More on The Fed Audit, “Secret Loans”, and Conflicts of Interest

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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….

Is The Fed Corrupt or Captured?

Yesterday I responded to a reader who asked if “The Fed is out of control”.  In short, I said no, not in the sense that critics have charged them with “out of control printing of money” that could produce inflation.  But I left the post with an acknowledgement that the secrecy of The Fed carries some risks.  I said:

…it is unseemly for The Fed to be able to make large loans on favorable terms to banks, loans that save those banks’ managers from failure, without any sunshine or transparency.  It makes fertile ground for corruption.

Today I want to look at the question of whether The Fed, as it is currently constituted, is corrupt.  The Fed has generated a lot of populist anger.  A quick Google search for “end the fed” turns up over 8 and 1/2 million results.  A lot of people seem to feel there’s something wrong here with The Fed, even if they can’t pinpoint what it is.  Typically the charge has been that The Fed has been guilty of creating (“printing”) money too fast and producing inflation.  We’ve seen that’s not true.  Inflation is not our problem and hasn’t been for 20-30 years. Nevertheless, many people feel there must be something wrong.

I tend to agree. First, let’s define corrupt.  From Webster’s online, we see two possible meanings for corrupt:

1…   b : characterized by improper conduct (as bribery or the selling of favors) <corrupt judges>…

3.  : adulterated or debased by change from an original or correct condition <a corrupt version of the text>

Going by this definition, The Fed is corrupt.  It’s characterized by improper conduct and it’s debased from a correct condition (although the original condition wasn’t much better).  Let’s take a closer look to understand problems better.

I’m not accusing The Fed or Fed officials of outright petty bribery.  I don’t think anybody has directly paid off Fed officials or promised personal gains in return for Fed decisions.  It’s more complex than that.  The Fed has become the subject of regulatory capture.  Regulatory capture occurs when an agency of the government is initially established to regulate or control the excessive behavior of some industry.  But then, over time, the industry captures the hearts, minds, and ideologies of the regulators.  The regulators come to function as the protectors and servants of the industry they were supposed to regulate.  Regulatory capture is common anytime the industry involved is complex and technical.  Experts have to be hired as regulators but the best source of experts on the industry is the industry itself.  The problem is made worse when the regulated industry is able to pay much higher salaries than the regulatory agency.  Wikipedia tells of a few examples from The Fed:

Federal Reserve Bank of New York (New York Fed)

The Federal Reserve Bank of New York is the most influential of the Federal Reserve Banking System. Part of the New York Fed’s responsibilities is the regulation of Wall Street, but its president is selected by and reports to a board dominated by the chief executives of some of the banks it oversees.[39] While the New York Fed has always had a closer relationship with Wall Street, during the years that Timothy Geithner was president, he became unusually close with the scions of Wall Street banks,[39] a time when banks and hedge funds were pursuing investment strategies that caused the 2008 financial crisis, which the Fed failed to stop.

In the wake of the financial meltdown, Geithner became the “bailout king” of a recovery plan that benefited Wall Street banks at the expense of U.S. taxpayers.[39] Geithner engineered the New York Fed’s purchase of $30 billion of credit default swaps from American International Group (AIG), which it had sold to Goldman SachsMerrill LynchDeutsche Bank and Société Générale. By purchasing these contracts, the banks received a “back-door bailout” of 100 cents on the dollar for the contracts.[40] Had the New York Fed allowed AIG to fail, the contracts would have been worth much less, resulting in much lower costs for any taxpayer-funded bailout.[40] Geithner defended his use[40] of unprecedented amounts of taxpayer funds to save the banks from their own mistakes,[39] saying the financial system would have been threatened. At the January 2010 congressional hearing into the AIG bailout, the New York Fed initially refused to identify the counterparties that benefited from AIG’s bailout, claiming the information would harm AIG.[40] When it became apparent this information would become public, a legal staffer at the New York Fed e-mailed colleagues to warn them, lamenting the difficulty of continuing to keep Congress in the dark.[40] Jim Rickards calls the bailout a crime and says “the regulatory system has become captive to the banks and the non-banks”.[41]

Regulatory capture isn’t limited to only the possibility that a regulators’ decisions might be influenced by their personal future employment prospects.  It also involves ideology and group think.  The regulators spend their time, both professional and personal, mixing with the regulated.  They come to think alike.  Professor Steven Davidoff writes at Deal Book:

Instead, we have ideological and social capture of the top regulators. This is an issue that trumps what can be a model regulator at the bottom where the line people are quite competent, able and uncaptured, but the message from the top skews their effectiveness….

