The Audit of Federal Reserve Governance: Wiggle Room for the GAO? 

We’ve recently endured the worst financial and economic crisis since the Great Depression, and for many people, it isn’t over yet.  We’ve had 11 recessions since World War II, and our latest included the largest decline in employment of all of them.  It has also been by far the worst jobs ‘recovery’ despite that fact that it was also the worst recession.  Hard recessions are typically followed by relatively rapid recoveries, but that hasn’t been the case this time.  Total nonfarm payroll employment in the U.S. remains 7 million jobs below where it was at the time the recession started – over 40 months ago. 

During the latest downturn, the national unemployment rate went from about 4.5% to 10%, and remains above 9% at the latest reading.  A recovery has been underway over the last year and a half, led, until recently anyway, by the manufacturing sector.  But the jobs picture has remained very bleak.  Since 1960, we never had a three-year interval where U.S. private sector employment fell at an average annual rate over 1%.  In 2009, that happened for the first time since the Great Depression, and again in 2010.

As the financial crisis was gathering steam in 2008, and as millions of people were losing their jobs, the Federal Reserve lent extraordinarily large amounts of money to large financial institutions.  The assistance was provided to banks as well as other parties not normally able to access central bank credit directly, including American International Group (AIG), one of the largest insurance enterprises in the world.  Loans to nonbanks arose under provisions in Section 13(3) of the Federal Reserve Act that allow the Fed to lend to ‘individuals, partnerships, and corporations,’ e.g., not just banks, in ‘unusual and exigent circumstances.’  The Fed’s emergency lending also included huge loans for foreign financial institutions.  The Fed extended over $1 trillion in emergency credit, at peak levels.  And the Fed’s balance sheet also mushroomed as it embarked on a buying spree of ‘mortgage-backed’ and other securities. Read more È