Time to Reform the Fed?

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Includes: DIA, QQQ, SPY
by: Lawrence York

Publically traded companies are audited by independent third-parties and regulated by government agencies who seek to make sure they keep the rules, make objective disclosures, and aren't committing fraud. On top of this there is Sarbanes Oxley mandating personal liability just to make sure senior management get the message. But what about the Fed? To whom are they accountable?

True the Federal Reserve is intentionally structured to be independent so that monetary policy decisions are not contaminated by political agenda, but can we any longer rely on this current arrangement? And, indeed has the Fed in fact been accomodating to political and/or big business pressure putting the world in peril of a collapse of the financial system? The GAO must investigate the Fed and report its findings to Congress?

We think this is necessary because as we see it there can be no ligitimite excuse for the lack of oversight that has led us to where banks now find themselves--short of capital to meet their reserve requirements. One has to ask why the Fed didn't step in to raise reserve requirements when loose lending practices became banking's stock-n-trade for years? Why the Federal Reserve Board of Govenors never curtailed the 100% mortgage loan practice that in addition to offering no down payment loans with equity lines, didn't even require full payment of current mortgage interest? Why the Fed, under Greenspan, actually lobbied for NO Regulation of derivative securities and Hedge Funds, the later of which have excessively leveraged themselves in some cases as an arm of a bank? And how anyone responsible for regulatory oversight could imagine that separating origination & appraisal from the credit risk & collateral assessment process could have ever reached the conclusion that this would work? I mean do the Comptroller, Federal Reserve and FDIC officials ever talk to one another about business matters? Are we being outrageous to assume people in these agencies think?

We have to have answers and following the money is usually the most direct route to getting them so we can fix this problem so it is will not be repeated again and so we can hold (ir)responsible parties accountable. We know that loans were sliced up and repackaged into an array of complex securities, slices were then collared with various risk triggers and insurance, and finally sold around the world to everyone from pension plans to sovereign governments. We know that investment banks and brokerage firms collaborated to make the sales. (We wonder if Treasury helped make the sales?) And we know that Fannie Mae (FNM), Ginnie Mae and Freddie Mac (FRE) guarantee mortgages and in the last few years had tremendous growth. So we ask, can all this activity go on for years and years without a probe, a question, or change in requirements as the normal lending process moves to the exotic and nothing less than pure speculation?

YES, YES, YES. And that is why we need to examine the facts and get some answers. There is an inherent conflict of interest at the Fed. We cannot let the Federal Reserve transfer this problem to the tax payer. To fix it they resist lowering interest rates, sanction charging excessive fees even to those in bankruptcy, authorize exorbitant credit card rates, and seek to entirely avoid responsibility. The answer now is not to let the shepherd who slept through the night do their own fix. They are obviously incapable and in any case conflicted. Safeguarding the banking system is best put in responsible, INDEPENDENT hands who have to allegiances to those they regulate. Not in the hands of those who need to make up their losses. This is so because before this story ends we'll be talking public tax dollars needed for a bailout. We think this is OUTRAGEOUS. It's time for Congress to take charge.