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Federal Reserve: Same old sheriff on Wall St.

Last week, Barack Obama announced that his new plan for Wall Street regulation would be hinged upon an enhanced oversight role for the Federal Reserve. Robert Pollin, while welcoming a first attempt at regulation, points out that the Fed already was tasked with bank oversight, but allowed the excess and recklessness to continue due to lack of transparency and accountability. Furthermore, while the Obama plan gives the Fed more power, it does not give one reason to expect a more transparent or accountable agency. When seen together with Treasury Secretary Geithner’s plan to relieve banks of their so-called toxic assets, Pollin believes that the White House’s vision for an overhauled financial system, falls horribly short.

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Story Transcript

JESSE FREESTON, TRNN: Last week, President Obama unveiled his plan for a new era of financial sector regulation with the promise of avoiding another calamity on Wall Street.

BARACK OBAMA, US PRESIDENT: That’s our goal, to restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed.

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ROBERT POLLIN, POLITICAL ECONOMY RESEARCH INST., UNIV. OF MASS.: The proposal is certainly an improvement on the virtually nonexistent financial regulatory system that we’ve had for the past decade or more, but it is not adequate to move our current virtual nonregulated system, our casino-capitalism version of a financial system, to one which is focused on channeling credit to productive activities to reward work and responsibility. Let me give you a couple examples why. One of the major features of this proposal is to provide the Federal Reserve itself with enhanced authority over regulating the big institutions that are called "too big to fail".

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OBAMA: We were facing one of the largest financial crises in history, and those responsible for oversight were mostly caught off guard and without the authority needed to address the problem. It’s time for that to change. I am proposing that the Federal Reserve be granted new authority and accountability for regulating bank holding companies and other large firms that pose a risk to the entire economy in the event of failure.

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POLLIN: The problem is the Fed has already had an enormous amount of regulatory power. They just don’t exercise that power. They didn’t exercise that power. Alan Greenspan, for example, who was chairman of the Fed for 17 years, said that the Fed was not going to intervene in the speculative markets, because the smart guys and women on Wall Street know better than the regulators. So why should we assume that giving more power to the Fed in and of itself is going to improve the rewarding of responsibility and hard work? What we need instead are things that are—shift the whole structure of the Fed, shift the whole regulatory environment.

FREESTON: The Federal Reserve has long been criticized for its lack of transparency, and Fed officials have done little to put those fears to rest over recent hearings, especially when under questioning by Congressman Alan Grayson.

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House Financial Services Committee

January 13, 2009

REP. ALAN GRAYSON (D-FL): Mr. Kohn, how much has the balance sheet of the Federal Reserve increased since September 1?

DONALD KOHN, VICE CHAIRMAN, FEDERAL RESERVE: It’s increased from around $800 billion to about $2 trillion.

GRAYSON: Which institutions received that, and how much for each institution?

KOHN: I don’t know which institutions, which specific institutions received it, but—and I think I would be very, very hesitant to give the names of individual institutions. In fact, I think it would be a very bad idea, because I think it would undermine the utility of the facilities that we’re giving.

GRAYSON: Mr. Kohn, you just said that $1.2 trillion has been lent or spent, as the case may be. That’s $4000 for every man, woman, and child in this country. Don’t Americans have the right to know how you spent that money?

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House Financial Services Committee

May 5, 2009

GRAYSON: We’re talking about events that started unfolding eight months ago. Have you reached any conclusions about the Fed expanding its balance sheet by over $1 trillion since last September?

ELIZABETH COLEMAN, INSPECTOR GENERAL, FEDERAL RESERVE: We have not yet reached any conclusions.

GRAYSON: Do you know who received that money?

COLEMAN: For the—? We’re in the process right now of doing our review, and—.

GRAYSON: Right, but you’re the inspector general. My question to you specifically is: do you know who received that $1 trillion-plus that the Fed extended and put on its balance sheets since last September? Do you know the identity of the recipients?

COLEMAN: I do not know. We have not looked at that specific area at this particular point on those reviews.

GRAYSON: What about Bloomberg’s report that there are trillions of dollars in off-balance-sheets transactions that the Federal Reserve has entered into since last September? If your agency has in fact, according to Bloomberg, extended $9 trillion in credit—which, by the way, works out to $30,000 for every single man, woman, and child in this country—I’d like to know, if you’re not responsible for investigating that, who is?

COLEMAN: We actually—we have responsibility for the Federal Reserve’s programs and operations, audits, to conduct audits and investigations in that area. In terms of who’s responsible for investigating—would you remind repeating the question one more time?

GRAYSON: What have you done to investigate the off-balance-sheets transactions conducted by the Federal Reserve, which, according to Bloomberg, now total $9 trillion in the last eight months?

COLEMAN: I’ll have to look specifically at that Bloomberg article. I’m not—I don’t know if I have actually seen that particular one.

GRAYSON: That’s not the point. The question is: have you done any investigation or auditing of off-balance-sheet transactions conducted by the Federal Reserve?

COLEMAN: At this point, we’re at the very—we are conducting our lending facility project at a fairly high level and have not gotten to a specific level of detail to really be in a position to respond to your question.

