By Pam Martens and Russ Martens: January 12, 2018
Economist Dean Baker Testifying Before the House Financial Services Committee, January 10, 2018
On Wednesday, the House Financial Services Committee held a hearing on a topic of critical importance to all Americans: restructuring the Federal Reserve into a modern day central bank instead of a captured regulator controlled by the very banks it purports to supervise. Dean Baker, the Senior Economist at the Center for Economic and Policy Research, presented an important assessment of reforms needed at the Fed but you will be hard pressed to find any mainstream media coverage of his testimony. Instead, President Trump’s characterization yesterday of Haiti and African nations as “sh**hole countries” is dominating the news.
How much critical work is falling by the wayside because mainstream media, dependent on ratings, elects to pursue only the most sensational stories – which they have no shortage of finding under President Trump.
Congress began its latest push to reform the Federal Reserve in 2014 after a bank examiner at the New York Fed, Carmen Segarra, filed a lawsuit stating that she was fired in retaliation for refusing to change her negative examination of Goldman Sachs. The gutsy Segarra secretly made tape recordings inside the Fed to show how the lapdog regulator viewed its supervisory mandate. Portions of the tape recordings were released by ProPublica and public radio’s This American Life.
A few weeks after the internal tapes were released in September 2014, additional news raised questions as to the competency of the New York Fed as a Wall Street regulator. The Federal Reserve’s Inspector General released a report indicating that the New York Fed was advised of potential trouble in the Chief Investment Office at JPMorgan on multiple occasions but failed to conduct a comprehensive examination that might have alerted it at an early stage to the wild gambles JPMorgan Chase’s traders were making in exotic, high risk derivatives with depositors’ money in its FDIC-insured bank. Those wild bets eventually led to the London Whale scandal and $6.2 billion in losses of depositors’ funds.
On November 21, 2014, Senator Sherrod Brown, Chair of the Senate Subcommittee on Financial Institutions and Consumer Protection, hauled the President of the New York Fed, William Dudley, before the Subcommittee to answer a blizzard of questions. Senator Brown said: “These recent reports should trouble any organization but they’re particularly catastrophic when the agency in question is responsible for four mega banks – four of the six largest banks in our country — four mega banks that alone account for $6 trillion in assets in some 11,000 subsidiaries.”
Senator Jeff Merkley grilled Dudley on how many names of the individuals who had engaged in the tax evasion scam deployed by Credit Suisse were turned over to authorities. Dudley said he didn’t know. Merkley asked how many Americans who created those secret tax evasion accounts with Credit Suisse were prosecuted. Dudley answered that he didn’t know. Merkley asked how many of the hundreds of Credit Suisse employees that set up these sham accounts were indicted. Dudley again said he didn’t know. Merkley said the answer to all of these questions was “none.”
Merkley explained that the Credit Suisse guilty plea to criminal charges came about not because of any advance information provided by the New York Fed or any investigation undertaken by the New York Fed, but as a result of the work of Senator Carl Levin’s Permanent Subcommittee on Investigations. Appearing stern-faced and exasperated, Senator Merkley said: “You’re the regulator; why did it take the U.S. Senate committee to find out those facts.” Dudley responded: “I don’t know the answer to that.”
At Wednesday’s hearing, Baker appeared alongside three other panelists: Dr. Norbert Michel, Director of the Center for Data Analysis at the Heritage Foundation; Alex Pollock, Distinguished Senior Fellow at the R Street Institute; and Dr. George Selgin, Senior Fellow and Director at the Center for Monetary and Financial Alternatives at the Cato Institute – a “nonprofit” which was secretly owned in part by the Koch brothers for decades.
Baker provided the most comprehensive assessment of the raging conflicts of interest at the Fed. His written testimony explained the following:
“The Federal Reserve System has an unusual status as being a mix of public and private entities. The governors are of course explicitly part of the public sector, as presidential appointees subject to congressional approval. However, the twelve regional banks are private, being owned by the member banks in the district, who have substantial control over the district bank’s conduct.
“This structure was put in place more than a century ago to fit the politics and the economy of the time. It is inconceivable that anyone constructing a central bank today would use the same framework…
“While there were reasons that a mixed public-private central bank and regulatory system may have made sense at the start of the last century, this is no longer the case today. The United States is the only major economy with this sort of mixed approach. The Bank of England, the Bank of Canada, the Bank of Japan, and the European Central Bank are all purely public entities. It is recognized that the conduct of monetary policy, along with the lender of last resort and regulatory functions of the central bank, are necessarily responsibilities of the government.”
Baker noted that the Dodd-Frank financial reform legislation of 2010 tinkered around the edges of reforming the Fed by taking away the votes of Class A Directors on the Boards of the regional Fed banks to vote for their President. “Nonetheless,” wrote Baker, “they still are likely to control the process since the Class B directors, who have half the votes, are appointed by the Class A directors.”
Wall Street’s biggest banks own and control the shares at the New York Fed – the primary supervisor of their sprawling bank holding companies. This “regulator” wore blinders in the leadup to the epic Wall Street collapse in 2008. It was reckless and irresponsible for Congress to give the Fed increased supervisory powers in the Dodd-Frank reform legislation.
Exclusive Past Reporting on the Fed from Wall Street On Parade:
Is the New York Fed Too Deeply Conflicted to Regulate Wall Street?
New Documents Show How Power Moved to Wall Street, Via the New York Fed
Intelligence Gathering Plays Key Role at New York Fed’s Trading Desk
