The Committee on Government Oversight and Reform has cleared Ron Paul’s (R – TX) Federal Reserve Transparency Act (H.R. 459) for a full vote in the House of Representatives to be held later this month. Paul had previously cultivated enough political capital to secure a one-time audit of the Fed—the first since the its inception in 1913. The results of that audit revealed a massive ongoing bailout of the global—not just the American—banking sector. Documents showed that the Fed had provided $16 trillion in loans with absurdly low interest rates to banks around the world.
Recipients of this corporate welfare boondoggle included all the usual suspects in finance. Between December 2007 and July 2010, Citigroup got $2.5 trillion in emergency low-interest loans; Morgan Stanley, $2 trillion; Merrill Lynch, $1.9 trillion; Bank of America, $1.3 trillion; U.K.’s Barclays, $868 billion; Goldman Sachs, $814 billion; Royal Bank of Scotland $541 billion; JP Morgan, $391 billion, and on and on.
Technically, because these were loans, the money doled out by the Fed wasn’t “free,” but based on the very nature of banking it might as well have been. Many of these loans were issued by the Fed at rock-bottom interest rates of less than 1%, just as they still are today. This means that the opportunity for arbitrage is enormous. If a bank can borrow money from one institution at a rate of 0.75%, and then lend that same money to its customers at rates of 10%, 15%, 25%, etc., how in the world can it not make money? In this way the Fed shores up the banks by providing them with enough capital to get them to lend, and in manner that allows them to make a killing on the massive gulf between the Fed’s lending rate and the rates at which the borrowing banks issue loans to their customers.
One would think that given the amount of money the Fed has been lending, that Congressional audits would be a yearly or even quarterly event. But that hasn’t been the case, as Fed Chairman Ben Bernanke has vehemently fought any and all efforts to illuminate the dealings at his institution. Indeed, he has many supporters in Congress in this regard as well. Bernanke said he is concerned that monetary policy, which the Fed influences by setting interest rates, might become politicized, and that rate-setting would become susceptible to popular pressure.
But in the aftermath of a direct bailout from the Treasury department of $700 billion in the form of the Troubled Asset Relief Program, and $16 trillion in low-interest loans in a two and a half year span, pretty soon we’ll be talking real money. The Federal Reserve exercises enormous influence over the monetary policy of the world’s largest economy, and thus by extension, the world economy. For such an institution to operate in near total secrecy is not merely ill-advised, but precarious, as we have already seen with the Fed-induced housing bubble that eventually popped and crashed the mortgage derivatives market, causing a global financial meltdown. Ron Paul’s audit-the-Fed is a no-brainer for those who want greater transparency at the world’s most powerful, and potentially most dangerous central bank.