Monday, May 11, 2009

Wall Street Journal: Growing Friedman-Goldman Sachs Scandal Endangers Federal Reserve

Even though Journal editors appear to be pulling their punches somewhat, today's Wall Street Journal editorial calls for the resignation of Federal Reserve Vice Chairman Donald Kohn, who approved NY Fed chair Stephen Friedman's ethics waiver that permitted him to remain on the Goldman Sachs board and trade their stock. The Journal concludes:
The problem is the politics of all this. Half of the financial world already thinks Goldman runs the U.S. Treasury and Fed, however unfairly. The American public is furious about the bailouts of AIG and banks, engineered by the Fed and Treasury, that have helped the likes of Goldman Sachs. And guess who Mr. Friedman's search committee picked as Mr. Geithner's successor when he left to run Treasury? Another Goldman alum, William Dudley. Yet with all of this in the political air, Mr. Friedman tried to stay in the New York Fed post at least through the end of 2009, and Mr. Kohn granted the waiver. It's hard to imagine a more politically obtuse judgment.

Their behavior has handed a sword to those in Congress who have long wanted to exert more political control over the 12 regional Fed bank presidents. Unlike Federal Reserve governors, the regional presidents aren't appointed by the U.S. President and confirmed by the Senate. They are appointed by their regional bank boards. They nonetheless serve, on a rotating basis, on the Fed's Open Market Committee that sets monetary policy, and the New York Fed president is Vice Chairman of the FOMC. This structure was designed under the Federal Reserve Act of 1913 to help insulate the Fed from political pressure, and it has worked well.

This insulation is especially important now, given how Mr. Kohn and Chairman Ben Bernanke have made the Fed an arm of the Treasury over the last 18 months. The Washington Fed has immersed itself deeply into fiscal policy and recently decided, for the first time since the early 1950s, to directly monetize U.S. debt by buying Treasury securities. Barney Frank would love to get more control over the regional banks to make them more amenable to political pressure as well, and the Friedman flap has given the politicians an opening.

At least Mr. Friedman is gone, but for all the harm he has done to the Fed's political independence, Mr. Kohn should resign too.
Unfortunately missing from this editorial: a demand for an SEC investigation into insider trading at Goldman Sachs and the Federal Reserve of New York...IMHO, necessary to begin to restore some confidence in the system.

More on this story from Robert Scheer at the Huffington Post, here...and Michelle Malkin, here,