[Welcome Robert D. Auerbach, and Host, James K. Galbraith. Please stay on topic during the salon, and take off-topic comments to the previous thread. Thanks - bev]
Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank
James K. Galbraith
Robert D. Auerbach began his career as a cab driver. A chance ride with Abram Lincoln Harris, a leading professor in the economics department at the University of Chicago — and its only African-American member — catapulted him into graduate school. (When he went to be interviewed, he still had his changer on his belt.) There he became a student of Milton Friedman, completing a dissertation in 1969. Then it was on to the staff of the Kansas City Federal Reserve Bank – the beginning of a lifelong no-love-lost affair with the central bank.
Arriving at American University in 1976, Bob gravitated into the orbit of Wisconsin Congressman Henry Reuss, the new Chair of the House Committee on Banking, Finance and Urban Affairs. An ardent monetarist in those days, he believed the Fed controlled inflation through the money supply. For a counterweight to this reactionary view, Reuss had me. I was between graduate schools – twenty-four, just back from a year at Cambridge, a dabbler in Keynes and as un-monetarist as one could get. Possibly for the fun of it, our staff director made us share an office.
By the grace of God, our secretary had nerves of steel.
Still, an alliance was possible, since we both favored serious congressional oversight of the conduct of monetary policy by the Federal Reserve, something that did not then exist. Working together, Bob and I made it happen, first in the quarterly hearings initiated in 1975; and eventually by drafting what became the Federal Reserve Act provisions of the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, requiring that the Federal Reserve Chairman report twice a year. This remains the basic framework for reporting on monetary policy to this day.
The Humphrey-Hawkins hearings helped establish an essential point about monetary policy in America. The central bank is intended to be independent of the executive branch. It is not independent of Congress. The Federal Reserve must report to Congress, truthfully and accurately, on the conduct of policy. Congress may choose not to intervene. But it has a right to know, and a responsibility to monitor, what the Federal Reserve does.
Bob went from the Democratic congressional staff to the Reagan Treasury Department in 1981, and then on to the University of California, Riverside, where he won distinction — and where reality mugged his monetarism. Simply put, the equations that had closely tied money to prices up to that point ceased to apply. And Bob changed his views. He also decided it was time to head back to Washington, and so seized a chance to go to work for Henry B. Gonzalez, Democrat of Texas, who had by the early 1990s taken over at the Banking Committee.
Bob’s new book, Deception and Abuse at the Fed, chronicles the battles of Henry B against the obscurantism, self-dealing and contempt for Congress that have long been hallmarks of our central bank, and that were particularly so during the long tenure of the “Maestro,” Alan Greenspan. These include management failures — a notorious “phantom airplane” in the Fed’s check-clearing fleet — and accounting abuses, civil rights violations of Fed employees, and especially the withholding of information from Congress and the public. Most luminously, Bob gives here the tale of the Fed’s 17-year effort to keep secret the fact that Federal Open Market Committee meetings are tape-recorded, with full written transcripts.
With the Great Crisis, these matters take on a new importance. To this day, Chairman Ben Bernanke has refused to disclose to Congress exactly who has received help under the many crisis measures and under what terms. The legal and constitutional situation is clear: Congress has a right to this information. There are no plausible national security concerns. If a member of Congress abuses access to such information (say for personal profit) it is up to Congress to discipline that member. Reps. Alan Grayson and Ron Paul have asked Senator Dodd, chair of Senate Banking, to withhold approval of Bernanke’s renomination to chair the Board until the Federal Reserve comes clean on this issue.
Similarly, there is a bill before Congress that would subject the entire operations of the Federal Reserve to an independent audit – a project that dates back to the great Texas populist, Wright Patman. No one reading this book will be in doubt about the need for this bill.
Finally, there is the question of financial reform. In the new effort to bring systemically dangerous institutions (now called “Tier One Financial Holding Companies”) under effective supervision, the administration proposes to vest regulation of those entities in the Federal Reserve. The Federal Reserve naturally agrees. But the Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.
Anyone who wishes to understand why the Federal Reserve should not be the regulator of choice for the most dangerous financial institutions should begin by picking up a copy of Deception and Abuse at the Fed.
As for Bob Auerbach himself, well – there’s a story in the fact that he’s now my colleague once again, at the LBJ School of Public Affairs, The University of Texas at Austin. When Henry B. Gonzalez was forced, by declining health, to retire from Congress, Bob sent me his resumé. I passed it along, with the thought that the school might be able to use someone with such a “solidly conservative credential.” I suppressed the further thought that it would be nice if that person also outflanked me on the left.
So here we are again, in adjoining offices, and once again a shared assistant. Luckily, she too has nerves of steel.
Welcome, Bob, to FDL’s Book Salon. Care to make an opening remark?
Related posts:
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- FDL Book Salon Welcomes Robert H. Frank, The Economic Naturalist’s Field Guide: Common Sense Principles for Troubled Times
- FDL Book Salon Welcomes Robert Wright: The Evolution of God
- Naomi Wolf, OMB Watch Endorse Alan Grayson’s Campaign to Reform the Fed
- FDL Book Salon Welcomes Bruce Bartlett, The New American Economy: The Failure of Reaganomics and a New Way Forward
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Bob, Welcome to the Lake.
