Saturday, September 26, 2009
AUDIT THE FED!!! (Or maybe not.)
There's a bipartisan effort afoot in Congress to pry open and audit the Fed's books.
I say, beware the law of unintended consequences.
One of the reasons the federal reserve's discount window operations are effective in preventing bank runs and collapses when member banks encounter short-term liquidity problems is because discount window operations are confidential. If we blow this, we take away an important arrow in the Fed's quiver.
Large depositors are very careful with their investors' money - and are not protected by FDIC. They maintain a watchful eye on bank strength and solvency.
If discount window transactions are not confidential, then the mere act of seeking much-needed assistance at the fed discount window is likely to create a run on the banks, thereby creating the liquidity disaster that the fed discount window was designed to prevent.
Congress is playing with fire, and not more than a handful of them know how big that fire is, or even that they've got matches in their hands.
Splash, out
Jason
I say, beware the law of unintended consequences.
One of the reasons the federal reserve's discount window operations are effective in preventing bank runs and collapses when member banks encounter short-term liquidity problems is because discount window operations are confidential. If we blow this, we take away an important arrow in the Fed's quiver.
Large depositors are very careful with their investors' money - and are not protected by FDIC. They maintain a watchful eye on bank strength and solvency.
If discount window transactions are not confidential, then the mere act of seeking much-needed assistance at the fed discount window is likely to create a run on the banks, thereby creating the liquidity disaster that the fed discount window was designed to prevent.
Congress is playing with fire, and not more than a handful of them know how big that fire is, or even that they've got matches in their hands.
Splash, out
Jason
Labels: banking, Congress, Economics, economy, finance, investing, The Federal Reserve
Comments:
Let's start off by saying that I am pretty ignorant of economics and finance, so this is a genuine question.
The Fed is run by people on bank boards, right? And those people started yelling 'fire!' so we poured money into the banks. And for our money, there seems to have been very little effect. The banks didn't even use the money the way the Fed (i.e., bank leaders) said they would. And, of course, for a LOT of that money we really have no idea where it went. That just seems like extortion to me.
So my question is, how is the Fed accountable for its actions? If we can't audit them, what keeps them from shaking us down for $700 billion whenever they claim the sky will otherwise fall? How can we trust if we can't verify?
The Fed is run by people on bank boards, right? And those people started yelling 'fire!' so we poured money into the banks. And for our money, there seems to have been very little effect. The banks didn't even use the money the way the Fed (i.e., bank leaders) said they would. And, of course, for a LOT of that money we really have no idea where it went. That just seems like extortion to me.
So my question is, how is the Fed accountable for its actions? If we can't audit them, what keeps them from shaking us down for $700 billion whenever they claim the sky will otherwise fall? How can we trust if we can't verify?
We should have had controls on the recipient banks. That wasn't the Fed. It was the banks themselves.
But Congress wanted the TARP recipient banks to loan out that money rather than use it to improve balance sheets. All that would have done would have been to make the problem bigger -- especially if banks continued to make bad loans in compliance with dumbass redlining rules, etc.
Hell, Congress wanted banks to continue to lend money into a declining real estate market. Bloody madness!
Believe it or not, bankers are much better at banking than Congress is.
But Congress wanted the TARP recipient banks to loan out that money rather than use it to improve balance sheets. All that would have done would have been to make the problem bigger -- especially if banks continued to make bad loans in compliance with dumbass redlining rules, etc.
Hell, Congress wanted banks to continue to lend money into a declining real estate market. Bloody madness!
Believe it or not, bankers are much better at banking than Congress is.
Your concern would seem to shape the form of the audit, and not be an argument against an audit.
Sure confidentiality is a useful thing when the problem is a legitimately unforeseen disaster that is quickly worked out. But that just means you should have a lag time between the conclusion of the operation and the audit or do audits without naming the financial institutions involved.
Sure confidentiality is a useful thing when the problem is a legitimately unforeseen disaster that is quickly worked out. But that just means you should have a lag time between the conclusion of the operation and the audit or do audits without naming the financial institutions involved.
Still, my question is, how can we trust the Fed if we can't verify? What keeps them from shaking us down for a few billion every so often?
Murtha's airport pork is right there in the open in the bills Congress passes. If there is a question about his use of government money, Congress can investigate him, including a complete audit. Murtha, in other words, is subject to a verification process.
So, no, dick, not at all like the Fed.
I know, I need to just go read a lot more. I don't understand this crap and it's frustrating. I actually thought the Fed was part of the US gov until I started researching the bailout. Now I'm trying to understand why an at least seemingly completely, utterly unaccountable private organization, or at least semi-private organization, has the power to pretty much force Congress to choke up $700B and people are upset that Congress might want to see where the money went.
A lot of really intelligent, well-educated people are telling me that's the way it should be, but that's a pretty big chunk to swallow.
I understand we don't want the money supply politicized, and we want to prevent runs on the banks. Great. But how do we keep the Fed honest? We just trust them? With hundreds of billions of dollars? Really?
So, no, dick, not at all like the Fed.
I know, I need to just go read a lot more. I don't understand this crap and it's frustrating. I actually thought the Fed was part of the US gov until I started researching the bailout. Now I'm trying to understand why an at least seemingly completely, utterly unaccountable private organization, or at least semi-private organization, has the power to pretty much force Congress to choke up $700B and people are upset that Congress might want to see where the money went.
A lot of really intelligent, well-educated people are telling me that's the way it should be, but that's a pretty big chunk to swallow.
