Audit the Fed!

Now is the Time to Pull Back the Veil of Secrecy

Written by Jimmy Mengel
Posted November 18, 2013

"When I started my first job at the Federal Reserve Board... it was an article of faith in central banking that secrecy about monetary policy decisions was the best policy: Central banks, as a rule, did not discuss these decisions, let alone their future policy intentions."

— Janet Yellen


I sincerely doubt anyone reading these pages is thrilled with the idea of new Federal Reserve Chair Janet Yellen taking the reins from Ben Bernanke.

After serving as his right-hand lady for the last three years as the vice-chair of the Fed, we can expect Yellen to extend all of the same easy money policies that Big Ben has shoved down our throats.

In fact, due to her reputation as an “inflation dove,” Yellen could end up being even worse than Bernanke when she gets her hand on the printing presses.

However, her confirmation hearing could indeed have a silver lining...

It may finally present the perfect opportunity to audit the Fed.

The Federal Reserve is the single most powerful organization involved in the U.S. economy.

Take a look at how much money the Fed pumped into big banks during the financial crisis:

  • Citigroup - $2.513 trillion

  • Morgan Stanley - $2.041 trillion

  • Merrill Lynch - $1.949 trillion

  • Bank of America - $1.344 trillion

  • Barclays PLC - $868 billion

  • Bear Sterns - $853 billion

  • Goldman Sachs - $814 billion

  • Royal Bank of Scotland - $541 billion

  • JP Morgan Chase - $391 billion

  • Deutsche Bank - $354 billion

And those are merely the top ten recipients...

All told, the Fed made $16.1 trillion in secret loans to the biggest banks in the world.

If an organization that holds that amount of money and power doesn't deserve an audit, I don't know what does...

The Fed fought for over two years to keep the actual figures from this bailout a secret. But thanks to a Freedom of Information request, they were forced to hand over 29,000 pages of Fed documents that laid bare the sheer scope of the big bank handouts.

If they were really acting in the interest of the people, why would they want to keep it secret?

Because the Federal Reserve's policies don't help the common American.

Their goal is to enrich the big banks.

Now, before you call me a conspiracy theorist, allow me to share some perspective straight from the horse's mouth...

Andrew Huzar, the man responsible for quarterbacking the Fed's massive quantitative easing plan, actually apologized for his role in the “greatest backdoor Wall Street bailout of all time”: 

I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

[…]

In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.

It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

Huzar's statement is a stark admission that the Fed is only concerned about Wall Street's bottom line.

In my opinion, an audit of the Fed would have been entirely appropriate even without such shocking admissions from within their ranks.

But after hearing Huzar's apology, the calls for an audit should reach fever pitch.

And that's where Yellen's nomination comes in...

Several prominent lawmakers have threated to hold up Yellen's nomination until Congress votes on Rand Paul's “Audit the Fed” bill.

"The Fed's operations under a cloak of secrecy have gone on too long, and the American people have a right to know what the Federal Reserve is doing with our nation's money supply. The Federal Reserve does not need prolonged secrecy — it needs to be audited, and my bipartisan Federal Reserve Transparency Act will do just that,” Paul noted when announcing his plans.

The idea is not a new one for Paul...

His father Ron was close to passing a similar bill in 2011.

The elder Paul's H.R. 459, the Federal Reserve Transparency Act of 2012, passed the House with a bipartisan 327-98 vote only to die in the Senate.

We're hoping his son can finish his work this time around.

The push to audit the Fed is not a purely Republican idea. Even Harry Reid once admitted he'd like to see a Fed audit. “There should be a Federal Reserve audit,” Reid said in 2010. “We haven’t gotten it yet. But we’ve made some progress in that regard.”

Support is indeed growing — and now may be the best chance we've had to truly pull back the curtain on this shadowy organization and see for ourselves exactly who and what they are serving.

Former Fed official Huzar has already shed some light on whom they are serving...

“Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets. As for the rest of America, good luck."

With an administration that had promised to be the most transparent in history — and in an age in which the IRS can audit you based purely on your political beliefs... an audit on the most powerful organization in the country is a no-brainer.

Janet Yellen may believe that when it comes to monetary policy decisions, secrecy is the best policy.

We couldn't disagree more.

It's time to audit the Fed.

Godspeed,
Jimmy Mengel

Jimmy Mengel

follow basic @mengeled on Twitter

Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow's Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he's brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor's page.

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