I mentioned in a post the other day that the adage is not always correct that truth is the first casualty of war. Sometimes conflict offers excellent opportunity for understanding the real motivations and priorities of the antagonists. Such is the case with the Federal Reserve’s attempt to prevent the public from knowing what it does at its discount window.
Bloomberg and Fox sued the Fed to force them to reveal who was selling their (crappy) paper at the Fed’s discount window. The discount window was used extensively by the Fed during the recent financial system imbroglio as a means of shoring up bank balance sheets. It would buy paper that banks would have had great difficulty (i.e., would have suffered a severe loss) selling elsewhere, for some multiple more than the paper would have fetched in the private markets. It was the Fed’s “lender of last resort” function (although nothing in its charter or enabling statutes provides it is to be such a lender) in action.
The Fed objected vociferously to being required to disclose from which bank it bought crappy assets, or to reveal what those crappy assets actually were. Here’s the Fed’s objection, in a nutshell, from the Wall Street Journal:
The Fed’s Board of Governors and a banking group had argued, in part, that disclosure would harm the banks who borrowed from one of 12 Federal Reserve banks and could affect the banking system as a whole if struggling banks refused to access the “last resort” lending programs because of disclosure requirements.
Get that? The Fed basically doesn’t want the American public to know what it is doing with their dollars because it feels that telling them–the very people to whom it owes its existence and allegiance–might impair its attempted subterfuge. I suppose they’re right on that score. Subterfuge is appreciably more difficult to accomplish in the glare of sunshine.
What about the rights of bank shareholder’s to know? Or the right of the public to know if a bank they are implicitly supporting by dint of FDIC backing is juicing its balance sheet through Federal Reserve largess?
The whole idea behind the discount window is a fraud. It represents a brazen rejection of market solutions for a taxpayer-funded game of extend and pretend. This is the true reason the Fed wishes its activity to not be disclosed. It knows nothing it does at the discount window would pass the market smell test. Which would, of course, render its actions less effective.
The claim that revealing its discount-window customers might put a bank in jeopardy is spurious. That’s exactly the sort of information that should be readily available, so investors and creditors alike could make better decisions about the viability of the institutions to which they entrust, and in which they invest, their money. What the Fed is attempting to do with banks would land the heads of non-financial public companies in jail for fraud.
So long as the Fed thinks it can get away with this sort of shenanigans, the longer it will take until the bottom is really in, and real, sustainable growth can begin anew. Secrecy of this sort just facilitates extend and pretend.