Tuesday, May 12, 2009

Worse Than Useless

Question: What do you call a regulator that doesn't regulate or an inspector that doesn't inspect?

Answer: Worse than useless.

Worse, because their presence in the first place gives a false sense of security to market participants that everything is being looked after. Participants are misled about risks in certain areas of the economy because they are advertised as "well regulated" when in fact, regulators are either asleep at the switch or have fallen prey to the phenomenon of "regulatory capture."

Regulatory capture is what happens when the goals of the regulators and the goals of the industry they are supposed to be regulating become so closely interconnected that rules get changed, bent or ignored altogether. If there is a phrase that summarizes the effectiveness of regulation over the last two decades, "regulatory capture" does a better job than any other. Administration after administration (Democrat and Republican equally - Conservative and Liberal equally) have fallen prey to the fallacious logic promoted by industry lobbyists that former industry insiders are the only ones qualified to regulate. The cozy relationships they have with big industry are sold as a plus factor by the lobbying groups that spend literally billions of dollars per year ($3.27 Billion in '08) to affect favorable legislation and regulation. If they weren't getting some serious bang for their buck, they wouldn't be spending that kind of money, would they?

But regulatory capture is only one half of the story. There appears to be other regulators who don't even pay attention.

Below is a video of a congressman Alan Grayson questioning New York Fed Inspector General last week. Sorry for the terrible audio. If you have headphones it comes across much clearer. Otherwise, a transcript is available to read.

The total cluelessness of this high level official is appalling. She seems totally oblivious to the fact that the Fed has taken on obligations off balance sheet. She does not even appear to have knowledge of any of the multiple Fed lending programs other than TALF. Nor does she even really acknowledge her role as an "inspector." A few exchanges:

Alan Grayson: Well, I understand that, but we’re talking about events that started unfolding eight months ago. Have you reached any conclusions about the Fed expanding its balance sheet by over a trillion dollars since last September?

Elizabeth A. Coleman: We have not yet reached any conclusions.

Alan Grayson: Do you know who received that money?

Elizabeth A. Coleman: For the… we are in the process right now of doing our review and…

Alan Grayson: Right, but you’re the Inspector General. My question specifically is do you know who received that $1 trillion-plus that the Fed extended and put on its balance sheet since last September. Do you know the identity of the recipients?

Elizabeth A. Coleman: I do not know. We have not looked at that specific area at this particular point on those reviews.


Alan Grayson: So I’m asking you if your agency has in fact, according to Bloomberg, extended $9 trillion in credit, which by the way works out to $30,000 for every single men, women, and child in this country. I’d like to know if you’re not responsible for investigating that, who is?

Elizabeth A. Coleman: We, actually… we have responsibility for the Federal Reserve’s programs and operations, to conduct audits and investigations in that area. In terms of who is responsible for investigating… would you mind repeating the question one more time?

Alan Grayson: What have you done to investigate the off-balance sheet transactions conducted by the Federal Reserve, which according to Bloomberg now?

Elizabeth A. Coleman: I’ll have to look specifically at that Bloomberg article. I’m not… I don’t know if I have actually seen that particular one.

Alan Grayson: That’s not the point. The question is have you done any investigation or auditing of off-balance sheet transactions conducted by the Federal Reserve?

Elizabeth A. Coleman: At this point, we’re conducting our lending facility project at a fairly high level and have not gotten to a specific level of detail to really be in a position to respond to your question.

Alan Grayson: Have you conducted any investigation or auditing of the losses that the Federal Reserve has experienced on its lending since last September?

Elizabeth A. Coleman: We are still in the process of conducting that review. Until we actually, you know, go out and gather the information, I’m not in a position to really respond to this specific question.

Alan Grayson: So are you telling me that nobody at the Federal Reserve is keeping track on a regular basis of the losses that it incurs on what is now a $2 trillion portfolio?

Elizabeth A. Coleman: I don’t know if… you’re telling me that there’s… you’re… missing… that there are losses. I’m just saying that we’re not… until we actually look at the program and have the information, we are not in a position to say whether there are losses or to respond in any other way to that question.

Alan Grayson: Mr. Chairman, my time is up, but I have to tell you honestly, I am shocked to find out that nobody at the Federal Reserve including the Inspector General is keeping track of this.

Grayson is "shocked." I'm not. This is par for the course for an organization that views itself as "above the law." Note the uneasiness of the Fed's team of lawyers in the background of this video. They are literally terrified of anyone saying too much. Unfortunately for them, saying nothing, like Ms. Coleman did in this questioning, is starting to have a negative effect. People are outraged at the blatant deception techniques being used by the Fed.

Thankfully, one member of congress who has been speaking out against the Fed's unlawful and damaging interventions for decades has introduced a bill to forcibly audit the books of the Federal Reserve and all its member banks. Ron Paul's HR 1207 now has bipartisan support of at least 147 cosponsors (growing daily).

President Obama campaigned on a platform of honesty, transparency and integrity in contrast with the abomination that were the Bush years. A full audit of the Fed would be a step in the right direction. More than likely, the details that would emerge from such an audit would enrage the American people so much that an outright repeal of the Federal Reserve Act would be demanded. Ideally, that would serve as a template for a full review of the Bank of Canada's mandate as well.

The damage that arises from implied but not applied regulation, the moral hazard that their interventions create, the degrading nature mandated positive inflation has on social preferences, and the distortions their manipulation of interest rates causes are all major factors in explaining the credit crisis we are in the midst of.

I urge my readers south of the border to call their representative (regardless of their party) and ask them to cosponsor HR 1207. It needs to be made obvious that non-participation in this bill would be political suicide.

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Anonymous said...

America is in a great deal of trouble, a lot more trouble than then want to acknowledge.
It is going to get a lot lot worse before any recovery occurs.
This women and her handlers are criminal, they are doing everything they can to deny the truth, transparency and honesty.
It's sickening, the lies simply never stop, ever!!!!

Anonymous said...


Dick Durbin confirms the evidence of regulatory capture. Really, a stunning piece of video that has all but been ignored by the American media. The rot at the core of the American press is just as deep and serious as the decay at the core of our gov't and regulatory apparatus. God help us.

Anyways, keep up the good work and keep speaking out, buddy.

Anonymous said...

Sobering video, but who would expect different from an organization that refuses to reveal its lending practices to the American public?

Ron Paul has been after the FED for a long time much to Bernankes disdain. He knows the fundamental premise that if you want to solve and economic crime you have to follow the money. If the FEDs balance sheet were open to scrutiny, it may cause a revolution and certainly a destruction (yet again) of the Federal Reserve System.

I'm very heartned that at least one senator seems to know what questions to ask and how to ask them.

Anonymous said...

But are they creating $USD or FEDROS? Where is the authority to create this money? No one can show any authority to print $USD in such quantities


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