Are you ready for a good laugh?
The head of the New York Fed wants Congress to grant the Central Bank extraordinary new powers to deal with future financial system emergencies like the bank run that followed Lehman Brothers collapse in September 2008. Here's the story from the New York Times:
"[William] Dudley's concern is about a little-noticed piece of the 2010 Dodd-Frank Act that actually reduced the central bank's authority in one crucial area: its ability to provide emergency funding to strapped financial firms.
"The Fed arrested the 2008 financial crisis by using this authority to create a series of unprecedented programs that offered emergency financing not just to American banks -- its traditional flock -- but also to foreign banks, and not just to banks but to other kinds of financial companies as well, and indeed to other kinds of companies entirely." ("Equipping the Fed for a Future Crisis", New York Times)- Advertisement -
It's true, congress did clip the Fed's wings after the last great debacle by putting limits on the Fed's authority to hose down the entire system, regulated or not, with trillions of dollars of taxpayer-funded bailouts. And congress should be applauded for that action, after all, why should the US government underwrite the high-risk trading activities of financial institutions which operate on mere slivers of capital? That's crazy! If they go bust, tough luck. Here's more from the Times:
"Congress responded to this performance by making it difficult to repeat. Dodd-Frank imposed new restrictions on the Fed's ability to make emergency loans, or to keep money flowing, outside the banking industry. One basic reason was that Congress had never really intended to give the Fed such broad power in the first place." (NYT)
Uh, huh. Is that hard to grasp? TARP was unpopular. The bailouts were unpopular. People don't like the idea of handing over free money to crooked bankers every time they get themselves into trouble.
The author seems genuinely puzzled by the fact that our democratic system is not supposed to proffer unlimited "power of the purse" to the swinish agents of the robber class at the central bank. The system has gotten so convoluted that journalists cannot even recall earlier times when policy was set by the elected representatives of the people and the banks played a subordinate role. Today, that all sounds like sentimental gibberish about "America's idyllic past." Here's more from the Times:
"'Many -- myself included -- have drawn from the financial crisis the conclusion that government safety nets should be drawn tightly so that only a very few, very tightly regulated firms get as little liquidity support as possible,' Karen Shaw Petrou, a close watcher of financial regulation who drew my attention to Mr. Dudley's speech, wrote to clients of her firm, Federal Financial Analytics.
"A more inclusive policy, she continued, 'will open the safety net, wide, wide open to all sorts of actors who, smiling sweetly, will rob us blind.'" (NYT)
Ms. Petrou is a dreamer. The Fed "does what it wants, when it wants." It answers to no one, which is why their books still remain closed to public inspection despite the myriad legal challenges to pry them open.
Sure, the Fed will "rob us blind"; that's their job, isn't it? Let me jog your memory a bit: Do you remember the Repo 105 scandal? Think back to April 2010 when the New York Fed (which Dudley now heads) was directly involved in a cover-up by the nation's largest banks that were engaged in shady accounting activities to conceal the amount of debt on their balance sheets. According to the Wall Street Journal:
"Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York. A group of 18 banks...understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters." ("Big Banks Mask Risk Levels", Kate Kelly, Tom McGinty, Dan Fitzpatrick, Wall Street Journal)
The "repo 105" flap was further complicated by suspicions that Lehman was assisted in its effort by the Federal Reserve Bank of New York which, at the time, was headed by former Secretary of the Treasury, Timothy Geithner. Here is a short recap of what transpired between the Geithner's NY Fed and Lehman according to ex-regulator William Black and former NY governor Eliot Spitzer from an article on Huffington Post:
"The FRBNY [i.e., New York Fed] knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman...