Love him or hate him, Ron Paul — a Republican congressman from Texas and candidate for the GOP presidential nomination — deserves commendation for his determination to put the Federal Reserve Board under the national political microscope.
Largely as a result of Paul’s persistence in the House and an amendment offered by Sen. Bernie Sanders, I-Vt., the General Accounting Office was directed in the Dodd-Frank financial reform bill to examine the extent to which conflicts of interest were involved in Fed decisions during the financial crisis of 2008. The results of the GAO examination were made public last week, and they make clear that there is indeed a great need for more transparency in the operations of the U.S. central bank.
The most troublesome revelation in the GAO audit is the extent to which insiders benefited from their positions and access during the crisis. The GAO found 18 instances in which banks and other companies affiliated with current and former members of the Fed received emergency loans from the board, including General Electric, Goldman Sachs, Lehman Brothers and JP Morgan Chase.
In the case of General Electric, CEO Jeffrey Immelt served on the New York Fed, which loaned his corporation $16 billion in emergency funding during the crisis. Those loans were made after the New York Fed consulted with General Electric officials concerning creation of a Commercial Paper Funding Facility, according to Sanders.
One of Goldman Sachs’ directors, Stephen Friedman, was chairman of the board of the New York Fed. Friedman also owned substantial stock in Goldman Sachs during the same period in 2008 when the New York Fed voted to allow Goldman to operate as a commercial bank as well as an investment bank. That approval meant Goldman got access to loans from the Fed at highly favorable rates.
Fed ethics guidelines prohibit a Fed governor from owning stock in a firm being considered for commercial status, but Friedman received a waiver and continued buying Goldman stock.
As for JP Morgan Chase, CEO Jamie Dimon was on the New York Fed board when the company received $29 billion in emergency loans. In addition, Dimon was able to secure approval from the New York Fed for an 18-month exemption of his firm from risk-based leverage and capital requirements, as well as removal of certain high-risk investments on Bear Stearns’ balance sheet prior to JP Morgan Chase’s acquisition of the troubled investment bank.
It is not necessary to agree with Paul’s demand that the Fed be abolished entirely to recognize the necessity for maximum transparency in its operations — seen in these conflicts of interest exposed by GAO. As presently structured, the Fed operates with virtually no oversight by Congress or the president.
Even if, as its defenders claim, the Fed needs to be independent to accomplish its purpose of stabilizing the U.S. economy, greater transparency will help reassure Americans that the board is operating to benefit the entire country and not just a few insiders.