James, Thank you for Hosting today’s Book Salon.
Welcome to both. I just got my copy. Disturbing stuff. I wonder if there is any realistic hope of bringing accountability to the Fed, and to the Greenspan era.
Since you brought up my cab driving days I’d like to start with:
The ultimate free lunch from Milton Friedman and Abram Harris
and a brief biography
Late on the night shift I drove along the long grass covered Midway Plaisance next to the University of Chicago in a Checker Cab. A man who would make a profound change in my life waved. I stopped and he stepped into the back seat of my taxicab a bit surprised. It was 1963 and the south side of Chicago was rife with crime and rampant gang activity.
My passenger asked about the equations I had clipped on the visor of the cab. That was a bit different since it was more advantageous for receiving tips to put up a family picture with smiling poorly clad children. I told him I was taking some courses downtown at Roosevelt University where I was trying to get a masters degree in economics. He asked me to pull over. He wanted to talk to me. I warned him that the meter keeps ticking; it would cost ten cents a minute. He laughed and we talked. He introduced himself as Abram Harris, a professor and prominent economist at the University of Chicago. I knew about the university because I grew up in Hyde Park where it is located.
Several weeks later I was sitting on a cab line at 57th and Stony Island, near the east end of the Midway Plaisance not far from the Museum of Science and Industry, when I heard the loudspeaker blurt “Harris” followed by an address. Thinking it might be the professor, I jumped out of my cab, ran to the front of the line and told the driver “I’d like to buy your load. Here’s fifty cents.” That was good money in 1963. He told me to take the load and I pulled my cab out of the line with the best investment of a lifetime.
When I picked up Professor Harris he said with a smile, “It’s you again.” On this trip we talked again and he told me to go to the economics department at the University of Chicago several days later and see the department chairman, Al Rees. I asked if he was kidding. I told him that my present occupation does not provide that kind of money. He said that I should just go.
I would never see Professor Harris again. Shortly after I arrived on the campus at the University of Chicago flags were at half mast and I was told he died. He turned my life around and paved the way for my career.
After I registered at the University of Chicago I went to my first class with Professor Milton Friedman. There were over a hundred students in the class. Milton called out my name and told me to meet him after class. Outside the classroom in the hallway he looked very short and very perplexed. I don’t think he liked the role he had to play. Maybe Professor Harris had talked to him. Milton told me that he had been sent a message that I had failed to pay my tuition and that he should evict me from his class. I told him I was taking economics courses at Roosevelt University, driving a cab on the night shift, and that I always wanted to study under someone like him but I didn’t have any money. I mentioned that I had registered but did not pay the tuition at the end of the process. He replied rather firmly: “Go back and tell them I said you stay.”
I went back to the administration building and conveyed that message. There were some caustic words from the lady assigned to accept the tuition payments. I was turned over to the collections agent. He asked me to follow him into his office. He closed the door and burst into laughter, saying: Nobody is going to kick you out if Milton Friedman wants you to stay. He’s our most famous professor. He asked me for a suggestion to write on the form for my lack of tuition. I suggested writing that I had put all my money in gold and I don’t want to sell at this time. He laughed and we became friends.
It was the ultimate free lunch from Milton Friedman and Abram Harris. Milton was my mentor and friend, even helping with my book, before his death in 2006.
Robert D. Auerbach
Professor of Public Affairs
Lyndon B. Johnson School of Public Affairs
University of Texas at Austin
Deception and Abuse at the Fed, Henry B.Gonzalez Battles Alan Greenspan’s Bank
Robert D. Auerbach (University of Texas Press, 2008)
Links to reviews, recent news and related articles:: http://www.utexas.edu/lbj/faculty/auerbach.html
Robert Auerbach was an economist with the House Financial Services Committee during the tenure of four Federal Reserve Chairmen: Arthur Burns, William Miller, Paul Volcker, and Alan Greenspan. Auerbach also served as an economist in the U.S. Treasury’s Office of Domestic Monetary Affairs during the first year of the Ronald Reagan administration and as a financial economist with the U.S. Federal Reserve System. Auerbach has been a professor of economics at the American University in Washington, D.C. (1976-83), and a professor of economics and finance at the University of California-Riverside (1983-93). He has written numerous articles, and two textbooks in banking and financial markets. He received two Masters degrees in economics, one from the University of Chicago and one from Roosevelt University, where he studied under Abba Lerner, and a Ph.D. in economics from the University of Chicago, where he studied under Milton Friedman.
Thanks for hosting Jamie, and welcome Robert.
From the intro, this should be a good discussion with the pair of you.
Does the Fed directly influence the stock market?
Every time I hear this story it has something in it I didn’t know.
Let me ask you for a small story from your book: The strange tale of Alan Greenspan’s Ph.D. thesis.
Welcome to FDL this afternoon Robert and Jamie.
Robert I have not had an opportunity to read your book but do have a couple of questions.