For an example of social capture at the top, one need only look at the publicly available calendars of Treasury Secretary Timothy F. Geithner and his predecessor, Henry M. Paulson Jr. The people regulating the financial industry largely come from that industry or look to that industry for their social interactions. They play squash with them and dine with them, and these are the peers they look to when they have issues to discuss. Jo Becker and Gretchen Morgenson of The New York Times documented this ably in their April 2009article on Mr. Geithner’s social interactions during his time as head of the Federal Reserve Bank of New York.

Lawrence H. Summers may not be as social, but even he worked at a hedge fund in the year leading up to his current position in the White House.

Among these people, there is no evil or nefarious plot to regulate in favor of the banks. These men and women may believe they are doing their best, but their worldview is affected by the people they interact with. This is a problem that can be exacerbated by a revolving door between finance and regulators.

This social influence can be affected by an additional factor: ideological capture also at the top. This occurs when regulators are appointed who share the same beliefs and ideas as their industry. A prime example of this is Alan Greenspan, the former Federal Reserve chairman, who was a devotee of Ayn Rand and objectivism and a fierce devotee of free markets. He no doubt was acting in good faith and true belief; the financial industry benefited from the fact that he shared their ideology

James Kwak and Simon Johnson, the authors of the book 13 Bankers, have written extensively about the regulatory capture of The Fed and the resulting improper conduct and debased condition of the world’s largest central bank. The book is worth checking out, as is their blog The Baseline Scenario.  Bill Moyers interviewed them for PBS on these topics. You can watch the video or read the transcript here.

The evidence is extensive that The Fed has become captured by the very banks it is supposed to regulate.  The Fed now sees it’s mission as first and foremost as protecting Wall Street, the banks, and the financial system.  The audit of The Fed in July 2011 confirmed that problems existed with conflicts of interest:

The audit also found that the Fed mostly outsourced its lending operations to the very financial institutions which sparked the crisis to begin with, and that they delegated contracts largely on a no-bid basis. The GAO report recommends new policies that would eliminate such conflicts of interest, and suggests that in the future the Fed should keep better records of their emergency decision-making process.

It was evident before that.  I March 2010 I recounted how Nobel-prize winner Joseph Stiglitz accused The Fed of being corrupt and said if a developing nation had a central bank like The Fed, we’d pressure them to change.  So, yes, The Fed is corrupt because it has been captured.

 

Is The Fed Corrupt or Out of Control?

The Federal Reserve System is an extremely controversial and largely misunderstood institution. Senators on both the right (Ron Paul) and the left (Bernie Sanders) are highly critical of The Fed.   I’ve shied away from commenting on The Fed because it’s  a pretty complex subject. Every time I think there’s a point to be made, I find it requires explaining some other point, which leads to yet another, and on and on.  It’s always seemed too daunting.  I could never figure out where to start.  But a reader asked last week for my thoughts about The Fed audit, so I’ll make an effort:

What’s the meaning of the audit of the Federal Reserve Bank that has just been completed? I am hearing from friends that the revelation of loans made to banks by the Fed is evidence that they “are out of control” and doing something corrupt or dishonest. I find that hard to believe.

At the risk that I’ll have a few “I’ll explain this later” points in this post, let’s talk about The Fed and whether it’s corrupt.  Let’s start with the results of the audit of The Fed which were released in July 2011 in response to a Congressional bill requiring a one-time public audit of The Fed..  The Raw Story summarizes the report for us and also has an embedded copy of the audit results for those interested:

The U.S. Federal Reserve gave out $16.1 trillion in emergency loans to U.S. and foreign financial institutions between Dec. 1, 2007 and July 21, 2010, according to figures produced by the government’s first-ever audit of the central bank.

Last year, the gross domestic product of the entire U.S. economy was $14.5 trillion.

Of the $16.1 trillion loaned out, $3.08 trillion went to financial institutions in the U.K., Germany, Switzerland, France and Belgium, the Government Accountability Office’s (GAO) analysis shows.

