Traditionally, the Federal Reserve’s inner-workings were not known to the public.
In the years following the Great Recession, the Federal Reserves, under Ben Bernanke, has controversially taken the lead in artificially spurring on the economy through its use of “quantitative easing,” or the buying of Treasury and mortgage bonds in order to shrink the supply and raise demand. With the Fed now holding more than $4 trillion in purchased bonds, newly-confirmed Fed Chair Janet Yellen’s first task upon taking office will be to find a way to return this stockpile to the market without stalling the economy in the process.
Many feel that this unchecked ability to influence the economy is potentially detrimental. In 2013, Sen. Rand Paul wrote to Senate Majority Leader Harry Reid, announcing his intentions to filibuster Yellen’s confirmation unless Reid agreed to take up the Federal Reserve Transparency Act, a bill introduced in the House by Paul’s father, former Rep. Ron Paul, in 2009 and 2011.
“We cannot continue to ignore the role that the Federal Reserve has played in our economy’s downward spiral. Our nation simply cannot afford a national bank that is dedicated to seemingly unlimited money-printing and spending policies,” Paul wrote in an op-ed for the Washington Times. “When the economy doesn’t improve, what is the Fed’s perpetual answer? Print even more money. Creating money out of thin air is not a sound way to help the economy.”
The bill, which forces the Board of Governors of the Federal Reserve System to be fully audited by the Comptroller General of the U.S., passed the House in 2012, 327 to 98. However, it has been permanently shelved in the Senate.
Many critics point to the Fed’s $7.77 trillion no-conditions bailout of the big banks. The disclosure, which Bloomberg won the right to publicly announce after winning a lawsuit against the major banks, showed that the Fed — without any public acknowledgment or consent from Congress — was keeping the Big Six banks afloat with emergency daily loans, which topped out at a combined $1.2 trillion in single-day borrowing on Dec. 5, 2008. This was compounded by the fact that the banks did not report the borrowing to their shareholders and most of the banks actually reported billions in profit at the time.
Bernanke argued after the fact that revealing the borrowing would have created a stigma in which investors would shun firms that used the Fed as a lender of last resort. This would lead banks not to turn to the Fed to borrow from during the next crisis, leading to an increased possibility of a financial meltdown.
The Fed: a history in secrecy
For much of the Fed’s history, the bank has been less-than-clear about the machinations that went behind its policies. Former chairmen, such as Paul Volcker and Alan Greenspan, were so skilled in hiding their intentions in “fed-speak” that banking analysts and congressional leaders were left confused. This “smokescreen” helped to shield the public from the uncertainty that went behind many of the Fed’s more controversial moves, preventing panics that would have hurt the dollar.
The Fed’s objectives, as defined in the Federal Reserve Act, are to create and impose monetary policies that maximize employment, stabilize prices and moderate long-term interest rates. It is felt that instability and rapid fluctuations in the market will weaken the faith in the dollar, as long-term planning would be difficult — if not altogether impossible. It has been traditionally held that the inner-workings of the Fed should not be known to the public, as it would make it harder to tamper public overreactions and market speculations.
When Bernanke became the Fed chairman, he promised an increase in transparency. He followed through with this as much as the law allowed, including publishing the minutes from the Federal Open Market Committee meetings, holding press conferences after Board of Governors meetings and public hand-wringing during congressional hearings. Many experts feel that this amounted to the industry reacting not so much on the actions of the Fed but on speculation.
For example, when the Fed started to speculate about the potential reduction in bond buyback by the Fed, or the “tapering” of quantitative easing, the bond rates spiked in anticipation. The Fed ended up choosing not to “taper” at that time.
Sy Harding, a Forbes contributor, argues that transparency, in the case of the Fed, amounts to “too much information” which could actually countermind the Fed’s intention. And said Bernanke’s approach was a stark contrast to European Central Bank President Mario Draghi, who in promising ECB action said: The ECB will do whatever it takes to save the Euro — and believe me, it will be enough.”
But Hardingwrote that Bernanke kept repeating that the Fed’s monetary action was not a panacea and wouldn’t solve the unemployment or slowing economy problems, rather it could only provide some support, and that further help would have to come from the fiscal side (Congress).
“The Fed does not have tools that are strong enough to solve the unemployment problem,” Bernanke also said several times.
But Harding wrote that “The Fed’s action would have a better chance of producing the sustained positive market reaction the Fed apparently is after, if the Fed had simply taken the action and shut-up.”
Making the Fed transparent
Yellen has voiced her opposition to the Federal Reserve Transparency Act, saying that the need for the public to know about what the Fed is doing must be balanced with the need for the Fed to be independent and free to pursue its mandates.
“I would be very concerned about legislation that would subject the Federal Reserve to short-term political pressures that could interfere with that independence,” she said during her November confirmation hearings.
The call for the end to Fed secrecy is not just a conservative issue but has bipartisan support. In 1995, Reid called for legislation that would make the Fed more open and nearly 100 Democrats voted for the House bill in 2012. In 2009, Rep. Mel Watt introduced a legislative amendment that — in full opposition to Ron Paul’s legislation — would guarantee the secrecy of the Fed’s operations by making Fed audits harder to conduct and narrower in scope.
“While my amendment will certainly fall short of demands by those intent on destroying the independence (if not the existence) of the Fed, the critics of my amendment will have to concede … that my amendment will provide transparency of the Fed’s financial operations that will be completely unprecedented,” Watts wrote in a letter to members of the House Financial Services Committee.
In response to Watt’s amendment, a diverse group of economists, bloggers, union representatives — including Dean Baker, Rob Johnson, Naomi Klein, Richard Trumka, and Zero Hedge’s “Tyler Durden” — wrote a letter to the Financial Service Committee, asking it to disregard Watt’s amendment.
“During the past two years, the Federal Reserve dramatically changed its operating procedures. Instead of simply setting interest rates to influence macroeconomic conditions, it rapidly acquired a wide variety of private assets and extended massive secret bailouts to major financial institutions,” the letter read.
“There are still many questions about the Fed’s behavior in these new activities, including potential cronyism and favoritism in its distribution of many trillions of dollars. As the Special Inspector General for the Troubled Assets Relief Program recently wrote about their bailout of AIG, the Fed’s ‘strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions,’ the letter continued”
Most would agree that the Fed, free to act according to its own conscience, is problematic. When the Dodd-Frank Wall Street Reform and Consumer Protection Act was drafted and passed, Congress had no clue that the Fed gave bailout money that dwarfed the Troubled Assets Relief Program 10 to one. While it is reasonable to argue that the Fed must have some leeway to act as appropriate toward meeting its mandates, this must be balanced with the need to openly disclose issues that directly challenge national security.
More importantly, the lack of transparency fosters the myths and speculations and the demand for answers that preoccupies the extremes of the political spectrum.
“The lack of transparency is not just frustrating; it really blocked accountability,” said Neil Barofsky, a former TARP special inspector general and a Bloomberg Television contributing editor. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”