The creeping power grab by the executive branch and Federal Reserve

By Edward Harrison of Credit Writedowns

Yves is tied up in the never-ending ordeal that is writing a book, so I will fill in a few gaps by posting on NC today. Let’s wish Yves well in getting this thing sorted.

The power grab at the Federal Reserve is a topic I first broached back in February when the Federal Reserve was creating its alphabet soup of liquidity programs to pull us back from the brink of financial disaster. I was troubled about Fed policy then and I am still troubled today.

I am equally disturbed by what is happening in shift in the balance of power to the executive branch. The Obama Administration seems to be following in the footsteps of the Bush Administration and making its own power grab and Congress has only just begun to wake up to this and start to push back.

At the risk of making this post overly broad, I want to make a few general comments about how executive power in government operates before I take on the specifics of the cases at hand. Everyone who has studied political science is aware that dictators and oligarchies use crises to invoke fear that allows them to usurp power using the cloak of ‘national security’ as a Trojan horse to consolidate power.

I would argue, this is what has just happened in the U.S. post-9/11 and again after the Panic of 2008. I see these developments undermining Americans’ faith in the political process and I hope an appropriate restoration of the checks and balances laid out in the Constitution can be restored. Having made my editorial statement, let me move to the specifics.

Executive Branch power grab

In September, after Lehman Brothers failed, US Treasury Secretary Hank Paulson asked for and received a blank check to disburse $700 billion to former colleagues and rivals in the financial services industry as he and his staff saw fit. In a brilliant act of cunning, Paulson had gotten approval to do anything he wanted from a gutless Congress more interested in loading the bill with sweeteners. This bill was not unlike the Patriot Act, passed after the 9/11 attacks, in that it increased the executive branch’s ability to intervene in the economy as they saw fit. I called it the Economic Patriot Act.

Originally, the Economic Patriot Act was about marking to market. However, once Gordon Brown started recapitalising Britain, Paulson made an about-face and proceeded to dispense the money in a similar fashion (albeit with much fewer strings attached than in the UK).

When the Obama Administration came to town, the modus operandi were not much different. Other support programs were forthcoming and bailouts at Citi and BofA ensued.

With the economy and banks on sounder footing and much of the money returned to taxpayers, the Obama Administration has turned to regulatory reform – and, what do you know – they are looking for a blank check again to do as they please in resolving too big to fail institutions that run into trouble. Again, as with Bush in 2002, if Congress gives the executive branch any blanket authority, it will be used and Congress will be cut out of the process. This is NOT how the American system of government is supposed to be run.

The Fed is grasping for the brass ring too

Enter the Federal Reserve. The Fed has been engaged in a policy of acting in concert with the Executive Branch in a non-arms length fashion since this crisis began. All of the liquidity programs and backstops the Fed has implemented are not just about liquidity, they are subsidies that lower the cost of capital and increase profits in the banking sector. As such, these subsidies are actually a part of America’s fiscal policy – stimulus, if you will. It is a clear no-no for the Federal Reserve to inject itself into fiscal matters. And to top it off, the Fed is refusing to be transparent about the process. Why would we make it the Systemic Risk Regulator?

Willem Buiter says it best so I will just quote him verbatim from his article, “Should central banks be quasi-fiscal actors?”:

Any action going beyond that, such as the recapitalisation of insolvent banks through quasi-fiscal subsidies, ought to be funded by the Treasury.  The central bank should be involved only as an agent of the Treasury – an expert assistant.  It should not put its own conventional or comprehensive balance sheet at risk.

The two arguments against the central bank acting as a quasi-fiscal agent are, first, that acting as a quasi-fiscal agent may impair the central bank’s ability to fulfil its macroeconomic stability mandate and, second, that it obscures responsibility and impedes accountability for what are in substance fiscal transfers.  In the US such actions subvert the Constitution, which clearly states in Section 8, Clause 1, that the power to tax and spend rests with the Congress: “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; but all Duties, Imposts and Excises shall be uniform throughout the United States.”.

If, as happened in the USA on a vast scale, the central bank allows itself to be used as an off-budget and off-balance-sheet special purpose vehicle of the Treasury, and refuses to provide to the Congress some of the information essential for the quantification of the fiscal transfers it has made, the central bank not only subverts the constitution.  By attempting to hide contingent commitments and to disguise de-facto subsidies by not divulging relevant information on the terms on which the central bank has offered financial assistance, it undermines its own independence and legitimacy and impairs political accountability for the use of public funds – ‘tax payers’ money’.  It is surprising that a country whose creation folklore attributes considerable significance to the principle of ‘no taxation without representation’ would have condoned without much outcry such a blatant violation of the equally important principle of ‘no use of public funds without accountability’.  This indeed amounts to a quiet usurpation of the power of the legislature by the central bank.

Qualitative easing, or whatever you call it, must end.  With the FOMC starting its two-day meeting tomorrow, and with the Reserve Bank of Australia having already hiked twice, it will be interesting to see if the Fed retracts its “extended period” language as many of us expect. While I think it premature in regards to the robustness of the economy, the Fed needs to show it is an independent actor.

