By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is:
You might have noted a few days ago that the Supreme Court ruled against Federal Reserve secrecy. The case had to do with a lawsuit by Bloomberg’s Mark Pittman demanding access to emergency loan documents relating to the Fed’s bailout of Bear Stearns. As the case traveled up the court system, major banks joined the Fed’s attempt to shield the information from public scrutiny. Eventually, the Fed dropped the suit, but the banks didn’t give up.
A few days ago, the Supreme Court refused to hear the case, letting a lower court decision in favor of Pittman stand. The Fed will now be releasing Bear Stearns-related emergency lending documents in a few days.
It’s a historic case. You wouldn’t know that, however, by the response from Wall Street.
“I didn’t even know it was happening,” a senior bank executive said by phone this week when asked about concern over the pending release. There are no crisis meetings to discuss how to manage public reaction to release of the information, he said.
This is a far cry from the intense opposition to Fed transparency just last year from both Treasury and Wall Street. The big banks, in the form of one of their trade groups known as the Clearinghouse Association, were crying wolf as late as 2010.
The Clearing House Association believes that disclosure of the identities of, and extent to which, financial institutions borrowed from the Fed Lending Programs likely would cause such institutions substantial competitive harm, and would impair the effectiveness of the Fed Lending Programs.
The “competitive harm” was so “substantial” that a highly political Wall Street executive had no idea that emergency lending information would shortly be released. In fact, the damage will be so severe that no bank has prepared any response whatsoever.
The reality is, while they may have been panicking at the time, executives on Wall Street are not embarrassed to have used the Fed’s balance sheet as a crutch during the crisis. It’s not even an afterthought. Arguments about stigma, competitive harm, and a falling sky were all simply designed to preserve unneeded secrecy. They got their “triple-thick milk shake of socialism”, and they liked it.
During the discussion of Dodd-Frank, Congress deliberated without knowing that the Federal Reserve had extended $9 trillion to various banks, foreign central banks, corporations, and hedge funds, often collateralized by junk. That’s roughly $30,000 of lending for every American. Shouldn’t Congress have known that Harley Davidson and McDonald’s were making payroll with Federal Reserve loans (or perhaps just getting access to cheap working capital unavailable to normal corporations)? That seems like a useful testament to the fragility of our financial system, something to know about before engaging in supposedly wholesale reform.
More to the point, there is now an explicit two-tiered monetary system, where elites can borrow against junk collateral under difficult circumstances, while ordinary people face foreclosure and bankruptcy should they encounter liquidity or solvency problems.
Those with a longer-term perspective, such as former New York Federal Reserve Bank officer John Dearie, are a bit more worried about this dynamic. Dearie, who is now a leader at Wall Street’s elite lobbying group – the Financial Services Roundtable – is gently trying to head off further audits of the Federal Reserve with wheezy pre-crisis talking points.
“Short of broadcasting FOMC meetings on C-SPAN, it’s difficult to imagine how much more transparent the Fed could be. It’s also difficult to understand how intrusive investigation of monetary policy can be consistent with maintaining price stability when academic studies and centuries of experience around the world make clear that a central bank’s relative independence and its effectiveness in fighting inflation are closely linked..”
In other words, what are you so concerned about? The Federal Reserve could not possibly be more transparent. But don’t audit us!
Of course, the claims to transparency are not true. The Federal Open Market Committee sets monetary policy for the nation, but will not release transcripts for its meetings for at least five years. This time lag on even knowing what was said during monetary policy deliberations is clearly an affront to democracy. We still have no idea what Fed officers were thinking in 2006, as the bubble inflated, in 2007 as credit constricted, or during the crisis itself. (House Oversight Panel Chair Darrell Issa said he’d look into the five year time lag, though I haven’t heard anything since December. )
As emergency lending information is released, one can almost hear the laughter from big banks executives. They won, or so they think. Yet, the reputational damage from the crisis to Wall Street is at this point enormous, both within banks and among the public at large. The specific documents released over Bear Stearns will probably show what we already know – excessive deference to banking interests.
The situation right now feels depressing. Wall Street mega-banks, and the Federal Reserve officials in charge during the collapse, are more powerful than ever. Ultimately, the consent of the governed does actually matter. Markets do not work when there is effectively no rule of law, or rigged rules. That is what we may be seeing in housing, with cultural shifts away from home-buying. The next crisis, and it is coming, will see wholesale reform of the Federal Reserve and the banking system. The public has noticed that the arguments from big banks are both untrue and self-serving, and that the Federal Reserve’s vaunted independence is simply more of the same.
The Fed and the concentrated banking interests took advantage of a deference to authority and a reservoir of trust that the public had in the system. That trust was key to achieving what they needed. But it is now tapped out. And the next time that consent is necessary, it just won’t be there.