Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Saturday, April 17, 2010

Information Disclosure Policy for the Fed

This constitutes a bit of a follow-up on my earlier post "Will Federal Reserve Secrecy Conceal Incompetence and Corruption "; see here.

Judging by the people I talk to, not many appear to have an accurate knowledge of what exactly the Federal Reserve Bank is, what it does, or what it is supposed to to. These same people, however, appear fairly certain that the Fed has secretly bailed out privileged groups with its extraordinary power of printing money. No doubt about, the Fed should be audited; it is an outrage that it is not.

Let's all calm down a bit and get some facts straight first.

The first thing that the general public should know is that the Fed is, in fact, audited. It is audited extensively and frequently at many different levels and by different agencies. One of my colleagues has estimated that more than 425,000 manhours are devoted to auditing the Fed every year (I do not know exactly how he came up with this number, but suffice it to say that no matter how you slice it, the number is large).

Each of the 12 Federal Reserve Banks have their own internal auditor, who reports to the audit committee of each regional Fed's Board of Directors. This is, I think, analogous to the manner in which any public corporation is audited.

Each regional Fed is also subject to oversight from the Board of Governors (I think from the Division of Bank Operations). On top of this, there is an external auditor (Deloitte). And last, but certainly not least, the Fed is subject to auditing by the U.S. Government Accountability Office (GOA), an agency of the U.S. Congress.

Of course, this does not mean that all aspects of Fed policy are made public. For example, it has been a matter of standard practice not to disclose the identity of those agencies making use of the Fed's discount window (Fed lending to banks with liquidity problems). The Fed, and other federal agencies like the OCC and the FDIC do not disclose their assessments of the financial health of private banks under supervision (CAMELS ratings).

The stated justification for these types of nondisclosure policies is that it encourages liquidity constrained banks to use the discount window (they avoid the apparent stigma associated with using the discount window). This policy has been, as far as I can tell, rather least up to the recent crisis.

During the crisis, the Fed opened up a number of additional emergency lending facilities. I don't want to get into the details here but very quickly: the Fed made emergency loans backed by what it considered to be high-quality collateral. The loans have all now been repaid, the emergency programs have almost completely shut down, and the Fed, apparently, has made a handsome profit.

In the middle of the financial crisis, the Fed was challenged by Bloomberg concerning the details of these transactions. The Fed refuses to make these details public. Here is a recent update "Fed Shouldn't Reveal Crisis Loans, Banks Vow to Tell High Courts."

Conspiracy and cover up...right? Possibly. But let's not get too carried away just yet. The most telling sentence in the piece is this:

“Our member banks are very concerned about real-time disclosure of information that could cause a run on the banks,” said Paul Saltzman, the group’s general counsel, in an interview yesterday.

The concern here appears not to be with respect to disclosure per se; but rather, with real time disclosure.

This suggests that a happy medium might be struck. Of course, the Fed should reveal the details concerning its emergency lending practices. But only with a sufficient time-lag. The exact length of this time-lag is something that can be debated. Does 5 years sound reasonable?


  1. Wow... Good post. There are so many complaints about the Fed. It was refreshing to read something original and informative on the subject.

    Maybe the Fed should reveal the standards that guide its decision-making, rather than the details of its decisions.

  2. Very carefully worded. Every time I read the beginning of a sentence I thought I would disagree with, by the end it looked reasonable. If we can get a legally binding commitment from the Fed (not just promises) regarding the 5 year time lag, I don't find that terribly offensive. Would a good show of faith be to start disclosing previously undisclosed activities from prior to 2005? (I'm sure you don't need me to compile a list of the most common complaints)

  3. The Arthurian: I believe that the Fed could certainly do a better job at communicating its policies and practices in general. Simply revealing its decision-making standards will not be enough, however. The level of distrust is so great that I'm sure the actual decisions will have to be made public, eventually, at least.

    Pointbite: I'm with you on this one. I will continue to probe the issue with our resident lawyer.

  4. David,

    I would be interested in your thoughts on George Selgin's work. He is a free banking advocate, and does work on the idea that central banks are a cause of, rather than solution to, financial crises. Mayhaps a blog post on that issue?

  5. Prof J:

    I love George's work. I haven't visited his website for a while, so thanks for the reminder.

    I have a hard time believing, however, that central banks per se are the cause of financial crisis.

    Evidence: We know of financial crises even in ancient times, middle ages, and even pre-1914 in the U.S. All these crisis episodes predate central banking. (This is not to say that a central bank cannot cause a crisis, however).

  6. David,

    You're quite correct. Unfortunately, I fell into the terrible habit of using lazy language. I believe it is not central banking, per se, that are the problem. George Selgin (and others, like De Soto) focus on currency-issue monopoly, as opposed to free banking in currency as well as deposit.

    A book entitled "History of Corporate Finance," the authors of which I forget, discussed the point that mercantile banks in the renaissance period found their demise in lending to the crown, which typically had a monopoly on currency issuance, but not other forms of money, like notes and bills of exchange.