Monday, February 28, 2011

Did the Federal Reserve Break the Law in Propping Up Fannie and Freddie?

At least one very smart money manager thinks that's the case.  Here's John Hussman's description of the problem:

"While QE2 is clearly both legal and constitutional, this contrasts with the activities of the Federal Reserve in creating Maiden Lane and other off-balance sheet vehicles to purchase private debt, as well as the first round of quantitative easing. In these instances, I am convinced that these transactions were outside of the restrictions of the Federal Reserve Act. 

QE1 was clearly the most egregious, because the Fed bought obligations of Fannie Mae and Freddie Mac outright - securities that were not "fully guaranteed by the United States as to the principal and interest," and whose issuers were insolvent and in conservatorship when the Fed bought the securities. Even though Fannie and Freddie securities maturing before 2012 have since been effectively guaranteed by the Treasury, the Fed's ownership of later maturities is still legally problematic.

Moreover, even if these purchases were consistent with the Federal Reserve Act, they still have, in Bernanke's own words, "a fiscal component." This makes them unconstitutional. The Fed cannot simply make transactions that have a "fiscal component" - such as buying bad debt to make what Bernanke calls a "money-financed gift to the private sector" - unless that expenditure is the consequence of appropriations made by law (per Article 1, Section 9 of the Constitution). [Ed. Note - I very much doubt this constitutional argument is correct.  Without much looking into it I believe he must be making a non-delegation argument, and those are loser arguments currently.]"
Read the whole thing.  I think the constitutional argument is probably wrong (although I haven't given it the thought it deserves), but the statutory analysis is interesting.  

If this is even possibly true, this needs to be investigated by and given prominence by the Republican House.  Moving away from the legal analysis, there is a moral issue here in that the response of the federal government to the greatest financial disaster since the Great Depression was to give away trillions of dollars to the wealthiest people in the country. 

This should be the subject of bipartisan outrage, and frankly among the public I think it is.  But among elected officials it was the bipartisan policy response.  Again, its very telling to me that liberal politicians, supposedly working hard to guard the interests of the poor, played a prominent part in orchestrating what was probably the largest redistribution in history in terms of absolute wealth, and one that was made from the middle class to the wealthy.  (And again, so-called "conservatives" in Washington, particularly the leadership, didn't do any better on this.)

In a healthy, sane world Ben Bernanke and Tim Geithner would be explaining to federal prosecutors where all the money went.  That's won't happen.  But they should at least have to explain this to Ron Paul. 

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