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 that 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 happens to be 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 from 2.05 percent to 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 Department and the Federal Deposit Insurance Corp., this approach mostly worked: Credit markets gradually thawed, the biggest U.S. banks were pulled back from the brink and the economy has posted seven quarters of consecutive -- albeit modest -- growth since June 2009.
So why does the Fed continue to keep Congress, and the rest of us, in the dark about the way taxpayer money was used? Last week, Bloomberg News’s Bob Ivry reported that in 2008 Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc 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 just 27 pages 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 contested all the way to the Supreme Court. Nor was the program mentioned in the reports on emergency lending the Fed was required to make to Congress last year under the Dodd-Frank law.
The Fed claims, with some justification, that it has been more open than ever before in its 97-year history, giving pride of place to Chairman Ben Bernanke’s big press conference on April 27. Openness is different from transparency, however. While it is true the central bank has released a trove of data concerning its lending facilities during the 2007-2009 crisis, it has never done so voluntarily.
There is 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.
Another urgent change is to require the Fed’s regional affiliates to be more transparent. The Federal Reserve Bank of New York, which administered the ST OMO program, has rebuffed requests for information about specific amounts the bank lent and to which firms. The New York Fed claims, unconvincingly, that it’s not subject to the disclosure laws that cover the rest of the executive branch because it’s a private entity.
Finally, 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.
More than two years after the official end of the recession, the Fed should understand that withholding information ultimately undermines its ability to preserve its independence, a fundamental requirement of fulfilling its mandate. Its opacity only serves to reinforce a misguided sense among some Americans that the central bank is an occult organization devoted to mysterious ends. This perception was visible in a Bloomberg National Poll published in December in which a majority of respondents said they favored either bringing the Fed under tighter political control or abolishing it outright.
Greater disclosure has the power to deepen public appreciation of an independent Fed’s beneficial role for all Americans. The central bank should trust the citizens it serves to understand the actions it takes in their name -- and with their money.
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