I understand we don't want the money supply politicized, and we want to prevent runs on the banks. Great. But how do we keep the Fed honest? We just trust them? With hundreds of billions of dollars? Really?
Go find and read a copy of William J. Greider's "Secrets of the Temple: How the Federal Reserve Runs the Country." Still the best piece of financial reporting I've ever seen, anywhere.
Hey, thanks for the recommendation. I'll do it.
I have to say, though, that the title isn't very reassuring.
I have to say, though, that the title isn't very reassuring.
It really comes down to right and wrong Jason. I can accept your argument up until I come to work for a Bank every morning. We (Banks) are the most regulated and audited sector of our economy. Sure, others would say we are not, if we are not...it's gonna be a photo finish.
The point is simply that we, the Banks, have an average of 4 audits a year. Everything is looked at. Everything is questioned and held to account...and no body has a problem keeping secrets. There's no reason why the Fed shouldn't be audited either. And to be honest, not too many Banks float at the window like you think. It cost money.
I can tell you honestly people are fired over floating at that window. A bank that doesn't keep its accounts straight and enough money in the FED to run their business doesn't stay in business and will be out of the banking business soon enough.
And who can keep a secret won't really affect that.
Audit the FED. The entire 1930's regulations that mean all banks are audited and regulated are based on the simple progressive thought that the people are stupid and must be protected from the Evil Banks. Well...my money went to and through the Federal Reserve, it does every day and on top of that they get to determine the economic parameters in their vain attempt to control the market...so...if where I work has to be audited and checked to make sure that we can be trusted with other peoples money...so do they.
cl
The point is simply that we, the Banks, have an average of 4 audits a year. Everything is looked at. Everything is questioned and held to account...and no body has a problem keeping secrets. There's no reason why the Fed shouldn't be audited either. And to be honest, not too many Banks float at the window like you think. It cost money.
I can tell you honestly people are fired over floating at that window. A bank that doesn't keep its accounts straight and enough money in the FED to run their business doesn't stay in business and will be out of the banking business soon enough.
And who can keep a secret won't really affect that.
Audit the FED. The entire 1930's regulations that mean all banks are audited and regulated are based on the simple progressive thought that the people are stupid and must be protected from the Evil Banks. Well...my money went to and through the Federal Reserve, it does every day and on top of that they get to determine the economic parameters in their vain attempt to control the market...so...if where I work has to be audited and checked to make sure that we can be trusted with other peoples money...so do they.
cl
Yes, borrowing at the discount window is normally rare. During normal times, if a bank went to the discount window, it raised a yellow flag with Fed regulators. It was a borderline shameful act, done under cover of darkness, behind a veil. I've heard the analogy to purchasing porn.
If a bank was a regular customer at the discount window, the Fed regulators were sure to be buzzing all over the bank.
During the crisis, the Fed let it be known that it understood what was happening. That it wasn't going to look negatively at discount window customers, and that it expected banks to float at the window rather than default on debt. See, it does cost a bank money to float at the window. But it costs way, way more to seize a bank, sell assets at 50 cents on the dollar, and let FDIC pay off smaller depositors. So there was a lot more borrowing at the discount window than usual. A LOT more. So much more, in fact, that fiscal policy had to step in, with TARP I.
So during normal times, the Fed window is quiet. But during abnormal times, with markets skittish, and everyone looking for the slightest reason to take their money and run, you can't say that "not too many banks float at the window like you think." During a systemic crisis, with tons of counterparty issues, they float like crazy. They'd better. A few basis points on a short-term loan from the Fed might cost money. But not as much as insolvency.
But who would audit the Fed? Congress? Obama? Whoever Obama's successor is? They sure as hell have trouble keeping secrets. And the minute a secret gets out, and causes a run on the bank, who's gonna pick up the tab? FDIC? Laughable. New York Life ALONE has more surplus capital than the FDIC... and isn't subject to near the single bailout risk.
FDIC is even worse off than it was a couple of months ago.
I don't think you've framed a 'right and wrong' construction here. Nor does it follow, if your bank has to be audited, then so does the Fed.
I'm open to being persuaded, but that's not the argument that would persuade me.
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If a bank was a regular customer at the discount window, the Fed regulators were sure to be buzzing all over the bank.
During the crisis, the Fed let it be known that it understood what was happening. That it wasn't going to look negatively at discount window customers, and that it expected banks to float at the window rather than default on debt. See, it does cost a bank money to float at the window. But it costs way, way more to seize a bank, sell assets at 50 cents on the dollar, and let FDIC pay off smaller depositors. So there was a lot more borrowing at the discount window than usual. A LOT more. So much more, in fact, that fiscal policy had to step in, with TARP I.
So during normal times, the Fed window is quiet. But during abnormal times, with markets skittish, and everyone looking for the slightest reason to take their money and run, you can't say that "not too many banks float at the window like you think." During a systemic crisis, with tons of counterparty issues, they float like crazy. They'd better. A few basis points on a short-term loan from the Fed might cost money. But not as much as insolvency.
But who would audit the Fed? Congress? Obama? Whoever Obama's successor is? They sure as hell have trouble keeping secrets. And the minute a secret gets out, and causes a run on the bank, who's gonna pick up the tab? FDIC? Laughable. New York Life ALONE has more surplus capital than the FDIC... and isn't subject to near the single bailout risk.
FDIC is even worse off than it was a couple of months ago.
I don't think you've framed a 'right and wrong' construction here. Nor does it follow, if your bank has to be audited, then so does the Fed.
I'm open to being persuaded, but that's not the argument that would persuade me.
