Henry Ford might be right, if America ever gets around to reading a General Accountability Office (GAO) report that was recently published, as mandated by the Dodd-Frank law. The report is extremely critical of the cozy relationship between the banking industry and the Federal Reserve Board and the potential for abuse and greed that this relationship has over the American economy, the potential for wasting taxpayer money, and the potential for massive conflicts of interest that sub-optimize the economy in this country.
The report was made public by Senator Bernie Sanders and includes the following highlights:
- The GAO study concluded that since people in the banking industry both elect and serve on the Federal Reserve’s board of directors, there is an obvious "appearance of a conflict of interest" and poses "reputational risks" to the Federal Reserve System.
- As a result of the Great Recession, at least 18 current or former bankers who were or had been Federal Reserve Regional bank directors were able to arrange loans and other financial assistance for their banks from the Fed amounting to $4 trillion at near zero interest.
- JPMorgan received $391 billion out of the $4 trillion in emergency funds at the same time the bank was used by the Fed as a clearinghouse for emergency lending programs.
- In March of 2008, the Fed provided JPMorgan with $29 billion in financing to acquire Bear Stearns. JP Morgan also got the Fed to provide an 18-month exemption from risk-based leverage and capital requirements.
- JP Morgan was not done milking the Fed since it also convinced the Fed to remove risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired the troubled investment bank.
- In 2008, the New York branch of the Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap loans from the Federal Reserve. At that time, Steve Friedman, a former chairman of the New York Fed's board of directors, sat on the Goldman Sachs board, an obvious potential conflict of interest arrangement.
- Friedmnan also owned Goldman stock during his time working for the Fed, something that was prohibited by Federal Reserve conflict of interest regulations. But not to worry, his friends in the banking industry and Fed allowed him to receive a waiver from the Fed's conflict of interest rules, news that was not made public until this report. GAO investment records show that Friedman continued to purchase shares in Goldman from November 2008 through January of 2009.
- General Electric CEO Jeffrey Immelt was a New York Fed board member at the same time his company helped create a "Commercial Paper Funding Facility" during the financial crisis. GE later received $16 billion in funding from the Fed under this emergency lending program.
That process was managed through the New York branch of the Fed which was being run by a former member of the Goldman Sachs investment bank, William Dudley. Dudley used Goldman Sachs to facilitate the quantitative easing process of the Federal government taking over bonds and bad assets of the major banks including Goldman Sachs.
A few observations:
- At no time in the past few years, as the Fed and the banks were busy taking care of each other with bailouts and staffing, was there any oversight from the Washington political class or the American people on whether or not the people ultimately responsible for the $4 TRILLION, the taxpayers, had any say at all into this process.
- The appearance of conflict of interest is just as bad as actual conflict of interest, and when there is a constant revolving door between membership on the Fed' staff and the Fed's boards and employment by the major banks, conflict of interest, real or potential, is a real problem.
- Despite all of the machinations of the Fed, its employees, and its ability to devalue the dollar with $4 TRILLION worth of fake wealth, the economy is still in the ditch with hardcore and high unemployment, subdued business growth and bank lending, and TRILLIONS of dollars of cash liquidity sitting around that will eventually ignite some serious inflation. Thus, not only is there massive and inefficient conflicts of interest, the economy and the taxpayers never even got an economic boost from the Fed and the banking industry.
- A statement from Senator Sanders' office summarized this previous point more elegantly: “This report reveals the inherent conflicts of interest that exist at the Federal Reserve. At a time when small businesses could not get affordable loans to create jobs, the Fed was providing trillions in secret loans to some of the largest banks and corporations in America that were well represented on the boards of the Federal Reserve Banks.”
At the very least, there has to be a way to ensure that the conflict of interest potential is eliminated. A democracy should not be run and manipulated by unelected bureaucrats, bureaucrats that ensure their "home" companies and industry friends always get their mistakes remedied with taxpayer bank bailouts or whose profitability is not driven by their success as business people but by their success in manipulating government functions.
Secrecy and conflict of interest should never be a part of a functioning democracy. Henry Ford recognized long ago, we are mostly ignorant about how the Fed and its banker friends undermine our democracy and our wealth. Unfortunately, nothing has changed since a contemporary of Ford, President Woodrow Wilson, first identified the problem long ago: "The government, that was designed for the people, has got into the hands of the bosses and their employees, the special interests. An invisible empire has been set up above the forms of democracy."
In this case the special interests are the Fed and its banker friends, an empire that can put the American taxpayer on the hook for $4 TRILLION in the most invisible way possible.
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