FacebookTwitterGoogle+RedditEmail

Secrecy at the Fed

The recent release of documents showing that the Federal Reserve loaned tens and possibly hundreds of billions of dollars to foreign banks in 2008 and 2009 has raised more questions about Ben Bernanke’s Chairmanship of the Fed.

The lending may or may not have been the right thing to do at the time, given the financial crisis. But it was done in secret, and the only reason that we have the information now is because Bloomberg News and Fox Business News won a two-year court battle, using the Freedom of Information Act, to get the documents released.

The official excuse for such secrecy at the time of lending is that the borrowing institutions could suffer “bank runs” if their loans were made public. That is debatable, but there is no excuse for keeping the information secret for years after the crisis has passed.

This kind of secrecy is maintained to avoid political accountability, not for reasons of financial stability. Such practices are what we would expect from authoritarian governments, not the government of a democratic republic.

Accountability is really the main problem at the Fed ? if there were any significant accountability, Ben Bernanke would never have become Chair of the Fed in 2006, and certainly wouldn’t have kept his job after the economy collapsed.

Bernanke was a governor of the Federal Reserve in 2002, when the housing bubble was already identified by my colleague Dean Baker. Bernanke was oblivious to the bubble as it continued to expand to $8 trillion in 2006, before bursting and causing our worst recession since the Great Depression.

Bernanke should have been aware of Baker’s analysis, which looked at house prices over the post-World-War II era, and especially the record run-up of 70 percent ? after adjusting for inflation ? from 1996-2006. Before the bubble burst, Baker became the most cited source on the housing market for the New York Times. Economist Robert Schiller followed with an analysis of a century of house price data and came to the same conclusion ? that this was a bubble that would inevitably burst. He was also frequently cited in the major media.

Baker showed clearly that this price run-up could only be explained by an asset bubble ? that other explanations attributing it to demographics, building restrictions, or other changes in demand or supply were not consistent with the data. This was not rocket science for an economist of Bernanke’s skill level. He is well-versed in economic history, including that of the Great Depression.

Yet as late as July 2005, Bernanke was asked directly if there was a housing bubble, and he replied: “I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened is supported by the strength of the economy.”

In May of 2007, just seven months before the Great Recession began, Bernanke stated: “.. .we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.”

Bernanke therefore missed the biggest asset bubble in U.S. history, and then failed to anticipate the inevitable destruction that its bursting would cause in the overall economy. This is analogous to Japan’s nuclear regulators’ determination that the Fukushima Daiichi nuclear power plant was safe from any tsunami.

The problem with rewarding incompetence and failure in high places is that even a well-regulated financial system ? which we are still very far from achieving ? cannot serve the public interest if the chief regulators don’t do their jobs. Secrecy, lack of accountability, and incompetence ? these are weapons of mass destruction for America’s economy.

Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.

This column was originally published by The Sacramento Bee.

More articles by:

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

Weekend Edition
August 17, 2018
Friday - Sunday
Daniel Wolff
The Aretha Dialogue
Nick Pemberton
Donald Trump and the Rise of Patriotism 
Joseph Natoli
First Amendment Rights and the Court of Popular Opinion
Andrew Levine
Midterms 2018: What’s There to Hope For?
Robert Hunziker
Hothouse Earth
Jeffrey St. Clair
Roaming Charges: Running Out of Fools
Ajamu Baraka
Opposing Bipartisan Warmongering is Defending Human Rights of the Poor and Working Class
Paul Street
Corporate Media: the Enemy of the People
David Macaray
Trump and the Sex Tape
CJ Hopkins
Where Have All the Nazis Gone?
Daniel Falcone
The Future of NATO: an Interview With Richard Falk
Cesar Chelala
The Historic Responsibility of the Catholic Church
Ron Jacobs
The Barbarism of US Immigration Policy
Kenneth Surin
In Shanghai
William Camacaro - Frederick B. Mills
The Military Option Against Venezuela in the “Year of the Americas”
Nancy Kurshan
The Whole World Was Watching: Chicago ’68, Revisited
Robert Fantina
Yemeni and Palestinian Children
Alexandra Isfahani-Hammond
Orcas and Other-Than-Human Grief
Shoshana Fine – Thomas Lindemann
Migrants Deaths: European Democracies and the Right to Not Protect?
Paul Edwards
Totally Irrusianal
Thomas Knapp
Murphy’s Law: Big Tech Must Serve as Censorship Subcontractors
Mark Ashwill
More Demons Unleashed After Fulbright University Vietnam Official Drops Rhetorical Bombshells
Ralph Nader
Going Fundamental Eludes Congressional Progressives
Hans-Armin Ohlmann
My Longest Day: How World War II Ended for My Family
Matthew Funke
The Nordic Countries Aren’t Socialist
Daniel Warner
Tiger Woods, Donald Trump and Crime and Punishment
Dave Lindorff
Mainstream Media Hypocrisy on Display
Jeff Cohen
Democrats Gather in Chicago: Elite Party or Party of the People?
Victor Grossman
Stand Up With New Hope in Germany?
Christopher Brauchli
A Family Affair
Jill Richardson
Profiting From Poison
Patrick Bobilin
Moving the Margins
Alison Barros
Dear White American
Celia Bottger
If Ireland Can Reject Fossil Fuels, Your Town Can Too
Ian Scott Horst
Less Voting, More Revolution
Peter Certo
Trump Snubbed McCain, Then the Media Snubbed the Rest of Us
Dan Ritzman
Drilling ANWR: One of Our Last Links to the Wild World is in Danger
Brandon Do
The World and Palestine, Palestine and the World
Chris Wright
An Updated and Improved Marxism
Daryan Rezazad
Iran and the Doomsday Machine
Patrick Bond
Africa’s Pioneering Marxist Political Economist, Samir Amin (1931-2018)
Louis Proyect
Memoir From the Underground
Binoy Kampmark
Meaningless Titles and Liveable Cities: Melbourne Loses to Vienna
Andrew Stewart
Blackkklansman: Spike Lee Delivers a Masterpiece
Elizabeth Lennard
Alan Chadwick in the Budding Grove: Story Summary for a Documentary Film
FacebookTwitterGoogle+RedditEmail