The New Economy

Last Updated: Fri, 06/26/2009 - 12:33pm

The CATO Institute provoked public debate about the economic crisis during a panel called “Bringing Transparency to the Federal Reserve” with Congressman Ron Paul, Gilbert Schwartz, and Bert Ely. The speakers provided some nice insights into the role of the Fed and its monetary policy. Separating theory and application, Schwartz noted that the Fed is a “creature of Congress” where it is supposed to be independent from the Executive Branch, but not from Congress. Congressman Paul emphasized that the Fed's recent actions are “shenanigans” and that while the federal government deals with billions of
dollars, the Federal Reserve deals with trillions of tax payer funds. He urged that his legislative bill will not focus
specifically on monetary or regulatory policy, but aim to simply “open
the books.”

Congressman Paul's legislation could be the first step toward the much needed economic reform that the speakers suggested. Schwartz contended that this reform is not with the courts, but with Congress. Meanwhile, Congressman Ron Paul stressed that while reform will prevail in Congress, the real battle is won when “the people are informed.” The speakers identified several problems and questions that will help inform the public:

* TARP funds were passed through Congress because no one bothered to read the bills.

* What role should Congress have in overseeing the Fed? At what point does oversight undermine the credibility of the Fed and risk foreign investors?

* Why is the Fed hiring lobbyists?

* Why doesn’t Congress eliminate the Government Accountability Office and ask to see the books and information directly? (Why doesn’t Congress use its subpoena power?)

* Has the Fed become an extension of the US Department of the Treasury (or vice versa)?

* What future role does a central bank (i.e. the Fed) have? Should it have the authority to use taxpayer funds for the private sector?

*Is a “dollar crisis” the next economic predicament?

While some of the listed issues involve economic initiatives that have precedent with section 13(3) of the Federal Reserve Act, the magnitude of government intervention and the cost to the taxpayer is unprecedented. Congressman Ron Paul compared the economy in bailout to being “like a drug addict.” If the federal government keeps bailing out institutions and passing regulations, then it is simply feeding an already bad habit with a quick fix.

As Congressman Ron Paul proclaimed that the immediate immobilization of Fed programs would be “catastrophic,” he proposed that the Fed should legalize monetary competition (i.e. allow gold currency) while intermittently ending regulatory programs like TARP. Paul further noted that the bailout funds may have been the Fed’s way of covering up the financial crisis, but “Why should we be afraid of the truth? Hiding the truth to make us look better does not make us better.”

Exposing this truth has been left to the media and public organizations as Congress has dawdled. The investigations are, of course, uphill battles as the issues are extremely complex and Fed transparency is a self-diagnosed problem.

In its efforts to promote reform through public understanding, Judicial Watch has sent over 25 Freedom of Information Act requests related to the economy and the federal government’s role. Judicial Watch’s investigations surround the financial issues of “too big to fail” and the efficient use of taxpayer money. These two problems are essential to understanding economic reform. Here is a sample of Judicial Watch’s economic Investigations (some of which have been reported in The Verdict and some of which will be reported in future articles):

Treasury’s Secret Meetings: During the infamous October 13, 2008 meetings, the TARP arrangement was devised behind closed doors. So far, Judicial Watch has received some emails that detail strong arming banks. Judicial Watch is battling the Treasury in court to get full access to documents that will shed light on this monumental meeting.

Freddie Mac and Fannie Mae: The Freddie Mac and Fannie Mae implosions caught America off guard. For years, foreign investors and Americans believed these Government Sponsored Enterprises (GSEs) to be stable despite dubious lending practices. As Judicial Watch investigates the details surrounding the government's role prior to the subprime lending fiasco, it has found that Congress was warned of some risks and those warnings appear to have been ignored.

Bear Stearns: On a fateful weekend in March 2008, the Treasury and Fed decided that Bear Stearns was too big to fail and JP Morgan would need to step in. The public still does not know all the details surrounding the share price and decision making surrounding this arrangement. Why was Bear Stearns too big to fail but Lehman Brothers was not? Judicial Watch received some records from the Treasury that are currently under appeal. The Fed released a few documents equivalent to a spit in the well.

The Fed’s Balance Sheet: The Fed is not subject to normal accounting rules. Despite providing a statistical release on its website, the Fed’s actual accounting for these initiatives is still obscure. The release provides some general information, but does not fully account for the Fed's finances and economic programs and interventions. The Fed’s balance sheet is a crucial instrument for understanding its role in the economic crisis.

AIG (American International Group): In September 2008, the federal government reversed its previous stance on bailing out AIG and funnelled $85 billion to the troubled corporation. While section 13(3) of the Federal Reserve Act has been used before for private entities, the amount, change in position and contrast with Lehman Brothers just a short period before raise questions as to the necessity and consistency of funding.

Troubled Asset Relief Program (TARP) and Public Private Partner Investment Program: Judicial Watch is actively investigating two financial programs: Troubled Asset Relief Program and Public Private Partnership Investment Program. Questions surround how TARP money is actually going to be used; the cost of TARP to the taxpayer; if there have been any barriers to repaying TARP; and whether the Partnership Program is allowing TARP recipients to reinvest in a circular manner.

Despite the desire for a quick remedy, as more documents are released, the clearer it becomes major economic changes are inevitable. These changes will either favor a greater government role that will undermine private enterprises or will consist of dramatically rethinking many issues including the "too big to fail" policy, economic safety nets, and possibly currency. While government intervention did not begin with the Obama administration, the path of economic reform will occur during his term. On a final positive note, if any good resulted from the past year’s economic turmoil, it is the opportunity to better understand the economy and use that understanding to reform it. All across the country the Fed has become a household name, people actually know who Timothy Geithner is, and college economic classes are at capacity. The United States has much potential to use this curiosity and crisis to strengthen the nation through economic reform, but to do so we must debate and understand the current financial undertakings and have the foresight to promote the best options.

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