The Trillion-Dollar Conspiracy (11 page)

Perhaps Jefferson and Lindbergh were right after all when they warned about private control over a central bank. With the creation of the Fed, the major bankers finally fulfilled a long-standing goal—taxpayer liability for the losses of private banks. Some have called it “corporate socialism,” whereby liabilities are assumed by the public treasury but profits are for the private gain of the bank officers and investors.

A taxpayer bailout was made manifest in the fall of 2008. The money that was used to cover government overspending and private corporation bailouts comes from a national income tax, which was invented by the same men who were behind creating the Fed. Sounding eerily like today’s politicians, Wilson proclaimed his government was “more concerned about human rights than about property rights.” Using this rhetoric as a smoke screen, Wilson pushed through more “progressive” legislation than any previous American administration. He created the Internal Revenue Service of the Treasury Department to enforce a graduated income tax, the Federal Farm Loan Act, which created twelve banks for farmers, and the Federal Trade Commission to regulate business.

To many people at the time, all of this legislation appeared necessary. Some still would argue that perhaps it is better that knowledgeable bankers be in charge of our nation’s money supply. After all, a 1963 Federal Reserve publication states, “The function of the Federal Reserve is to foster a flow of money and credit that will facilitate orderly economic growth, a stable dollar, and long-run balance in our international payments.”

ATTEMPTS TO AUDIT THE FED

I
F THE TRUE FUNCTIONS
of the Fed are to protect the nation’s money, then it has failed miserably. In 2009, its failure brought demands for an audit of the Fed and possibly for its abolishment. Because no governmental audit of the Fed has been allowed since its inception, there has been no way to examine the Fed’s true operating expenses or activities.

As far back as 1975, consumer advocate Ralph Nader asked, “Since other departments of government, including the departments of Defense and Treasury and other agencies that regulate banks, have long been subject to the audit of the General Accounting Office (GAO)—the investigative arm of Congress—why has the Federal Reserve been excluded? The answer is found in the secretive mixture of big power and big money of the banking goliaths and their Federal Reserve servants that for decades has kept such matters away from both [the] public and Congress, in order to retain their unperturbed control.”

No matter how obscure the functions of the Fed are to the average citizen, according to Nader, its decisions and policies “affect the level of inflation, unemployment, home buying, consumer credit and other prices consumers and workers must bear. It also adds up to how few or how many financial corporations will dominate the economy.” Despite Nader’s support, as well as the backing of savings and loans institutions, credit unions, and some small bankers, a bill to provide for annual congressional audit of the giant Federal Reserve System was never passed in the 1970s.

Nothing much has changed more than thirty years later. Explanations that come from the Internet of how the Fed operates almost always come from government or Fed sources. Nevertheless, efforts have continued to rein in the Fed. On the pro-business site Forbes.com, Texas representative and dark horse presidential campaign contender Ron Paul wrote in May 2009, “One of the fallacies of modern economics is the idea that a central bank is required in order to keep inflation low and promote economic growth. In reality, it is the central bank’s monetary policy that causes inflation and depresses economic growth. Inflation is an increase in the supply of money, which in our day and age is directly caused or initiated by central banks.”

After noting the crumbling economy, Paul observed, “The necessary first step to restoring economic stability in this country is to audit the Fed, to find out the multitude of sectors in which it has involved itself and, once the audit has been completed, to analyze the results and determine how the Fed should be reined in. Proposals to push the Fed back into the shadows, or to give it an even greater role as a guarantor of systemic stability, are as misguided as they are harmful.”

On February 26, 2009, Ron Paul introduced bill H.R. 1207, stating: “Serious discussion of proposals to oversee the Federal Reserve is long overdue. I have been a longtime proponent of more effective oversight and auditing of the Fed…. Since its inception, the Federal Reserve has always operated in the shadows, without sufficient scrutiny or oversight of its operations. While the conventional excuse is that this is intended to reduce the Fed’s susceptibility to political pressures, the reality is that the Fed acts as a foil for the government. Whenever you question the Fed about the strength of the dollar, they will refer you to the Treasury, and vice versa. The Federal Reserve has, on the one hand, many of the privileges of government agencies, while retaining benefits of private organizations, such as being insulated from Freedom of Information Act requests.