Based on the intro, why do you think it is only folks like Paul and Grayson who are pushing things like the audit?
And how did the Fed gain ANY type of regulatory role in banking? Isn’t the conflict of interest off the scales or am I missing something?
OK, Elliott got there first — go with his question.
Welcome to Firedoglake – glad you could join us today!
This is going to be an uphill battle since the Federal Reserve is revered and hides under its mantra of “independence”. However, there is a very good start in the Congress with the bipartisan call for a complete audit of the Fed. Here is something I worte about this battle:
The Fed’s unbridled lobbying powers could shoot down most of its perceived problems from the Congress. During my first term of service on the Banking Committee staff (1976 – 1981) I had helped former House of Representatives Banking Committee Chairman Henry Reuss uncover the Fed’s use of the banks it regulated to lobby against bills the Fed did not like. The Fed’s orchestrated lobbying campaign managed to cripple the ability of private sector auditors and government auditors from examining significant parts of the Fed’s operations. That trophy for the Fed’s lobbying success is still on the Fed’s shelf.
Few Members wanted to incur the wrath of bankers marching into their offices to argue for issues such as a complete independent audit of the Fed’s books. The special financial interest groups overcame any public interest in that issue. That did not detour Reuss. He told the House of Representatives that this lobbying was organized by the Fed was illegal because the Fed used government funds to organize private sector bankers.1
The Fed did lose some battles. Reuss was victorious in the passage of a Congressional Resolution that directed the Fed to regularly and publically report to the Congress on Fed policies beginning in 1975.
The Greenspan Fed (1987- 2006) was more proficient in lobbying. Its liaison staff could bring the famous chairman into a Member’s office. What a wonderful opportunity to have a one-on-one with the nation’s sage rendering advice about the economy or his views on undesirable legislation that would impair the Fed’s independence, the all purpose banner that could be waved to prevent individual accountability for Fed officials. The Fed knew that even friendly legislation invites ornaments (amendments) from unfriendly Members. Issues such as corruption and lies uncovered by Congressional investigations could be quietly trivialized and swept under the Fed’s lumpy rug. Greenspan even visited president elect Bill Clinton in Arkansas in 1992, reporting back that Clinton’s body language and peripheral comments were consistent with independence for the Fed.
Following up on the Fed and the stock market, one of the striking revelations in your book is that in 1994 the Greenspan Fed – without admitting it – set out to “prick the bubble” in the stock market.
It clearly failed rather badly at that — stock prices took off and continued to rise for six years. Greenspan then decided to adopt a policy of fostering growth-by-bubbles, first in information technology and then in housing.
What do you make of the rise in the stock market since March? Are we still in the same basic policy mode? And what will happen if we are?
I have also heard it argued that the FRB doesn’t bother with its regulatory duties because regulation is a second class citizen, and policy making is all the FRB is about. Perhaps that’s just another way of saying the same thing.
Welcome to you both!
From the post:
Bill Black made similar comments here at FDL a while back. I’ve only just gotten the book, but made a beeline for your section on the Fed as a bank regulator. The heading on p. 185 sums up a lot: “End the Fed’s severe conflicts of interest and place bank regulation in a separate entity.”
Bob, as you look at the players in the regulation game today — especially Bernanke, Bair, and Geithner — what is your impression of them? What are the prospects for getting the Fed out of the bank regulation game?
Yes, exactly.
And, to Peterr, it will perhaps not come as a great surprise that Bill Black also spent seven years on the faculty at the LBJ school, and wrote his book here. We are both very much under his influence.
Isn’t Tim Geithner a perfect example of the bank-captive nature of those who populate the Fed system as executives now? If they aren’t Goldman alumni, they owe their careers to Goldman. He is regulation-averse, and his telephone log shows he spends his SecTreasury days listening to the big bankers he should be breaking up or selling off.
How can we ever fix this mess the bankers have got US into? Do you think the Congressional leadership on financial affairs and banking is strong enough — and independent enough — to be a successful counterweight to the captive Executive and Fed?
That’s one hell of a story, Professor!
Is it some sort of law that grad students must drive cabs for a living?
Oh, and welcome to you both, what a wonderful opportunity to “chat” with both of you. Thanks for spending time here today!
In a word, no. But Congress has an advantage: a lot of different viewpoints get heard there.
I’d add this: central bankers tend to be soft. They are accustomed to being deferred to. They are not usually all that effective against determined and intelligent oversight, carried out in public.
So a single figure like Reuss, Gonzalez, or Alan Grayson can make a difference.
Robert, what’s the Greenspan story you like best?
As an example, Bob ran rings around the Fed on the transcript issue. Bob – feel free to say a bit about that.
I’m in the middle of reading Charlie Wilson’s war. Hoping that Grayson can make the same difference with the FRB that Wilson made in Afghanistan.
Of all the scandals/mistakes/blunders of the Fed over the last 15 years or so, which do you see as the most problematic for the economy, but also the least well known because of its secrecy?
So, too, can single figures like Phil Gramm, who led the charge to dismember Glass-Steagal.
