An authoritative, well-documented exposé of abuses of power at the U.S. Federal Reserve Bank (the Fed) during the tenure of renowned chairman, Alan Greenspan.
The Federal Reserve—the central bank of the United States—is the most powerful peacetime bureaucracy in the federal government. Under the chairmanship of Alan Greenspan (1987-2006), the Fed achieved near mythical status for its part in managing the economy, and Greenspan was lauded as a genius. Few seemed to notice or care that Fed officials operated secretly with almost no public accountability. There was a courageous exception to this lack of oversight, however: Henry B. Gonzalez (D-TX)—chairman of the U.S. House of Representatives Financial Services (banking) Committee.
In Deception and Abuse at the Fed, Robert Auerbach, a former banking committee investigator, recounts major instances of Fed mismanagement and abuse of power that were exposed by Rep. Gonzalez, including:
- Blocking Congress and the public from holding powerful Fed officials accountable by falsely declaring—for 17 years—it had no transcripts of its meetings;
- Manipulating the stock and bond markets in 1994 under cover of a preemptive strike against inflation;
- Allowing $5.5 billion to be sent to Saddam Hussein from a small Atlanta branch of a foreign bank—the result of faulty bank examination practices by the Fed;
- Stonewalling Congressional investigations and misleading the Washington Post about the $6,300 found on the Watergate burglars.
Auerbach provides documentation of these and other abuses at the Fed, which confirms Rep. Gonzalez's belief that no government agency should be allowed to operate with the secrecy and independence in which the Federal Reserve has shrouded itself. Auerbach concludes with recommendations for specific, broad-ranging reforms that will make the Fed accountable to the government and the people of the United States.
- Chapter 1. Hitting a Tank with a Stick
- Chapter 2. The Burns Fed: Price Controls, Inflation, and the Watergate Cover-up with a Distinguished Professor at the Helm
- Chapter 3. The Master of Garblements
- Chapter 4. Spinning Mountains into Molehills
- Chapter 5. Valuable Secrets and the Return of Greenspan's "Prophetic Touch"
- Chapter 6. The Seventeen-Year Lie
- Chapter 7. Corrupted Airplanes and Computer Mice
- Chapter 8. Standing in the Door against Civil Rights
- Chapter 9. When Five Hundred Economists Are Not Enough
- Chapter 10. The Myth of Political Virginity
- Chapter 11. Pricking the Stock Market Bubble and Other Greenspan Policies
- Chapter 12. Bring the Fed into the Democracy
- Appendix: Excerpts from Waste and Abuse in the Federal Reserve's Payment System
The Combative Henry B.
The amazing 1990s began with a recession, high unemployment, and victory in the first Gulf War. Soon, though, the economic good times rolled, as the promise of remarkable computer and Internet technologies was realized. The economy grew, unemployment dropped, the federal deficit changed to a rising surplus, and jubilant investors hung on to the stock-market balloon that rapidly inflated until the end of the decade. The spotlight focused on one man, who was cast as the country's economic "maestro." Alan Greenspan achieved saint-like status as he led the country's most powerful peacetime governmental bureaucracy: the nation's central bank, the Federal Reserve, the Fed.
Meanwhile, a relatively little-known man from Texas, Henry B. Gonzalez, who had risen to the chairmanship of the House Banking Committee, decided to carry out the responsibility assigned to that committee for overseeing the Fed. The Fed had frequently waved its "independent from politics" flag to ward off congressional intrusion. Now, under an enshrined leader, it appeared safe, except that Gonzalez seemed determined, and in 1992 had made public his suggestions for requiring accountability from Fed officials—who were shocked. The chairman of the "politically independent" Fed sought political help. Greenspan traveled to Little Rock, Arkansas, to talk to the president-elect, Bill Clinton. On December 14, 1992, at a then-secret meeting, Greenspan reported back to Fed officials about his conversation with Clinton, ten days earlier (selections from the transcript of the Fed meeting are in Chapter 10). The powerful Greenspan Fed was determined to stop Henry Gonzalez.
