Time to End the Fed’s Independence?

For almost 100 years, since it was established in 1913 by an act of Congress, the Federal Reserve System and its governing body, the Board of Governors, have enjoyed a degree of independence and autonomy shared by no other government entity. For most of its history, the Fed has acted responsibly and Congress has maintained the Fed’s independence. However, that situation may be coming to an end with the disclosure by the Fed back in December 2010 that it lent not just ONE TRILLION, but TENS of TRILLIONS of U.S. dollars to financial institutions not only in the U.S., but AROUND THE WORLD, in its efforts to save Wall Street, which it claims were necessary to prevent a recession that would rival the Great Depression of the 1930s. Now, it is impossible to prove or disprove what would have happened had the Fed not engaged in the lending activities to which it has now owned up, but it is possible to question the appalling lack of transparency in these activities. Back in 2008, former Treasury Secretary Hank Paulson was pilloried by the financial press and many citizens for asking the U.S. Congress to authorize the $800 billion Troubled Asset Relief Program (“TARP)”. We now know that the TARP was but a band-aid compared to the heart surgery being performed by the Fed’s trillion-dollar lending programs.

Yesterday, Bloomberg News revealed that a Federal Court had ordered to the Federal Reserve Board to comply with a Freedom-of-Information-Act request and reveal additional details of its lending activities. In response, the Fed admitted to yet another secret lending program–the so-called “Single Tranch Open Market Operation” where he Fed lent yet another $80 billion to Wall Street banks, including those with headquarters in Germany, the U.K. and Switzerland. No one in Congress was consulted; not even House Financial Services Chairman Barney Frank. Why was the Fed bailing out foreign banks? Why weren’t those bank being bailed out by their home country central bank and taxpayers? Why hide these loans from Congress and the taxpayer? We have no coherent answer from the Fed, only that these institutions are “inter-connected” and that it is important to “hide their identity” lest market discipline run them out of business.

Why was it so important for the Fed to save Wall Street while, at the same time, it was doing nothing for Main Street? In fact, the Fed was punishing savers on Main Street by pushing bank deposit rates to zero in yet another back-door bailout mechanism for Wall Street. Why couldn’t the Fed have made a paltry one trillion available to Main Street to refinance delinquent residential mortages? That amount would have been sufficient to refinance EVERY SINGLE DELINQUENT MORTGAGE back in 2008, which would have stabilized the residential housing market at a level almost 30% above today, preserving trillions of dollars in household wealth and preventing millions of additional delinquencies and foreclosures. For that matter, why not offer such a program today? These loans could be structure after the student loan program so that the Fed would be assured of eventual repayment (you can never walk away from a student loan!).

Ask Big Ben Bernanke, the White Knight of Wall Street.

But don’t expect an answer from Mr. Opacity.

Do expect at least four million more U.S. families to lose their homes to foreclosure during the coming years.

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