The Deep-Rooted Lawlessness Of The Federal Government

The Federal Reserve System, or the Fed, is the central bank of the United States. It was created in 1913 through the passing of the Federal Reserve Act, which aimed to establish economic stability in the country by introducing a central bank to oversee monetary policy. The Fed has the power to print money, adjust the discount rate and the Fed funds rate, and buy and sell US treasuries. However, critics argue that the Fed's expanded role in the financial industry is not matched with accountability for its actions. There are concerns about the Fed's closeness to the banking sector and its failure to address the problems that led to the financial crisis.

Lack of accountability for policy blunders

It is evident that America's political and military elites are rarely held accountable for their mistakes and crimes. This culture of impunity extends to both individuals and institutions, with the latter often shielding the former from scrutiny and consequences. This dynamic has resulted in a lack of accountability for policy blunders that has profound implications for the country and its global engagements.

A striking example of this lack of accountability is the Pentagon's cover-up of a March 2019 airstrike in Syria that resulted in the deaths of up to 64 civilians, including women and children. Despite exposure by the New York Times, there has been no indication that those responsible for the attack or the subsequent cover-up will face any significant repercussions. This incident reflects a broader pattern within the military, where initial justifications for deadly strikes are often revealed to be false, yet those involved face little to no consequences.

This lack of accountability is not limited to the military but also permeates the highest levels of government and policymaking. For instance, Bill Clinton's former national security adviser, Samuel R. "Sandy" Berger, illegally removed classified documents from the National Archives but ultimately received a lenient plea deal. Similarly, CIA Director David Petraeus admitted to providing highly classified information to his lover but avoided prison time. These cases illustrate a system that often protects its own, with lenient punishments that fail to serve as a deterrent.

The foreign policy realm provides another example of this lack of accountability. Policymakers and pundits who advocate for reckless and destructive actions rarely face consequences for their decisions, even when they result in disastrous outcomes. This is partly due to voter apathy, as foreign policy often takes a back seat in electoral considerations. Additionally, the media's failure to scrutinize hawkish policies and politicians contributes to this culture of impunity. As a result, policymakers can repeatedly make disastrous decisions without facing any meaningful repercussions.

The consequences of this lack of accountability are far-reaching. It erodes trust in institutions, perpetuates a culture of impunity, and enables a cycle of policy failures with devastating impacts on the lives of people both within the US and abroad. It is crucial to address this issue and establish mechanisms that promote transparency and hold individuals and institutions accountable for their actions.

Close ties to the banking sector

The Federal Reserve System, often shortened to the Federal Reserve or the Fed, is the central banking system of the United States. It was created in 1913 with the enactment of the Federal Reserve Act, following a series of financial panics that led to the desire for central control of the monetary system.

The Federal Reserve System combines public and private characteristics. The central governing board of the Federal Reserve System is an agency of the federal government and reports to Congress. The Federal Reserve Banks that it oversees are set up like private corporations.

The Federal Reserve System is composed of a board of seven members, 12 regional Federal Reserve Banks, and the Federal Open Market Committee. The regional Federal Reserve Banks are located in cities throughout the nation and regulate and oversee privately owned commercial banks. Nationally chartered commercial banks are required to hold stock in, and can elect some board members of, the Federal Reserve Bank of their region.

The Federal Reserve System's duties include:

• Conducting national monetary policy
• Supervising and regulating banking institutions
• Maintaining financial system stability and containing systemic risk
• Providing financial services to depository institutions, the U.S. government, and foreign official institutions

The Federal Reserve System has a unique structure that is both public and private. It is described as "independent within the government" rather than "independent of government". The system does not require public funding and derives its authority and purpose from the Federal Reserve Act, which was passed by Congress in 1913 and is subject to Congressional modification or repeal.

The Federal Reserve System is the central monetary authority of the United States and has broad power to act to ensure financial stability. It is the primary regulator of banks that are members of the Federal Reserve System and serves as the lender of last resort to member institutions.

