Unbearable At The Fed

Clinton Labor Secretary Robert Reich says the Fed has no choice but to tell the complete truth about how Bear Stearns went under.

The Fed has finally came clean. It now admits it bailed out Bear Stearns - taking on tens of billions of dollars of the bank's bad loans - in order to smooth Bear Stearns' takeover by JPMorgan Chase. The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed. The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.

The losses from those deals still total tens of billions, and taxpayers are ultimately on the hook. But the public never knew. There was no congressional oversight. It was all done behind closed doors. And the New York Fed - then run by Tim Geithner - was very much in the center of the action.

This raises three issues.

First, only Congress is supposed to risk taxpayer dollars. The Fed is not part of the legislative branch. Its secret deals, announced almost two years after they were done, violate the democratic process, if not the Constitution itself. Thomas Jefferson put a stop to Alexander Hamilton's idea of a powerful central bank out of fear it would be unaccountable to the public. The Fed has just proven Jefferson's point.

Second, if the Fed can secretly bail out big banks, the problem of "moral hazard" - bankers taking irresponsible risks because they know they'll be rescued - is far greater than anyone assumed after Congress and the Bush and Obama administrations bailed out the banks. Big banks will always be too big to fail because they know the Fed will secretly back them up if they get into trouble, even if Congress won't do it openly.

Third, the announcement throws a monkey wrench into the financial reform bill now on Capitol Hill, which gives the Fed additional authority by, for example, creating a consumer protection bureau inside it. Only yesterday, Sen. Jim DeMint (R-S.C.) blasted the Dodd bill for expanding the Fed's authority "even as it remains shrouded in secrecy."

The Fed has a big problem. It acts in secret. That makes it an odd duck in a democracy. As long as it's merely setting interest rates, its secrecy and political independence can be justified. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk -- choosing winners and losers in the capitalist system -- its legitimacy is questionable.

And he's right on all three accounts.  While we badly need financial sector reform, we badly need Federal Reserve reform too, and the bill before Congress now just does not include that factor.  Banks need oversight, but so does the Fed.  We've taken too much damage from the Greenspan/Bernanke era at the Fed as a country.  Their decisions have cost us trillions.

And they are completely unaccountable for those decisions.  That's wrong.  It needs to change, because if it doesn't, we'll be right back here again in a few years asking why Bernanke's plans didn't work either and why we're right back in the hole again.

Only the next time, there's no way to get out.  Period.