Commentaries

Naming banks

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

The historical parallel to the ruling in a lawsuit brought by Bloomberg is clear to Kasriel:

If the Fed is required to publish the names of financial institutions to which it has extended credit and this publication induces financial institutions to refrain from borrowing from the Fed, one can only speculate if this would be the tinder for another liquidity conflagration in the coming months.

This is an interesting echo, but his concern is not entirely convincing. There is a big difference, as Kasriel acknowledges, between 1932, before the New Deal and deposit insurance, and today, when the huge scale of federal intervention in the financial system is a given. And his concern is one that the judge did not find sufficiently compelling.

The big Fed news

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. Preska rightfully concludes that the Fed’s fear is based on mere speculation and “conjecture.”

A big tip of the hat also goes to Bloomberg News for pursuing this lawsuit, after the Fed denied the media outlet’s Freedom of Information Act request seeking the loan information. Thanks to Bloomberg, the public’s right to know all the ins-and-outs of the federal government’s effort to bailout the banks has been preserved.

Of course, I fully expect the Fed to appeal this decision. So I don’t expect these loan documents to be released anytime soon. And that’s a shame because throughout the financial crisis the Fed has shown it is tone deaf when it comes to the issue of accountablity and public disclosure.

Remember, the Fed fought against releasing the names of the banks that got an indirect bailout from the federal government’s rescue of American International Group. And the Fed has been less then forthcoming in providing information about the $30 billion in ailing assets it took on from Bear Stearns as part of the forced sale of the failing investment bank to JPMorgan Chase.

The Fed’s arrogance only has emboldened its critics and given ammunition to those on Capitol Hill who oppose the Obama administration’s plan to turn the Fed into some sort of uber-regulator.

Now that President Obama has rewarded Fed Chairman Bernanke with a new term (subject to Congressional approval), maybe the nation’s top money-man will move to breakdown the Fed’s historic wall of silence.