Bloomberg View


Imagine that a friend with infinite resources gives you unlimited access to his bank account in exchange for a symbolic amount of interest, say 0.01 percent. Then imagine you can do as you please with the money, including lend it back to your deep-pocketed friend at a much higher rate of interest—and keep the difference as profit.

It sounds too good to be true, yet it's a pretty good analogy for the method the U.S. Federal Reserve used to rescue the financial system from collapse in 2008. The biggest U.S. banks—and some foreign ones—were given access to Fed lending programs at negligible rates and then used the money to, among other things, buy 10-year Treasury securities with yields between 2.05 percent and 4.27 percent. Altogether, the central bank committed $3.5 trillion to bailing out banks and restoring the flow of credit to a paralyzed financial system.

Astoundingly, in combination with the $700 billion Troubled Asset Relief Program and various other bailouts by the Treasury Dept. and the Federal Deposit Insurance Corp., this approach mostly worked. So why does the Fed continue to conceal the way taxpayer money was used?

On May 26, Bloomberg's Bob Ivry reported that in 2008, Credit Suisse (CS), Goldman Sachs (GS), and Royal Bank of Scotland (RBS) each borrowed at least $30 billion from a Fed emergency lending program whose details haven't been disclosed to shareholders, members of Congress, or the public.

It was no simple task to uncover this $80 billion Fed initiative known as single-tranche open-market operations (ST OMO), which from March through December 2008 made 28-day loans to units of 20 banks that paid interest rates as low as 0.01 percent. Information about the program was buried in 27 of the more than 29,000 pages of data the Fed was forced to release under the Freedom of Information Act after a request for disclosure was fought all the way to the Supreme Court.

The Fed claims, with some justification, that it's never been more open, giving pride of place to Chairman Ben S. Bernanke's big press conference on Apr. 27. Openness is different from transparency, however. While it's true the central bank has released a trove of data concerning its lending facilities during the 2007-09 crisis, it has never done so voluntarily.

There's a lot more to be done. Specifically, the Fed should make public the bank-supervisory memos from the period that preceded the popping of the credit bubble. Determining which signs and portents were missed, ignored, or misinterpreted will help regulators and Congress—and the Fed itself—avoid similar mistakes in the future.

The Fed's emergency policy of funneling money into the banking system has been followed by a post-emergency policy of quantitative easing, which amounted to funneling even more money into that same banking system. This has increased the threat of inflation and weakened the dollar. More disclosure would force central bankers to tell us how they plan to address these unintended consequences and deepen public appreciation of an independent Fed's beneficial role for all Americans.


Have you been asked about gold lately? Has someone tried to explain to you that the precious metal's 27 percent increase in dollar terms during the past year signals ominous things? Runaway inflation, economic panic, infinite instability...

Instead of wasting your breath, direct the concerned party to a corner of the report released May 19 by the World Gold Council, the gold-mining industry's main trade group. Buried amid the standard report-ese is a statistical review of worldwide gold demand in 2011's first quarter. The data show that gold's ascent is being driven by extraordinary demand from India and China, where rising prosperity is making it easier for millions of people to buy gold in all its forms, particularly jewelry.

The WGC estimates that Indian households own more than 18,000 metric tons of gold, the largest holding on the planet. (U.S. official gold reserves total about 8,100 metric tons.) Indian consumers aren't done buying; in this year's first quarter they purchased an additional 206 tons of gold jewelry and 85 tons of gold bars and coins. And China's appetite is growing rapidly and could soon overtake India's.

To come at the demand another way: If you strip out Chinese and Indian purchases, the rest of the world's hunger for gold isn't nearly so vibrant. Some new buyers have shown up; some prior speculators are cashing out. But a global flight to gold as a hedge against Armageddon doesn't appear to be taking shape.

This is not the company line of China National Gold Group, the country's largest gold mine. Earlier this month, President Sun Zhaoxue predicted that gold prices will stay high because of the dollar's depreciation and "intensifying geopolitical risks." His measured version of the safe-refuge thesis can be heard in much shriller tones on late-night American advertisements for gold coins.

Yet price surges for gold don't always reflect genuine fears and the need for disaster-proof investments. And gold's price may continue to climb this year. A recent Bloomberg News survey of 31 analysts, investors, and gold-mine operators found respondents, on average, predicting a year-end price of $1,750 an ounce, up significantly from recent levels of about $1,530. If such a rise occurs, however, it's likely to reflect new global demand for the shiny commodity rather than a farsighted warning to the world's central bankers.

To read Jonathan Alter on education reform and Daniel Goleman on the magic of laissez-faire bosses, go to

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