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Lessons From the Federal Reserve Audit

Thanks to the persistence of Senator Bernie Sanders and Representatives Alan Grayson and Ron Paul we have been given a rare glimpse into the secret dealings of the Federal Reserve Bank.  These three legislators pushed hard for an amendment to the recently passed financial regulatory reform law that required the Fed to disclose its activities during the financial crisis.  This past week, with the release of some the required information, the public was able to see how the Fed single-handedly bailed out the global financial sector and capitalism in general. 

The magnitude of the bailout was incredible.  The lack of accountability involved with pulling it off was particularly upsetting.  During 2008-2009, the Fed implemented several loan programs or ‘facility’ as they call them.  These programs mostly involved very low interest rate, short-term loans.  At the peak use of these programs, the Fed had $3.3 TRILLION loans outstanding. 

ProPublica has a very good interactive database of which banks that received these cushy loans.  It should be no surprise that with these loans plus the TARP bailout ($500+BILLION), Wall Street reported record profits in 2009 while the rest of the economy still burned.  Citigroup was the largest beneficiary of these Fed loans and Goldman Sachs loved these loans too.  Who wouldn’t - borrow at low rates and go trade in the markets.  Nothing like funding a ponzi scheme or ponzi finance.

BTW, it wasn’t just banks that benefited from these Fed loan programs.  Toyota, Harley Davidson and Caterpillar, to name a few, also borrowed from the Fed.  Not to mention various hedge funds and mutual fund firms.  Heck, it was cheap money and a great opportunity to leverage it into higher returns.

There are some very important lessons to be learned from this $3.3 TRILLION bailout:

1)  Capitalism and the global financial sector FAILED.  That’s right.  Greed, incompetency in assessing risk and lack of trust caused the fabled markets to freeze.  It required the money creating power of the Fed to bail it all out - at least the financial sector.

2)  Fed independence = Protecting of financial oligarchy.  This notion that Fed needs to be immunized from political pressure is a joke.  Fed independence means no accountability to taxpayers.  This $3.3 trillion bailout served the interests of financial oligarchy and didn’t help the rest of the economy.  Fed knew or should’ve known that banks would use these money for profit generating purposes such as trading/speculating and not necessarily for increasing credit to businesses. 

3)  Money creating monopoly/power of Fed is pretty powerful.  All it took was a click a mouse or an entry on a spreadsheet to create $3.3 trillion in loans.  The same monetary fire power that was used to bailout financial sector/financial oligarchy could be used to address high unemployment (it wouldn’t even require $3.3 trillion).  It’s a matter of priorities for politicians in Washington DC and an understanding how to structure fiscal stimulus properly (hint: less tax cuts and more public investments).

It’s sickening to realize how our government has allowed the same sector that created this financial crisis to profit tremendously from taxpayer largess without requiring or at least providing an incentive to help out the rest of our economy.  How about ending with some perspective - U.S. Gross Domestic Product is approximately $14 TRILLION vs. $3.3 TRILLION bailout of capitalism and the global financial sector by the Fed.  That’s a lot of fire power.  Amazing.

Good luck.