A Call For Greater Accountability For the Fed

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It’s been obvious to anyone who bothered paying attention that the Fed is increasingly acting as an extension of the Administration, without the oversight and disclosure to which the Executive Branch is subject. For instance, only the Federal Reserve Board of Governors appears to be obligated to honor to Freedom of Information Act requests (the Board of Governors has a FOIA office). The New York Fed, which is the where the alphabet of new programs is domiciled, argues that it is a private organization and has made only limited. voluntary disclosures.

As Willem Buiter has commented:

I have written at length before about the ever-expanding quasi-fiscal role of the Fed. This began as soon as the Fed began to take private credit risk (default risk) onto its balance sheet by accepting private securities as collateral in repos, at the discount window and at one of the myriad facilities it has created since August 2008. It is possible – I would say likely – that the terms on which the Fed accepted this often illiquid collateral implied even an ex-ante subsidy to the borrower. But the Fed is refusing to provide the necessary information on the valuation of the illiquid collateral, interest rates, fees and other key dimensions of the terms granted those who access its facilities, for outsiders, including Congress, to find out what if any element of subsidy is involved.

Should the borrowing bank default and should the collateral offered also turn out to be impaired, the Fed will suffer an ex-post capital loss on its repos and other collateralised lending operations against private collateral. It does not have an indemnity from the Treasury for such capital losses.

The Fed also created the Maiden Lane I (for Bear Stearns toxic assets), Maiden Lane II (for AIG’s secured loans and Maiden Lane III (for AIG’s credit default swaps) special purpose vehicles in Delaware. The losses made by Maiden lane II and III when the Fed paid off the investors (counterparties) of AIG at par, were, however, not booked on the balance sheets of the two Maidens, but were booked on AIG’s balance sheet, keeping Maiden Lane I and II, and the Fed, clean for the time being. The financial shenanigans used by the Fed (in cahoots with the US Treasury) to limit accountability for these capital losses are quite unacceptable in a democratic society. Clearly, the US authorities are using the financial engineering tricks and legal constructions whose abuse by the private financial sector led to our current predicament, to engage in Congressional- and tax payer accountability avoidance/evasion. To watch the regulators engage in regulatory arbitrage is astonishing.

It’s time we put a stop to this nonsense.

Rep. Alan Grayson has sent the letter below to all Democrats in the House to promote Democratic co-sponsorship for the HR1207 Bill, aka The Federal Reserve Transparency Act. It will enable the GAO to audit the Federal Reserve, and requires that the Federal Reserve report to Congress by the end of 2010.

The actions taken by the Fed on a daily basis have a huge impact on the public at large. Any shortfall on its large commitments will be funded either by “printing”, as in creating inflation, or by having the Treasury reimburse the Fed for its losses. The notion of Fed independence became a sham with Alan Greenspan, when he, in contradiction to the actions of his predecessors, supported both Clinton and Bush Administration initiatives. Under Bernanke, the Fed has worked even more closely with the Treasury. The idea that it is independent is a farce.

We encourage all readers who believe in transparency and accountability join me as well as Dean Baker, Bill Black,Glenn Greenwald, Naomi Klein, James K. Galbraith, Tyler Durden, US PIRG, Public Citizen, Mike Farrell, Digby, Rob Kuttner, Ian Welsh, Bill Greider, Stirling Newberry, ANWF, Les Leopold, Mike Lux and others in supporting Alan Grayson and asking Democratic members of Congress to cosponsor the Federal Reserve Transparency Act. Please sign the petition.

Forwards this broadly, Grayson already has good support for the bill, but given the odds of serious Fed and financial services industry pushback, he needs all the firepower he can get.

Alan Grayson’s letter to colleagues:

Bring Some Accountability to the Federal Reserve

Dear Colleague,

I write to ask you to co-sponsor HR 1207, the Federal Reserve Transparency Act, which would give the Government Accountability Office the authority to audit the Federal Reserve and its member components and require a report to Congress by the end of 2010.