Despite the low odds of success, Gonzalez would not retreat from carrying out the responsibilities that the U.S. House of Representatives assigned to its Banking Committee for overseeing the nation's central bank. The Fed was so shrouded in mythology, and seemingly so guarded by its self-proclaimed need to act with absolute independence, that anyone aggressively poking it would be subject to trashing. Admiring politicians and a coterie of Fed watchers who earned their income by interpreting the Fed's garbled announcements would voice their disgust for anyone intruding on the Fed's advertised independence. Gonzalez compared his attempt to remedy severe problems at the Fed to hitting a Sherman tank with a stick. Those who knew Henry B., as he was called in his San Antonio district, knew that even later-model combat tanks would not have stopped him.
Gonzalez was certainly not driven by a need for power or fame. Jake Lewis, who served on the House Banking Committee staff under four chairmen and as a reporter had covered Gonzalez's unsuccessful campaign for governor of Texas, knew him well. In 1997, Lewis noted that thirty-six years in Congress had not changed Gonzalez: "'A lot of people come here [to Congress] and when they . . . rise to positions of power, you can't recognize them as the person that came here. But Henry today is, I think, exactly the same person that arrived in 1961.'"
Gonzalez did not pay homage to rank or power, even his own after he became chairman of the House Banking Committee, which had more than fifty members, in 1989. When I arrived for a second period of service on the committee staff, I was proud to call him "Mr. Chairman." I had known him in the 1970s. He would occasionally join me in the cafeteria for lunch. He had not changed in 1992. He told me to drop the "Mr. Chairman" and call him "Henry." When I occasionally walked with him through the hallways of Congress, he would stop and talk to each of the employees, everyone from those cleaning the floors to Capitol Hill police officers. He knew not only many of their names, but also something about their families, and was interested in how they were getting along. When he walked to work along Pennsylvania Avenue, he would stop to speak to those begging and homeless, and there were many on the streets of the District of Columbia. Some of them offered him ideas that he seriously considered. This sincere interest in those far from positions of power carried over to his constituents. He would stay in his office until late at night, reading mail from constituents and writing notes to be included in the replies. One letter written to Gonzalez about banking issues was passed to me for a reply, and I wrote the customary constituent response, something like: "We thank you for your inquiry and we will look into it." Gonzalez drew an X through this weak dodge and wrote back to me in large letters: "No BS."
It would also be a weak dodge to say he was not on the best of terms with the Democratic leadership of the House. Gonzalez, a Democrat, had fought with the Democratic leadership to become chairman of a subcommittee, then to become the Banking Committee chairman, and finally, in a knock-down, drag-out battle, to retain his position as ranking member after he returned in 1998 from an absence due to illness. Shortly after I arrived, I accompanied Gonzalez to a chamber near the House floor. Speaker of the House Thomas Foley (D-WA) approached to speak with him, perhaps, I thought, about attending or holding a fund-raiser. After all, Gonzalez was chairman of the large Banking Committee. (In 2006 it had approximately seventy members and was called the Financial Services Committee.) Since legislation passing through this committee affected trillion-dollar financial conglomerates, the chairman could be a powerful fund-raiser. Before Speaker Foley could talk, Henry told him to "speak to the young man [who was not young] who works for me. He's an economist." Henry looked the other way, and Foley said hello to me and left.
Gonzalez was not afraid of losing. To illustrate this point, he told me that some years ago a friend who had campaigned for him, President Lyndon Baines Johnson, called him and complained. Henry, he asked, why were you the only one who voted against a bill I wanted? Gonzalez replied, "Mr. President, I'm glad to hear from you, but . . ." President Johnson interrupted with a laugh and said that there was no use trying to pressure Henry. He knew that Gonzalez was taking a principled stand. The same principled stand prevailed in 1957, the year after Gonzalez's election to the Texas Senate. Senator Gonzalez holds the record for the longest filibuster in the history of that body, twenty-two hours straight, to defeat eight of ten proposed school segregation bills (another senator, Abraham Kazen, spoke for an additional fourteen hours as part of the same filibuster). Henry told me he kept going even when the lieutenant governor, who had a residence adjoining the Senate floor, appeared in the middle of the night and asked, in a profanity-laden question that made Henry laugh when he recalled the outburst, what it would take to shut him up. The filibuster was successful.
