Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan's Bank

286 Pages·2008·2.86 MB·English

by  Robert D. Auerbach

Deception anD abuse at the FeD
THIS PAGE INTENTIONALLY LEFT BLANK
Robert D. Auerbach
Deception
and Abuse
at the Fed
Henry B. Gonzalez Battles
Alan Greenspan’s Bank
University of Texas Press Austin
The publication of this book was made possible in part by
a University Cooperative Society Subvention Grant
awarded by the University of Texas at Austin.
Copyright © 2008 by the University of Texas Press
All rights reserved
Printed in the United States of America
First edition, 2008
Requests for permission to reproduce material from this work should be sent to:
Permissions
University of Texas Press
P.O. Box 7819
Austin, TX 78713-7819
www.utexas.edu/utpress/about/bpermission.html
♾ The paper used in this book meets the minimum requirements of
Ansi/nisO Z39.48-1992 (R1997) (Permanence of Paper).
LibRARy Of COngRess CAtALOging-in-PubLiCAtiOn DAtA
Auerbach, Robert D.
Deception and abuse at the Fed : Henry B. Gonzalez battles Alan Greenspan’s Bank /
by Robert D. Auerbach.
p. cm.
Includes bibliographical references and index.
isbn 978-0-292-71785-5 (cl. : alk. paper)
1. Board of Governors of the Federal Reserve System (U.S.) 2. Governmental
investigations—United States—Case studies. 3. Greenspan, Alan, 1926– 4. Gonzalez,
Henry B. (Henry Barbosa), 1916–2000. I. Title.
Hg2563.A94 2008
332.1 ′10973—dc22
2007051720
Contents
vii
Acknowledgments
1
CHAPteR 1 Hitting a Tank with a Stick
CHAPteR 2 The Burns Fed: Price Controls, Inflation,
and the Watergate Cover-up with a
12
Distinguished Professor at the Helm
32
CHAPteR 3 The Master of Garblements
55
CHAPteR 4 Spinning Mountains into Molehills
CHAPteR 5 Valuable Secrets and the Return of
74
Greenspan’s “Prophetic Touch”
87
CHAPteR 6 The Seventeen-Year Lie
106
CHAPteR 7 Corrupted Airplanes and Computer Mice
122
CHAPteR 8 Standing in the Door against Civil Rights
135
CHAPteR 9 When Five Hundred Economists Are Not Enough
148
CHAPteR 10 The Myth of Political Virginity
CHAPteR 11 Pricking the Stock Market Bubble and
166
Other Greenspan Policies
182
CHAPteR 12 Bring the Fed into the Democracy
APPenDix Excerpts from Waste and Abuse in the
195
Federal Reserve’s Payment System
201
Notes
251
Glossary
255
Bibliography
261
Index
THIS PAGE INTENTIONALLY LEFT BLANK
Acknowledgments
Both the United States and the account presented in this book benefited
from the legislators who carried out their oversight responsibilities for
the U.S. central bank during their service on the House of Representa-
tives Banking Committee. (The committee, formerly called the Bank-
ing, Finance and Urban Affairs Committee, is now known as the Finan-
cial Services Committee; as was the custom in the House, I will refer
to it as House Banking or the Banking Committee.) They include the
late House Banking Committee chairmen Henry S. Reuss (D-Wi; chair-
man, 1975–1980) and Henry B. Gonzalez (D-tx; chairman, 1989–1994;
ranking member to 1998) as well as other members who served on the
Banking Committee, including Representatives Barney Frank (D-MA,
ranking member in 2003, chairman in 2007), Maurice Hinchey (D-ny),
Jessie Jackson, Jr. (D-iL), Joseph P. Kennedy II (D-MA), Carolyn Maloney
(D-ny), Maxine Waters (D-CA), and Melvin L. Watt (D-nC). Former
congressman James Leach (R-iA; chairman, 1995–2000) was always ac-
cessible and knowledgeable, and provided funds for the Gonzalez inves-
tigation, in which I participated, of the airplane fleet contracted by the
Federal Reserve System (the Fed). I was privileged to work with these
members during the eleven years I served as a staff economist on the
committee. I also benefited from my service as a staff adviser on monetary
policy and the Federal Reserve to Beryl Sprinkel, undersecretary of the
treasury for monetary affairs, during the first year of Ronald Reagan’s
administration.
I am indebted to Nobel laureate Milton Friedman, my professor and
dissertation chairman, who drew my attention to central banking and
continued to provide me with suggestions and encouragement until his
�
viii DeCePtiOn AnD Abuse At tHe feD
death in 2006. Insightful suggestions from several of his letters to me ap-
pear in the book. He said he was looking forward to reading the book and
liked the section of it I sent him in 2006, on whether it is important (or
not) for Fed officials to be able to explain their actions (Chapter 9). Milton
phoned me several times when I was working on congressional investiga-
tions of the Fed. He called once to say that someone had asked for his help
in stopping me. Milton wanted me to know that he strongly objected to
this call and that I should continue my efforts. In another call, we talked
about the exemption given to the Fed by some “conservative” think tank