The Federal Reserve System operates as the central bank for the United States, managing the economy’s money supply and overseeing the banking system. Until recently, the Fed has not picked winners and losers when distributing money, nor has it brought credit risk onto its balance sheet. It has slowed or stimulated the economy by raising or lowering interest rates. Since March 2008, the Fed has resorted to using its emergency powers to pick winners and losers, and to take massive credit risk onto its books. Since last September, the Fed’s balance sheet has expanded from around $800 billion to over $2 trillion, not including off-balance sheet liabilities it has guaranteed for Citigroup, AIG, and Bank of America, among others. The bank is also ‘monetizing’ the debt of the United States Government by purchasing massive amounts of agency and Treasury bonds. An audit is the first step in bringing this unaccountable system under the control of the public, whose money it prints and disseminates at will.

The Federal Reserve is an odd entity, a public-private chimera that controls the US monetary system and supervises the banking system. The system is governed by a Board of Governors, with twelve regional reserve banks that serve a supporting role. While the Governors are appointed by the President with confirmation by the Senate, the regional Reserve Banks have boards of directors chosen primarily by private banking institutions. Right now, for instance, the CEO of JP Morgan, Jamie Dimon, serves on the Board of Directors of the New York Federal Reserve Bank, as did Goldman Sachs Director Stephen Friedman.

This creates striking conflicts of interest and unseemly appearances in the management of what is ultimately the public’s money.


JP Morgan’s CEO was a board member of the New York Fed even as he negotiated on behalf of JP Morgan with the New York Fed for a $29 billion bridge loan to allow his company to take over Bear Stearns.

New York Fed and Goldman Sachs board member Stephen Friedman purchased 37,300 shares of Goldman Sachs stock in December at the same time as Goldman received permission to convert to a bank holding company regulated by the Federal Reserve. Friedman at the time was also overseeing the selection of a New York Federal Reserve President to replace Tim Geithner, and the New York Fed ended up hiring another alumni from Goldman Sachs.

According to the bank’s website, the two “class B” directorships of the New York Fed that are supposed to represent the public are vacant.

Enron’s Jeff Skilling was on the board of the Dallas Federal Reserve Bank.

Criticism of banker influence and control of our monetary system is not new. However, the urgency of the financial crisis and the actions of the Fed picking investment bank winners and losers have changed the nature of the criticism. The Senate just passed a non-binding resolution requiring more transparency at the Federal Reserve in its Budget Resolution.

Still, neither the GAO nor the Federal Reserve Inspector General has audited the books of the Federal Reserve or its regional banks. The Federal Reserve has refused multiple inquiries from both the House and the Senate to disclose who is receiving trillions of dollars from the central banking system. The Federal Reserve has redacted the central terms of the no-bid contracts it has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to leverage the Treasury’s balance sheet. With discussions of allocating even more power to the Federal Reserve as the ‘systemic risk regulator’ of the credit markets, more oversight over the central bank’s operations is clearly necessary.

The net effect of recent actions has been to isolate financial policy-making entirely from democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance sheet to spend money it cannot get appropriated from Congress. The public does not know where trillions of its dollars are going, and so has no meaningful control over the currency or this unappropriated “budget”. The extraordinary size of these lending facilities combined, the extreme secrecy, and the private influence is a dangerous seizure of Congress’s constitutional prerogative to appropriate public monies and control the currency.

An audit of the Federal Reserve may not be sufficient to control this sprawling system or bring it back into balance, but it is a start. The public has a right to know to whom the US government is lending trillions of dollars. Dancing around this issue with technocratic terms like ‘increasing liquidity’ and ‘private financial intermediation’ is preventing a full and long overdue public debate on the role of the Federal Reserve and the influence of private banking interests in the governing of our economy.

I encourage my colleagues to support H.R. 1207, so that we can bring some transparency to our banking system and allow the public to have a real debate over the fundamental direction of our nation’s political economy.

Please sign the petition. Thanks!

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  1. Ned Bushong

    >>Rep. Alan Grayson has sent the letter below to all Democrats in the House to promote Democratic co-sponsorship for the HR1207 Bill, aka The Federal Reserve Transparency Act. It will enable the GAO to audit the Federal Reserve, and requires that the Federal Reserve report to Congress by the end of 2010.<<

    That's pretty funnny!!!!!!!

    If that were to pass it guarantees at least another 1.5 years of dealing in the dark. What a country.

