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Racketeering 102: Fed's Lacker Threatens With Mutually Assured Destruction If Fed Audited

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by Tyler Durden
01/15/2010 15:14

It was a four short months ago that the Clearing House Association, in a court filing, threatened with untold destruction if the Fed was ordered to submit to an audit that would expose all their dirty laundry in the form of undervalued assets used as collateral by the Federal Reserve. We recall the direct threat used back then:

If the names of our member banks who borrow emergency funds are publicly disclosed, the likelihood that a borrowing bank's customers, counterparties and other market participants will draw a negative inference is great. Public speculation that a financial institution is experiencing liquidity shortfalls - which would be a natural inference from having tapped emergency funds - has caused bank customers to withdraw deposits, counterparties to make collateral calls and lenders to accelerate loan repayment or refuse to make new loans. When an institution's customers flee and its credit dries up the institution may suffer severe capital and liquidity strains leaving it in a weakened competitive position.

It is fitting that as attempts to expose the Fed's shady practices accelerate on all fronts, and include direct legal approaches as well as subpoena demands by various politicians, that a Fed President would once again come out today, and recap the good old Mutual Assured Destruction treatise that both Wall and Main Street have gotten used to since the beginning of the bailouts. Somehow financial M.A.D. makes an appearance every time the bankers demand something and have no other rational justifications. So why not just feed the stupid plebs something about the Apocalypse that is certain to transpire should the financial oligarchs not get their way. Today was no exception.

Enter Richmond Fed president Jeffrey Lacker. His words, from prepared tesimony to the Richmond Risk Management Association:

Some observers argue that the financial reform agenda should include changes in the role and governance of the Federal Reserve. One proposal would extend the GAO's authority to audit Fed operations to include monetary policy decisions. Other proposals would alter our governance structure by making Reserve Bank directors and/or presidents political appointees. I know it might sound self serving for a Fed insider to object to such changes, but I believe such moves would present very serious risks to the effectiveness of monetary policy and ultimately to economic growth and stability. Looking across time and across countries, there is abundant evidence that economic policy and macroeconomic performance are generally better when the central bank's monetary policy decisions are shielded from the political pressures of the moment. For an illustrative case, one need only look to the 1970s in the U.S., when political influence led to high and volatile inflation that disrupted economic growth. The governance of the Federal Reserve System balances accountability, with ultimate authority resting in Washington, and independence, with the participation of non-political leaders from throughout the country. While the performance of our economy in the last two years has clearly been unsatisfactory, and policy mistakes may have contributed to our problems, the Fed's balanced, hybrid governance structure has, I believe, given us a good record over the better part of three decades. Disrupting that balance would pose another long term challenge for our economy.

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