Once lost, independence will not be easily restored.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. wethepeeple

    The executive branch expansion of powers began under the cover of the New Deal, with Roosevelt running on a Democratic platform of less government, balanced budget, and less government spending. In the “Greatest Bait and Switch in History” we got the New Deal, and a near totalitarian exectutive branch, accomodated by a rubber stamp Congress. Guess what it is happening again, with the New Deal 2.0. Beware!

    1. Doug Terpstra

      IMO it was the deliberate, systematic erosion of the New Deal, beginning in earnest with reaganomics and boosted by Clinton Rubinomics that reconcentrated capital and elite power to unsustainable levels today. When all oil is concentrated in the heads, the pistons seize and the engine is scrap, a point we are very close to now.

      I welcome replacing our obsolete infernal combustion engine with revolutionary technology. A New Deal 2.0, crafted under a truly deomocratic (small d) process is long overdue.

  2. ndk

    Thanks for tackling this subject, Ed. It’s a very important one.

    I see these developments undermining Americans’ faith in the political process and I hope an appropriate restoration of the checks and balances laid out in the Constitution can be restored.

    I’m dubious that faith can be restored at this point. It will at best be a grinding process that will take many years, and be resisted by entrenched powers at every step. But our political system is not designed to have that kind of continuity in the executive or legislative branch. Even worse, the institutional memory of the governance structure today is generally lobbyists, party animals, and the occasional lifer who gains enough power. None of them has any interest in reform.

    We may have bouts of reform, like the person who somehow stumbles to church on Sunday morning after Saturday night, but when the time rolls around, we’re going out clubbing again with all our closest friends.

    Qualitative easing, or whatever you call it, must end.

    It must, but it can’t. Loan qualities are still rapidly deteriorating across the board, particularly in commercial real estate, and few of the losses to date have been recognized because those power grubbing corrupt officials strong-armed FASB into changing accounting law.

    Even with all these powerful distortions of reality, Greenlee(Associate Director, Division of Banking Supervision and Regulation) testimony states in his testimony that “higher loan losses are depleting loan loss reserves at many banking organizations, necessitating large new provisions that are producing net losses or low earnings.”

    The return on lending for banks is probably, at these interest rates and default levels, a cumulative negative number. If we can’t permit interest rates to rise, because borrowers can’t handle that, then we’ve got one option: reduce the risk. Since risk can’t just magically go away, that means the Fed eats the risk.

    And this has indeed been the strategy, as we’ve taken as much risk as possible onto the Fed’s balance sheet. If they want to force banks into lending more, or prevent them from bellyflopping again, they’re going to be taking more and more risk on in the future. If more lending and inflation is a precondition for improvement in the real economy, we can only get there from more borrowing and lending, and the Fed will have to absorb the losses.

    It’s no way to run a railroad. I think it’s doomed to failure. But, to me, it’s very clearly the path our corporatocracy has chosen.

    1. mikkel

      “If more lending and inflation is a precondition for improvement in the real economy, we can only get there from more borrowing and lending, and the Fed will have to absorb the losses.”

      I know that’s their strategy and I know that you don’t believe this is possible. There isn’t really a way to get the type of inflation needed (wage/domestic asset) and all their efforts will result in is bubbles in commodities and such that are actually deflationary in effect. Just as stagflation proved inflation can occur with high unemployment/low growth, so too will monetarism be shown to have no clothes in a high debt environment.

  3. Edward Harrison Post author

    I do see a connection between deregulatory zeal and executive power creep because of the power vacuum created by the lax regulatory environment.

    That said, Roosevelt’s was very much a power grab by the executive branch. Think of the confiscation of gold or the attempted stacking of the supreme court. How one sees Roosevelt is colored by political identity. I see his legacy as mixed. I identify with some of his policy aims, but do not like the tactics or the precedent they set.

    Post-Roosevelt, the fact that no declaration of war has ever been made by Congress is evidence of the stranglehold the military-industrial complex has on foreign policy – using the concentration of power in the executive to dictate terms.

    All of this has been expanded further with the wire taps, detention of unlawful combatants, suspension of habeus corpus and on and on.

    Now, the same is happening in the financial arena – or at least is beginning.

  4. mannfm11

    Lets just say the Democrats did it in 1917 and then again in 1933. This is a conspiracy hounds delight as the Federal Reserve and the CEO of GE (I think his name was Scopes or Scotes)proposed straight and narrow fascims and executive rule under Section 5b of the Act of October 6, 1917, better known as the Trading with the Enemy Act. Hoover refused, even though he had already started much of the framework of the New Deal. FDR came in with the statement that he was prepared to ask Congress for powers that amounted to the moral equivalent of war. There is no Constitution in sum under war. I don’t believe Paulson needed to ask Congress for permission to do the TARP. Paulson had already taken in liabilities under FRE and FNM that dwarfed anything the TARP would be. We all know the rule of necessity is that necessity knows no law, that you can kill if you would be otherwise murdered, that you can throw freight overboard on a sinking ship or kill in the case of a mutiny. The law has never been suspended, as the notes for legal tender would be unlawful and cease to exist. The Constitution is laced with statements like No State shall make anything but gold and silver coin a tender in payment of debt. No state shall emit bills of credit. Congress shall coin money and regulate the value there of. Is there any regulation of the value of money by Congress? They wouldn’t even begin to know where to start and most would find a corner in a round room easier than they could even begin to grasp what that meant. Since WW II we have had several wars and not one declared by Congress. We are in 2 now.