Additionally, asset swap arrangements were opened with banks in the U.K., Canada, Brazil, Japan, South Korea, Norway, Mexico, Singapore and Switzerland. Twelve of those arrangements are still ongoing, having been extended through August 2012.

Out of all borrowers, Citigroup received the most financial assistance from the Fed, at $2.5 trillion. Morgan Stanley came in second with $2.04 trillion, followed by Merrill Lynch at $1.9 trillion and Bank of America at $1.3 trillion.

The audit also found that the Fed mostly outsourced its lending operations to the very financial institutions which sparked the crisis to begin with, and that they delegated contracts largely on a no-bid basis. The GAO report recommends new policies that would eliminate such conflicts of interest, and suggests that in the future the Fed should keep better records of their emergency decision-making process.

The Fed agreed to “strongly consider” the recommendations, but as it is not a government-run institution it cannot be forced to do so by lawmakers. The seven-member board of governors and the Fed chairman are, however, appointed by the President of the United States and confirmed by the Senate.

The audit was conducted on a one-time basis, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed last year. Fed officials had strongly discouraged lawmakers from ordering the audit, claiming it may serve to undermine confidence in the monetary system.

The big news, judging by both Ron Paul’s and Bernie Sanders’ reactions is the three-fold fact that The Fed provided loans (or their equivalent in asset swaps) to large banks and governments to the tune of $14.5 trillion “in secret”.  The first concern is the size of the actions. The second concern seems to be that some of these banks and governments were foreign. And the third is that the loans were secret. I think the conflicts of interest and poor decision making processes are bigger issues uncovered by the audit. But I’ll get to that later in this post.

Before we can conclude The Fed is “out of control” or corrupt we need to look at what The Fed is supposed to do.  The Fed, being the central bank for the U.S., is responsible for:

  • maintaining the health of the U.S. banking and financial system and institutions.  It does this by regulation of those institutions and by being lender of last resort in a crisis.
  • conducting monetary policy. Legally, The Fed has a “dual mandate” on monetary policy. It is supposed to:
  1. maintain price stability (in other words, avoid inflation or deflation)
  2. maintain full employment

The critics from the right tend to be followers of Austrian economics (Ron Paul) or far-conservative and libertarian. These are the ones most likely to claim The Fed is “out of control”.  What they generally mean (a typical example is here) is they think The Fed has created too much money and is debasing the currency.  There’s very little The Fed can do that would satisfy most of these people other than to shut down and ask the government to return to a gold standard.  Their concerns about the $14 trillion in loans being inflationary and “newly printed money” reveal deep misunderstandings about the nature of money (a post yet to be written), the functioning of the financial system, and even the nature of inflation.  They make a big deal of the size of the loans by comparing them to real GDP.  That’s apples to oranges.  To figure out if the $14 trillion in loans was large, it should be compared to the total balance sheet of the banking system, not GDP.   Yes, the loans The Fed made were of record amount, but so was the crisis. The Fed has a duty to act as lender of last resort in a financial crisis.  It did that. And it largely avoided the scale of disaster that occurred in 1929-1933 when The Fed failed to act as lender of last resort and was complicit in creating The Great Depression, snuffing out thousands of banks in the U.S. and depositors’ savings with it.  So if “out of control” means The Fed is wildly “printing money”, creating inflation, and debasing the currency, then, no, The Fed is not out of control.

A second charge that both the right and left have leveled is that The Fed shouldn’t have made loans to foreign banks and governments.  In a pure-thought fantasy world of theoretical political economy, I suppose The Fed would be a nationalist institution.  Certainly we expect the central bank of any other nation to be dominated by solely by protecting their own nation’s interests. (in the case of the Eurozone, it would be a great improvement if the ECB gave a hoot about even it’s own).  But reality has to intrude.  The U.S. dollar is the world’s reserve currency. We wanted it that way. More than half of all U.S. money is outside the U.S.  The world’s trading and financial systems depend on the dollar. Given the scale and scope of the crisis in 2008, The Fed had little practical alternative to making loans to some large foreign banks and even some nations.  Nobody else could do it.  The alternatives were too nasty.  Should it be regular practice? No. Should it be encouraged? No. Should we second guess the middle of the crisis when nobody else was stepping up?  Probably not.  Should we think about how to handle it better in the future so we don’t have to rely on The Fed?  Yes.  Have we thought about it and changed? No.  So the second charge of being “out of control” as evidenced by making foreign loans doesn’t really hold up.

