Richmond Federal Reserve Bank President Jeffrey Lacker was recently the featured speaker at a recent Dulles Regional Chamber of Commerce luncheon for some 250 bankers and a handful of elected officials, including Virginia Del. Bob Marshall, R-Manassas. Marshall was also one of two guests chosen to ask a question from the floor: Was the Fed’s dual nature as a public-private hybrid a problem? Marshall said Lacker did not answer his question outright, although he did admit that Fed members were not unanimous regarding the desirability — or the legality — of bailing out certain banks and corporations. The Fed acted the way it did, Lacker claimed, because it suddenly found itself in “uncharted waters.” Uncharted waters indeed. The first-ever audit of the Federal Reserve in its 100-year history was released last month by the General Accountability Office. The audit was required under an amendment to the Dodd-Frank financial reform bill that was supported by Rep. Ron Paul, R-Texas, and Sen. Jim DeMint, R-S.C., on the right, and Reps. Bernie Sanders, I-Vt., and Dennis Kucinich, D-Ohio, on the left. Page 131 of the audit shows that the Federal Reserve secretly handed out $16 trillion in “loans” at zero percent interest — more than the entire GDP of the United States — with no public debate and without the approval of either Congress or the president.
Recipients included a small handful of U.S. financial heavyweights, including Citigroup, Morgan Stanley, Merrill Lynch, Bank of America, Bear Stearns, Goldman Sachs and Lehman Brothers. But trillions more were also given to foreign banks, such as Barclays PLC, Royal Bank of Scotland, Deutsche Bank, UBS, Credit Suisse, Bank of Scotland and BNP Paribas. Virtually none of that money has been returned — leaving U.S. taxpayers on the hook.
Marshall pointed out that the audit revealed loose internal controls at the Fed that allowed conflicts of interest that would not be permitted in the federal government. For example, the CEO of JPMorgan Chase was sitting on the New York Federal Reserve Bank’s board while his bank was getting a $390 billion bailout. And New York Fed President William Dudley got waivers allowing him to keep his investments in bailed-out AIG and General Electric.
Even though Lacker did not answer Marshall’s question about the dangers of unaccountable public-private entities, the answer has already been provided by Standard & Poor’s, which just downgraded Fannie Mae and Freddie Mac. One thing that is certain is that such public-private hybrids are hazardous to the nation’s economic health. Less certain is whether Congress has the guts to probe deeper into the Fed’s affairs.
