Americans can take comfort knowing that Congress and the courts affirmed what may prove the most reassuring legacy of the worst financial disaster of our time: The Federal Reserve is the people’s bank and obligated to share what it knows and does with the citizenry it serves.
When the Supreme Court last month decided to leave intact a lower court’s order, it validated the notions that transparency is an essential requirement of democracy and that the Fed is no less accountable than any other institution in our government.
The release yesterday of about 29,000 pages of data has already yielded insights. For example, a European bank, not an American one, was the biggest borrower from the discount window during the height of the 2008 panic. Bank of America Corp. visited the discount window more often than it has disclosed. And the Bank of China Ltd. and Arab Banking Corp., a Bahrain-based bank controlled by the Libyan Central Bank, both tapped the window.
Congress, which last year carved an exemption for the Fed’s discount window into its Dodd-Frank financial regulatory law, will now get a look at specific loans that went out through the window in 2008. This presents a second chance for lawmakers to require the central bank to disclose the collateral it accepted for those discount window loans during the financial crisis and for its lending through other programs.
U.S. Senator Bernard Sanders, a Vermont Independent who wrote most of the Fed transparency provisions in Dodd-Frank, has said the central bank should have already revealed more. While an audit by the Government Accountability Office that’s due in July may lead to additional disclosures, Congress should insist on them. More than two years after the fact, the public ought to know what sort of risks its central bank took when borrowers came to the lender of last resort.
Right to Know
At stake is the individual’s right to know how the public as involuntary investors provided loans to banks and in what amounts. How we reached this point can be attributed in no small way to a reporter’s quest to share with his readers how the Fed, for the first time since its inception in 1913, created $2 trillion of assets and debts to bail out banks.
After his repeated attempts to obtain this data were rebuffed, the late Mark Pittman, who reported on credit markets, sued the Fed through Bloomberg News’s parent company under the Freedom of Information Act.
The Fed initially said that U.S. citizens don’t have the right to know these things and resisted all requests for an accounting under FOIA. When its lawyers went to court to prevent disclosure, federal Judge Loretta A. Preska of the Southern District of New York ruled that the central bank is obligated to release records of its lending on behalf of the taxpayer. The Fed took the case to the U.S. court of appeals in New York, which upheld Preska’s ruling.
The central bank declined to pursue its claim to the highest court, leaving it to the Clearing House Association, which represents the country’s biggest commercial banks, to make the final appeal.
U.S. law, as the courts have defined it, says that central bank independence doesn’t mean independent from the people. Independence means independent from the executive branch, not from Congress, which alone has the constitutional power to coin money. Congress delegates that power to the Federal Reserve. At some point long before financial markets collapsed in 2008, the Fed forgot that it is the central bank for the people of the United States and not a private academy where decisions of great importance may be withheld from public scrutiny.
The Obama administration, which paradoxically championed transparency in government when it came into office and then for two years supported the Fed in its resistance to be transparent, ultimately decided to let the lower court orders stand. Still, this reversal wasn’t a sign that the administration was embracing the president’s directive to “adopt a presumption in favor of disclosure, in order to renew their commitment to the principles embodied in FOIA.” Instead, the solicitor general merely acknowledged that, in many ways, Congress had already settled the question.
The showdown over transparency culminated in July with the passage of the Dodd-Frank Act requiring the Fed to disclose its lending on a two-year lag from now on. That change, which institutionalized transparency, represents a turning point in the way the U.S. central bank does business, and begins a new era of accountability for the lender and its borrowers alike.
For all its virtues, Dodd-Frank didn’t require a public accounting of discount window lending during the financial crisis. Now, the courts have filled in that gap. The public will get a view into how the Fed used public money to shore up banks that were struggling as a result of conditions the banks themselves helped create. Shareholders in banks where executives’ poor decisions were, in part, papered over by the Fed’s lending will be able to see just how important the discount window and the unusual steps taken to boost its lending beginning in August 2007 were to keeping their banks afloat.
While the notion that no U.S. institution is above accountability has been affirmed, we cannot wait patiently for government institutions to lift the veils of secrecy. We have to open them ourselves as part of the democratic process. The courts already acknowledged that the world doesn’t end when information is released so we have to question the motivations behind the Fed’s policy of secrecy and by extension the rationale of all government departments to resist disclosure.
After all that has been said and done, we still don’t know whether the Fed was accepting unsuitable collateral to keep insolvent banks afloat. And we still don’t know why the Fed and the Obama administration so strenuously protected the identities of the discount window borrowers. All of us stakeholders, especially the historians among us, might like to know who borrowed from the discount window from 1914 to 2008 as well.
(Matthew Winkler is the editor-in-chief of Bloomberg News. The opinions expressed are his own.)
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