It’s time for a serious housecleaning at the Fed. A recent audit by the General Accountability Office found a lack of transparency at the Federal Reserve. That’s putting it mildly. There’s no excuse for the shady dealings at the central bank - reform is long overdue.
Government auditors were most disturbed by the long list of characters appearing on the boards of both the regional Fed Reserve banks and the banks bailed out by the Fed. They weren’t too happy about the waivers granted and the number of contracts awarded without a competitive process, either. The report was careful to point out that guidelines were followed in the $1 trillion bailout that followed the financial-market meltdown that began in 2008, but in classic bureaucratic deadpan, GAO stated “opportunities exist to strengthen … conflict policies” at the New York Fed, referring to the rules for managing conflicts of interest among employees, directors and vendors.
There was quite a bit of money on the table. Reserve Banks awarded contracts worth $659 million between 2008 and 2010, and eight out of 10 of the highest-value deals were handed out noncompetitively. The rules were so loose that the New York Fed’s “restrictions on its employees’ financial interests did not specifically prohibit investments in nonbank institutions that received emergency assistance.” For instance, in 2008, Stephen Friedman received a waiver to remain as chairman of the New York Fed during the time Goldman Sachs was granted the status of a “bank holding company” so that it would have access to cheap credit, courtesy of taxpayers. At that time, Mr. Friedman was on the board of Goldman Sachs and a shareholder.
No-bid contracts went to the likes of Jamie Dimon, the CEO of JP Morgan. Jeffrey Immelt of General Electric was consulted for advice about assisting the commercial paper market, even when GE, the company he headed, was one of the country’s largest issuers of commercial paper. As the GAO auditors put it, the existing rules need to be tightened up because they may not be sufficient to “avoid the appearance of a conflict in all situations.”
The Federal Reserve’s planning abilities are also lacking. GAO described it as an opportunity “to strengthen risk-management practices for future crisis management.” In other words, if the Fed wants to play with trillions of dollars in taxpayer money, the least we can expect is good stewardship. The Fed has been lucky that the emergency programs have not incurred any losses, but that has more to do with luck than having a well-thought-out plan in place.
This glimpse behind the curtains of the highly secretive organization came thanks to the efforts of Sen. Bernie Sanders, Vermont Independent, and Rep. Ron Paul, Texas Republican and one of the Fed’s most outspoken critics. It shows the need to scale back the Fed’s role to that of managing monetary policy - and nothing else. The larger the role of the Federal Reserve, the more power it has, and the greater the incentive there is to overlook the all-too-cozy relationships that have developed. This further politicizes the Fed and undermines its independence. It’s time for the Federal Reserve to return to its core monetary policy mission, not manage bailouts.
Nita Ghei is a contributing Opinion writer for The Washington Times.