Two news items this morning highlight an aspect of the financial bailout that is getting far less attention than the Treasury Department’s TARP program, and they both involve the Federal Reserve Board.
First, Bloomberg reports that the Fed has pledged an astounding amount of money credit to financial institutions:
Nov. 24 (Bloomberg) — The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”
The problems here are two-fold.
First, there’s the lack of any real oversight over an institution that is carrying out a duty that, Constitutionally, is reserved solely to Congress. We know next to nothing about the assets the Fed is buying, the institutions whose solvency it’s guaranteeing, or the rationale behind those decisions.
In fact, as the Washington Post notes this morning, the entire Federal Reserve program is largely at the discretion of five people:
[U]nlike the Treasury’s rescue package, which has elaborate disclosure requirements and oversight mechanisms, the Fed lending is occurring quietly and at the discretion of its five governors, as well as top officials of the 12 regional Fed banks. Timothy F. Geithner, president of the Federal Reserve Bank of New York and the Obama administration’s expected nominee for Treasury secretary, has been a leading architect of the new lending programs.
(…)
Bernanke also said there is little chance taxpayers will lose money on most of that lending, because the central bank lends money only to institutions it views as sound and requires that the collateral borrowers put up be worth more than the amount of the loan.
So, you know, just shut up and trust us.
Second, there’s the fact that when the Federal Reserve prints money or extends credit, which are essentially the same thing, it is not creating any new value. Instead, it is merely adding to the money supply. In the end, all that does is create inflation and artifically stimulate the economy, which is partially who we got in this mess in the first place.
The demand that someone do “something” is, it seems, drowning out any effort to determine if the right thing is being done.
