A small group of unelected government officials in Washington have the power to bail out banks and other financial institutions, free from budgetary constraints or democratic accountability. Yet insiders don't think the public has any right to know what's going behind the curtain.
Sen. Rand Paul wants a vote on his “Federal Reserve Transparency Act,” and to that end, he's delaying the nomination of Janet Yellen as chairwoman of the Federal Reserve Board. Majority Leader Harry Reid, however, has the power - and apparently the intention - to block a vote on this bill, which Wall Street and the Fed both oppose.
Paul’s bill would order an “audit” of the Fed by the Comptroller General. This would reveal the Fed’s actions and decision-making process on monetary policy (how much money to create and what sort of financial assets to buy with that money) and on the Fed’s lending to banks.
Congress created the Fed 100 years ago as an independent entity, allowing it to set monetary policy free from political pressure. It would be interesting to know in detail how the Fed sets monetary policy, but the Fed's lending to banks is where added transparency is really needed.
Traditionally, the Fed lends money to banks through the “discount window” in order to help smooth the ordinary ups and downs in a healthy bank’s cash reserves.
Since 2007, though, the Fed has expanded this window to be a continuous subsidy to banks and all sorts of corporations (including McDonald's) who borrow secretly at below-market rates.
Government secrecy is undemocratic, and it tends to rig the game in favor of insiders.
Even assuming that government policymakers are motivated only by a desire to help the country, it’s clear they are subject to influence. The two main pulls on policymakers: popular pressure and insider pressure. Popular opinion drives votes, constituent emails and phone calls, and to some extent the news media. Insider pressure works through campaign contributions and access—the insiders have much more opportunity than outsiders to make their case to decision-makers.
When Congress sets up an arm of the government to be independent of politics, though, it removes popular pressure — or at least dampens it immensely. This leaves only one force acting on policymakers: insider influence.
In the case of the Fed, banks and other major financial players are the insiders — and not necessarily even in an insidious way. Fed officials value the opinions and the information that can only come from industry players. But when the insider influence is not balanced by popular pressure, public transparency is important.
The insiders, of course, hate transparency. The American Bankers Association has consistently lobbied against legislative efforts to improve transparency. The Fed - while touting its own transparency (federalreserve.gov has troves of information on its activity) -- has fought to keep its lending secret.
After the 2008-2009 financial crisis in which the Fed and Congress bailed out Wall Street, Bloomberg News used the federal Freedom of Information Act to request details of the emergency lending the Fed made through the discount window. The Fed said no. Bloomberg spent millions in a court battle, and eventually the Supreme Court ordered the Fed to open its books.
That epic legal battle is the only reason we learned that U.S. banks earned $13 billion during the crisis by borrowing from the Fed at below-market levels. Bloomberg revealed that the Fed’s bailout efforts for banks dwarfed the Troubled Asset Relief Program that Congress passed.
Bloomberg reported that the Fed provided $7.77 trillion in aid to banks during the crisis – more than 10 times the size of TARP. You can see why the ABA joined the Fed in its court fight to keep this information secret.
Recent lobbying disclosures show the ABA lobbying on Paul’s bill, as is General Electric. GE is known as a manufacturer, but it’s also a finance company. In late 2008, the Fed loaned GE $16.1 billion to help the company make it through the crisis.
The Fed, Wall Street and their allies defend the secrecy. If the public knew who was seeking discount-window cash, there would be runs on the banks.
“There are some Fed operations that must be treated as non-public in real time,” said Wall Street advocate Tony Fratto of Hamilton Place Strategies. “Not because there's anything nefarious as Rand Paul would have you believe, but because it's market sensitive.”
It's another case where transparency and democracy are on one side, and the interests of industry and government insiders are on the other side.
Timothy P. Carney, The Washington Examiner's senior political columnist, can be contacted at [email protected] His column appears Sunday and Wednesday on washingtonexaminer.com.