As Banking chairman, Gonzalez shepherded passage of the bailout legislation that ended the decade-long savings and loan crisis, which lasted until the early 1990s. He had shown his skill as a committee chairman. Why not stop there? Why hit a stick against a tank driven by an enshrined national icon: Fed chairman Alan Greenspan?
A 1997 book review in the Financial Times stated that Greenspan is "widely called without a hint of hyperbole, the most powerful man in the world." Why not follow the wise political practice of many others and join the chorus of admiration?
No governmental official—including occupants of the White House—had ever received more sustained applause than Alan Greenspan had enjoyed since being appointed chairman of the Federal Reserve. He adorned the covers of numerous newsmagazines and was the subject of an untold number of feature stories in major newspapers across the nation. He received an honorary knighthood from Queen Elizabeth II. An endless stream of superlatives described Greenspan as a wizard, a maestro, a genius. No praise was too extreme or too saccharine to be applied by the media or fawning members of both political parties in the Senate and the House. Almost all the press was favorable. Before the stock market bubble deflated in 2000, criticism was hard to find. Any negative comments that found their way into news stories were invariably balanced with fulsome praise. Most serious students of the Federal Reserve might have argued vigorously against the idea of early sainthood for Greenspan, but there was likely general agreement that the title "wizard" fit if one were trying to describe the amazing and long-running public relations success of Alan Greenspan, who was chairman of the Fed until January 2006, nearly nineteen years.
The Tank's Specs
Greenspan drove a formidable tank, an approximately 23,000-person bureaucracy with immense powers. Among other things, the Fed approves or denies the purchase of competitor banks by trillion-dollar banking conglomerates, controls the nation's money supply, and manages targeted interest rates. And those are just part ofits arsenal.
The Fed is led by nineteen unelected decision makers: the presidents of each of the twelve Federal Reserve district banks (Fed Banks) and the seven governors at its Washington, D.C., headquarters. The seven governors are nominated by the president and must be confirmed by the Senate. Each governor serves a fourteen-year term. They can be fired only through congressional impeachment, which has never happened. The twelve Fed Bank presidents are internally appointed. They are not subject to Senate confirmation, so their views, backgrounds, credentials, and records do not have to pass public examination. The Fed headquarters, in Washington, D.C., is run by the seven governors and is called the Board of Governors, or just the board. Twelve of these nineteen officials sit on the Fed's most important policy-making committee, the Federal Open Market Committee (FOMC).
Over this bureaucracy presides one of the seven governors, who is the chairman of both central policy-making committees, the FOMC and the Board of Governors. The chairman is nominated by the president and confirmed by the Senate. He serves a four-year term as chairman and can be reappointed and confirmed for additional terms.
Since 1951 the Fed and its chairmen have held increased power at the expense of a greatly diminished U.S. Treasury Department. In 1951, under the direction of President Harry Truman, the cooperation between the U.S. Treasury and the Fed in controlling the nation's money supply ended. The Treasury gave up all power to issue money, retaining authority over only the Bureau of Engraving and Printing, which it uses to fulfill the Fed's orders for new currency and coins. Six Fed chairmen have served under that agreement:
- William McChesney Martin, Jr. (1951-1970)
- Arthur F. Burns (1970-1978)
- G. William Miller (1978-1979)
- Paul Volcker (1979-1987)
- Alan Greenspan (1987-2006)
- Ben S. Bernanke (2006-present)
The Fed's unbridled lobbying powers can shoot down most of the problems it perceives coming from Congress. During my first term of service on the House Banking Committee staff (1976-1981), I helped the Banking Committee chairman, Henry Reuss, uncover how the Fed used the banks it regulated to lobby against bills the Fed did not like. The lobbying campaign orchestrated by the Fed managed to cripple the ability of private-sector and governmental auditors to examine significant parts of the Fed's operations. That trophy for the Fed's lobbying success is still on the Fed's shelf.
