Robert Reich: The Fed in hot water

[Winehole23]

The Fed in Hot Water


Thursday, April 1, 2010

The Fed has finally came clean. It now admits it bailed out Bear Stearns – taking on tens of billions of dollars of the bank’s bad loans – in order to smooth Bear Stearns’ takeover by JPMorgan Chase. The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed. The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.
The losses from those deals still total tens of billions, and taxpayers are ultimately on the hook. But the public never knew. There was no congressional oversight. It was all done behind closed doors. And the New York Fed – then run by Tim Geithner – was very much in the center of the action.


This raises three issues.


First, only Congress is supposed to risk taxpayer dollars. The Fed is not part of the legislative branch. Its secret deals, announced almost two years after they were done, violate the democratic process, if not the Cons ution itself. Thomas Jefferson put a stop to Alexander Hamilton’s idea of a powerful central bank out of fear it would be unaccountable to the public. The Fed has just proven Jefferson’s point.
b

Second, if the Fed can secretly bail out big banks, the problem of “moral hazard” – bankers taking irresponsible risks because they know they’ll be rescued – is far greater than anyone assumed after Congress and the Bush and Obama administrations bailed out the banks. Big banks will always be too big to fail because they know the Fed will secretly back them up if they get into trouble, even if Congress won’t do it openly.


Third, the announcement throws a monkey wrench into the financial reform bill now on Capitol Hill, which gives the Fed additional authority by, for example, creating a consumer protection bureau inside it. Only yesterday, Sen. Jim DeMint (R-S.C.) blasted the Dodd bill for expanding the Fed’s authority “even as it remains shrouded in secrecy.”


The Fed has a big problem. It acts in secret. That makes it an odd duck in a democracy. As long as it’s merely setting interest rates, its secrecy and political independence can be justified. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable.
b

That it chose to reveal the truth about its activities during a week when Congress is out of town, when much of official Washington and the Washington media have gone on vacation, and only after several federal courts have held that the Fed must release do ents related to its bailout of Bear Stearns, suggests it would rather remain secret than become transparent.


Much of what Ben Bernanke and Tim Geithner did (when Geithner was at the New York Fed) in 2008 was presumably necessary. But the public has no way of knowing. The public doesn’t even know who else the Fed has bailed out, or what en ies it will bail out in the future. All we know is the Fed secretly bailed out Bear Stearns and AIG and thereby subjected taxpayers to risks that remain even today, without informing the public. That’s not a record on which to build public trust.

[EVAY]

Interesting and significant story.

I wonder if it will cost Geithner his job.

Paulson and Geithner knew about this at the time. I wonder if Bush did. I doubt it. But surely Obama knew Geithner's role in it when he made him Treasury Sec'y.

I though when Geithner was named it was done to calm the financial markets and smooth the transition from Bush to Obama. Now, it seems to me that Geithner has to go. Mind you, if Geithner IS fired, Wall Street will take out its ire in the market, and all of us will pay the price.

[Stringer_Bell]

I though when Geithner was named it was done to calm the financial markets and smooth the transition from Bush to Obama. Now, it seems to me that Geithner has to go. Mind you, if Geithner IS fired, Wall Street will take out its ire in the market, and all of us will pay the price.

No doubt.

I'd like to see the Tea Party Express take those assholes on...Wall Street is so temperamental and subject to getting its pussy hurt and making us pay the price for lotion.

[MiamiHeat]

no surprises here.

The Fed has been a ing joke, a trojan horse ever since it's inception.

"Give me control of a nation's currency, and I care not who writes the laws"

[EVAY]

No doubt.

I'd like to see the Tea Party Express take those assholes on...Wall Street is so temperamental and subject to getting its pussy hurt and making us pay the price for lotion.

This. I might not have used the exact language, but the thought is right on!

[Wild Cobra]

If this is true, seize all the assets of those making the decision and try them in the courts.

[RandomGuy]

Gotta love Robert Reich, one of my favorite authors on the economy.

His newest book, "Supercapitalism" is next on my read list.

[coyotes_geek]

The sad thing is that you can pretty much rest assured that BS isn't the only one. No wonder the fed wants no part of being audited.

[Winehole23]

On the brighter side, maybe we'll actually find out who the others were. A judge recently ordered the Fed must reveal the details about the $2T in loans it has been trying to keep in the dark.

[ElNono]

The Fed is peachy. Can't touch those guys. Furthermore, as the article indicates, they'll most likely get a pat in the back in the form of more power assigned to them.

[RandomGuy]

The sad thing is that you can pretty much rest assured that BS isn't the only one. No wonder the fed wants no part of being audited.

Sad or scary?



I have never been one to advocate monkeying with the Fed before, but it seems we are in need of some old-fashioned transparency.

[RandomGuy]

It makes me sad that truly important bits of news/topic like this fall off the dialogue table so quickly.

[Stringer_Bell]

It makes me sad that truly important bits of news/topic like this fall off the dialogue table so quickly.

If the Tea Party Express isn't against it or bringing attention to it, it must not be important.

[LnGrrrR]

Given what happened to Abu Gonzalez, I don't expect anything to happen to these guys.

Here's a question: did they actually break the law, or merely violate the spirit of the Cons ution? (Which, to my mind, is probably a bigger transgression, but anyways...)

[RandomGuy]

Given what happened to Abu Gonzalez, I don't expect anything to happen to these guys.

Here's a question: did they actually break the law, or merely violate the spirit of the Cons ution? (Which, to my mind, is probably a bigger transgression, but anyways...)

Hmm. I think it more likely that some of the former happened, rather than the latter.

I beleive that such actions by the Fed are supposed to be reported to Congress in some manner, but cannot say that is the case with any reasonable degree of certainty.