The Fed helped to finance the tech stock market bubble from 1996 to 2000. The money supply increased by more than a trillion dollars. Now, the Fed has pumped money into bank reserves and is paying the banks interest on these reserves . They are rewarding them for not lending and this is injuring the economy. If the banks start lending the reserves and the money supply booms again there is the possibility that they could finance a stock market boom.
The continuation of the present rise in stock prices is very difficult to predict because the underlying conditions in major parts of the economy are still very poor.
I wouldn’t put Gramm in the same category. He was a water-carrier for the big banks, and for the commodity speculators, and for Enron, and for … well, you name it.
Those are a dime a dozen on the Hill, though Gramm was, to be fair to him, pretty good at it.
But getting worse less quickly!
Are they gods or not? The “Fed” acts as if they were god-like. I myself am an economic atheist and do not revere them.
“Independence” for them is no accountability, corrupt bankng schemes, and neo-con new world order economics.
Agreed. And if the dollar turns around and starts to rise, perhaps because the world’s central banks decide to support it, then the foreign earnings of big listed companies, measured in dollars, will fall.
The effect on the Dow of that is very predictable.
I had asked New York University for a copy of Greenspan’s dissertation. They would not send it. The rest of the story is on my web site http://www.utexas.edu/lbj/faculty/auerbach.html
It was revealed by Jim McTague, the Washington editor of Barron’s.
During the tech stock bubble, when I was still a Wall St. economist, I argued that any monetary easing would go into asset price bubbles. Real consumer purchasing power (real wages and employment) was not growing fast enough to absorb it, there were all kinds of reasons why widespread inflation in goods and services would be constrained (race to the bottom is a useful summary phrase), so asset price bubbles were the only other alternative.
When the FRB eased after LTCM, I wrote a report titled “Beginning the Next Bubble.” LTCM was the most corrupt policy move I saw in my days on Wall St. Would you care to delve into how the FRB thought it was appropriate to bail out a single hedge fund by easing overall monetary policy?
The real underlying problem is that 2/3 of the directors of the Federal reserve District Banks are elected by the banks in the district. The banks are regulating themselves.
Let me follow up on the “gods” question. What’s your view of the FOMC – the Fed’s decision-making committee on monetary policy — as an institution?
Are the deliberations, which you’ve read about in the transcripts, the discussions of intelligent, well-informed and capable people? Are they matters that could not be discussed in front of the country?
Would there be any loss, in your view, if a videotape of those meetings were broadcast (or posted to the web) immediately after the announcement of the decision?
I’ve called this idea Fed-Span.
Professor Auerbach,
Hope I’m not loading my question, but…
Which do you think more effectively proves Keynes right and so-called “effecient market theory” wrong, the huge market bubbles since the Reagan era, or the fact that, in the face of the unknown, actors don’t readjust spending, but stop spending entirely, as happened and has continued to happen since last fall?
Welcome Mr. Auerbach, and thank you Jamie.
Like most Americans I became more inquisitive about the Fed on the day that Paulson presented the 2 1/2 page stick-up note to the Senators and the resultant panic. I’ve done a lot of hurry-up and catch-up reading since then. I’ll just say I’m glad you fellows are influential in the outcome of this mess. Now, I’ll hush and listen and learn. [thanks, pups, for the great comments and questions.]
One severe problem was it was all done behind closed doors at the New York Federal Reserve. When Greenspan came to the House Financial Services Committee there were no records. There was no paper trail for establishing accountability. .
Didn’t know that. Thanks.
It is interesting to note that Milton Friedman never believed in the efficient market theory. He told the Money and Banking Workshop at the University of Chicago in the 1960’s that if it was efficient traders who trade on their own account at the New York stock exchange could not make money. Yet they earned a good living.
Still works that way, doesn’t it?
I have a Greenspan story that just makes me shake my head in dismay. He was, of course, on my mailing list for the reports I wrote on Wall St. He mailed one back (subject was U.S. productivity) with a handwritten note, making a petty technical correction to a footnote where I defined the data. I thought: doesn’t the man have anything better to do with his time? He could have used his spare time to write a real PhD thesis.
So Friedman preferred a system that encourages periods of false optimism and periods of false panics so that traders could make money?
Still, pushing the notion of “effecient market theory” might help traders profit by allowing the less savvy to have certain illusions about markets, no?
There has been little accountability at the Fed. They lied for 17 years that they had no transcripts of their policy making committee. In a Congressional investigation by Chairman Gonzalez they were forced to show the 17 years of transcripts around the corner from Greenspan’s office.
In that vein, the FDIC Board of Directors webcasts their open meetings live, and then the videos are posted a few days after that, for any who want to see it.
In a particularly great moment in the book, Bob tells how Henry Gonzalez observed that the FOMC members had little green lights in front of their microphones. What did they think they were for? Henry B said, “I hope they didn’t think the green light meant ‘raise interest rates’”
In my attic, I have the transcipt for the period around the stock market crash of 1987. I’ve never read it though. By the time it was released, it was old news and there always was something more pressing to spend my time on. Since I retired, it doesn’t seem all that intriguing, but I can’t bear to throw it out because perhaps one day …
Were any specific individuals held accountable for lying to Congress? Once upon a time, Congress took a dim view of such people.
