December 2, 2014

A Grand Masquerade? Regulatory Capture?

By C.W.

Two months ago, much to the chagrin of her  coworkers, former FED Bank examiner Carmen Segarra released audio recordings implying officials from the Federal Reserve Bank of New York showed leniency in an exchange of assets between Goldman Sachs and Spanish bank Banco Santander. The deal explained as “legal but shady” by the recorded FED employee, offers a rare glimpse into FED meetings. The contract required a “no objection” clause on behalf of the FED, the FED notices the detail and in their meeting with Goldman Sachs they do not press Goldman Sachs, rather accept Goldman’s explanation of it “not meaning what it appeared to say.” After the meeting, the tape records Segarras’ fellow employee speaking, encouraging his collegues not to “discourage” and “criticize” Goldman Sachs “in order to better understand the market place (1).” The article by NPR intonates the FED of being too familiar with the said banking institution and not having the strength to properly regulate banks. She advocates that the FED promotes a “culture of fear and servility in dealing with banks (2).” Jake Bernstein, the reporter who leaked the tapes states:

"These are people who work inside the banks. They see these people every day, and they need to obtain the information from these banks, and it's easier to obtain the information if you're friendly and if you have a good relationship, but sometimes that can slide to deference.” (1)

A quote form a recent reading of ours, echoes a similar sentiment:

“…but they can be people who importantly enforce the rules of the sport as they are known at the outset of the match, that is who follow the rule law- or they can be people who arbitrarily enforce rules against one team but not the other.” (3)

In the wake of the public criticism, the FED has decided to launch an internal investigation into whether it is too close to certain banks. While an internal review will offer little transparency and impartiality, it does highlight a major concern: is the FED in a state of regulatory capture? Have they ceased acting for the public good and are they too influenced by other major banking institutions? Obviously, the problem is a lot more complicated then what will be discussed here, but the existence of a central bank is a core argument in Austrian vs. neoclassical economic thought. 

The Federal Reserve is an exceptionally powerful institution; a bank that can literally dictate markets. By some reports, the Federal Reserve allocated 16 TRILLION dollars to banks around the world during the 2008 crisis. Do Austrian economists have a point? Is the Federal Reserve handing out free lunches? Will “printing money from thin air” have long term repercussions? Why did we not let these banks fail, and allow more risk adverse banks replace them in the financial niche?

Carmen Segarra was fired from her job and subsequently sued the FED. She lost.

3.     3.   LH. White ,The Rule of Law of the Rule of Central Bankers, Cato Journal 30, pg. 453

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