At the time, few members of Congress were willing to incur the wrath of powerful bankers in order to argue for a complete independent audit of the Fed's books. The need to appease financial interest groups trumped any public interest on that issue. That did not detour Reuss. He told the House of Representatives that this lobbying organized by the Fed would be illegal if the Fed used appropriated funds to organize private sector bankers who did it.
The Fed did lose some battles. Reuss was victorious in passing a congressional resolution that directed the Fed to regularly and publicly report to Congress on Fed policies, beginning in 1975.
The Greenspan Fed (1987-2006) was more proficient than its predecessors at lobbying. Its liaison staff could bring the famous chairman to a member's office. What a wonderful opportunity to have a one-on-one with the nation's sage, who could offer advice about the economy or his views on undesirable legislation, defined as any that would impair the Fed's independence, the all-purpose banner that could be waved to shield Fed officials from accountability. The Fed knew that even friendly legislation invites ornaments (amendments) from unfriendly members. At meetings with friendly members, issues such as corruption and lies uncovered by congressional investigations could be quietly trivialized and swept under the Fed's lumpy rug. Greenspan even visited president-elect Bill Clinton in Arkansas in 1992, reporting back that Clinton's body language and peripheral comments were consistent with independence for the Fed. (See Chapter 10 for the full story.)
Any sensitive subject could be handled during Greenspan's visits to congressional offices. For example, those questioning the Fed's contention that it was not covered by the Civil Rights Act of 1964 were assured that it fully subscribed to civil rights, even though it might be facing certain problems in that area.
The Fed could not silence or intimidate Gonzalez. Greenspan and his staff of lobbyists made the rounds in Congress without making any sales that mattered to Gonzalez. The congressman saw to it that the Banking Committee would maintain an arm's-length relationship with Greenspan and institute actual checks and balances. Gonzalez wanted action taken on issues that were important to the country. The heat generated by the Fed and its sympathizers never caused Gonzalez to stop an investigation. There was an attack against Gonzalez's ancestry. In February 1995, a national newspaper, USA Today, defended the Fed chairman by attacking Gonzalez with a blatant ethnic slur in its main editorial: "Fortunately, for most Americans, Greenspan and other members on the Fed board tuned out the noise. They rejected the Mexican approach to economics, easy money for fast growth, whatever the consequences. Instead they tweaked up interest rates. Seven times." Greenspan's actual policy in 1994 was revealed more than five years later. He had informed Congress and the public in 1994 that he was taking a preemptive strike against inflation even though there was little inflation. Now there is a record of what he was secretly and continually telling Fed officials (see Chapter 11).
The vicious editorial in USA Today was not the only personal attack Gonzalez faced during his rise to the chairmanship of the Banking Committee. Despite these attacks, many legislators stood with him. When the Democrats lost the House of Representatives in 1994 and Henry went from being chairman of the Banking Committee to being ranking member, Congressman Joseph Kennedy (D-MA), a Banking Committee member and a strong Gonzalez supporter, asked Henry B. how he liked being in the minority. Henry laughed and said he had always been a minority. All of us at the meeting laughed; we knew being in the minority would not hurt Henry B.
Gonzalez could not be swayed by campaign donations. That kind of offer would receive a stiff rebuke. He did not hold fund-raisers for anyone. A group representing large banks once called me because it wanted to hold a dinner to honor the chairman of the Banking Committee; I put the caller on hold and checked with Gonzalez. Without hesitation he said to tell them he did not take free meals. Few other members were as careful to avoid this possible conflict of interest with the oversight functions assigned to the Banking Committee.
Given the sea of money surrounding political campaigns, Gonzalez's strict adherence to principle may certainly have seemed eccentric and out of place. But his stand had valuable payoffs for his public service. Overseeing the Fed bureaucracy, which has established barriers to transparency, is very difficult unless the many honest people inside the bureaucracy, who may know of severe problems, trust the integrity of the investigator. Many Fed employees knew about Gonzalez. In one period in 1994 he spoke in the House chamber night after night for weeks while Congress was in session. He was sometimes mocked for addressing the empty room at the end of the day's regular session. But from feedback we received, it was apparent that, thanks to C-SPAN, people were listening. People came to him because they trusted him. Fed officials quietly blasted him. Someone at the Fed told me that Gonzalez was called an old buzzard and I was called his henchman. Although I was certainly not the only person on the excellent committee staff, I was deeply honored to be associated with Henry.