The third charge, the question of “secrecy” in the loans is more difficult.  On the one side, it is unseemly for The Fed to be able to make large loans on favorable terms to banks, loans that save those banks’ managers from failure, without any sunshine or transparency.  It makes fertile ground for corruption.  On the other hand, banking is a confidence game. Publicizing loans to banks, even when part of the normal course of affairs, can be misinterpreted by the public, fund managers, or other banks.  It alone could spark a run on a bank. The run then creates the very crisis the loan was intended to avert, turning temporary liquidity crisis into permanent bank failure.

Some fear of the secrecy of these loans is driven by a misunderstanding of what The Fed loans and where it comes from.  Again, this arises from common misunderstandings of what money really is or where it comes from.  Many fear the “money” The Fed lends is money that had to come from somewhere (they suspect taxpayers) or diverted from some other useful purpose.  Not so.  The Fed doesn’t actually lend “money” in the sense that you and I have “money” to spend.  The Fed creates new bank reserves out of thin air.  It’s not spending money and it’s not scarce. The Fed can as easily remove these reserves later in the future.

So, is The Fed “out of control”?  I don’t think so in the way that many critics make the accusation.  Just because I don’t think The Fed is some “out of control money printing machine” doesn’t mean I think The Fed is innocent or doesn’t need to be changed.  The audit revealed other issues regarding decision-making and transparency that I find much more troubling.  They reveal that The Fed has fallen into a kind of “group think” that doesn’t serve the nation well.  I think The Fed is both misguided and poorly structured.  But I’ll deal with that in tomorrow’s post.

The Fed is a Rorschach test.

The Fed’s New “Twist” – Not Likely To Help

Late Wednesday The Federal Reserve announced a new program to try to stimulate  the economy so that maybe somebody, somewhere could get a new job, or maybe it’s so that critics would shut-up about employment.  It’s always hard to tell what The Fed’s real objectives are.  I don’t have time to explain now why it’s not likely to do much. But I didn’t want it to go unnoticed, so I’ll give you Stephanie Kelton from neweconomicperpectives, the UM Kansas City MMT people:

Ben Kenobi Launches Operation Twist: Will it Save the Republic?

The Federal Open Market Committee (FOMC) just announced that it’s going to begin another round of asset buying, this time offsetting its purchases of longer-dated securities with sales of shorter term holdings. The goal? Flatten the yield curve. The hope? Engineer a recovery by helping homeowners refinance at lower rates and making broader financial conditions more attractive to would-be-borrowers.

At this point, it looks like Obi-Ben Kenobi realizes that Congress isn’t going to lend a hand with the recovery. Indeed, as a scholar of the Great Depression, he’s probably deeply concerned by the “Go Big” mantra that is now drawing support from people like Alice Rivlin, former Vice Chair of the Federal Reserve.  And so it is Ben, and Ben alone, who must fight to prevent the double-dip. It is as if he’s responding to the public’s desperate cry, “Help me Obi-Ben Kenobi. You’re my only hope.” Will it work?  Not a chance, but that conversation is taking place over at Pragmatic Capitalism, so drop in and find out why.  Below is a description, taken from the full FRB press release, that describes just what the Fed is going to do.  May the force be with us all.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.”

The Fed Has NOT Been Printing Money

A common refrain among the “cut, cut, cut” chicken littles and the hard-money crowd is that “the Fed has turned the printing presses lose printing money”.  These folks should really join us in the 21st century.  That’s not how it works and that’s not what The Fed has been doing.  Quantitative Easing, as well as The Fed bailouts of the big banks 2-3 years ago, did not involve “printing money”.  It involved creating bank reserves that are NOT loaned out and therefore do not create new “money” or M1.  James Hamilton explains:

Money and reserves

I wanted to offer some clarification on stories about all the money that the Federal Reserve is supposedly printing. It depends, I guess, on your definition of “money.” And your definition of “printing.”

When people talk about “printing money,” your first thought might be that they’re referring to green pieces of paper with pictures of dead presidents on them. The graph below plots the growth rate for currency in circulation over the last decade. I’ve calculated the growth rate over 2-year rather than 1-year intervals to smooth a little the impact of the abrupt downturn in money growth in 2008. Another reason to use 2-year rates is that when we’re thinking about money growth rates as a potential inflation indicator, both economic theory and the empirical evidence suggest that it’s better to average growth rates over longer intervals.