“The Federal Reserve can enter into agreements with foreign central banks and foreign governments, and the GAO [the government’s General Accountability Office] is prohibited from auditing or even seeing these agreements. Why should a government-established agency, whose police force has federal law enforcement powers, and whose notes have legal tender status in this country, be allowed to enter into agreements with foreign powers and foreign banking institutions with no oversight? Particularly when hundreds of billions of dollars of currency swaps have been announced and implemented, the Fed’s negotiations with the European Central Bank, the Bank of International Settlements, and other institutions should face increased scrutiny, most especially because of their significant effect on foreign policy. If the State Department were able to do this, it would be characterized as a rogue agency and brought to heel, and if a private individual did this he might face prosecution under the Logan Act, yet the Fed avoids both fates.

“More importantly, the Fed’s funding facilities and its agreements with the Treasury should be reviewed. The Treasury’s supplementary financing accounts that fund Fed facilities allow the Treasury to funnel money to Wall Street without GAO or Congressional oversight. Additional funding facilities, such as the Primary Dealer Credit Facility and the Term Securities Lending Facility, allow the Fed to keep financial asset prices artificially inflated and subsidize poorly performing financial firms…. The Federal Reserve Transparency Act would eliminate restrictions on GAO audits of the Federal Reserve and open Fed operations to enhanced scrutiny…. By opening all Fed operations to a GAO audit and calling for such an audit to be completed by the end of 2010, the Federal Reserve Transparency Act would achieve much-needed transparency of the Federal Reserve.”

National polls indicated deep and widespread public support for Paul’s proposed audit. A mid-2009 Gallup poll showed that only 30 percent of those surveyed thought the Fed was doing a good job. Additionally, a Rasmussen poll stated that 75 percent of respondents wanted Congress to audit the Fed. Taking these poll numbers into consideration, the passage of legislation to audit the Fed is a litmus test to see who wields more power in the United States—the people or the banking interests.

As of February 2010, Paul’s attempt to pass legislation to audit the Fed had gained 319 cosponsors in the House and 32 sponsors in the Senate where it was known as the Federal Reserve Sunshine Act of 2009 (S. 604). In early 2009, H.R. 1207 was referred to the House Committee on Financial Services, chaired by Massachusetts Democrat Barney Frank. In a letter to a constituent, Frank wrote: “I agree with the general thrust of [Ron Paul’s] bill…. There have already been some moves forward in increasing the transparency of the Federal Reserve, and I agree that there are further steps we can take…. I do believe that the Federal Reserve is exercising that power with some good effects recently, but it is not a power that should exist in a democratic society in the hands of an entirely unelected entity.”

On July 6, 2009, South Carolina Republican senator Jim DeMint attempted to amend the Legislative Branch Appropriations Act by adding the entire text of Ron Paul’s bill, but he was stopped by senior Nebraska Democratic senator Ben Nelson, who said the amendment violated Senate Rule 16, which prevents tacking legislation onto an appropriations bill. After DeMint pointed out that other GAO audits in the appropriations bill violated Rule 16, Vice President Joseph Biden, who also is president of the Senate, agreed but took no action and the bill passed without the amendment. After two readings, S. 604 was referred to the Committee on Banking, Housing, and Urban Affairs in March 2009. On November 19, 2009, the House Committee on Financial Services approved an amendment to the Financial Stability Improvement Act of 2009 (H.R. 3996) that included many provisions of Paul’s bill, such as the removal of some GAO audit restrictions and review of Fed policies and agreements with foreign institutions. This amendment was opposed by Fed chairman Bernanke, Treasury Secretary Geithner, and other Obama administration officials. After further changes to the amendment, including a provision that provided for audits of the Fed’s balance sheet but not its monetary policies, in December the Financial Stability Improvement Act was combined with several other financial bills to form the Wall Street Reform and Consumer Protection Act of 2009—Financial Stability Improvement Act of 2009 (H.R. 4173), which was passed on December 11 in the House with a 223 to 202 vote. No Republicans voted for the bill, including Paul, who apparently saw this combining maneuver as an attempt to water down his original audit proposal.

