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Why the era of top secrecy for the Federal Reserve should end
The Federal Reserve has passed with flying colours and failed spectacularly a test on the same subject in just seven days.
Fed Chairman Ben Bernanke, left, speaks with Bank of England governor Mervyn King. Until 1994, the Fed's equivalent of the BoE's Monetary Policy Committee didn't even disclose any changes it was making to the fed funds rate - the key interest rate in America's financial system. Photo: AP
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A week ago, America's central bank announced that Ben Bernanke, its chairman, will hold four press conferences a year, starting next month. An 'A', then, for transparency.
On Thursday, the Fed disclosed 25,000 pages of documents revealing the banks that came to it with their begging bowls during the crisis. Again an A grade, but not for the Fed. It goes, instead, to Bloomberg, the news organisation that harried the bank through the courts to force the data dump.
It's the failure that has generated far more interest. The Fed resisted disclosing the who, what, when of the loans it made through its discount window (please excuse the jargon) on the grounds that investors might now start to get worried about the health of those lenders who tapped on the window the loudest.
The Clearing House Association, the biggest financial lobby group in the US, also joined in the legal fight in a clear sign that the banks really wanted this kept under wraps. In fairness, when the banks borrowed they did so in the understanding it was confidential.
And it's hard to overstate the stigma attached to using the window, the oldest lending tool the Fed has. In the early 1990s, as America's banks were recovering from the Savings & Loans crisis, they would rather pay more to borrow from each other than turn to the window for cheaper money.
It's seen as the financial equivalent of leprosy, a condition no bank is known to have survived without government medicine.
However cold their sweats, though, the public's right to know where taxpayers' money was lent during the country's worst financial crisis since the 1930s is a greater one. What's more, the Fed released huge swathes of its emergency lending data in December and the banks are still, well, standing.
While the F grade on transparency has caused a storm, it's the Fed's decision to engage with the press each quarter that history is more likely to remember from this week. Press conferences do, of course, carry risks for those holding them. It's the reason journalists like them. Ben Bernanke and his line of successors have more chances than they did before to spook and confuse investors. There can certainly be no answers like the remark Alan Greenspan is alleged to have made during a speech in 1998: "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said."
But the Fed has rightly judged the benefits outweigh the risks. Bernanke is likely to face the challenge later this year of dismantling the life support machine the US economy has been on since the autumn of 2008. The opportunity to explain how they're doing it is one any central banker should welcome.
Some historical context also helps underline how significant a moment it will be when Bernanke stands up to give his first press conference on April 27. It was only in the 1970s that the chairman of the central bank started testifying before Congress. Until 1994, the Fed's equivalent of the Bank of England's Monetary Policy Committee didn't even disclose any changes it was making to the fed funds rate - the key interest rate in America's financial system.
Instead, banks and investors were left to deduce it from changes the Fed made to the quantity of reserves in the banking system. "Central banks have had the attitude that what they do is none of your business," says Allan Meltzer, a professor of political economy at Carnegie Mellon and author of a history of the Fed. "That doesn't square with a modern democracy."
So how far should this drive for transparency reach within the Fed go? Some say it's already gone too far. Just as banks lick their wounds from Thursday's disclosures, they know they'll have to face it all again because last year's Dodd-Frank Act compels the release of the names of those who borrowed from the window with a two-year lag. There's no shortage of good arguments against it. Whatever the stigma, the Fed's window was actually designed for healthy banks who unexpectedly need overnight funds to meet their reserve requirements. A large payment, for example, that they were expecting might not have come in. Lou Crandall, a veteran observer of the banking system, says the drive for disclosure is the "nail in the coffin" of an important tool in a central bank's armoury.
It's also true that not all information is useful information. But a central lesson of the financial crisis is that when in doubt always err on the side of too much disclosure.
If most of the information proves irrelevant, let the highly-paid fund managers who invest in bank shares make that judgement. It's what customers pay them to do.
However cold their sweats, though, the public's right to know where taxpayers' money was lent during the country's worst financial crisis since the 1930s is a greater one. What's more, the Fed released huge swathes of its emergency lending data in December and the banks are still, well, standing.
While the F grade on transparency has caused a storm, it's the Fed's decision to engage with the press each quarter that history is more likely to remember from this week. Press conferences do, of course, carry risks for those holding them. It's the reason journalists like them. Ben Bernanke and his line of successors have more chances than they did before to spook and confuse investors. There can certainly be no answers like the remark Alan Greenspan is alleged to have made during a speech in 1998: "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said."
But the Fed has rightly judged the benefits outweigh the risks. Bernanke is likely to face the challenge later this year of dismantling the life support machine the US economy has been on since the autumn of 2008. The opportunity to explain how they're doing it is one any central banker should welcome.
Some historical context also helps underline how significant a moment it will be when Bernanke stands up to give his first press conference on April 27. It was only in the 1970s that the chairman of the central bank started testifying before Congress. Until 1994, the Fed's equivalent of the Bank of England's Monetary Policy Committee didn't even disclose any changes it was making to the fed funds rate - the key interest rate in America's financial system.
Instead, banks and investors were left to deduce it from changes the Fed made to the quantity of reserves in the banking system. "Central banks have had the attitude that what they do is none of your business," says Allan Meltzer, a professor of political economy at Carnegie Mellon and author of a history of the Fed. "That doesn't square with a modern democracy."
So how far should this drive for transparency reach within the Fed go? Some say it's already gone too far. Just as banks lick their wounds from Thursday's disclosures, they know they'll have to face it all again because last year's Dodd-Frank Act compels the release of the names of those who borrowed from the window with a two-year lag. There's no shortage of good arguments against it. Whatever the stigma, the Fed's window was actually designed for healthy banks who unexpectedly need overnight funds to meet their reserve requirements. A large payment, for example, that they were expecting might not have come in. Lou Crandall, a veteran observer of the banking system, says the drive for disclosure is the "nail in the coffin" of an important tool in a central bank's armoury.
It's also true that not all information is useful information. But a central lesson of the financial crisis is that when in doubt always err on the side of too much disclosure.
If most of the information proves irrelevant, let the highly-paid fund managers who invest in bank shares make that judgement. It's what customers pay them to do.
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http://www.telegraph.co.uk/finance/economics/8419513/Why-the-era-of-top-secrecy-for-the-Federal-Reserve-should-end.html
1 person
1 person
Bernanke effectively serves the bankers who own the shares in the US Federal Reserve Bank. He will probably get a huge bonus for his work enriching these banks.
If I was one of these banksters I would be very scared.
Freedom of information on the Internet has left them in full view of the good people of the USA.
3 people
4 people
3 people
26 people
Bill and Ben, the Zionists men.
7 people
http://viableopposition.blogsp...
37 people
43 people
As the foundation for the reserve currency of the world the secrecy which surrounds this bank is a disgrace.
It stinks of corruption.
50 people
6 people
http://www.zerohedge.com/artic...
9 people
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