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."'"
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