Why Central Bank Secrecy is Detrimental to Free-Market Capitalism

WikiLeaks is grabbing the headlines, but your California editor considers the “Icky-Leaks” issuing from the Federal Reserve to be much more intriguing – like the icky leak that the Fed doled out trillions of dollars in clandestine bailouts and guarantees during the crisis of 2008 and early 2009.

Thanks to a nifty little provision in the Dodd-Frank reform bill, the Fed was forced to come clean with these embarrassing details. On December 1, the Fed published an exhaustive and detailed list of bailout recipients, along with the sums each received.

The document dump confirms,” The Nation reports, “that the $700 billion Treasury Department bank bailout…signed into law under President George W. Bush in 2008 was a small down payment on an secretive ‘backdoor bailout’ that saw the Fed provide roughly $3.3 trillion in liquidity and more than $9 trillion in short-term loans and other financial arrangements.”

Bernanke vehemently resisted making these disclosures…for obvious reasons. The disclosures reveal the Fed’s too-cozy relationship with Wall Street. They also reveal a kind of institutionalized arrogance: the Federal Reserve knows what’s best for us, even if we don’t know it ourselves…or believe it.

During the last several months, Chairman Bernanke frequently and persistently asserted the need for secrecy at the Federal Reserve. Transparency, he argued, would compromise the Fed’s independence. The argument is ridiculous. Secrecy facilitates corruption and abuse. Transparency prevents it. A couple of free-thinking politicians recognized this reality early in the credit crisis.

As early as February, 2009, Senator Bernard Sanders, the Vermont Independent, complained to Bernanke, “Given the size of the [Fed’s] commitments, it is incomprehensible that the American people have not received specific details about them.”

Bernanke tersely replied: “The Federal Reserve does not release specific information regarding the borrowings of individual institutions from our lending facilities. The approach is completely consistent with the long-standing practice of central banks.”

As it turns out, this approach is also completely consistent with promoting deceptions and conducting crony capitalism…like doling out enormous bailout checks to Wall Street banks without ever disclosing the timing or size of these bailouts to the general public.

This is not a healthy circumstance for an economy that purports to practice “free-market capitalism.”

“Since its inception,” Congressman Ron Paul griped in a February 2009 speech, “the Federal Reserve has always operated in the shadows, without sufficient scrutiny or oversight of its operations. While the conventional excuse is that this is intended to reduce the Fed’s susceptibility to political pressures, the reality is that the Fed acts as a foil for the government…”

But now that the Fed has lost its “right” to non-disclosure, the American public is learning some very ugly truths, like the ugly truth that several large Wall Street banks received much greater assistance from the Fed than anyone had ever disclosed during the crisis of 2008-9. The bailout recipients and the Fed were both as silent as starfish about the spectacular scale of the Fed’s bailout activities.

“Almost two years ago,” Senator Sanders recalled recently. “I asked Chairman Bernanke to tell the American people which financial institutions and corporations received trillions of dollars as part of the Wall Street bailout. He refused. [But now], as a result of an audit-the-Fed provision I put into the financial reform bill, we finally learn the truth – and it is astounding.”

During the crisis, most Wall Street banks admitted to receiving a few billion dollars in TARP lending (after which they all made a big to-do about re-paying it). But they never uttered a peep about the billions of dollars they obtained secretly.

Goldman Sachs borrowed billions from the Fed’s Primary Dealer Credit Facility, but never bothered to mention this fact in any of its SEC filings. Goldman was equally silent about its borrowings from the Fed’s Term Securities Lending Facility. Only now – nearly two years later – do we learn what really happened.

“Morgan Stanley sold the Fed more than $205 billion in mortgage securities from January 2009 to July 2010,” The Huffington Post reports, “while it’s much bigger rival, Goldman Sachs, sold $159 billion. Citigroup, the nation’s third-largest bank by assets, sold the Fed nearly $185 billion in mortgage bonds. Merrill Lynch/Bank of America sold about $174 billion. It’s not clear how much these firms profited, but it’s abundantly clear that they did turn a profit.”

These obscenely large taxpayer-funded bailouts are not merely reprehensible for being conducted secretly; they are reprehensible for having deceived taxpayers, dollar-holders, investors and all other individuals who deserve honest and transparent financial markets.

Eric Fry
for The Daily Reckoning