members who were critical of the untethered powers of other governmen-
tal bureaucracies. I have always remembered his terse comment about this
inconsistency of the conservative think tankers: “They aren’t perfect.”
My thanks also go to Anna Schwartz, at the National Bureau of Eco-
nomic Research, who coauthored with Friedman three classic books, one
of which, A Monetary History of the United States, 1867–1960, encompasses
the early history of the Federal Reserve. I was honored that she agreed to
be a discussant of a paper I presented at a meeting of the Western Eco-
nomic Association in 2000, detailing the deceitful manner in which the
Fed concealed transcripts of its meetings for seventeen years and misled
Congress. She thought such actions were outrageous. She testified before
the House Banking Committee on October 19, 1993, about numerous
leaks of inside information from the Fed. She was one of Congressman
Gonzalez’s favorite witnesses. Two other witnesses at that same hearing
also provided valuable testimony: James Meigs, an expert money-and-
banking economist, and Robert Craven, an experienced broker who re-
vealed some of the effects that leaks of inside information from the Fed
have on securities markets (see Chapter 6).
Three days after Anna Schwartz testified, when the Fed was discussing
in a secret meeting what actions it would take with regard to the Gonzalez
investigation and hearings, a governor of the Fed, apparently displaying his
historical perspective, paid an unintended tribute to a wonderful scholar.
He suggested to the Federal Open Market Committee that it not disclose
the transcripts of any of its meetings from before 1981, since “the very deep
history first of all is less interesting, except to the Anna Schwartzes of the
world perhaps” (fOMC transcript, October 22, 1993, 7).
I am especially indebted to Jake Lewis, who provided substantial expert
knowledge and assistance. He has vast experience, going all the way back
to 1958, when, as a reporter in Texas, he covered Gonzalez’s unsuccessful
gubernatorial campaign. Jake served on the House Banking Committee
�
ix
Acknowledgments
staff for twenty-seven years (1965–1992). He was a superb adviser and the
go-to expert for the staff during the tenure of four Banking Commit-
tee chairmen, beginning with Wright Patman. He worked in the public
interest on innumerable investigations and hearings as a primary force
behind the scenes. He is the author of “Monster Banks: The Political and
Economic Costs of Banking and Financial Consolidation” (Multinational
Monitor, January–February 2005).
I was very fortunate to work with many other excellent House Bank-
ing Committee staff members, including Kelsay Meek, who served with
Congressman Gonzalez for many years. He was staff director of the com-
mittee until 1994, then minority staff director until Gonzalez left Con-
gress, in 1998. Kelsay used his outstanding writing ability to assist in the
preparation of many speeches and played a constructive leadership role
in Banking Committee oversight and investigations. Other valuable staff
members include the late Paul Nelson, who served as staff director under
House Banking chairmen Wright Patman, Henry Reuss, and Fernand
St. Germain; Stefanie Mullin, who was the innovative and hard-working
press secretary for the committee; and Armando Falcon, who served as
a committee lawyer under Gonzalez and performed spectacularly during
his five-year tenure as director of the Office of Federal Housing Enter-
prise Oversight (1999–2005), uncovering severe problems in government-
sponsored enterprises operating in the mortgage market. Dennis Kane, an
expert investigator, played a major role in assisting Gonzalez with an in-
quiry into $5.5 billion in loans extended to Saddam Hussein’s Iraq govern-
ment through an Atlanta banking operation (Chapter 4). Michael Crider
served on the committee staff and participated in an investigation of Fed
transcripts.
During the 1970s, I worked on hearings and oversight actions related
to the Federal Reserve System, efforts that in 1980 produced legislation
regulating the Fed. During those years I worked closely with three econo-
mists: Louis Gasper, of the House Banking Committee’s Republican
staff; the late Robert Weintraub, of the committee’s Democratic staff; and
James K. Galbraith, also of the Democratic staff. Galbraith, with whom I
shared a small staff office in the 1970s and who is now my colleague at the
LbJ School of Public Affairs, has been a very valuable source for discussing
economic issues. I benefited also from discussions with David Meiselman,
who wrote a classic book on interest rates and coauthored a famous study
with Milton Friedman.
I gratefully acknowledge the Fed employees who publicly assisted the