There’s no reason in the world the FOMC couldn’t do that. The Fed Board might have to reserve certain matters, relating to particular banks, for executive session. But the discussion of monetary policy doesn’t have any confidential aspects, at least not once the interest rate decision is known.
When you and I sent a letter to Senator Wellstone that he read on the floor to stop the “Modernization Bill” that would allow the creation of t he super banks that are too big to fail I received a letter from Senator Gramm thanking me. I didn’t realize he would become the new chairman of the Senate Banking Committee and pass a worse bill in 1999..
The audit bill has over 200 sponsors in the House.
In the spring of 2008, the Washington Post quoted me on Gramm: “the sorcerer’s apprentice of financial instability and disaster.”
The reporter called Gramm up and read it to him, and he denied it.
Professor Auerbach,
There have always been people who have questioned Greenspan, but why do you think it wasn’t until more recently that questioning the genius of Greenspan became more commonplace beyond the world of economists, especially in the last year or so?
It seems like conventional thinking before then – especially among investors – was that every utterance of Greenspan was more valuable that gold.
No legitimate reason, you mean.
Bob’s book notes how Greenspan “held off-the-record conferences with selected reporters” to spin the media coverage he/The Fed wanted out there, favoring some media people and shunning others. If the FOMC were webcast live, that would be a lot harder to do.
Among the current crop of financial media reporters and outlets — print, cable, bloggers, etc. — which do you see as the best of the bunch?
Oh that is a lovely (and quite apt) image.
We could alert the media, that the privatized, super powerful bank, the Federal Reserve does not tell the truth.
We could start with Ms. Greenspan (Andrea Mitchell).
There’s a very good chance the audit bill will pass.
But I hope people also take a minute to write or call Sen. Dodd about the Grayson/Paul letter on Bernanke’s confirmation and full disclosure of the Fed’s balance sheet.
This is an important constitutional question. The Fed does not have the right to judge what information may be withheld from Congress.
Any thoughts on the current financial reform bills? Especially the notion of a systemic risk regulator? Should there be one, and if so who? Or alternatively, is that the wrong approach — e.g., what about Volker’s ideas?
My impression is not good. They have just allowed Goldman Sachs to become a commercial bank with free access to the lending window at the Fed and with a vote for the board of directors at the NY Fed.. They are adding to the problem by creating banks that will be too big to fail. They are adding fuel for the next financial crisis.
What do you think of New York Fed’s new president William Dudley being a Goldman alumnus?
I am sure someone has asked about the Fed serving as the Executive’s own private purse.
Do you think Obama will dump his financial team? My bet is next year after the elections.
Not exactly about the Fed but actually yes, what do you know about how the Money Markets are backstopped? What about the role of the Fed and the shadow banking system in general? The recent failed liquidity reverse repo test?
And don’t I see you over at Naked Capitalism from time to time?
Never has a government official — including occupants of the White House — received more sustained applause than had been enjoyed by Alan Greenspan since he was appointed Chairman of the Federal Reserve. He adorned the covers of numerous news magazines and was the subject of untold numbers of feature stories in major newspapers across the nation. He received an honorary knighthood from Queen Elizabeth II. There was an endless stream of superlatives with Greenspan described as a wizard, a maestro, a genius. No praise was too extreme or too saccharine not to be applied by the media or fawning Members of both political parties in the Senate and House of Representatives. Almost all the press were favorable. Criticism before the stock market bubble deflated in 2000 was hard to find. What negatives comments that found their way into news stories were invariably balanced by fulsome praise. Most serious students of the Federal Reserve might have argued vigorously with the idea of early sainthood for Greenspan, but there was likely general agreement that the title of “wizard” fits if one is trying to describe the amazing and long running public relations success of Alan Greenspan who was chairman of the Fed until 2006, nearly 19 years.
Finally, critics were able to examine his record and finally some people would listen.
By the way: What’s your take on credit unions? Should we all be rushing to get into those, since they seem to have avoided doing a lot of the stupid stunts that the banks were allowed to pull?
I offer the first few lines of my review of Woodward’s book Maestro, back in 2001:
“And what is the relationship between Alan Greenspan and the American boom? Now there (to an economist) is a gripping topic. Bob Woodward thinks he knows: The one is the author of the other. And so, while the word “objectivism” oddly does not appear in his index, Woodward gives us Greenspan as an Ayn Rand hero, an all-seeing, all-knowing, all-wise figure: The Man Who Made Capitalism Work.
“Shaman would be, on the whole, a better title for Maestro. Woodward sets the tone on the opening page….
(…You can fool some of the people all the time…)
Volcker was a very good Fed chairman. We should have a bank regulator that is independent of the banks being regulated. Systemic risk is an empty ended term. We should not give this power to any entity unless there is some method of checks and balances.. The regulator should be independent of the banks but not independent of the Congress..
Robert, James, did either of you see the PBS – Frontline broadcast, The Warning? http://www.pbs.org/wgbh/pages/frontline/warning/view/
Your thoughts?
