The last couple of days I’ve posted some thoughts on The Fed and the summer 2011 “audit” by the Government Accounting Office (GAO) here and here. A long time reader and commenter, AZleader, apparently also wrote about The Fed audit. I like his post a lot. In particular, AZleader went beyond the press releases and news documents to read the actual report itself, something real historians do and journalists used to a long time ago. He makes some good points (emphasis is mine):
Politicians and Press Releases
Shock of shocks! What you read in politician press releases doesn’t always jive with unbiased, objective truth. Politician press releases, as is true in the Sanders one, are often a mixture of fact and false implication crafted toward a political agenda.
It is not casual reading but ya gotta study the small print of the GAO’s very complex 253 page report that Sanders based his press release on to get to fundamental truths:
- The $16 trillion in “secret” Fed loans are not loans. They are MOSTLY innocuous financial services transactions provided by The Fed for which it was paid banking fees.
- There is nothing “secret” about the loans. According to the GAO Report all information it includes is in existing publicly available annual financial statements of the 12 federal reserve banks.
- The GAO audit isn’t “The first top-to-bottom audit of the Federal Reserve” as Sanders’ claims. It isn’t even remotely close to that. Such an audit was proposed by Congressman Ron Paul and others but, as often happens in Congress, it got watered down in Dodd-Frank.
- The GAO audit is very limited in scope. It covers only temporary emergency loan programs between December 1, 2007 and July 21, 2010.
The main outcome of The Fed audit was to make recommendations on how The Fed can protect itself against exposure as the “lender of last resort” in emergencies.
Almost all the $16 trillion in transactions by The Fed are money swaps or very short-term 82 day or less collateralize loans to banks.
In other words, not only was The Fed not “out of control” as I noted, but it was instead actually doing what a central bank is supposed to do: act as lender of last resort, facilitate transactions between banks, and facilitate international currency exchange — the precise things The Fed didn’t do so well in 1929-1933 and we paid for it with a Great Depression.
He also points out that while
…two CEOs were involved in conflict of interest situations. JP Morgan CEO, Jamie Dimon, and NY Fed Bank President, William Dudley, were both in positions of conflict of interest during the crisis.
The Fed was in a crisis mode and needed all the expertise it could get, even at the risk of having some conflict of interest. I would agree that given the situation at the time, it was probably necessary to involve Dimon and Dudley. However, what I fault The Fed for is for not having been prepared for such a situation. The Fed has been too cozy with the banking executives for too long and too slow to move when changes in the industry or markets create a possible conflict of interest.
I agree with AZleader also in noting how the real scandal, the real damning information in the audit hasn’t gotten the attention it deserves. Specifically:
….The vast majority of actual dollars spent by The Fed was in the “Agency Mortgage-Backed Securities Purchase Program“.
That isn’t even a loan program at all.
That program was created “to support the housing market and the broader economy”. It bought up all the toxic home mortgage loans approved by and backed up by Fannie Mae and Freddie Mac, the home mortgage lending giants.
The Fed had to buy all of Freddie and Fannie’s bad debt because it was required by law. Both companies are government sponsored enterprises (GSEs) created by the government. Those companies went into government receivership in September of 2008.
The total real dollar net purchases in that program was $1.25 trillion. Some of those assets have since been sold. There is still a $909 billion debt balance outstanding.
The Fed paid out about $80 billion in investment management fees to outside vendors, all of them American companies
Again, the problem here isn’t so much that they bought the Freddie and Fannie debt. Something had to be done to help “support the housing market”. The problem is again a lack of foresight, planning, and consideration of alternatives. In the reality, what The Fed did was prop up Freddie, Fannie, and the big banks involved in wholesaling mortgages and the MBS market. The way it was done didn’t really address the fundamental issues in the housing and mortgage market, as evidenced by us being in the fourth year of a continued housing depression, declining house prices, and rising foreclosures. Sick lenders were a symptom, not the disease in housing. The Fed only addressed one symptom. The Fed has also exposed itself to serious losses by taking on much of this mortgage debt. What options The Fed might have considered is a topic for another discussion.
AZleader and I don’t always agree on a lot of things, but I think we’re close on The Fed audit. Of course, how we fix The Fed is another topic….
4 thoughts on “More on The Fed Audit, “Secret Loans”, and Conflicts of Interest”
You see today’s Bloomberg expose on The Fed’s loan programs?
At first glace, to me, it appears to have surprising oversights. I’m curious what you think of it.