Failure to prevent the housing bubble

The 2000s United States housing bubble was a sharp increase and subsequent collapse of house prices, affecting over half of the US states. It was caused by a combination of factors, including:

• Increased demand and limited supply
• Speculation and exuberant spending
• Low-interest rates
• Loose lending conditions
• Lax lending standards
• Failure of regulators to intervene
• Speculative fever
• Tax policy (exemption of housing from capital gains)
• Historically low interest rates
• Government policies that encouraged homeownership
• Financial market innovations that increased the liquidity of real estate-related assets

The housing bubble had far-reaching effects on communities and the overall US economy. Homeowners were forced to look for ways to pay off their mortgages, often digging into their retirement accounts. The bubble also significantly cut into the equity of homes, with many homeowners finding that their mortgage balance exceeded the value of their property. This led to an increase in foreclosures as people were unable to afford their mortgage payments.

The Federal Reserve failed to use its supervisory and regulatory authority to prevent the housing bubble. Between 2003 and 2007, banks, mortgage underwriters, and other lenders abandoned loan standards, emphasising the lender's ability to securitise and repackage subprime loans instead. This contributed to the collapse of the housing market and the subsequent economic recession.

Ignoring evidence of fraud in the housing market

The US housing market is a bubble full of fraud, and it is going to burst. The Federal Reserve Bank of Philadelphia published a report titled "Owner Occupancy Fraud and Mortgage Performance", which revealed that occupancy fraud is widespread and constitutes one-third of the effective investor population. These fraudulent loans are being bundled with other loans and sold as mortgage-backed securities.

Occupancy fraud is when someone states that they plan to live in a home when they apply for a mortgage, but in reality, they are an investor who will never live there. This is fraud because homeowners get preferential loan terms backed by the federal government, while investors pay something closer to a market rate. They can also, therefore, pay more for a home than they otherwise would.

In the run-up to the 2008 housing and financial crisis, underwriters facilitated wide-scale fraud by knowingly misreporting key loan characteristics, credit rating agencies catered to investment banks by inflating their ratings on both mortgage-backed securities and collateralized debt obligations, originators engaged in mortgage fraud to increase market share, and real estate appraisers inflated their appraisals in order to gain business.

As credit was extended to those who could not afford loans, house prices boomed and subsequently crashed when homeowners started defaulting. However, this supply of fraudulent credit was not uniform across US zip codes.

According to CoreLogic’s data in September 2022, one in every 131 mortgage applications shows indications of fraud. There are professional organizations that monitor and investigate mortgage fraud, along with the FBI.

Common individual mortgage fraud scams include identity theft and income/asset falsification, while industry professionals may use appraisal frauds and air loans to dupe the system.

Dismissing the possibility of falling house prices

The Federal Reserve's expanded role has been criticised for not matching this increased responsibility with adequate accountability. This is particularly concerning given the magnitude of the 2008 financial crisis, which was the worst since the Great Depression. In the lead-up to this crisis, top central bankers, including then-governor Ben Bernanke, dismissed the possibility of a national decline in US house prices. This was a significant error in judgment, as property values did indeed plummet by more than 30% from their 2006 peak, with even steeper drops in states like Florida, California, and Nevada.

The Fed's defenders argue that it has a deep repository of economic expertise, with thousands of staffers tracking key economic trends and statistics across the country. However, critics like Dean Baker, co-director of the Center for Economic Policy Research, counter that the central bank had all the authority it needed to prevent the housing crisis but failed to act. Baker further asserts that a lack of enforcement by supervisors, rather than insufficient rules, fostered a culture of rampant risk-taking on Wall Street.

The Fed has also faced scrutiny for its close ties to the banking sector. Each of the Fed's 12 branches is overseen by a nine-member board of directors, two-thirds of whom are elected by the bankers in the district. Robert Auerbach, a professor of public affairs at the University of Texas at Austin, highlights this as a "massive conflict of interest" that makes the Fed "ill-suited" for its regulatory functions.

In response to these concerns, the Fed has argued that the problems leading up to the 2008 crisis stemmed from financial entities outside its jurisdiction, such as mortgage brokers and investment banks. However, this defence has been criticised as the Fed did not flag this lack of authority when times were good, even though it would be expected to serve as a lender of last resort during a crisis. Furthermore, there were visible symptoms of the impending crisis within commercial banks directly under the Fed's authority, such as Citigroup Inc, Countrywide Financial, and Washington Mutual, which engaged in increasingly risky lending practices.

Despite these issues, the Fed's handling of the crisis, particularly its provision of trillions of dollars in emergency measures to support big banks, has been praised by investors. Michael Feroli, an economist at JP Morgan, sums up this sentiment by stating that Bernanke "played a bad hand well."

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