Bring Some Accountability to the Federal Reserve

Dear Colleague,
I write to ask you to co-sponsor HR 1207, the Federal Reserve Transparency Act, which would
give the Government Accountability Office the authority to audit the Federal Reserve and its
member components and require a report to Congress by the end of 2010.
The Federal Reserve System operates as the central bank for the United States, managing the
economy’s money supply and overseeing the banking system. Until recently, the Fed has not
picked winners and losers when distributing money, nor has it brought credit risk onto its balance
sheet. It has slowed or stimulated the economy by raising or lowering interest rates. Since
March 2008, the Fed has resorted to using its emergency powers to pick winners and losers, and
to take massive credit risk onto its books. Since last September, the Fed’s balance sheet has
expanded from around $800 billion to over $2 trillion, not including off-balance sheet liabilities
it has guaranteed for Citigroup, AIG, and Bank of America, among others. The bank is also
‘monetizing’ the debt of the United States Governmentby purchasing massive amounts of agency
and Treasury bonds. An audit is the first step in bringing this unaccountable system under the
control of the public, whose money it prints and disseminates at will.
The Federal Reserve is an odd entity, a public-private chimera that controls the US monetary
system and supervises the banking system. The system is governed by a Board of Governors,
with twelve regional reserve banks that serve a supporting role. While the Governors are
appointed by the President with confirmation by the Senate, the regional Reserve Banks have
boards of directors chosen primarily by private banking institutions. Right now, for instance, the
CEO of JP Morgan, Jamie Dimon, serves on the Board of Directors of the New York Federal
Reserve Bank, as did Goldman Sachs Director Stephen Friedman.
This creates striking conflicts of interest and unseemly appearances in the management of what
is ultimately the public’s money. Consider:

• JP Morgan’s CEO was a board member of the New York Fed even as he negotiated on
behalf of JP Morgan with the New York Fed for a $29 billion bridge loan to allow his
company to take over Bear Stearns.

• New York Fed and Goldman Sachs board member Stephen Friedman purchased 37,300
shares of Goldman Sachs stock in December at the same timeas Goldman received
permission to convert to a bank holding company regulated by the Federal Reserve.
Friedman at the time was also overseeing the selection of a New York Federal Reserve
President to replace Tim Geithner, and the New York Fed ended up hiring another alumni
from Goldman Sachs.

• According to the bank’s website, the two “class B” directorships of the New York Fed
that are supposed to represent the public are vacant.

• Enron’s Jeff Skilling was on the board of the Dallas Federal Reserve Bank.

Criticism of banker influence and control of our monetary system is not new. However, the
urgency of the financial crisis and the actions of the Fed picking investment bank winners and
losershave changed the nature of the criticism. The Senate just passed a non-binding resolution
requiring more transparency at the Federal Reserve in its Budget Resolution.
Still, neither the GAO nor the Federal Reserve Inspector General has audited the books of the
Federal Reserve or its regional banks. The Federal Reserve has refused multiple inquiries from
both the House and the Senate to disclose who is receiving trillions of dollars from the central
banking system. The Federal Reserve has redacted the central terms of the no-bid contracts it
has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the
Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to
leverage the Treasury’s balance sheet. With discussions of allocating even more power to the
Federal Reserve as the ‘systemic risk regulator’ of the credit markets, more oversight over the
central bank’s operations is clearly necessary.
The net effect of recent actions has been to isolate financial policy-making entirely from
democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance
sheet to spend money it cannot get appropriated from Congress. The public does not know
where trillions of its dollars are going, and so has no meaningful control over the currency or this
unappropriated “budget”. The extraordinary size of these lending facilities combined, the
extreme secrecy, and the private influence is a dangerous seizure of Congress’s constitutional
prerogative to appropriate public monies and control the currency.
An audit of the Federal Reserve may not be sufficient to control this sprawling system or bring it
back into balance, but it is a start. The public has a right to know to whomthe US government is
lending trillions of dollars. Dancing around this issue with technocratic terms like ‘increasing
liquidity’ and ‘private financial intermediation’ is preventing a full and long overdue public
debate on the role of the Federal Reserve and the influence of private banking interests in the
governing of our economy.
I encourage my colleagues to support H.R. 1207, so that we can bring some transparency to our
banking system and allow the public to have a real debate over the fundamental direction of our
nation’s political economy.