Federal Reserve Chairman Ben Bernanke ventured to the Hill this week for his semi-regular beating at the hands of freshman Rep. Alan Grayson (D-Fla.).
His most recent battle with Bernanke, which is already on its way to 100,000 views, was fought over the Fed's project of "central bank liquidity swaps." The Huffington Post first reported the swaps in March. In response to the global economic crisis, the Fed has injected hundreds of millions of U.S. dollars into foreign central banks in exchange for foreign currency. The swaps represent a radical intervention by the Fed in the global money supply but have barely been covered by the media. They are done without approval from or oversight by the Congress or the White House.
Bernanke, asked by Grayson what the central banks did with the U.S. money, replied: "I don't know."
Grayson, in an interview with the Huffington Post, said that the lending program represents a startling amount of decision-making authority vested with one man.
He put the $500 billion-plus lending program in perspective. "I see all the time, still to date, actual recorded votes on $100,000-dollar elements on these actual appropriations bills. Now compare that to the fact that the Federal Reserve handed out $500 billion dollars, which is literally five million times as much...and they don't even know who ended up with the money," he said.
"Was the money used to buy U.S. treasuries and prop up the dollar? They don't know. Was the money used to bail out European automakers? They don't know. He literally doesn't know what happened to $500 billion dollars," he said. "I find that extremely disturbing."
The swap program was approved by the Federal Open Market Committee, a 12-member board within the Fed, which is quasi-public entity controlled in large part by private banks.
The Fed doesn't consider the currency exchange risky because it holds the foreign banks' currency as collateral. But that fundamentally misrepresents the risk associated with currency speculation, said Grayson, who has a deep business background.
"It's speculation. It's exactly the thing that hedge funds do all the time and hedge funds do blow up," he told the Huffington Post. "Look at the Fed balance sheet right now. It has 40 times as much in liabilities as it does in capital. Historically that's a dangerous place to be."
And judging from the movement of the dollar since the swaps began, Grayson said, it looks like the U.S. could have taken a $100 billion dollar loss because the value of the foreign currency held by the U.S. depreciated in value by roughly one-fifth. Bernanke told Grayson that it was a "coincidence" that the dollar appreciated substantially after the half-trillion dollar swap project got underway in September. The Fed website maintains that the transactions are without risk because the exchange rates are locked in.
But regardless, the currency value did change, leaving somebody with a big loss, despite any Fed attempts to avoid losses. "You can't undo the fact that the relative value of the currency did change," said Grayson. "You can't stop the world from turning."
Bernanke told Grayson that the U.S. has so far profited from the exchanges because the foreign banks paid interest. But Grayson calls that claim "misleading" because the U.S. likely paid interest -- probably higher interest -- on its half of the deal and also lost as the currency fluctuated.
"This is the sort of thing that happens when he's not subject to audit, he's not subject to document requests, and you only get the pieces of the story that he wants you to hear," said Grayson.
The half-trillion dollar foreign lending program, said Grayson, is more reason for the House to pass Rep. Ron Paul's (R-Texas) bill that would mandate an audit of the Fed. It's currently backed by more than 270 members of Congress, a wide majority.
"The first step is to find out exactly what happened and that's something that hasn't happened yet, particularly when you get deceptive answers," said Grayson. "You have to figure out what happened and that takes an independent audit."