Why Does the Fed Operate in the Dark?

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Dean Baker
Bailout Watch, April 20, 2009

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President Obama has made an impressive commitment to run an open administration, posting contracts and spending on the Internet wherever possible. For some reason, there has been no effort to extend this openness to the Fed.

This creates a bizarre disjuncture in public policy. When the Treasury loans money to a troubled bank or other institution through the TARP or its various derivative programs, there is a clear paper trail. Reporters, analysts, and advocates can look up how much money was lent, under what terms and what the government received as collateral. However, when the Fed makes a loan, there is no record whatsoever. The Fed will not even report the names of the institutions to whom it has lent money.

It is difficult to understand the rationale for this secrecy. Like the Treasury, the Fed is an agency of the government. It gets its money from the taxpayers and it derives it regulatory authority from the government.

It makes no sense to have a policy of openness at Treasury if it can be circumvented by lending from the Fed. And, in fact the $1.3 trillion that has been thus far lent to banks and other private corporations through the Fed's special loan facilities far exceeds the $700 billion that Congress appropriated to the TARP administered by the Treasury.

The Fed's "trust me" attitude is especially inappropriate in this situation since this whole crisis came about largely because of the Fed's failure to either recognize or counteract the growth of an $8 trillion housing bubble. The sharp run up in house prices from 1996 to 2006 was a sharp break from a hundred year long trend. Therefore, the housing bubble should have been apparent.

It also should have been obvious that when the bubble broke the loss of such a vast amount of wealth would devastate the economy. Remarkably, even after the bubble began to deflate in 2007 the Fed continued to minimize the consequences at every turn.

Workers in most jobs would have been fired immediately for such extraordinary incompetence, however Fed chairman Ben Bernanke has been allowed to keep his position and to have unchecked control over enormous sums of money. That is no way to run a railroad.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.