Much of this book is based on investigations of the nation's central bank, the Fed, in which I assisted Henry B. Gonzalez. Some material is also from my work with Henry Reuss, a previous chairman of the Banking Committee. Here are some of the severe problems described in the book:
- The shielding of powerful Fed officials from individual accountability to Congress and the public by falsely declaring—for seventeen years—that it had no transcripts of its meetings
- The shredding of official source records during the 1990s
- The leaking of inside information that could be exploited for billions of dollars
- A policy to manipulate the stock and bond markets in 1994 under cover of a preemptive strike against inflation
- Faulty bank-examination practices, as revealed by the $5.5 billion sent to Saddam Hussein from a small Atlanta branch of a foreign bank
- Stonewalling congressional investigations and misleading the Washington Post about the $6,300 in hundred-dollar bills found on the Watergate burglars
- Billion-dollar loans to foreign countries without congressional authorization
- Employee theft of more than the officially reported $500,000 in cash from the central bank's enormous vault facilities
- Corrupt accounting practices at the Fed's second-largest vault facility, which stored $80 billion in cash
- Denying that the Fed was covered under the Civil Rights Act of 1964 and firing women who sued for racial discrimination
- Retaliation by the Fed against critical reporters
- Falsified records and shady operations regarding the Fed's fleet of fifty-plus airplanes, including paying for a "phantom" backup airplane at Teterboro Airport
How to explain the lies, deceptions, and abuse at the Fed described in this book, given its excellent personnel? The Fed did many activities well with a staff and officials, including Chairman Greenspan, who were predominantly conscientious, capable people. I am a former Fed employee, as Greenspan told the FOMC (cited in the acknowledgments). The coexistence of conscientious personnel with the lies and deceptions discussed in this book presents a central question. Why did Fed officials, aided by their staff, behave duplicitously? A major reason for this behavior, advanced long ago, relates to all governmental bureaucracies. The primary objective and rationale of the officials who run a governmental bureaucracy such as the Fed is to preserve and enhance the power and prestige of the bureaucracy, sometimes even if its policies are harmful to the public. One reason for this is that bureaucratic success is measured by power and prestige, not profits. If the Fed's success were measured by profits, it could appear efficient and very profitable, since the governmental presses print new money on its command. Instead, Fed officials' legacies and reputations are dependent on what happens to the bureaucracy.
I call this explanation the "preservation hypothesis." It is borrowed from a famous sociologist, Max Weber (1864-1920), who emphasized the tendency of a governmental bureaucracy to preserve itself: "The individual bureaucrat is thus forged into the [bureaucracy's] mechanism. They have a common interest in seeing that the mechanism continues its functions and that the societally exercised authority carries on." The preservation of power in combination with secrecy is directly applicable to the Fed: "The pure interest of the bureaucracy in power, however, is efficacious far beyond those areas where purely functional interests make for secrecy. The concept of the 'official secret' is the specific invention of bureaucracy, and nothing is so fanatically defended by the bureaucracy as this attitude, which cannot be substantially justified beyond these specifically qualified areas."
From this perspective, how likely is the head of a powerful governmental bureaucracy such as the Fed, with all the acclaim and prestige that comes with such a position, to accept a policy that severely reduces its power and prestige by injuring its reputation?
Some of Greenspan's prior views, brought from the private sector, enhanced or conflicted with this preservation motive at the Fed. He experienced serious conflicts between his position as the nation's top regulator and his long devotion to and association with novelist and philosopher Ayn Rand's economic views, which strongly rejected regulation, intrusion, and ownership by the government. He could hide these antigovernment views behind equivocating language or constrain them in garblings, but he could not erase his record as king of the Fed bureaucracy.
