News Release

The Fed System: Banks Regulating Banks

AP is reporting this morning: “Testimony is on tap today by Federal Reserve Chairman Ben Bernanke. He’s to talk about the economic outlook before members of the House Budget Committee.”

ROBERT AUERBACH
Auerbach is professor of public affairs at the University of Texas at Austin. He was an economist with the House Committee on Financial Services during the tenure of four Federal Reserve Chairmen: Arthur Burns, William Miller, Paul Volcker, and Alan Greenspan. He wrote the recently released book Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank.

He said today: “The billions of dollars taxpayers are paying to bail out banks, especially the trillion-dollar superbank financial holding companies, should not obscure the need to fix underlying and continuing causes of the financial crisis. Under Alan Greenspan’s leadership of the Federal Reserve Bank, the nation’s central bank, it had a defective bank examination process. …

“One root cause of poor regulation of banks by the Federal Reserve is the underlying conflicts of interest at the 12 Federal Reserve Banks. Two-thirds of the board of directors in each of these Fed banks are voted onto the boards by the banks in the district. So the bankers are charged with regulating themselves.

“The Congress should immediately obtain the minutes of the Board of Directors meetings and the Board of Governors to see if the heads of the trillion-dollar superbanks that were on the boards of directors of the New York Federal Reserve Bank and other district Fed Banks have recused themselves from participating in any regulatory decisions in which their firms were participating. Bailout loans to banks should be at penalty rates with no coercion to take such loans. There should be an independent regulator, independent of the banks it regulates, staffed by experts in accounting, digital information systems, and fraud detection.

“Even Ben Bernanke, the present chairman who is working diligently to organize the bailout, seems oblivious to the recent history of his bureaucracy. Last month he assured the Senate Banking Committee that the Office of the Inspector General at the Federal Reserve was ‘very effective.’ That was a serious misstatement and a bad omen for understanding the problems of regulating the trillion-dollar superbanks.

“The Fed’s Office of Inspector General has been a farce, operating at the mercy of the leaders of the bureaucracy the IG investigates. The Board of Governors, the Fed’s central command, set up the IG office in 1987 with the provision that the ‘Chairman can prohibit the Inspector General from carrying out or completing an audit or investigation, or from issuing a subpoena, if the Chairman determines “that sensitive information is involved.”‘”
More Information

For more information, contact at the Institute for Public Accuracy:
Sam Husseini, (202) 347-0020, (202) 421-6858; or David Zupan, (541) 484-9167