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Chairman Bernanke's "Urban Legend" About Deception and Corruption at the Fed

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On the same day, October 4, 2011, I testified on Capitol Hill about the terrible record for transparency and corrupt records at the Federal Reserve, its chairman, Ben Bernanke, gave a strong opposing view before the Joint Economic Committee. When Senator Michael Lee (R, Utah) said he was concerned about the "general veil of secrecy under which the Federal Reserve typically operates," Bernanke replied: "That's an urban legend." (Defined as "a bizarre untrue story that circulates in society...")

Bernanke's reply incorporated the Fed's urban legend: "We are thoroughly audited at this point." and "Nobody has found an impropriety." While Bernanke may confine this reply to the partial audit in the 2010 Dodd-Frank law, which the Fed vigorously opposed, the Fed's long history of deception and corruption should not be bypassed.

My testimony on the same day before the Subcommittee on Monetary Policy and Technology of the House Financial Services Committee, chaired by Congressman Ron Paul, reveals a different record from Congressional investigations in which I participated:

Blocking large parts of the Federal Reserve from GAO audits

House Committee on Banking, Finance and Urban Affairs Chairman Henry Reuss (D, Wisconsin) proposed a GAO audit of the Fed in 1976. The Fed orchestrated a massive campaign using the officials of the private banks it regulates to lobby to kill the audit bill. The Fed won. The bill could not garner enough support to pass out of the Committee. It passed the Government Operations Committee two years later, only after glaring no-audit barriers for Fed monetary policy and international operations were added.

Billions of dollars can be made from inside information leaks from the Fed's monetary policy operations. One necessary step to stop leaks is to severely limit inside information on future Fed policy to a few Fed employees.

This has not happened. Congress received information in 1997 that non-Federal Reserve employees attended Federal Reserve meetings where inside information was discussed. Banking Committee Chairman/Ranking Member Henry B. Gonzalez (D, Texas) and Congressmen Maurice Hinchey (D, New York) asked Fed Chairman Alan Greenspan about the apparent leak of discount rate information. Greenspan admitted that non-Fed people including "central bankers from Bulgaria, China, the Czech Republic, Hungary, Poland, Romania and Russia" had attended Federal Reserve meetings where the Fed's future interest rate policy was discussed. Greenspan's letter (4/25/1997) contained a 23-page enclosure listing hundreds of employees at the Board of Governors in Washington, D.C. and in the Federal Reserve Banks around the country who have access to at least some inside Fed policy information.

Destroying Fed records

In 1995 Greenspan held a non-recorded vote - no finger prints - to destroy the source transcripts of the Fed's policy-making committee, the Federal Open market Committee (FOMC). I was informed November 1, 2001 by Donald Kohn, the future Fed Vice Chairman, that this destruction would continue and that the Fed considered the destruction to be legal.

The Fed's shredding machines destroyed the 1995 source FOMC transcripts of Fed officials who bypassed the Congress and voted for a $5 billion loan to Mexico collateralized by revenue from Mexico's oil industry. When the potential loan become public the peso stopped falling, and the loan was not made.

No audits can be made of source FOMC transcripts that were formerly sent to the National Archives and Records Administration because the transcripts are destroyed. That is not an urban legend.

Corrupted bookkeeping at Fed vaults

A 1997 Gonzalez investigation, assisted by the GAO, found extensive corrupt accounting at the cash section of the Los Angeles branch of the San Francisco Fed Bank with dire possibilities at other Fed vault facilities. Greenspan informed Gonzalez that nearly $500 thousand had been stolen from Fed vaults by Fed employees from 1987 to 1996. The Gonzalez/GAO investigation indicated this was an understatement.

The Fed Banks' vaults contain uncirculated currency and coin transferred from the Bureau of Engraving and Printing and cash from banks throughout the country. The Fed district banks and branches need to be audited with GAO personnel who are trained and experienced in central bank operations and auditing. When will these audits be done and reported to the Congress or will Bernanke dismiss this national security problem as an urban legend?
Bernanke replied in a similar manner at a previous Congressional hearing (2/23/2010) to Congressman Paul's questions based on material in my book, Deception and Abuse at the Fed (2008). It may not be a coincidence that the Fed's Inspector General office contacted me about my book (5/19/2011) shortly after Congressman Paul announced his candidacy for president. Since the Fed's IG is appointed by the Fed's chairman, the IG's investigation of my book does not rule out a continuing cover-up to save the Fed's "urban legend".