In an austere room at the Fed headquarters, at 20th and Constitution in Washington, D.C., hang the large framed pictures of the past chairmen of the Fed. As cheery as a mausoleum, the room was designed to preserve in dignity the memories of the men who have been at the helm of this great ship. That room is next to the large meeting room for the Fed's two top policy-making committees. The picture gallery is both a symbol of the importance of the legacy that will follow from the decision making next door, and a shrine to the preservation of the bureaucracy. It also stresses the importance of the officials who will be remembered as kings of the proceedings.
For many reasons, the motives of Fed officials to preserve its power and prestige may well be in accord with the public interest. Determining just where this effort crosses the line and begins to harm the public interest can be an especially hazy, or even nonexistent, task for Fed bureaucrats, who have an incentive to form a united front against criticism and close accountability. They are joined by a large number of admirers and protectors, many of whom distrust other governmental bureaucracies that operate with insufficient congressional oversight, but grant a special exemption to the bureaucracy handling the nation's money supply.
The account presented in this book will, I hope, help eliminate that exemption. Free and informed public coverage aided by effective congressional oversight from legislators such as Henry B. Gonzalez are essential to diminish actions against the public interest by unelected governmental officials.
Gonzalez's efforts to turn the lights on at the Fed were not politically partisan. The bipartisan desire of legislators for transparency was evident in Greenspan's remarks at secret Fed meetings. During his testimony before the Banking Committee on October 13, 1993, Greenspan apparently thought that Republicans would protect him, but became alarmed when Republicans started asking penetrating questions. Former Banking Committee chairman Jim Leach (R-IA) had written a statement for the hearing record, describing how the Fed should be reformed: "The issues of greater transparency of FOMC decision making as well as greater budgetary openness can no longer be ducked." At a secret meeting, Greenspan warned the FOMC: "Jim Leach, of course, was the one who concerned me the most because his view is that there will be some markup of some form on some legislation."
Greenspan was also concerned with another Republican member of the Banking Committee. He called him "nonrational." He told the FOMC that Congressman Toby Roth (R-WI) was questioning him about the existence of Fed budget records. Actually, Roth's primary concern, as he explained to Greenspan, was why large parts of the Fed should be off-limits to governmental auditors, as stipulated in a 1978 law. Roth also referred to legislative efforts by Congressman Lee Hamilton (D-IN, who in 2004 cochaired the National Commission on Terrorist Attacks Upon the United States, also known as the 9/11 Commission) to require the Fed to publish its budget in the official Budget of the United States Government and to include details Hamilton said were missing. When Roth asked why the Fed budget had not been published, Greenspan replied that it had a sixty-six-page budget. During a secret FOMC conference phone call, Greenspan attacked Roth:
For example, there was Toby Roth out there, a Republican, who was saying that we don't publish our budget. I pick up a blue [document, a] budget of 66 pages and I look through it and I say: "This is the most detailed budget of expenses I have seen of a federal agency." Did Toby Roth say to me "Oh, I didn't know [about] that. May I take a look at it?" He went on as though I had not made a single remark. What we are confronted with here is a very peculiar degree of nonrationality. It's not irrational; it's nonrational. And I'm very much concerned that in the areas where it really matters to us we can become very vulnerable if we mishandle how we respond to this particular problem that we have with respect to these transcripts.
Gonzalez was awarded the 1994 Profile in Courage Award at the Kennedy Library. He was recognized for launching congressional investigations into the corruption of the savings and loan industry and for probes into the sale of U.S. arms to Iraq before the Gulf War in 1991. Caroline Kennedy Schlossberg noted his "well-known insistence on ethical conduct, tireless pursuit of the truth, respect for the Constitution, and opposition to powerful special-interest groups." Gonzalez told the audience:
In my time I have had the honor to be vilified for standing up against segregation. I have had the privilege of being a thorn in the side of unprincipled privilege, and the great joy of being demonized by entrenched special interests. I have had the special pride of seeing hard jobs completed: the great civil rights laws; the cleanup of corruption in the savings and loan industry; the enactment of Federal laws that help educate the poor, care for the sick, eradicate disease, and house the people. And I have endured the impatience and humiliation that comes along with sometimes falling short of the goal.
Gonzalez was then leading the oversight investigations of the Fed.