  2. Russell

    I don’t know what would be worse – a runaway Fed beholden to the crooks on Wall Street or a Fed beholden to the crooks in Congress.

    For all intents and purposes, the Fed is doing what Congress and the Executive Branch want anyway.

    The Federal Government and the Federal Reserve have been marching in lock-step since at least 1929.

  3. Yves Smith


    That is factually incorrect.

    In the early 1950s, Truman wanted a rate cut. He called some Fed governors in and asked for it. They said no, but get back to the ranch and learn that Truman has put out a press release saying there would be a cut.

    They refused to knuckle under. Congressional hearings ensued threatening to change the Fed’s charter. They stared them down.

    Similarly, when Carter appointed Volcker, he wanted him to wring out inflation, then got cold feet when he saw how bad the resulting unemployment was. He and other Administration officials called on Volcker to relent, but he refused.

    There are other examples.

  4. profnickd

    Oh geez, what a hoot — the idea that the government will audit the government.

    So what happen to the government when the government finds that the government fails the audit?

    Look, the problem is not that the Fed isn’t being audited — the problem is the Fed.

    This country essentially had 126 years of history with no central bank. Since its creation, the Fed proceeded to do precisely what is was meant to prevent, namely, inflation/debasement of the nation’s currency.

    Rothbard, Mises, and others have long since demonstrated the failure of central banking — failure, at least, in the sense that central banks always inflate the money supply, which then inevitably is followed by to recession/depression. To not acknowledge this fact at this point is simply indicative of illiteracy.

  5. Yves Smith


    That is also factually incorrect. I do not have my Palgrave’s Dictionary of Finance, otherwise I would provide more particulars (it has long essays by top scholars), but the US had two central banking regimes prior to the establishment of the Fed. Immediately prior, for 70 years, the US Treasury assumed the functions now performed by the Fed.

    I suggest you investigate history before making sweeping and inaccurate comments.

  6. Silas Barta

    @Yves_Smith: Wow, what a sea change in public opinion on the Fed! But how come no mention of the courageous Congressman who introduced the House bill in the first place, Ron Paul?

    Is introducing a popular, watershed bill no longer enough to get a mention these days?

  7. jest


    not to pile on, but you’re talking mainly about the NY Fed; those are the guys we need to go after. the rest of the FRBs (SF, Philly, ATL, Dallas, etc.) are fairly benign.

    but i do agree, in the unlikely event that the “geniuses” in congress catch them, then what? we can’t even handle blatant war criminals, so how are they going to handle this? the 9/11 commission was a joke, and this will be too.

    but it’s a start, i guess. we’ve got to start somewhere.

  8. Minh

    Dear Colleague,
    As a foreign user of the FED note, I think it’s legitimate for me to voice concern on this issue. As I once commented on NC, the money system (paper/electronic or in any other form) is the backbone of an advance society. When it is compromised and no longer credible the real pandora box of human passion is open.

    I sincerely hope you will success in your democratic action and bring back the FED under the control of democratic society.

  9. Matt Stiles

    How the heck is Grayson getting all the attention for this? It has been an entirely grassroots campaign from Ron Paul’s “Campaign for Liberty” that got the first 150 cosponsors.

    I really don’t care. I just want to get it passed. But come on, Paul has been fighting tooth and nail for this for over 30 years. Let’s give some credit where credit is due.

  10. skippy

    Lets not quibble over the author of transparency in this matter as it deflects from the true goal, which is, to_rein_in_the pirate ghost ship of fools aka the Fed Reserve.

    Skippy…I’ve just elbowed a few thousand people via my Internet community affiliations…put the kettle on and get stuck into it, this is a real opportunity to act and not blather on about it.

  11. Sailor

    I will echo previous comments that this RON PAUL’S bill!

    I have heard that some are having problems with executing the petition at the site given. Be advised that you can go to http://www.campaignforliberty.com/, which is Ron Paul’s PAC site, and sign the petition there also.

  12. tz

    Shhh! Ron Paul has a two part plan.

    First, Audit the Fed. It helps to have it get through first.

    Second, when it is completely clear that the Fed is a cancer and should be excised, we end it.

