Despite all of the attention heaped on the Treasury Department and the Troubled Asset Relief Program, the Federal Reserve served as the chief bank bailout engine in the U.S. economy during the . But unlike the Treasury, the Fed isn’t subject to basic government transparency requirements—we know almost nothing about the trillions of dollars the Fed has extended to Wall Street, and the banks want to keep it that way. No financial reform will be complete until the Fed—Wall Street’s chief enabler in Washington, D.C.—is subjected to a comprehensive audit, just like any other government agency.
Let’s start with the numbers. TARP was a big program– $700 billion is nothing to sneeze at. But according to the Center for Media and Democracy, the Federal Reserve has extended nearly $4.3 trillion to the financial system since the banking system blew up in 2008. About $2.0 trillion of that is still outstanding, and with a few exceptions, we don’t know who it went to, or what taxpayers got in return. This is not just a problem for progressives or conservatives—it is a fundamental issue of government accountability that all citizens should be concerned about. A public institution is spending public funds without any oversight or obligation to inform the public about its actions.
Fortunately there’s a plausible alternative to this undemocratic farce. Late last year, Reps. Alan Grayson (D-FL) and Ron Paul (R-TX) backed legislation that would subject the Fed to a comprehensive audit, letting citizens know exactly how our money is being spent. Both Wall Street lobbyists and Fed officials opposed the measure ferociously, deploying money and political influence to win over lawmakers. Ultimately, both President Barack Obama and House Financial Services Committee Chairman Barney Frank (D-MA) joined many key Republicans in opposing the bill.
But the Grayson-Paul legislation had such strong appeal among both progressives and conservatives that it cleared the House as part of the Wall Street reform bill in December. The same legislation will be introduced in the Senate today by Sen. Bernie Sanders (I-VT). It already has strong support from Senators on both sides of the aisle– Sens. John McCain (R-AZ), Jim DeMint (R-SC), David Vitter (R-LA) and Sam Brownback (R-KS) are all co-sponsoring the amendment.
The Fed is a deeply secretive institution. Anytime there is a push to require greater access to information regarding the central bank, it responds by claiming that such transparency would spark a financial crisis. When the Fed pumped money into AIG in the fall of 2008, the failed insurer immediately handed over the cash to its trading partners—mostly big banks. This was effectively an under-the-table bailout for these banks, who were receiving much more for the reckless bets they’d made with AIG than they would have scored in bankruptcy.
But in late 2008, when public officials demanded to know who received AIG’s bailout money, the Fed argued that this information would spark a major run on the companies who benefitted from the bailout, and destabilize the financial system even further. The Fed kept launching this argument until March of 2009, when outrage over the AIG bonuses finally forced their hands.
What happened when this sensitive information was finally disclosed? So far as financial stability was concerned, nothing at all. There was no massive run on AIG’s counterparties, and no collapse in the credit markets. For a handful of individual players, however— Treasury Secretary Timothy Geithner, the public relations team at Goldman Sachs, and a few other bankers—this news was a disaster.
Through AIG, Goldman received nearly $12 billion from taxpayers with no strings attached. That looked bad for a company that had previously insisted it hadn’t been bailed out and didn’t need TARP money. Since Geithner had been in charge of negotiating with AIG’s trading partners (he was President of the New York Fed in the fall of 2008), he looked bad for allowing the money to go out the door without securing some kind of discount for taxpayers.
This was critical information for both the economy and our democracy. Markets learned more about how banks were receiving their funding and citizens learned more about the public policy decisions behind the bailout—who made them and why. The Fed’s excuse for withholding this information—that it would jeopardize our entire economy—proved totally wrong. The only things at risk were the reputations of individuals who needed to be held accountable—a few public officials who had to answer to the citizens they represented, and a few bank executives who had to answer to their shareholders.
The Fed is using that same AIG defense today when members of Congress demand accountability from the central bank. If you audit the Fed, they argue, the banking system will collapse. It’s just as false today as it was in the fall of 2008. If the Treasury Department offered up this kind of an excuse, it would be laughed out of court. Congress has the authority to order an audit of the Treasury, the Securities and Exchange Commission and other agencies at any time, and does so as a matter of routine. In a democracy, no institution should ever have the right to spend trillions of taxpayer dollars without even telling the public how it is spent.
Ultimately, even the epic AIG bailout only accounted for a small fraction of the trillions of dollars the Fed devoted to this crisis. Without a serious accounting of all this money– where it went, on what terms, and at whose discretion—some of the most critical economic decisions of the past fifty years will remain a secret. Our economy needs that information in order to function efficiently. Our democracy needs that information in order to function at all.