Bob, what can the Congress do to reform itself?
Absent Henry B, it’s hard to deny, and impossible to defend, the power of the banks in the banking committees.
For instance, should the House shrink the Financial Services committee back to 25 or 30 members?
One of the big tells about Greenspan’s hucksterism should have his authoring of the 1983 Social Security reform with its fictional surpluses which were really a backdoor tax on the lower and middle class.
What of the revelations of Brooksley Born who battled to regulate the derivatives market in the late 1990s with Goldman and the free market team? Why didn’t anyone else get it?
It is difficult to put all the problems in order of importance. Consider the following problems I cover in one chapter of my book:
The reactions to problems by the Fed, especially its Chairman, provide striking public relations lessons on how to avoid significant public recriminations and accountability, and limit meaningful remedies. Greenspan has trivialized mountains and deftly swept what he has painted as molehills under the Fed’s lumpy rug. He has been called upon to deal with nearly $500,000 stolen from the Fed’s cash and vault areas – and this official amount is an underestimate; revolving doors between Fed bank examiners and the banks they examine; the exposure of faulty examinations of a foreign bank in Atlanta through which $5.5 billion was sent to Saddam Hussein that a Federal Judge found to be part of United States active support for Iraq in the 1980s; meals, gifts, and sports tickets for Fed officials and examiners from regulated banks they examine; and the Fed bypass of the Congressional appropriations process with loans to foreign countries and the “warehousing” of funds to take them off of the U.S. Treasury’s books.
Bev, I just diaried about it, I was so blown away.
I don’t see real reform happening for many reasons, Barney Frank and Chris Dodd to mention two.
Brooksley Born was clearly one of the few heroes of that period (the late 1990s). The dogs were the guys who got their faces on the cover of Time.
I’m late for the party, but before reading the comments, I wanted to echo the sentiments of others:
Bob, Welcome to the Lake.
James, Thank you for Hosting today’s Book Salon.
Bob in AZ
My thought was, “why haven’t those people been arrested?”
This is a very important point. The Greenspan Social Security commission was a huge part of the tax restructuring that took place in the early 1980s – cutting the burden on the rich and raising it drastically on the poor.
Now we’re getting the next leg in the scam, the same people telling us that Social Security can’t support the baby boomers. But, of course, the whole supposed point of the Greenspan changes was to support the baby boomers – all of whom had been born, and counted, decades before.
In truth, the entire argument is about distribution: who pays taxes, who lives decently, and who does not.
I can only hope. Chairman Barney Frank is working hard to address these problems. However, President Clinton sent an Undersecretary of the Treasury to the Congress in 1992 to talk about plans for an independent consolidated bank regulator, independent of the banks being regulated. He appeared in the Financial Services chamber (the Wright Patman room) before a large group of staff.. I told him the Fed would never allow what he suggested. Shortly thereafter he resigned from the treasury and took a job at a large New York Bank..
She has much less political power than Secretary Rubin or Chairman Greenspan who opposed her views.
thanks — that’s a scary list, but the worst part is, it all seems so common now — we can read about that many scandals in a week, today. We seem to live in an era of non-accountability at all levels. Which might explain why a simple bill to just audit the nation’s central bank still can’t get passed. There’s huge resistance in the country to ‘fessing up.
When you look on today’s landscape — who else, in addition to yourselves, are the accountability heroes? Liz Warren? Are they under siege?
and an exceptional diary it is
Professor Auerbach,
I want to get a question in before you need to leave: I am under the impression that most Republicans today have as one of their articles of faith a bowdlerized version of Friedman’s economics as filtered through Ronald Reagan. They don’t seem to be terribly interested in evidence, but are strong on articles of faith.
Is this a fair assessment?
Bob in AZ
Frank has essentially gutted the CFPA, and that was the only positive in a totally inadequate list of reforms. I am pretty much done cutting Democrats any slack on financial and economic matters. I see Frank as one of the villains.
Sure, and no accident. Same is true today of Sheila Bair as against Timothy Geithner or Larry Summers.
Though I was pleased to see Summers a week ago finally got around to telling the banks to stop lobbying against financial reform.
Is there a chance that battle lines are now, at long last, getting drawn?
“In truth, the entire argument is about distribution: who pays taxes, who lives decently, and who does not.”
Would you also say that also appears to be happening with health “reform.” consider the alternative tax proposals, and who winds up paying for them.
Without campaign finance reform, the end of legalized bribery, will the common good ever be a priority to a majority of our representatives?
Also, with a corporate-biased media focusing on distractions, distortions and titillations, it feels like such an uphill battle.
And, say, universal health care as a basic human right. Just not feasible and pragmatic, apparently. How tragic is that?
Elliott … ty! :) That story has been haunting me!
Elizabeth Warren has done a very good job at the Congressional Oversight Panel (COP) in reviewing the TARP — the COP reports are generally excellent. I don’t think she had to give up her day job (at Harvard Law School) to take on that assignment.