After I have some time to fully digest it I will do a followup on my first article based on the Bloomberg piece.
Yes, I’m intriqued by the reports, but haven’t had time to fully read or digest. Particularly interesting are the quotes from key Fed Presidents that they didn’t know it. If so, that would be quite disturbing. I also wonder how much of it reflects poorly on the entire Fed system, just the governors/FOMC, or just is it possible that NYFRB is the real rotten apple.
A fundamental problem with The Fed… who regulates the regulators?
FEDERAL RESERVE POLICY & PRODUCTIVE ECONOMY
Four articles have kept my interest: “Fed: Corrupt or Out of Control?” “Fed: Corrupt or Captured?” “Fed: the Audit.” “What a Liquidity Trap Looks Like.” Within the insular world of present-day banking, the articles explain the function, rationale and obligation of the Federal Reserve and the conundrum of the financial system. But if the financial system itself is not, by design, capable of cultivating a productive industrial economy, then the system of assigning and substantiating value to the economy will fail and the efforts of the Fed, though legal and superficially prudent, will not work.
In my mind, an analysis that’s useful to a productive economy will first get outside of and then subordinate the system of money, finance and banking. This would take us into the organization of intelligence, labor and nature for creating human wealth and sustenance. We might call this the economy of human sustenance and human development. It seems to me that here meaningful measures of economy are: productive capacity per need, production per capacity and capacity per technology, to be searched out from dedicated services like the Army Corps of Engineers, industrial manufacturers and NASA. From this, we can analyze the development and substantiation of value from wealth. Furthermore, on this basis, we can see that some value is assigned to something which we anticipate will be created in the future. This is the basis for productive debt in the form of capital investment.
The value of wealth has both objective and subjective components. The objective component is based on wealth’s usefulness, on what it can actually do. The subjective component is based on wealth’s particular desirability. Suppose an economy was a farm, what is its value? One might argue that it is the land, seeds, tools, and maybe people. But what if these are not put to work? What if the owner does not want to farm? Alright, suppose it’s put to use as a farm. Then we might argue that value originates in what is produced, but this is true only if what’s produced has a further use in the development of the human population.
Here’s another tool I created to advance my understanding: a fine instrument maker creates a beautifully sounding cello. Materially it commands greater value than a mass produced instrument. But why is this so? Because the one using it, having the skills to use it, gains access to musical resources not available in an inferior product. But the cello’s value is dormant until it’s unlocked through the skills of the cellist, which will have required training. That training then becomes part of the value of musician-instrument and musical-production complex. That complex is substantiated by the development of an audience, whose social and productive powers in turn are enhanced.
For the farmer, the counterpart to musical schools and teachers is the agricultural college. This takes us into the realm of wealth as it is created, where the capital investment will create debt that will facilitate the creation of more wealth. What happens in politically organizing and capitalizing our work into an integrated productive system? We create and utilize laws, credit, money, institutions, popular will and public trust.
Returning to money and the interaction of money and economy, I start with this orientation: money is simply a socialized value. As value, it may or may not be trusted and embraced by a people. But if it is, then it has power. As empowered value, it may become a subordinate medium of transforming a natural economy into an industrial economy and going beyond that. However, it might also overpower a productive economy and contrive to sustain its own internal needs. To put it in a nutshell: all societies must create economic value to survive. Real economic value arises out of the materials of human sustenance. Societies create their wealth to exist. Can we exist under the present system of finance?
Are the Federal Reserve and financial system in general in sync with the maintenance and development of our productive economy? I don’t think this can be answered by Department of Labor and stock market statistics. Nor can it be answered by simply poring over the findings of the Fed audit. A better insight into the audit, and the financial system in general, can be gained by means of the Financial Crisis Inquiry Report, issued January 2011. Simply working through chapters one through eight, it became unmistakable to me that a business model and market for originating and trading pure value exists and dominates our planet.
Other noteworthy areas of investigation: William K. Black’s recommendations regarding auditing the system under bankruptcy laws; James Galbraith diagnosing in Congressional testimony the faulty axioms underlying the Congressional Budget Office’s forecasting system; and the dissenting opinions of Kansas District Federal Reserve Governor Thomas Hoenig, who on April 12, 2011 recommended reclassifying government subsidized financial institutions as Government Sponsored Enterprises for the purpose of preventing them from engaging in activities not prescribed under Glass-Steagall standards.
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