The Fed Uncloaked

Instructed by Congress and the president, and after repeated Freedom of Information Act requests, the Federal Reserve last week finally lifted the veil of secrecy that cloaked more than three trillion dollars in emergency loans made by the central bank at the height of the financial crisis. The list of recipients who came calling at the Fed reads like a Who’s Who of American financial and corporate life: Goldman Sachs, General Electric, Caterpillar, McDonalds, J.P. Morgan, and hundreds more.

The fallout from the disclosures has been a flurry of reporting on the recipients of the emergency loans, here and abroad. Who benefitted from the Fed’s emergency programs? What conflicts of interest lurk in the Fed’s compendium of borrowers? These are important questions, particularly given how much the Fed resisted opening its balance sheet to the public.

Focusing only on the loan data, however, risks losing sight of the political consequences of the Fed’s disclosures. The revelations confirm the worst suspicions of the Fed’s critics on the left and right and will further harm the Fed’s already tarnished reputation. 

First, Congress’s Audit-the-Fed movement is taking a victory lap. On the far left, critics like Senator Bernie Sanders (I-Vermont) claim that the disclosures are proof positive the Fed cannot be trusted. On the far right, critics like Rep. Ron Paul (R-Texas) argue that a one-time audit is not enough. What we really need, Ron Paul says, is a Wikileaks episode to expose the inner workings of the Fed. After two decades of his often-solitary campaign to end the Fed, Ron Paul is poised as the likely head of the House’s monetary policy panel to push for additional disclosures.  

Second, the disclosures will fuel the fire of anti-bailout activists. News that the Fed loaned billions to the most powerful, wealthy, and politically connected Wall Street firms confirms Main Street suspicions that the nation’s central bank is completely captured by the entities it oversees. The central bank’s impunity in lending to powerful financial interests is bound to raise the ire of Tea Partiers who already distrust the Fed. Tea Party agitation will encourage Republicans to keep the Fed in its crosshairs once the new Congress descends on Capitol Hill. With their new majority, House Republicans are likely to push for more aggressive oversight of the Fed, seeking to open up its decisions to more frequent and wider scrutiny.

Finally, the disclosures will weaken the Fed’s increasingly tenuous political standing.  Unveiling of the Fed’s balance sheet comes at a politically inopportune moment for a fragile Fed. The chair of the Federal Reserve’s Board of Governors, Ben Bernanke, has spent the last several weeks defending the Fed from Republican critics of its large-scale asset purchases. The new disclosures increase the Fed’s woes by re-opening its wounds from the financial crisis. The Fed offered over three trillion dollars worth of subsidies to the biggest and richest institutions in the world under a cloak of secrecy, with no accountability. Handouts to financial and other sectors may have been critical to avoiding financial apocalypse, but we had only the Fed’s word to go on. After the fact disclosure undermines the Fed’s credibility, already in short supply.

Pummeling of the Fed comes as no surprise. Congress historically pounces when the economy sours. Recurring criticism of the Fed reminds us that the economy has yet to recover and that legislators still want someone to blame. No doubt, the Fed’s resistance to openings its books has compounded its political difficulties. To be sure, the formal authority of the Federal Reserve was enhanced in the Dodd-Frank overhaul of the nation’s financial regulatory system. But the central bank’s political authority is diminished. Revelations about the Fed’s emergency loans add to Bernanke’s difficulties in trying to regain the Fed’s footing. It is hard to see the Fed come through these disclosures without its already-compromised independence further imperiled. Better communicating and defending the Fed’s plans for securing its dual mandate of job growth and price stability—as well as reiterating the risks of inaction—must be Bernanke’s top priority.