Fed’s Secrecy During Crisis Limits Effort to Stop Another: View
Opposites in many ways, the Tea Party movement and Occupy Wall Street have this in common: Both have channeled the public’s not always well-informed anger over the behavior of banks and government during the financial crisis. As it turns out, they didn’t know the half of it, and neither did the rest of us, including Congress.
As a story in the January issue of Bloomberg Markets magazine shows, between August 2007 and April 2010, the Federal Reserve secretly administered the largest bailout in U.S. history without approval or oversight from the legislative branch. To give a sense of the scale of this effort, as of March 2009, the Fed had committed $7.77 trillion, more than half the value of everything produced in the U.S. that year, to the rescue.
Even as they were tapping the Fed for emergency loans at rates as low as 0.01 percent, the banks that were the biggest beneficiaries of the program were assuring investors that their firms were healthy. Moreover, these banks used money they had received in the bailout to lobby Congress against reforms aimed at preventing the next collapse.
By keeping the details of its activities under wraps, the Fed deprived lawmakers of the essential information they needed to draft those rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, was debated and passed by Congress in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival. Similarly, lawmakers approved the Treasury Department’s $700 billion Troubled Asset Relief Program to rescue the banks without knowing the details of the far larger bailout being run by the Fed.
The central bank justified its approach by saying that disclosing the information would have signaled to the markets that the financial institutions that received help were in trouble. That, in turn, would make needy institutions reluctant to use the Fed as a lender of last resort in the next crisis.
Fed officials argue, with some justification, that the program helped avert a much bigger economic cataclysm and that all the loans have now been repaid.
Yet the opacity undoubtedly caused severe damage of its own by hiding the depth of the crisis faced by the banks, which were able to argue that the regulatory status quo worked just fine. Bloomberg Markets quotes some of the pivotal lawmakers responsible for devising the congressional response to the crisis as saying they were kept in the dark. “We didn’t know the specifics,” said Barney Frank, a Massachusetts Democrat, the former chairman of the House Financial Services Committee and one of the co-authors of the 2010 regulatory overhaul.
The Fed’s program also enabled the biggest banks to grow even bigger by allowing them to borrow from taxpayers at negligible rates. According to a calculation by Bloomberg, the 190 financial firms for which data were available may have produced additional income of $12.9 billion, thanks to their access to the Fed programs. The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion, or 23 percent of their combined net income during the periods they were borrowing from the central bank.
There is no question that the Fed and other central banks should have an independent status that allows them to conduct monetary policy free from political interference and public pressure. That independence should be accompanied by transparency and accountability to the taxpayers who would have been on the hook if the central bank’s gamble hadn’t worked out.
The Fed agreed to disclose this vital information in March, after a legal battle that lasted more than two years. Yet David Jones, who worked as an economist at the Federal Reserve Bank of New York and has written four books on the central bank, says it would have been “totally appropriate” to disclose the data by mid-2009, when it could have informed the drafting of the regulatory legislation.
Dodd-Frank will make a difference; it requires the central bank to make public its discount-window lending -- but only two years after the fact. Given the pace at which economies can unravel, and the need for up-to-the-minute intelligence, this seems insufficient. The two-year delay prevents lawmakers from having timely access to critical data on the economy that should inform its legislation. Congress is well within its rights to be more insistent with the bank, and compel the Fed to conduct closed briefings for lawmakers most involved in such decisions.
If intelligence agencies and the Pentagon can do this on sensitive issues of national security, then there’s no reason the Fed can’t do the same when it comes to economic peril.
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