    Ever since March 6, 1933, the US has been under dictatorship. Read 12USC95a and 95b. If you think this is banking, go to 50USC5b and see the same identical law as 12USC95a. The President doesn’t go to Congress for permission once Congress declares war. You might note that Robert Rubin went straight out the door during the Mexican crisis and committed $40 billion. Congress uttered not one peep. It says under 12USC95b: The actions, regulations, rules, licenses, orders and proclamations heretofore or hereafter taken, promulgated, made or issued by the President of the United States or the Secretary of the Treasury since March 4, 1933, pursuant to the authority confered by subsection (b) of section 5 of the Act of October 6, 1917, as amended [12 USCS § 95a], are hereby approved and confirmed.
    (Mar. 9, 1933, c. 1, Title 1, § 1, 48 Stat. 1)

    If you want to read about the Law that disputes everything modern Americans have ever been told about the operation of their government, read this book.

  5. Hugh

    Not sure a power grab can ever be called creeping, especially when it involves trillions of dollars. And it is not the Executive and the Fed but rather the Executive and an Executively-controlled Fed so really the power grab is just the Executive. I agree completely it is unConstitutional. I would say it is doubly so. The whole Constitutional basis for the Fed is pretty dubious, and its use by the White House simply makes it even more so.

    As for QE, it was always a bad idea. We do need interventions but reflating bubbles is not one of them.

  6. Mickey, Akron, Ohio

    The expansion of Executive Branch power at the expense of the other two branches is something to be conerned about, but its growth is concomitant with that of the large corporation. Ask yourself, what came first in this country – BIG BUSINESS or BIG GOVERNMENT? Prior to 1900, the Federal government had a minimal role in the economy, albeit the canal system and Continental Railroad would never have been built without government intervention/promotion. Laissez-faire has always been more a part of the economists’ mythological/ideological predilections than it has been of reality. But it was only after the emergence of trusts/monopolies in the late 1800s and the passage of the Sherman Act/Clayton Acts that the federal government’s role in the economy increased. And let’s not forget that Theodore Roosevelt, a Republican, played a significant role in such reforms.

    So the expansion of the Federal Government – Executive Branch – over the last 100 years can be attributed to two factors: 1) a need to regulate commerce provided for by the COMMERCE CLAUSE [DOMESTIC] that resulted in the creation of the various alphabet executive agencies [FDA, FCC, FTC, etc] to check antitrust behavior followed subsequently by the New Deal – once again a response [SEC, FDIC, etc] to a perceived failure of the private sector; and 2) [FOREIGN] to War/Defense and the emergence of the National Security State/Military Industrial Complex since 1945. And exacerbating this growth in Executive Branch power has been the fact that the expertise required to “regulate” business comes principally from industry itself and/or academia. Hence the captive industry and revolving door phenomena so loathed by most Americans. And look what happened when the Executive Branch pursued a vigorous course of financial deregulation for the past three decades… Congress may have enacted such legislation but it was championed/signed by the President-elect [Reagan, Bush I, Clinton, and/or Bush II].

    Add to this that even with the expansion of Congressional staff and the prerogative of oversight, the Legislative Branch by its very nature/design is incapable of challenging the Executive Branch – too fragmented, limited tenure?, and prone to faction/partisanship. This is more than obvious in the realm of foreign policy. Indeed, the last time Congress trumped the Imperial Presidency of Richard Nixon, it was judged by many as a failure, how we lost the war in Vietnam – congressional meddling – even if reflective of the American people’s will. And it was the one episode that VP Cheney never forgot and sought to redress. His success in doing so is only now – after the fact – coming under scrutiny.

    Could it be that the US Constitution with its separation of powers, checks and balances, Bill of Rights, and inherent concept of limited government has been eclipsed by events/time? Is limited government consistent with the emergence of global corporations? What force other than the government and what branch other than the EXECUTIVE is capable of dealing with such an entity on a daily basis? Is limited government as a concept consistent with an entity that is not limited by such constitutional constraints? Here is where I quarrel with adherents of Hayek and Friedman. Did either ever consider the possibility that such a private entity might one day rival the state and pose a threat to individual liberty? We don’t only have one Big Brother in the room to fear, but TWO!

    And remember, once again, the Executive’s most recent grab for power in the economy is occuring only after the TBTF financial corporations failed to regulate/police themselves, necessitating government intervention. What other governmental branch could have intervened with any degree of efficacy? Congress? Please… But it only makes my point that the growth of the Executive Branch is reflexive and concomitant with the growth of the large corporation. Dismantle the latter and Executive Branch’s grab for such power would not be necessary or legitimate, yet alone constitutional!

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