The Financial Times reports that the House Oversight committee wants to have a little chat with the Fed over the widespread reports that it muscled BofA more than a tad to complete its acquisition of Merrill after the Charlotte bank learned that the securities firm had posted large losses in December and tried to exit the deal.
What is noteworthy about this move is that this is apparently the first time in 20 years that Congress has subpoenaed the Fed. Some will lament the supposed loss of Fed independence, but Willem Buiter has already tagged the Fed as the second least independent major central bank, surpassed only by the Bank of Japan.
As we noted in an earlier post, the Fed began selling out its vaunted independence in the Greenspan era, when the Maestro made nice to the Clinton administration for an unidentified quid pro quo. presumably reappointment as Fed chairman. And Bernanke hasn’t simply been coordinating policy with the Treasury, but has instead acted as an off balance sheet vehicle for the Treasury, enabling it to circumvent budgetary constraints and evade the need for Congressional approval (and oversight too).
So while it is a positive step to see this shot across the Fed’s bow, Congress peculiarly is not going after the elephant in the room, namely the Fed’s increasing role, as Buiter put it, as quasi-fiscal agent of the Treasury.
From the Financial Times:
The Federal Reserve was served with a subpoena from a Congressional committee on Tuesday,…
The committee said it would “have a subpoena served on the Federal Reserve” as it tries to discover whether undue pressure was placed on Ken Lewis, chief executive of Bank of America, to complete an agreed deal to buy Merrill Lynch last year….
One person familiar with the Fed’s history could remember only one previous occasion in the past 20 years when it had been served with a subpoena.
As the Fed adopts non-conventional tactics such as buying bonds to restore liquidity to the economy, parts of Congress are trying to subject the institution to new oversight.
The House committee is holding a hearing on Thursday where Mr Lewis will be questioned. In his prepared testimony, seen by the Financial Times, Mr Lewis says that the Treasury and Fed “expressed significant concerns about the systemic consequences and risk to Bank of America” of declaring a “material adverse change” – a step that would precede cancelling the transaction….
The House oversight committee last month asked for e-mails and documents related to the deal. In response, Mr Bernanke said he had offered “full access to all papers, documents, notes related to those meetings and to the Bank of America-Merrill Lynch transaction”. However, the House oversight committee, chaired by Democrat Edolphus Towns, said the opportunity to review documents at the Fed’s office was insufficient and he wanted copies to pursue an investigation.
The Fed had resisted providing the documents because they contain confidential supervisory information.
In a Congressional hearing last month, Mr Bernanke denied acting inappropriately in urging BofA to complete the Merrill deal. He said the presence of legal staff, including the Fed’s general counsel, at a meeting with Mr Lewis ensured that “everything… met all the necessary legal requirements”.
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The Fed's status as pseudo-independent and pseudo-private is just the most extreme example of how we have these entities that are in fact public utilities, which could not exist at such size in any other way. Fannie and Freddie were other pre-existing examples, and now with the Too Big To Fail ideology all large FIRE entities, however nominally "private", have been de facto declared to be wards of the corporatist state.
So why doesn't such a society take the rational step of formalizing the public utility status of these things? Simple corporatist ideology, which lyingly calls itself "capitalist". A religion, really.
Congress should subpoena Treasury documents from the recent Chrysler bankruptcy – and determine what "undue pressure" was placed on the secured bondholders to relinquish their first priority rights. An egregious example of the overturning of the 100-year cornerstone of bankruptcy law.
The Fed embodies the quintessence of modern rationalistic naturalistic thought. The Fed is deemed to be the ultimate refuge where reason and rationality–science–can ostensibly rule over man's ego. Here mind triumphs over passion.
The underpinnings of the theory are spelled out by Hume:
It is sufficient for our present purposes if it be allowed, what surely without the greatest absurdity cannot be disputed, that there is some benevolence, however small, infused into our bosom, some spark of friendship for humankind, some particle of the dove kneaded into our frame along with elements of the wolf and the serpent. Let these generous sentiments be supposed ever so weak…they must still direct the determinations of our mind and, where everything else is equal, produce a cool preference of what is useful and serviceable to mankind above what is pernicious… Avarice, ambition, vanity and all passions vulgarly though improperly comprised under the denomination of self-love are here excluded from our theory…
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Hume's conviction that man's rationality can trump his passions, writes Reinhold Niebuhr, ultimately leads to the theory that "the natural egoism of man is regarded as harmless so long as bad rulers and legislators do not interfere with the balance of competing egotistic impulses as it exists in nature."
So "scientist-kings" who, due to their superior training and education are able to rise above the political and economic fray, are crowned.
The touching faith that disinterested intelligence can transcend man's nature was perhaps no better illustrated than in the writings of John Dewey. "That coercion and oppression on a large scale exist no honest person can deny," he declares. "But these things are not the product of sciene and technology but of the perpetuation of old institutions and patterns untouched by the scientific method."
All of this of course runs completely contrary to man's history, and his nature. As Niebur explains:
Contemporary history is filled with manifestations of man's hysterias and furies; with evidences of his daemonic capacity and inclinations to break the harmonies of nature and defy the prudent canons of rational restraint. Yet no cumulation of contradictory evidence seems to disturb modern man's good opinion of himself. He considers himself the victim of corrupting institutions which he is about to destroy or reconstruct, or of the confusions of ignorance which an adequate education is about to overcome. Yet he continues to regard himself as essentially harmless and virtuous. The question therefore arises how modern man arrived at, and by what means he maintains, an estimate of his virtue in such pathetic contradiction with the obvious facts of his history.
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Reinhold Niebuhr, The Nature and Destiny of Man