    On a more serious note, if we really wanted an independent “bank”, we would create rules paralleling that of the judiciary (which doesn’t always act properly, but is removed from the common pressures).

    The problem with most if not all of these things is that we require angels, or the closest humans can come to angels to run them. And instead of trying to find and conscript a Mother Theresa, we leave it up to a democratic election, which properly reflects and represents the corruption of the people.

  13. tradelite

    http://www.quantcast.com/apps/news?pid=20601087&sid=ajgUp7xQIhkn6c&refer=homeI am glad I didn’t know any better, however, as a wee green undergrad. Why? Cuz it’s good to

    have experienced that kind of ‘blank slate’ naiveté at such a ‘green shoot’ age. That

    first-hand experience at naiveté has really helped me to anticipate why so many folks today

    willingly consume the ‘green shoot’ fertilizer shoveled out by Timmie & Bennie, as well as

    by the TV talking necks. cool site: http://kl.am/jP7

  14. Hugh

    “The net effect of recent actions has been to isolate financial policy-making entirely from democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance sheet to spend money it cannot get appropriated from Congress.”

    From Art. I Sec. 7 of the US Constitution:

    “All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills”

    and from Art. I Sec. 8:

    The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…

    To borrow money on the credit of the United States…

    To coin Money, regulate the Value thereof, and of foreign Coin…”

    It is not only undemocratic but unconstitutional as well. Indeed looking at what the Constitution says about money, you can see why it has been argued that the whole concept of a Fed is unconstitutional.

    Nevertheless, the current Fed policies seem particularly egregious violations since they so blatantly do an end run around the Congress’ power of the purse.

  15. Hugh

    I did want to say too that it is good for scrutiny to fall on the Fed. In the meltdown we have had, there was a system-wide failure. The commercial banks, the investment banks, private equity, hedge funds, pension funds, money markets, investors, bondholders, the Treasury, the regulatory system, the Fed, the ratings agencies, the Congress, the President, Republicans, Democrats, the media, academia, all contributed to and promoted the policies and activities that led to the meltdown. We need to shine a bright light on them not just to understand how we got here but how we get out of here. Currently we have opacity pretty much across the board.

  16. Erick

    Rep. Grayson has some awesome videos on YouTube. He asks exactly the right kind of question: to which banks are you giving subsidized credit, what did you receive in return, how did you establish a price?

    Those making the decisions refuse to answer. Those providing oversight know nothing.

    We should commend Grayson for trying to build bipartisan, Democratic support for this bill. We need more people in Congress like him.

    Yes, Ron Paul created the bill. That is not what is important. The only way to get this bill to pass is if Democrats start supporting it.

    Transparency was an important part of the Democratic platform. HR 1207 is an incredible opportunity for congressmen — whether Republican or Democrat — to make good on that pledge. People should do more to help their rep. realize this.

  17. b

    I agree that I want to see this legislation pass. However, I’m not sure why some people are being dismissive of Ron Paul or stating that it’s not important that he created the bill. Is it too difficult to swallow that a libertarian Republican was the impetus (and that he has been a proponent of this for decades)? I’ve also noticed a complete lack of attention drawn to Bernie Sanders and his role in sponsoring similar legislation in the Senate. Is acknowledgement that a socialist was one of the sparks to ignite this congressional action too taboo?

  18. Bill

    Grayson’s bill is a step in the right direction, but I’m not sure it will go anywhere because the Federal Reserve system is a private banking corporation where the shareholders are commercial member banks, that is, private banks. Please see Lewis v. United States, 680 F.2d 1239 (1982), in which a Federal Court held that the Federal Reserve was a private corporation.

    Just as the GAO has no authority to audit a private corporation, I don’t see where it would have any authority to audit the Federal Reserve system.

    From my understanding of things, Federal Reserve notes are, for all practical purposes, private currency, that is, bankers currency. Federal Reserve notes are only national in name: 31 U.S.C. § 5103, 12 U.S.C. § 411.

    The only national currency left is coinage (trivial monetary amount) and US Notes, but US Notes are no longer being printed and there’s very few, if any, left in circulation.

    Look up the 1878 Greenback Law. It was repealed in the 1990s.

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