On Why The Federal Reserve Is Corrupt

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa
There has been considerable anger, consternation and public debate since the Federal Reserve, my former employer, turned an internal memo of mine of February 01, 2003 to its administrative Committee on Board Affairs (CBA) written by me upon its request to employees for comments on the governance of the institution, into a document akin to the famous George Keenan X-Memo of 1948.

Keenan’s memo was a Central Intelligence Agency (CIA) gray operation and was not attributed to him for many years because it had defined the Cold War strategy of containing the former Soviet Union in 1948 during President Harry Truman’s administration.

Keenan, a young and unknown US diplomat in Department of State’s bureaucracy with a grand strategy had known all along that he was grayed out by Washington. I did not. And so it ravaged my personal life from within my immediate and extended families, friends, personal and professional acquaintances, and the court system by inducing tensions in my relationships through behavioral control operations of the United States government.

The lack of integrity in accolades is that Nixon’s National Security Adviser and Secretary of State Henry A Kissinger won his Nobel Peace Prize in 1973 for adopting the strategy in George Keenan’s 1948 memo just as Washington is desperate to misattribute my memo and my work to Barack Obama since 2008 and to Alan Greenspan since 2003.

My memo had critiqued the Clinton-era economic claims about productivity of the Greenspan Fed and pointed out the more fundamental determinants of sustainable economic security during the tumult of the run up to the Iraq war in 2003 and in continuation of my year 2000 internal critique of Fed’s light regulation of the banking sector – to whom it supplies money in crisis – in preparation for a speech on Critical Infrastructure Protection for the Clinton White House, regulation being an anathema to the Greenspan Fed and the Rubin Treasury. My 2003 memo had challenged the nation’s sense of its central bank for good reason.

There has been quite a bit of research in the economic sciences on the fundamental determinants of economic security, notably by Robert Lucas, Robert Fogel, Robert Barro and William Baumol, and on corruption, for example, by scholars such as Dr Shang Jin Wei, a Chinese-American educated at Fudan University in China, and University of California, Berkeley who later worked at Harvard University, The World Bank and the International Monetary Fund before moving to Columbia University.

I had communicated my ideas about the political economy of global development I had written as an essay to Harvard’s John F Kennedy School of Government to Mr Wei among others at Harvard and the IMF in 2002. Mr Wei was a colleague of my former spouse at the IMF and a friend of my family.

The literature has thus far not expounded on the concept of structural corruption which I had intimated to Mr Wei in the context of monetary policy, given his research on corruption, in an email to him from my Federal Reserve email account chandra.tamirisa@frb.gov in 2003 (Shang Jin had also worked at the Fed temporarily many years ago when he was a student). I develop that idea more below.

I state that the above two strands of literature – fundamental determinants of economic security and corruption – in fusion, really point to institutional and social designs of properly structured incentives at work in any society, as can be seen in US economic history from 1789 to 1913, where development benefits to social welfare and interest groups exceed the rents from corruption.

The Federal Reserve, established by the United States Congress and President Woodrow Wilson in December 1913, as the monopoly provider of the US dollar and to rescue banks in distress was legally structured as a private-public institution.

Money is supplied by selling and buying government debt in relationship with Wall Street financial institutions – known as primary dealers whom it does not regulate, despite Dodd-Frank, but it protects these institutions in a crisis because they are represented in the Fed’s corporate governance in the 12 Fed districts. Money is also supplied secondarily by the Fed’s Discount Window directly to member commercial banks which may or may not be primary dealers.

Allegiance of 12 out of the 19 members of the Federal Open Market Committee (FOMC) – the policy-making core of the Federal Reserve upon delegation of those powers to it by the Federal Reserve Act and of its de jure independence from the U.S. Treasury As Amended after the Treasury-Fed pact of 1951 – is to the business constituents of the 12 Federal Reserve districts.

Moral Hazard, as it is commonly known in economic literature, in FOMC (and IMF policies), in particular in crisis lending, has been well documented. Its causes and resolution options (reform) have not been documented in economic literature besides government legislation. There have been more and deep crises since the inception of the Fed and IMF respectively in 1913 and 1944.

I am arguing here that moral hazard is an intended consequence of the legal structure of the Fed and of the connection between monetary policy and financial crises response to the compensation of financial market participants and the policy-support economist staffs of the Fed and IMF, not appropriately accountable to any world government in the name of monetary policy independence from politics but independent as a cover
to benefit certain political interest groups.

Little did Keenan know that the Cold War could have been averted and World War II ended both in Asia and Europe by Truman by also nuking Stalin’s Russia into a shocked submission in 1945, and banning all weapons of war and war itself than making a deal with the devil to keep the world on edge for the next 44 years.

After all has been said and done, the way back is wisdom, for this is the purpose of power and wealth, homo politicus and homo economicus, of homo sapiens sapiens, of the species, in its pursuit of survival in its natural habitat, earth.

The purpose of it all, of work for money, is neither work nor money, but to return from fall to grace.