The Federal Reserve has been the center of attention recently — for two reasons. The first involves its view that it should keep its cards close to its vest; the second expresses its wish to lay its cards on the table, face up.
The conflicting ideas in its actions and the fact that the conflicting actions are both reasonable tells us a lot about the economic mess we are in and about the role of the Federal Reserve in getting us out of it.
On Dec. 8, the Federal Reserve responded to a Freedom of Information Act suit filed in November by Bloomberg News. The news service wanted to know who received the $2 trillion in loans that the Federal Reserve had made in its efforts to patch up the sinking financial system.
In response, the Federal Reserve Board said that “Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure. In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information.”
In other words, “No, that’s not going to happen.”
The reference to “enhanced transparency” is not accidental. Ever since he first took over as Federal Reserve Chairman, Ben Bernanke has been working to make the Fed’s monetary policy actions and intentions more visible to the public and to financial markets. So, at first glance, it seems odd that the basic facts surrounding $2 trillion in Federal Reserve actions would be obscured by a cloud of secrecy.
In the Fed’s view the answer is simple enough: If they released the names of the institutions that had received the loans, this information would immediately be translated by the news media and financial markets into a “loser list.” Investors and traders would short the stocks of these institutions, whether they deserved it or not, and we would be right back in the soup. Release of the information into this market atmosphere would topple institutions and prompt a repeat of exactly the kind of financial crisis the Fed and the Treasury Department has been working so hard to get us out of.
News organizations do not see it that way, of course, for they are in business of sharing information, not keeping secrets. Bloomberg News will undoubtedly pursue this matter further through the courts.
If we are lucky, the legal process will illuminate and resolve the underlying issue that makes this case so interesting: time. There is no doubt that the information on who got the loans will eventually become public once its time sensitivity decays. And there is no doubt that the public has a right to know. The real question: Is there a “right” time for releasing the information, one that would balance the need for confidentiality against the need to satisfy the public’s right to know?
While the Federal Reserve clearly wishes to conduct this kind of operation in secret, it decided to announce its latest economic stimulus program even before it really began. After deciding to push short-term interest rates down nearly to zero, the Fed announced its plans to purchase large amounts of mortgage-backed bonds issued by Fannie Mae and Freddie Mac. It also said it intends to purchase long-term Treasury bonds. These actions will drive up the price of those bonds and lower long-term interest rates.
The move into long-term interest rate markets represents a major shift in Federal Reserve policy. For decades the policy has been focused on short-term rates only. The idea behind this was that if you got short-term rates where you wanted them, the financial markets would add their estimates of the risk factor and take care of the long-term rates on their own. In the current market situation, though, that system is not producing the desired results and the housing sector is still a distressed industry. So the Fed is jumping in.
The new program to lower long-term interest rates will help the housing market, and the government’s backing of the mortgage bonds will encourage lending to home buyers. It is a good idea.
It is not enough of a good idea, though. The sickness of the housing sector has already spread to other parts of the economy, and lower long-term rates won’t have the same effect there. We need to encourage lending.
The basic principle of using federal loan guarantees should be expanded. We are bleeding jobs and what the economy needs right now is a massive expansion of government-backed loans to businesses to stanch the flow. The Small Business Administration, for example, needs to be making ten times as many loans as it is now, to get the economy’s wheels moving — while we still can.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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