It is time for a comprehensive audit of Janet Yellen ’s Federal Reserve – and not just for the reasons presidential candidate Rand Paul and others have given.
The Fed needs to be audited to see if its ruling body has broken the law by manipulating financial markets that are outside its jurisdiction. A thorough investigation of the Fed will show once and for all if its former chief Ben Bernanke and current Chairwoman Yellen should go to jail.
I know, that’s a bold statement coming as it does on Sept. 1, 2015, with Wall Street still in half-bloom. But it won’t be so preposterous some day in the future if the stock market suffers a full-blown economy-busting collapse and Congress and everyone else are looking for scalps.
The Fed should be audited as a brokerage firm would be — its financial holdings, its transactions, market orders, emails and phone calls. Special attention should be given to what is called the “trade blotter” at the Federal Reserve Bank of New York, which handles all market transactions for the Fed.
The Fed’s dealing with foreign central banks — especially at times of market stress — should be given special attention. Trades in the wee hours of the morning should be in the spotlight.
Not surprisingly, the Fed is strongly opposed to an audit and sees it as an intrusion into its autonomy. Washington shouldn’t be intimidated.
Autonomy? Hah! That ended when the central bank started playing footsie with Wall Street.
Let’s look at what happened to the stock market last week, and it’ll explain what I think those who audit the Fed need to look for.
As you probably remember, stocks were headed for oblivion on Monday, Aug. 24. The Dow Jones industrial average was down 1,089 points early in the day before the index rallied for a close that was “only” 588 points lower.
China’s problems. Weak US economic growth. Greece. The possibility of an interest-rate hike. Those and other issues were the root causes of last Monday’s woe.
But Wall Street’s real problem is that there is a bubble in stock prices created by years of risky monetary policy by the Fed. Quantitative easing, or QE — the experiment in money printing that has kept interest rates super-low — hasn’t helped the economy (and even the Federal Reserve Bank of St. Louis concluded that). But QE did force savers into the stock market whether they wanted to take the risk or not.
None of that is illegal.
But the Fed now finds itself in the awkward position of having to protect the stock market bubble it created. So Yellen and her board of governors must have been pretty nervous when the Dow and other market indexes fell by an unprecedented amount on Aug. 24.
Then, overnight, there was massive buying of Standard & Poor’s 500 Index futures contracts. This was the remedy proposed by a guy named Robert Heller back in 1989 just after he left the Fed board. The Fed, Heller proposed, should rig the stock market in times of collapse.
Were those contracts being bought overnight by some Wall Street cowboy for whom potential losses in the disastrous market were of no concern? Or was it the Fed propping up the market?
Stock prices initially reacted well to the mysterious overnight buying on Tuesday, and the Dow was up 442 points — until it wasn’t anymore. The blue-chip index finished Tuesday, Aug. 25, with a loss of more than 200 points.
Then the same magical buying of S&P futures contracts happened Tuesday night and early Wednesday morning. Stocks again went up at the opening on Wednesday, but this time the gain held.
Credit was given to William Dudley, the head of the NY Fed I mentioned above, who offered his soothing opinion that interest rates probably wouldn’t be raised by the Fed at its September meeting.
“Once again, the Federal Reserve helped save the day for investors,” the New York Times wrote in a front-page article that cited Dudley’s speech.
But that wasn’t true — not unless Dudley’s speech leaked ahead of time. Stocks were up before Dudley’s talk and actually fell when he began speaking. That was probably due to the fact that Dudley pooh-poohed the idea of another dose of QE.
Wall Street got lucky the rest of the week ahead of this past weekend’s St. Louis Fed annual conference in Jackson Hole, Wyo. Plus, the month of August was coming to an end — usually a time when traders pretty up their books.
Money managers don’t want stocks to go down right before their performance is locked in and reported to clients.
The Fed has certain mandated responsibilities. It is supposed to keep inflation within a certain range. It is also charged with protecting the US dollar. Plus — and this is a modern-day responsibility — the Fed is supposed to help the economy and keep unemployment low.
Even if you agree with Heller that the market sometimes needs help, there is an enormous risk in doing this too often.
First, traders come to think that there is no risk in the stock market — a belief that has been proven wrong time and again.
Second, investors have no way of telling what the real value of stocks is.
And third, certain well-placed people on Wall Street will always know what the Fed is doing and benefit from it. And when the financial elite benefit, regular folks suffer.
It’s time to find out what the Fed has been up to. In this case, ignorance isn’t bliss — it’s costly.