Currency in circulation has increased by 5.2% per year over the last two years, a bit below the average for the last decade. If you took a very simple-minded monetarist view of inflation (inflation = money growth minus real output growth), and expected (as many observers do) better than 3% real GDP growth for the next two years, you’d conclude that recent money growth rates are consistent with extremely low rates of inflation.

Two year growth rate (quoted at annual percentage rate) of currency in circulation. Data source: FRED.
currency_feb_11.gif

But if the Fed didn’t print any money as part of QE2 and earlier asset purchases, how did it pay for the stuff it bought? The answer is that the Fed simply credited the accounts that banks that are members of the Federal Reserve System hold with the Fed. These electronic credits, or reserve balances, are what has exploded since 2008. The blue area in the graph below is the total currency in circulation, whose growth we have just seen has been pretty modest. The maroon area represents reserves.

Continue reading

Money Multiplier has Collapsed

From Yves Smith & Naked Capitalism  :   Guest Post: The Fed Is Responsible for the Crash in the Money Multiplier … And the Failure of the Economy to Recover

Washington’s Blog.

Greg Mankiw noted in January 2009:

Econ prof Bill Seyfried of Rollins College emails me:

Here’s an interesting fact that you may not have seen yet. The M1 money multiplier just slipped below 1. So each $1 increase in reserves (monetary base) results in the money supply increasing by $0.95 (OK, so banks have substantially increased their holding of excess reserves while the M1 money supply hasn’t changed by much).

Since January 2009, the M1 Money Multiplier has crashed further, to .786 in the U.S. as of February 24, 2010:

(Click for full image; underlying data is here)

That means that – for every $1 increase in the monetary base – the money supply only increases by 79 cents.

Why is M1 crashing?

Because the banks continue to build up their excess reserves, instead of lending out money:

These excess reserves, of course, are deposited at the Fed:

Why are banks building up their excess reserves?

As the Fed notes:

The Federal Reserve Banks pay interest on required reserve balances–balances held at Reserve Banks to satisfy reserve requirements–and on excess balances–balances held in excess of required reserve balances and contractual clearing balances.

The New York Fed itself said in a July 2009 staff report that the excess reserves are almost entirely due to Fed policy:

Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically, as shown in Figure 1.1 Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Excess reserves spiked to around $9 billion in August 2007, but then quickly returned to pre-crisis levels and remained there until the middle of September 2008. Following the collapse of Lehman Brothers, however, total reserves began to grow rapidly, climbing above $900 billion by January 2009. As the figure shows, almost all of the increase was in excess reserves. While required reserves rose from $44 billion to $60 billion over this period, this change was dwarfed by the large and unprecedented rise in excess reserves.

The Fed is Corrupt

The current structure of The Federal Reserve Bank has  outlived it’s usefulness.  The Fed was born in secrecy among privileged, monied elites. It failed us in the Great Depression.  It has failed us in the past two decades as evidenced by the Great Global Financial Meltdown of the past 3 years.   I have a lot of respect for Joseph Stiglitz, a Nobel winning economist who never lost sight of what we’re supposed to do in economics: figure out how to improve people’s living conditions and welfare, instead of shilling for the monied powers that be.

Nobel Prize-Winning Economist: Federal Reserve System is Corrupt and Undermines Democracy

Joseph Stiglitz – former head economist at the International Monetary Fund (IMF) and a nobel-prize winner – said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is “corrupt” and undermines democracy.

Stiglitz said:

If we [i.e. the IMF] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.

Stiglitz pointed out that – if another country had presented a plan to reform its financial system, and included a regulatory regime that copied the makeup of the Federal Reserve system – “it would have been a big signal that something is wrong.”

Stiglitz stressed that the Fed banks have clear conflicts of interest, since the banks are largely governed by a board of directors that includes officers of the very banks they’re supposed to be overseeing:

So, these are the guys who appointed the guy who bailed them out … Is that a conflict of interest?

They would say, ‘no conflict of interest, we were just doing our job. But you have to look at the conflicts of interest”…

The reason you talk about governance is because in a democracy you want people to have confidence … This is a structure that will undermine confidence in a democracy.

….

This via: Washington’s Blog.