Economist Robert Reich claims that the secretiveness of the Federal Reserve means it has no place in a democracy.
"The Fed is not part of the legislative branch," Reich recently wrote in his blog. "Its secret deals … violate the democratic process, if not the Constitution itself."
Reich, who served in three national administrations and was a secretary of labor under President Bill Clinton, says that “Thomas Jefferson put a stop to Alexander Hamilton’s idea of a powerful central bank out of fear it would be unaccountable to the public. The Fed has just proven Jefferson’s point.”
As long as it's merely setting interest rates, Fed secrecy and political independence can be justified, says Reich, now a professor of public policy at the University of California at Berkeley.
But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable.
The Fed now admits it bailed out Bear Stearns — taking on tens of billions of dollars of the bank's bad loans — in order to smooth Bear Stearns' takeover by JPMorgan Chase, Reich notes.
“The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed,” he points out.
“The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.”
The Bear Stearns deal marked a turning point in the financial crisis for the Fed, Bloomberg reports.
By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury.
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