The Federal Reserve (Fed) is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral. Ted Forstmann, senior partner of Forstmann Little & Co. in New York said “It's your money; it's not the Federal Reserve's money,” “Of course there should be transparency.”
The Fed is transparent in that it is subject to the oversight of Congress. Periodically Congress reviews the Fed’s activities and can alter its responsibilities by statute. The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. Legislation requires that the Federal Reserve reports annually on its activities to the Speaker of the House of Representatives, and twice annually on its plans for monetary policy to the banking committees of Congress.
The recently failed Franklin Bank which is based in Houston, described their founder Lewis Ranieri in a securities filing last year as "the father of the securitized mortgage market," during the 1980’s. Today, we are in the midst of experiencing the consequences of the failure of a party that got way out of control. The party was brought on by the geeks bearing formulas. Their party gave us the credit default swap, mortgage backed securities and other structured investments that have pushed the global banking system into crisis. One of the greatest of Federal Reserve chairmen, William McChesney Martin, once said that the job of the Fed is “to take away the punch bowl just as the party gets going.” Washington Irving wrote about the Mississippi Bubble in his paper “Crayon Papers” from 1719 that common sense told him that eventually, the “short but brilliant” phenomenon of irrational exuberance bursts and is most often replaced by irrational fear. What was a sure thing yields to uncertainty; uncertainty undermines decision making; and the confident decision making that is needed to sustain the economy retreats into a defensive crouch. Counterparties come to be viewed with suspicion. No business appears worthy of financing. Cash is hoarded. The economy, starved of the lifeblood of capital, staggers and begins to weaken.
Now that the economy has weakened again the Fed has stretched out the terms with which we lend to bankers; accepted new forms of collateral; broadened access to our lending window to securities dealers and one particular insurance company—AIG—whose failure was deemed by the Federal Reserve Board to present a risk to the financial system; opened a window for financing commercial paper; backstopped money market mutual funds; and, recognizing that we are inextricably interwoven with a global economy, established swap lines to help meet the dollar-funding needs of 14 central banks, ranging from the European Central Bank and the Bank of England to the Banco de México and the Singapore Monetary Authority, the total of which now aggregates to hundreds of billions of dollars. The Fed's staff and policymakers have provided substantial intellectual input into activities of other regulators, such as the FDIC and the Treasury, as they develop innovative means and modes of recapitalizing the banking system, dealing with the mortgage crisis and restoring economic growth.
You can see the size and breadth of the Fed’s efforts to counter the collapse of the credit mechanism in its balance sheet. At the beginning of this year, the assets on the books of the Fed totaled $960 billion. Today the Fed's assets exceed $1.9 trillion. I would not be surprised to see them aggregate to $3 trillion—roughly 20 percent of GDP—by the time we ring in the New Year. The composition of the Fed's holdings has shifted considerably. Previously, almost 100 percent of its holdings were in the form of core holdings of U.S. Treasuries; today, less than a third are. The remainder consists of claims deriving from our new facilities.
The fourth President of the United States James Madison once said, “The circulation of confidence is better than the circulation of money.” Madison led the unsuccessful attempt to block Hamilton's proposed Bank of the United States, arguing the new Constitution did not explicitly allow the federal government to form a bank. While President in 1815, he supported the creation of the second National Bank. James Madison also said, "Union of religious sentiments begets a surprising confidence."