Global Economic Crisis

Under the tutelage of Chairman Ben Bernanke, the Federal Reserve system has achieved the heights of power, while simultaneously the economy it  presides over has descended to the depths of  despair. This Zen paradox sums of the inexplicable success of Ben Bernanke. Having ignored or mistakenly assessed all the warning signs that the American housing bubble had burst and was set to take down the Wall Street investment banks, the panicky and massive policy measures undertaken by Bernanke in the wake of the collapse of Lehman Brothers last year have made him the improbable hero of the global financial and economic crisis. With Bernanke set to be reappointed as Fed Chairman by President Barack Obama, it seems both he and the Federal Reserve have successfully consolidated their monetary and economic omnipotence.

Yet, some cracks in the foundations of the Fed’s  previously unassailable power have begun to emerge. Manhattan Chief U.S. District Judge Loretta Preska has issued a ruling in the case of Bloomberg LP v. Board of Governors of the Federal Reserve System that marks the first challenge to the virtual dictatorship on monetary policy that Bernanke has been able to impose on Congress and the media. The lawsuit had been filed by the Bloomberg news organization after the Federal Reserve refused to disclose the recipients of $2 trillion in emergency loans it provided to troubled banks. The rationalization used by the Federal Reserve for its refusal to follow the legal requirements of the Freedom of Information Act truly defines the meaning of arrogance. If the American taxpayers, who are ultimately on the line for the loans, were to know the identity of the banks receiving financial aid from the Federal Reserve, they would act irresponsibly and perpetuate a run on those very institutions, claim Bernanke‘s minions. In other words, Nixonian logic applied to the massive indebtedness of the American taxpayer, who is not entitled to know for whom the balance sheet of the Federal Reserve is being overloaded with toxic assets.

In its lawsuit, Bloomberg stated that disclosing the beneficiaries of the Federal Reserve‘s largesse is “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”  However, Bernanke and company are not interested in illuminating the public in their understanding of the government’s role in the crisis, especially that of the Federal Reserve. Full disclosure might very well contradict the image being crafted by the Fed’s aggressive public relations program to portray Ben Bernanke as the saviour of the American economy and global financial system.

The Fed may still appeal Judge Preska’s ruling. However, if the ruling prevails and becomes precedent, it will mark a rare but important defeat for the Federal Reserve’s cone of silence and lack of transparency.

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Alan Grayson is a Democratic Congressman  representing Florida’s 8th congressional district. He was elected in 2008, having beaten the 4-term Republican incumbent. Despite his freshman status, Grayson is already developing a reputation as a fierce advocate for taxpayer interests in the wake of massive bailouts of the financial sector that have been orchestrated by the Treasury Department and Federal Reserve. Serving on the Financial Services Committee and subcommittee that deals with capital markets, the congressman, having been a successful entrepreneur, clearly knows how to read a balance sheet and ask relevant questions. Thus, the stage was set when the Florida congressman had the opportunity to question Fed Chairman Ben Bernanke when the latter appeared before Congress to present an update on the economic crisis gripping America and much of the world.

Congressman  Grayson demanded details from Bernanke on a half trillion dollars in  liquidity swaps to foreign central banks undertaken by the Federal Reserve, apparently under the radar and in the dead of night. Demonstrating that he and his staff had done their fact-checking, Grayson noted that in 2007 these swaps with overseas central banks were a mere $24 billion, but had swelled to a staggering $553 billion in 2008 with the onset of the Global Economic Crisis.
The exchange between Grayson and Bernanke appears almost Kafkaesque in its reality-defying character, conveyed in the following, as a clearly uncomfortable Fed Chairman provides a tortured explanation regarding this half  trillion dollar transaction:

Bernanke: “Those are swaps that were done with foreign central banks…”
Grayson: “So who got the money?”
Bernanke: “Financial institutions in Europe and other countries…”
Grayson: “Which ones?”
Bernanke: “I don’t know.”
Grayson: “Half a trillion dollars and you don’t know who got the money?”
Bernanke: “Um, um, the loans go to the central banks and they then put them out to their institutions…”
Half a trillion dollars is a number so grandiose, it defies comprehension unless it is reduced to its ultimate simplicity. These credit swaps that exchanged American dollars for various foreign currencies were done without any consultation with elected officials, and amount to more than $1,800 for every man, woman and child residing in the United States. Under section 14 of the Federal Reserve Act, according to Chairman Bernanke, the Fed’s Open Market Committee (FOMC) can engage in swapping U.S. dollars with foreign central banks without any limitations, at any time, without any requirement for congressional scrutiny. In other words,  “Congressman Grayson, why are you wasting my valuable time with these irrelevant questions,” Bernanke seemed to be implying through his frosty demeanour. Never mind that the Federal Reserve Act was originally passed in 1913, nearly a century ago.

“Is it safe to say that nobody in 1913 contemplated that a small little group of people would decide to hand out half a trillion dollars to foreigners,” Grayson pointed out. He raised as an example New Zealand, which received $9 billion from the Federal Reserve, an amount equal to $3,000 for every one of that nation’s citizens.

The congressman from Florida’s 8th district is to be commended for his focussed inquiries directed at the Fed Chairman, and steadfastness in the face of Bernanke’s evasiveness. More importantly, Grayson raises anew serious questions regarding the unlimited power placed in the hands of the Federal Reserve. The defenders of the Fed’s current position of fiscal omnipotence maintain that its independence from political influence must be preserved. However, the historical record, especially in the last 20 years, clearly shows that the Federal Reserve is influenced politically, either through the executive branch and the power of the President to reappoint the Fed Chairman, or through the large financial institutions on Wall Street, which have a level of access to Fed decision-making not available to any other category of citizens. More importantly, since the onset of the current financial and economic crisis, the Federal Reserve and its chairman have proven to be highly fallible, having made many errors in judgment, not the least being their original overly-optimistic pronouncements when the first tremors from the subprime meltdown arose.

Congressman Grayson’s penetrating inquiry serves as a reminder that the ultimate systemic risk to America’s financial system and economic superstructure stems from allowing a small, fallible clique to make speedy decisions involving incalculable sums of public money without any consultation with or checks and balances from the nation’s elected representatives. This is not only fiscal tyranny by any other name; it is a recipe for unintended and disastrous consequences.

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