanke's Town Hall Meeting

A town hall meeting sponsored by the Federal Reserve?? I've never heard such a thing, how about you? It actually happened on Sunday, in Kansas City, Missouri.

The Fed Chairman in a town hall meeting. What was he selling?

Bernanke: Economy to bounce back stronger
(7/26/2009 CNN Money)

"NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said Sunday that lessons learned from the recession and the financial crisis will help make the economy stronger than it was before the crisis.

"The Fed chairman answered questions from members of the public as well as moderator Jim Lehrer of PBS at a town hall event sponsored by the Federal Reserve Bank of Kansas City, Mo.

"The silver lining in this whole thing is that people are starting to save more, since they saw what happened with 401(k) investments," Bernanke said. "People are adopting good habits, so not only will we will be back on track, but the economy will be stronger than it had been before this started."

Hmmmm, do I see a semi-visible hand of the Fed's new lobbyist from Enron?

Bernanke says the economy will be stronger. How? He doesn't say. Just fluffy and vague words to allay vague fears by the mass: Things happen, but this, too will pass.

"Facing questions from many concerned consumers, Bernanke sought to assure the audience by noting that "recessions happen." Though he said this is the worst recession since the Great Depression, he also said that, like all prior economic downturns, this one will end too.

"Bernanke said the economy is beginning to show signs of improvement, but recovery will be gradual. He said gross domestic product will likely rise by the end of the year into 2010, but job growth will lag. He conceded, "economic forecasts make weather forecasts look like physics," but said unemployment will top out above 10% before falling back in the second half of next year."

All he could offer is that the economy has recovered from recessions before, so it will recover someday from the curent one. And we are supposed to breathe a sigh of relief?

But the real purpose of this silly exercise (town hall meeting) is not to discuss the economy or the supposed recovery that's coming. The article continues:

"He declined to say outright that he opposes efforts by Congress and the Obama administration to create a separate consumer financial protection agency. But he said there were drawbacks to it, including possible "duplicative efforts" in monitoring. And he defended the Fed as being "very active" in the last three years on the consumer protection issue.

"Bernanke was even more defiant about a congressional proposal to audit Fed monetary policy and actions. He said politics need to remain separate from the Fed to ensure that inflation and financial stability remain in balance.

""It is incredibly important that the Fed maintain its independence -- it is so critical to the stability of economy," Bernanke said. "I don't think people realize that Congress' bill would allow the Government Accountability Office to be able to audit Fed decisions. That's not congruent with independence.""

This was the whole point of this town hall meeting: to sell the Federal Reserve as an independent, benevolent overseer of the U.S. financial matters; to lobby for more powers for the Fed and attack the Audit the Fed bill in the House (H.R. 1207) which now has 276 co-sponsors.

The Federal Reserve, to be sure, is indeed audited by an accounting firm (Deloitte). However, according to the Forbes article on July 21, (BTW, this Forbes article is very misleading; more later in another post)

"The law currently disallows auditing of three areas: the swap lines the Federal Reserve arranges with other central banks and international financing organizations; the actual deliberations and decisions of monetary policy (such as how much to raise and lower interest rates); and transactions made under the Federal Open Market Committee's direction."

Under the third - transactions made under the Fed Open Market Committee's direction - is where the garbage resides: TALF, TSLF, TAF, PDCF, OMO, ABCPMMMFLF (or AMLF for short), CPFF, etc, etc. Do we know who's getting these loans and how much? What are the collaterals? How are they priced? How about Maiden Lane LLC to "manage" Bear Stearns and AIG "assets"? Do we know what are those assets and how they are priced?

"Too big to fail" best describes the Federal Reserve.

Just last week, the U.S. Treasury Department auctioned off $65 billion of 70-day Cash Management Bill, which happen to carry higher interest rate than the equivalent regular Treasury bill, just so that the Federal Reserve can use the money for whatever that they've been doing. And the chairman is telling the taxpayers who foot the bill to just trust him.

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Ron Paul at Cato Institute 6/24/09: Audit the Fed

Is Cato Institute changing its tune? Texas Congressman Ron Paul spoke today at Cato Institute, which has been pro-Fed.

Ron Paul at Cato: ‘Audit the Fed’ (6/24/09 Cato Institute)

"When Texas Congressman and former Republican presidential candidate Ron Paul speaks about transparency in the Federal Reserve, he sums up his argument with one simple question. Why not?

“Why in the world should this much power be given to a Federal Reserve that has the authority to create $1 trillion secretly?” Ron Paul asked a standing room-only crowd today at the Cato Institute."

A standing room-only crowd. Nice. The above link has an audio podcast of Ron Paul's opening remark.

I hope the Institute is changing, and this is not a co-opting strategy to dilute H.R. 1207 (Audit the Fed bill).

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H.R. 1207 Audit the Fed Bill Update 6/11/09

As of June 11, 2009, the bill has 222 cosponsors. There are 435 Representatives in the House.

Update - HR 1207 - 222 co-sponsors (6/11/09, Dailypaul.com)

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