Why we have 16 trillion reasons to worry about the US Federal Reserve

At the height of the global financial crisis in 2008, the US Federal Reserve secretly conducted the biggest bank bailout in the history of the worldReuters

I have taught Masters of Finance (MFIN) students at major universities and executive courses on Wall Street for years. Some of the students tell me that their finance professors hardly – if ever – mention the role of the US Federal Reserve and its paramount importance to the global economy, let alone the American monetary system.

At first, I thought these students were pulling my leg. So, I asked one of them to make an appointment with one of her finance professors and ask explicitly about the Fed. The student said her finance professor gave 'zero' information about the US central bank – just a few minutes of perfunctory mumbo jumbo followed by a "let me get back to you".

Many of these MFIN students will end up working in financial institutions on Wall Street or in other financial centres around the globe.

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Now you have to stop and ask yourself - if Masters level students studying finance at major universities are not taught about the role of the Fed, what hope is there for the average person on Main Street to be able to wrap their brains around this mysterious entity and understand how it affects their lives in so many ways?

This amazing revelation about finance education in the US immediately brought to mind the following quote from a speech by President John F. Kennedy: "The very word 'secrecy' is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths and to secret proceedings."

Simply 'Fed' up!

Who cares, or rather should care, about the Fed? I am going to tell you why we should all worry about what the Fed does. Since the subprime mortgage crisis in 2008, the US government has provided money to hundreds of banks, a few insurers, and automakers as part of the $700bn Troubled Asset Relief Programme [or "TARP"].

Some firms have repaid the government, and many have announced they intend to return the money. However, it will astound you to learn that several domestic and foreign banks also received secret back-door bailouts from the Fed.

Foreign banks - with US government money? Which ones? British, French, German, Mexican, Chinese, Iraqi? We do not even know and we do not know how much. Apparently we did not even require the banks to spend the money wisely! Hey, it is only taxpayers' money after all!

Many US taxpayers have not forgotten the multi-billion dollar TARP bailoutReuters

I'd say in 2008 at the height of the global financial crisis, the Fed secretly conducted the biggest bank bailout in the history of the world. To make matters worse, the Fed fought in courts for several years to keep these bailouts a secret from the US taxpayers.

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Bet 'TARP' and 'Too Big To Fail' sound familiar?

Many taxpayers remember the multi-billion dollar TARP bailout. Folks on Main Street are still very angry that the US government spent hundreds of billions of dollars bailing out 'Too Big To Fail' Wall Street banks. Well, the TARP bailout was a fraction of the 'bailouts' the Fed gave to domestic and foreign banks.

In case you are worried, the banks that have all got your money are still paying out bonuses and dividends! In my recent book, I've discussed at length how the Fed gave more than $16trn in nearly interest-free money to many 'Too Big To Fail' domestic and foreign banks between 2007 and 2010. Yet, they did not tell us.

This multi-trillion-dollar bailout was revealed during a limited US Government Accountability Office (GAO) audit of the Fed, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act which entrusted this investigative arm of the congress to examine matters relating to the receipt and payment of public funds.

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Keep in mind that the gross domestic product (GDP) of the US for the entire year of 2010 was only $14 trn dollars. In addition, the total US national debt is currently over $19trn dollars and still growing. So every single US taxpayer, including your babysister and your grandfather, each paid tens of thousands of dollars to bail out the banks.

With President 'Make America Great Again' Donald Trump in the White House, just how the US gets out of this mess would be the question. In the interim, my dear IBTimes UK readers, I have just given you over 16 trillion reasons why we should worry about what the Fed does!


Iris Mack, PhD, EMBA, is a distinguished US academic who currently lectures on energy derivatives, trading and risk management for Fitch Learning and Tulane University, Louisiana, United States. She is a former MIT professor and derivatives quant/trader who has worked in financial institutions in the US, Europe and Asia. She has also previously worked for Nasa, Boeing and AT&T Bell Laboratories.

Over the years, Iris has authored several books including: Energy Trading and Risk Management: A Practical Approach to Hedging; Trading and Portfolio Diversification; A Wall Street Bailout for Main Street: This Bulletproof Trade Will Help You Get Paid and Mama says, "Money Doesn't Grow on Trees."


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