GRAYSON: Mr. Chairman, my time is up, but I have to tell you, honestly, I am shocked to find out that nobody at the Federal Reserve, including the inspector general, is keeping track of this.

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FREESTON: And as for the agency’s accountability, here’s former Fed chairman Alan Greenspan back in 2007 on the Jim Lehrer NewsHour.

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CBS NewsHour with Jim Lehrer

September 18, 2007

JIM LEHRER, HOST: What should be the proper relationship between a chairman of the Fed and a president of the United States?

GREENSPAN: Well, first of all, the Federal Reserve is an independent agency, and that means basically that there is no other agency of government which can overrule actions that we take. So long as that is in place and there is no evidence that the administration or Congress or anybody else is requesting that we do things other than what we think is the appropriate thing, then what the relationships are don’t frankly matter.

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POLLIN: One idea would be to put the governors of the Federal Reserve up for democratic elections. That would force them to address the public’s concerns. Those concerns would be on the table; they would be openly debated. And that would then open up the books of the activities of these institutions. That alone is not going to solve the problem of casino capitalism, but it’ll at least create a much-enhanced level of accountability. And that’s one starting point to move towards a responsible financial system.

FREESTON: During the speech, President Obama gave his take on the cause of the financial crisis.

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OBAMA: A regulatory regime basically crafted in the wake of a 20th-century economic crisis, the Great Depression, was overwhelmed by the speed, scope, and sophistication of a 21st-century global economy.

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POLLIN: There was a remarkable set of regulations that were put in place in 1933-1934 that came under the name of "Glass-Steagall system". One of them was to separate out commercial banks from investment banks. So let me put it more simply: to separate out the day-to-day, normal activities of people that want to just put their money in a safe place, versus casino capitalism. Investment banks is a fancy way of talking about highly speculative investing in all kinds of Wall Street activities that most people don’t want to touch with a 10-foot pole. So those things were separated out, so that under that regulation it said, well, okay, if you want to be in the casino, you can be in the casino, but it is not going to affect what happens in the regulated banking system that people count on for their savings and investment. Now, what’s happened over the years is that that distinction that was put in place in the ’30s between the highly regulated plain-vanilla banking system and the highly speculative casino were integrated. Those barriers were broken down. And finally—under Bill Clinton, in fact—those barriers were formally eliminated. So Obama’s quote is not accurate, because what really happened is that we had a pretty good financial regulatory system in place, but for 30 years, bit by bit, both Democrats and Republicans dismantled this system because Wall Street wanted it dismantled. And so, by the end of the century, we have a pure casino system, and we’ve had severe financial crises all along the way.

FREESTON: Another piece of the financial system that would be left largely unfazed by the new rules is the private credit-rating system.

POLLIN: Another proposal would be to create a public credit-rating agency. We know that Moody’s, Standard & Poor’s, and Fitch, the big credit rating agencies, the ones you hear about that give AAA ratings, AA ratings, they were waving along all kinds of ultra-speculative activities. Why? Because the people that pay them are the financial institutions that are trying to get regulated in the first place. So of course the agencies know that they will get more business if they give all A’s, just like teachers become more popular if they give all A’s. We need a public credit-rating agency that will take an objective look and put that information out.

FREESTON: The new regulatory proposal can be seen as the second half of Obama’s plan to restructure the US financial system, the first being Treasury Secretary Geithner’s plan for relieving banks of their so-called toxic assets, a plan that was heavily criticized, including damning objections by renowned mainstream economists like Jeffrey Sachs and Joseph Stiglitz.

POLLIN: The system that Geithner put in place is one in which financial institutions—anybody can come and buy up the so-called toxic assets that these big banks hold. Okay? You can come and buy them up. The US government is going to guarantee 90 percent of the losses you might incur by buying up these assets, and if the assets fail, if nobody can pay back their debts, the US government covers 90 percent of the losses. If those assets turned good, if you’re holding the paper, if you’re the creditor, you get 100 percent of the gains. So that’s the deal: 100 percent of the gains go to the big Wall Street financiers; if there are losses, 90 percent are absorbed by the public.

FREESTON: The new framework will now head to a series of congressional committees. Meanwhile there was little sign of Wall Street making any independent corrections. According to former insider William Cohan in his appearance on Bloomberg TV:

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Courtesy: Bloomberg TV

June 3, 2009

WILIAM COHAN, FMR. MANAGING DIR., MERRILL LYNCH AND JPMORGAN CHASE: What happened six months ago seems to be completely evaporated from the current sensibility in the market. And you have people wanting to pay back their TARP funds as quickly as possible so they can be free of government oversight and government accountability, they can pay people what they want, they can invest again in what they want. They’ll probably be wanting to return to the days of huge amounts of leverage again. And it’s really disturbing to me, frankly, that this is happening as quickly as it is without any people stepping back and saying, hey, what’s really going on here? Do we really want to go back to reconnect and reestablish the system that didn’t work very well at all for the last, you know, 10 or 15 years?

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FREESTON: While US banks appear to go back to business as usual, the world is watching closely. Some are suggesting that decisions are already being made outside of Washington and New York that could drastically alter the global power structure by moving away from the US dollar as the world’s reserve currency. In Part Two, we will discuss whether or not we are entering what economist Michael Hudson recently labeled "the ending of the US financial-military empire".

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