I agree with you about the terrible burden on those who earned less than the ceiling contributing limits caused by the 1983 Social Security Commission led by Greenspan. Let me try an idea on you from Milton Friedman:
A plan to help poor people
Milton Friedman thought the most efficient way for the government to administer support for the poor was to send poor people a check in the mail. Their remittances would be reduced by 50 cents for each dollar they earned. Thus, this “negative income tax” would include an incentive to work with a strong safety net. This idea was supported by both President Richard Nixon and his opponent, George McGovern in the 1972 election. It failed to pass in the Congress. In 1956 it was added to the other welfare plans for the safety net: The Earned Income Tax Credit (UEITC).
“ Annually, it puts more than $43 billion in the hands of more than 22 million low wage workers. The Current economic situation makes it even more imperative that we reach out to those people who may be newly eligible for this important tax credit.
In 2008 the recipients “Earned income and adjusted gross income (AGI) must each be less than:
$38,646 ($41,646 married filing jointly) with two or more qualifying children
$33,995 ($36,995 married filing jointly) with one qualifying child
$12,880 ($15,880 married filing jointly) with no qualifying children
Tax Year 2008 maximum credit:
$4,824 with two or more qualifying children
$2,917 with one qualifying child
$438 with no qualifying children
Investment income must be $2,950 or less for the year.”
UEITCt should be enlarged and take the place of many programs that attempt to monitor how poor people should conduct their lives in order to receive help. Remember, the largest poverty programs are the wonderful state universities that obtain much of their funds from sales taxes on poor people to send mostly middle class and rich people to college. I don’t think we should require the college students to forego their unnecessary –as specified by the government – expenditures to retain their subsidies for tuition.
What also is needed are better primary and secondary schools, especially in the poor neighborhoods.
Sure. Congressional minds work that way.
We have seen the same thing in healthcare. The sellout is still on but there is some frustration on the Administration’s part that it is catching flak from the health (or banking) industry.
Some Republicans may well be mixed up. I wish they would read Milton Friedman’s plan to help the poor.
A plan to help poor people
Milton Friedman thought the most efficient way for the government to administer support for the poor was to send poor people a check in the mail. Their remittances would be reduced by 50 cents for each dollar they earned. Thus, this “negative income tax” would include an incentive to work with a strong safety net. This idea was supported by both President Richard Nixon and his opponent, George McGovern in the 1972 election. It failed to pass in the Congress. In 1956 it was added to the other welfare plans for the safety net: The Earned Income Tax Credit (UEITC).
“ Annually, it puts more than $43 billion in the hands of more than 22 million low wage workers. The Current economic situation makes it even more imperative that we reach out to those people who may be newly eligible for this important tax credit.
In 2008 the recipients “Earned income and adjusted gross income (AGI) must each be less than:
$38,646 ($41,646 married filing jointly) with two or more qualifying children
$33,995 ($36,995 married filing jointly) with one qualifying child
$12,880 ($15,880 married filing jointly) with no qualifying children
Tax Year 2008 maximum credit:
$4,824 with two or more qualifying children
$2,917 with one qualifying child
$438 with no qualifying children
Investment income must be $2,950 or less for the year.”
UEITCt should be enlarged and take the place of many programs that attempt to monitor how poor people should conduct their lives in order to receive help. Remember, the largest poverty programs are the wonderful state universities that obtain much of their funds from sales taxes on poor people to send mostly middle class and rich people to college. I don’t think we should require the college students to forego their unnecessary –as specified by the government – expenditures to retain their subsidies for tuition.
What also is needed are better primary and secondary schools, especially in the poor neighborhoods.
I’m a great fan of the EITC, which was expanded under Reagan and again under Clinton. The effect is similar to food stamps, another sensible and effective program.
The EITC works best if combined with a decent minimum wage and a strong employment policy.
These days I’m attracted to the idea that the government should now just start offering jobs (at, say, $8/hr) to all those who want them — on the ground that it’s better to have an employed buffer stock than an unemployed one.
This would supercede the minimum wage and get a lot of people working, meeting many social needs that currently don’t get dealt with.
Profs. Auerbach and Galbraith,
I was impressed by the Frontline special on Brooksley Born. Near the end, they said without elaboration that Larry Summers now favors regulation. Is he actually pushing for regulation, or is his support only pro forma? And what about Timothy Geithner? Is he still in Wall Street’s pocket? Can he say “no” to Goldman Sachs?
Bob in AZ
I am late to the party, but have to share this. A friend of mine was eating at Earl Abel’s the day Henry B. was insulted by a fellow at a nearby table as being a commie. Gonzalez, who was then fairly well up in years, punched the guy, and fists flew. They had to be restrained.
Henry B. is not forgotten down here–we could use many more like him now.
There need to be an efficient way to help people who cannot afford healthcare.. In Chicago there is the giant Cook County Hospital that helps to fulfil that function. More efficient hospital and clinics are needed. Remember, there are only a little over 800,000 M.D.’s in t4e U.S. By subsidizing county hospitals and clinics open to those who cannot afford healthcare there would be a more efficient use of the limited number of doctors available.
