Now raising intellectual capital
A federal judge’s ruling that the Federal Reserve must disclose information about the $2 trillion in emergency loans it made during the financial crisis has been hailed by a number of commentators, including Matthew Goldstein, as a significant victory for transparency and accountability.
But Paul Kasriel, the economist with Northern Trust, wonders if this week’s court decision is a disturbing repeat of a legislative action during the Depression that helped spark bank runs.
The Reconstruction Finance Corp. was established Congress in 1932 to make loans, chiefly to financial institutions. An act passed in July of that year required the RFC to make monthly reports on its loans to Congress and the President. Milton Friedman and Anna Jacobson Schwartz in their 1963 classic, “A Monetary History of the United States, 1867 to 1960,” noted that Democrats pushed for disclosure of the loans as a safeguard against favoritism, and the House Speaker in August ordered that the information be made public. Kasriel explains what happened next:
This publication of the names of banks borrowing from the RFC discouraged current borrowers from continuing their borrowing and prospective borrowers from commencing borrowings out of a fear that depositors would judge this borrowing as a sign of financial weakness. By November 1932, the outstanding amount of RFC loans to banks had decreased
A federal judge’s ruling that the mighty Federal Reserve must release information about some $2 trillion in “emergency” loans made during the financial crisis is a big blow to the central bank’s self-styled image as an impenetrable shrine.
US District Judge Loretta Preska should be applauded for not taking the Fed’s bait that to release information about the banks and financial institutions that received those loans would imperil the financial system.Â Preska rightfully concludes that the Fed’s fear is based on mere speculation and “conjecture.”