Paul’s vote apparently was especially addressed to those who continue to support a hands-off attitude of the Fed, such as Forbes columnist Thomas F. Cooley, the Paganelli-Bull professor of economics, and Richard R. West, dean of the NYU Stern School of Business, who writes a weekly column for
Forbes
.

In a spring 2009
Forbes
column, Cooley argued that “it is important to have an independent central bank…. An independent central bank can focus on monetary policies for the long term—that is, policies targeting low and stable inflation and a monetary climate that promotes long-term economic growth. Political cycles, alas, are considerably shorter. Without independence, the political cycle would subject the central bank to political pressures that, in turn, would impart an inflationary bias to monetary policy…politicians in a democratic society are short-sighted because they are driven by the need to win their next election. This is borne out by empirical evidence. A politically insulated central bank is more likely to be concerned with long-run objectives.”

Cooley quoted a Ron Paul statement that “auditing the Fed is only the first step towards exposing this antiquated insider-run creature to the powerful forces of free-market competition. Once there are viable alternatives to the monopolistic fiat dollar, the Federal Reserve will have to become honest and transparent if it wants to remain in business.” In response to this, Cooley wrote, “Great! Obviously, monetary policy is so falling-off-a-log simple that your elected representatives can insert themselves via the demand for transparency into decisions of true complexity and subtlety. Why am I not feeling reassured?”

He added, “Anything that threatens the independence of the Fed threatens the long-term viability of monetary policy. It is really important that the expanded role of the Fed in the current crisis not threaten that viability.” But does such viability include secrecy and arrogance?

FED ARROGANCE

T
HE ARROGANCE OF THE
Fed today is such that its board members refuse to even reveal what they have done with this nation’s wealth.

The amounts of wealth involved are staggering, both in losses, bailouts, and unaccounted-for funds. In mid-May 2009, Federal Reserve inspector general Elizabeth A. Coleman stunned a congressional panel by verifying that her office could not account for $9 trillion worth of off-balance-sheet transactions made by the Fed between September 2008 and May 2009. “We’re actually conducting a fairly high-level review of the various lending facilities collectively,” she said. She added that she could not provide any information on those investigations and that she had no authority to look into Fed practices but only to oversee the Federal Reserve’s board of governors. Her inability to answer questions regarding the missing taxpayer funds prompted Florida Democratic representative Alan Grayson to state, “I am shocked to find out that nobody at the Federal Reserve, including the inspector general, is keeping track of this.”

Even the Fed chairman apparently wasn’t keeping an eye on the store. On July 21, 2009, Grayson confronted Fed chairman Ben Bernanke concerning the whereabouts of more than half a trillion dollars that the Fed had made as credit swaps with foreign banks. Bernanke’s response: “I don’t know.”

Many Americans saw the Fed’s economic recklessness as nothing less than an attempt by the financial rule makers to break the rules for themselves and their cronies in order to privatize profits and socialize losses. Americans were also concerned about the Federal Reserve System’s great power over American monetary policy. Despite this concern, and despite his desire to see the Fed audited, Barney Frank, the chairman of the Financial Services Committee, and others in Congress have suggested that the Fed supervise the entire U.S. monetary system. A number of financial analysts disagreed. “I have intense concerns with the Fed as a regulator,” said economist William K. Black. “Fed regulators have no power within the institution, and the institution is inherently hostile to vigorous regulatory action against the big banks.” Conrad DeQuadros, a former economist at fallen investment giant Bear Stearns, agreed with Black’s point, writing, “There were obviously some significant lapses [at the Fed]…so widening their regulatory authority isn’t really what the system needs.” The Reuters news agency put the usual mild spin on the economists’ criticisms by stating in an April 2009 article: “Yet given the institution’s opaqueness and its failure to prevent the current financial crisis, critics say the country would not be well served if the central bank were anointed as an all-powerful supra-regulator.”