The Fed's shadow TARP

By SEN. JIM DEMINT, POLITICO

In the run-up to the financial crisis, the Federal Reserve fueled the housing bubble with its easy money policy. Now, we know that after the crisis struck, the Fed secretly propped up elite bankers all the way from Wall Street to Brussels to the Central Bank of Libya.

A Bloomberg news investigation found that while the Treasury Department was pumping $700 billion into banks under the Troubled Asset Relief Program, the Fed was covertly operating its own bailout program – the biggest in American history. The Fed’s Shadow TARP issued $1.2 trillion in loans to domestic and foreign banks from 2007 to 2010, far more than Congress authorized Treasury to spend under TARP.

The bailouts were supposed to revive the economy, but all they have done is institutionalize too-big-to-fail policies that put American taxpayers on the hook for reckless and irresponsible actors in the global financial system.

Shadow TARP is just one of many unilateral actions the out-of-control Fed has taken over the last few years. Trillions more in aggregate lending authority was offered to banks by the Fed, without the public’s knowledge. And the Fed printed an additional $2 trillion to buy up government debt and toxic mortgage-backed securities in two controversial rounds of so-called quantitative easing.

Left to its own devices, the Fed would have never revealed its secret bailout. Fed Chairman Ben Bernanke said in an April 2009 speech that disclosing the names of the borrowers “might lead market participants to infer weakness.” To obtain the names, Bloomberg LP, the parent company of Bloomberg News, waged a two-year legal battle that was ultimately won in the U.S. Supreme Court.

While the Fed was fighting Bloomberg’s Freedom of Information Act requests, it was also opposing attempts by Congress to audit the central bank for the first time in its 98-year history. Bernanke, who only has his position because Congress delegated its power to coin money to the Fed, testified the audit would “effectively be a takeover of policy by the Congress."

Congress eventually approved a partial audit that showed the Fed extended an incredible $16 trillion – more than the entire U.S. economy – in aggregate lending authority to foreign and domestic banks from the end of 2007 to the middle of 2010. Still, no one knows how or why those decisions were made.

The Fed may be independent, but that does not mean it should be unrestrained or unaccountable. Earlier this year, it surpassed China as the single largest holder of U.S. debt. Since the beginning of 2011, the Fed’s purchases of Treasury debt equal almost 90 percent of the increase in total public debt outstanding.

Leaders from around the world have openly complained about the way the U.S. is intentionally weakening the dollar, since doing so cheapens the value of U.S. debt they hold. After the second round of quantitative easing was announced, Chinese Vice Finance Minister Zhu Guangyao said America “does not recognize, as a country that issues one of the world’s major reserve currencies, its obligation to stabilize capital markets.”

German Finance Minister Wolfgang Schaeuble was more blunt, calling the Fed “clueless.”

Americans are feeling inflationary pangs at home, too. The congressional Joint Economic Committee found that since the Fed launched its program of quantitative easing in late November 2008, the value (trade weighted) of the U.S. dollar has declined 14 percent, which translates into higher food and fuel costs.

The United States simply cannot print its way out of a recession. But the Fed doesn’t appear willing to reverse its policy of debasement or be any more transparent in its future efforts.

However it may displease officials at the Fed, it’s still subject to Congress. America is not subject to the Fed. The five members of the Federal Reserve Board who orchestrated a bigger bailout than all 535 members of Congress ever have must be held accountable.

Unfortunately, when Barack Obama became president, he opted not to replace Fed leadership, which helped create and prolong the deep recession that continues to strangle our country’s economic growth.

Going from bad to worse was certainly not the change Americans had in mind when they elected Obama. Positive change will require electing a new president in 2012 who won’t tolerate a secret-keeping Fed any longer and who will finally put an end to the bailouts once and for all.

Sen. Jim DeMint (R-S.C.) serves on the Senate Banking, Housing and Urban Affairs Committee.