Cynthia Kouril has written here at FDL about the “new Pecora Commission” (this and this from July, and this from September, just to pick three posts). The charge to this commission (from the first of her posts) is:
Any thoughts on the task, the commissioners, and their chances of effecting any meaningful reforms?
The question is, of course, would this produce a living wage for individuals and families. At a minimum since cost of living varies depending on where you live, there would need to be adjustments for this.
Stop you’re killing me. LOL When Larry starts pushing a return to Glass-Steagall, as a beginning to regulatory reform, we will know he is serious. Geithner is his sockpuppet.
I don’t like that idea because I would rather expand the more efficient private sector. Poor people should be sent a check in the mail under a negative income tax now embedded in the Earned Income Tax Credit. If people have to work to get help then the homeless man coming to your door would be asked to rake leaves until he proves he deserves the money. That is described in Max Weber’s Protestant Ethic.
It’s sometimes hard to judge from the outside where someone like Larry Summers really stands within the administration. High officials can change their views, and it’s often the case that outsiders get — or are given — the wrong impression of what they are up to. That goes with the territory.
Yet, there are test issues. Whether the administration hands more power to the Federal Reserve is one. Whether it gives the FDIC the authority to resolve the worst big banks is another. Whether it executes a serious audit of the loan documentation behind the bad mortgages is another. Whether it finally reestablishes Glass-Steagall is another.
Gary Gensler, for one, at the CFTC, has changed his views and undergone a Damascene conversion, and there is a clear public record of this fact.
If you give a committee this open ended assignment you may not see them again for many years.
The Financial Crisis Inquiry Commission has a very broad mandate, under the Fraud Enforcement Recovery Act of 2009 — note the use of the F-word in the title of that statute. It has subpoena power and authorization to make criminal referrals as appropriate to the DOJ.
This could be a very important enterprise — but it will take some time to tell. Let’s wait and see how it does.
The two are not mutually exclusive — and not everyone who needs work is actually poor. A lot of the uptake on programs organizing weatherization or home health care or neighborhood conservation would be young people who can’t find jobs in the private sector. Once the private sector recovers enough to offer them work at $8.50, they’d move on.
That may not be a bad idea. It may give them a taste of real life. When I drove Chicago was infested with crime.. There were something like 11 police channels. On Friday night cars would be lined up around County Hospital with gunshot and stabbing wounds waiting to get into what was called the “knitting room.” It was an eye opening and humble experience.
Robert — what’s been the reaction to your book from friends and former colleagues in government — any surprises?
they love it. our offices are filled with flowers…
Discussions about how to help the poor and encourage working raise larger questions about what we want the economy to do besides rake leaves.
A very few analysts describe the Fed (and Treasury) in each era as pushing some larger “play,” meaning some grand design to move the economy or base its growth on a larger strategy. Do you see some larger strategy in “play” now, and what is it? (What are Obama’s people up to?) Does it makes sense? And where does the “independent” Fed and Bernanke fit in that?
That is one way to look at it but the end result may not be what you want. Once established it will be difficult to pull the rug out from under the people in the program. Why not just give tham a negative income tax and let them get jobs with a future.
I am sure there are some parts of the private sector that are more efficient than the public one, but after all we have seen I do not take such assertions on faith.
As we come to the end of this lively Book Salon,
Robert, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book, Greenspan and The Fed.
James, Thank you very much for Hosting today’s great Book Salon.
Everyone, this is a must-read book on The Fed, if you have not bought a copy yet, here is a link.
Thanks all.
Uh, dare I ask, what kind?
The Obama plan is to revive what was. What we need is a re-industrialized base which is sustainable both in terms of energy and the environment.
Well then, how about setting up a new (or perhaps parallel) banking system, to finance investments in green energy, conservation and infrastructure reconstruction to meet the challenge of climate change?
That’s what we did in the 1930s to support the creation of a well-housed middle class, and it worked brilliantly until the deregulators ruined it.
Point is: the private sector exists in those particular sectors where the right incentives are created for it by the public sector and the structure of regulation.
paper flowers made with shredded currency…
Thanks to all for joining us, and thanks especially to Bob Auerbach for writing this terrific and important book.
It’s also, by the way, a great read.
When Ryan Grim printed Chapter 9 of my book, “When Five Hundred Economists are Not Enough” on the Huffington Post and he wrote a very good follow up (September 7,2009) there was an interesting reacion The chapter details how the Federal Reserve sends money into academia.. The result can be biased research. As you can imagine many economists were not happy. .
Scarecrow is upstairs!
The Misplaced Concern About Whether the Public Option Would Be “Subsidized”
Thank you both for a fascinating Book Salon, enjoyed it very much.
and as always, thanks Bev.
Thanks again. Well done, UT Austin.
Professor Galbraith,
The Pecora Commission did not become noteworthy until Pecora was named to head it. What do you think of the head of the new Financial Crisis Inquiry Commission, Phil Angelides, is he up to the job? Will he keep the committee sufficiently focused?
Bob in AZ
Oops, its EPU time. However, any who continue to lurk here may be interested in the members appointed to the new commission:
Bob in AZ