by John M. Curtis
(310) 204-8700

Copyright Sept. 2, 2009
All Rights Reserved.

                  When the economy began to fail December 2007, former Federal Reserve Board Chairman Alan Greenspan called the mishap a “once in a century event,” comparing it to the Great Depression.  Bank and institutional failures were occurring at an alarming rate, leaving banks without cash.  Markets were stunned when Bear Stearns ran out of cash in November 2007 due to the collapse of the “derivative” market.  Former Treasury Secretary Henry Paulson, a former Goldman Sachs CEO, collaborated with Fed Chairman Ben Bernanke to arrange the sale of Bear Stearns March 14, 2008  to J.P. Morgan Chase for two dollars a share, a staggering loss when you consider it traded at $172 in Jan. 2007.  Only a few months later, the Fed refused to rescue Lehman Brothers, whose derivative investments turned sour, saddling the company with trillions in debt.  Bernanke and Paulson turned a blind eye, letting Lehman Brothers go under.

            Bernanke and Paulson never explained why they rescued Bear Stearns but not Lehman Bros.  Many economists blame Lehman’s bankruptcy for causing liquidity crisis in the nation’s financial markets, prompting the Fed to add trillions to the banking system or risk insolvency to the nation’s banking sector.  Back in March, Bank of America’s, the nation’s largest bank, stock plummeted to two dollars a share.  Even J.P. Morgan Chase, the nation’s most solvent bank, and Wells Fargo Bank dropped to under $!0 a share, obliterating the confidence of ordinary investors, and certainly consumers refusing to spend the needed cash to stimulate the economy.  Bernanke, a Princeton Great Depression Scholar, took unprecedented steps to capitalize banks and financial institutions for about $8.5 trillion.  Congress only authorized President George W. Bush $690 billion in Sept. 2008.

            When President Barack Obama took the reins Jan. 20, 2009, his top priority was getting an additional $790 billion stimulus.  Bush and Obama’s stimulus only account for 1.5 trillion, leaving roughly $7 trillion unaccounted for.  Bernanke and Treasury Secretary Tim Geithner, former head of the New York Fed, refuse to account for approximately $7 trillion in unaccounted for taxpayer money.  Neither the Treasury Department nor the Fed can account for the missing cash.  House Financial Services Chairman Rep. Barney Frank (D-Mass.) endorsed a bill sponsored by Rep. Ron Paul (R-Texas), a former presidential candidate and strict Constitutionalist, to audit the Federal Reserve.  Paul’s bill has hundreds of co-sponsors each tired of the Fed hiding behind its historical independence, since created in 1913 in response the Financial Panic of 1907 causing a national banking crisis.

            Never before has the Fed been subject to audits, getting carte blanche to manage the nation’s money supply and short-term interest rates.  Only in the U.S. does the central bank coordinate the manufacturer of cash through the Treasury Department, an agency of the executive branch.  Since the Fed doesn’t print money, Bernanke orders cash for the Office of Printing and Engraving, which, in turn, delivers cash in hundred dollar denominations to the Federal Reserve Banks.  “We will subject them to a complete audit,” said Frank, admitting he worked with Paul on the bill that should come up for a vote in October.  “We don’t want to have the audit appear as if it is influencing monetary policy, because that would be inflationary,” said Frank, not revealing the real reason behind the audit:  Auditing the whereabouts of $7 trillion has nothing to do with interest rates or inflation.

            Paul wants more transparency at the Fed after Bernanke refused to reveal a complete list of institutions to which the Fed handed out its largess.  Paul’s bill commissions the controller general of the Government Accountability Office to conduct the first audit by 2010.  Calling Paul’s bill “wrong-headed in the extreme,” the Washington Post said audits would cause “public second-guessing,” raising doubts about the Fed’s decisions.  After Bernanke and Geithner let Lehman Bros. go bankrupt, it raised questions about the arbitrary and capricious manner in which the Fed operates.   Lehman Bros.’ failure caused the “run-on-the-bank” that led banks to collapse nationwide.  Paul’s bill reacted to regulatory proposals handing the Fed more authority when there’s no one policing the Fed .on (a) its cash orders to the Treasury and (b) how the cash has been distributed.   

            Frank’s endorsement of Paul’s bill to audit the Fed is long overdue.  While there’s risk to the monetary system asking the Fed to come clean, there’s far bigger risk to U.S. economy allowing the Fed or order cash indiscriminately from the Treasury.  “I think it’s the financial crisis obviously that’s drawing so much attention to it, and people want to know more about the Federal Reserve,” Paul told FOXNews, opposing the Obama administration for giving the Fed more regulatory authority.  Given the $7 trillion discrepancy, the Congress—and indeed the people—has every right to know where each dollar goes.  Bernanke can’t justify his secrecy by saying openness would jeopardize the U.S. financial system.  Audits could expose the Fed—and indeed the U.S. financial system—to considerable embarrassment that could further devalue the dollar.  Frank and Paul must keep their audit from giving away too many secrets.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.