More Secrets of the Temple
by L. Randall Wray
This post first appeared at "Great Leap Forward”, my EconoMonitor blog.
Back in 1989 William Greider shined a little light on the Fed’s operations in his book Secrets of the Temple: How the Federal Reserve Runs the Country. And then Robert Auerbach, working with Representative Henry B. Gonzalez, worked to expose Alan Greenspan’s abuse of power as Chairman of the Board of Governors. (See his book, Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank.) As I argued last week, one of the concerns in 1993 was the possibility that Greenspan’s Fed routinely leaked information to favored market participants. And it looks like that continues up to the present day. Another major concern was that rather than doing its job to oversee bank practices, instead the Fed saw its role as lapdog for Wall Street. And that, too, continues to be its anointed role. Today, let us look at two examples, all related to the bail-out and cover-up by our “public stewards”.
As reported today by Bloomberg-Businessweek, in the depths of the financial crisis in July 2008, Treasury Secretary Paulson provided two diametrically opposed messages—one to insiders and one to outsiders. He told the official press that the Treasury was looking at the books of Fannie and Freddie, but expected to find that they’d be A-OK. He led reporters to believe that no “bazooka” would be required and that Fannie and Freddie would remain private. All that was for the outsiders—the American public.
However, the message to insiders was completely different. At a meeting of Wall Street’s finest on July 21, he talked about putting Fannie and Freddie into a conservatorship—with government seizing the firms and wiping out private investors. This was useful information, indeed, to Wall Street investors who might have some dogs in the hunt. A bunch of the attendees were Goldman alums. While speculators had been shorting Fannie and Freddie stocks for some time, the shorts peaked 3 days after Paulson’s meeting with insiders.
So what this means is that it is not just the Fed that leaks to insiders. Indeed, Congress is looking at possible leaks in several other federal agencies with ties to Wall Street—including the Education Department, the Department of Commerce and even the White House itself. While it is not clear that public officials like Paulson can be prosecuted for leaks, those investors who used the information he leaked can be prosecuted.
But back to the Temple. In its continuing series on the Fed’s bail-out of Wall Street, Bloomberg estimates that the banks got a $13 billion hand-out from the Fed’s easy lending terms.
Using the excuse of the crisis, the Fed lent funds at near-zero interest to the banks. This was supposed to encourage them to begin lending to firms and households, to spark economic growth and recovery. Of course, the problem with that scheme is that households were already underwater with debt (hence, the recession), firms had no sales hence no reason to borrow to increase production, and banks were loathe to lend to households and firms that face a bleak future on account of Wall Street’s crashing of the economy. So instead, banks mostly bought Treasuries and played the yield curve—earning more on Treasuries than they had to pay the Fed. The $13 billion subsidy directly created by the ZIRP (Fed’s zero interest rate policy) directly created $13 billion of extra profits that Wall Street could then use to reward the same genius CEOs that created the crisis. Nice synergy.
The same Bloomberg article reports that the bail-out itself cost $7.77 trillion—a lucky string of sevens if you happen to be in the top 1% and work on Wall Street. This is based on the secret Fed documents that Senator Sanders managed to force Bernanke to release—25,000 pages worth. I do not know how Bloomberg came up with that number. The true number is almost four times bigger–$29 trillion based on careful analysis done at UMKC. In any event, 7 trillion is a big enough number to raise eyebrows. It is more than 10 times the Treasury department’s $700 billion TARP program that Paulson managed to get out of Congress (after holding a loaded gun to his head and threatening to blow his brains out if Congress didn’t give him the money with no strings attached; Congress wouldn’t blink so he had to come back on hands and knees). But it is not just the size that is shocking—it is that the measly little $700 billion was subject to Congressional approval and oversight, while the Fed’s bail-out (whether $7.77 trillion or the more likely figure of $29 trillion) not only was never approved, nor overseen by Congress, but it actually took an act of Congress to get the Fed to fess up to its largess.
Folks, $29 trillion is over two year’s worth of national GDP. Provided in secret by the Temple. With no approval. And with virtually no visual benefits to the US economy. Indeed, if anything, the bail-out has made things worse. Concentration in banking has increased. US inequality has risen. The top one-tenth of one percent grabs ever more of a shrinking economic pie. And we are going to crash again.
This raises two questions. When will we begin to reign-in the Fed and hold it accountable? And will we let the Fed bail-out Wall Street without Congressional approval of funding the next time it crashes? We need to answer these questions soon, because it is beginning to look like the next crash is on its way.