On Friday, I
wrote about new revelations that many of the trillions in loans
disbursed by the Federal Reserve during the financial crisis went
to some of the biggest banks on Wall Street. We’re lucky that the
information about those loans was ever made public, a fact that
vindicates the grassroots movement to audit the Fed.
Stephen Williamson, an economist at Washington University in St.
Louis,
suggests that there may be other justifications for greater
transparency about the Fed’s emergency lending programs. He doesn’t
think that the primary reason the Fed prefers secrecy to openness
— the fear that banks could hesitate to borrow from the Fed
because of the “stigma” that might result — is as weighty as Fed
officials believe it is.
To explain the Fed’s concern about the stigma that could come
with emergency loans, it’s necessary to understand what the Fed is
trying to accomplish. In addition to conducting monetary policy,
one of the Fed’s responsibilities is to act as the “lender of last
resort.” In the case of a run on the banking system — when banks
are unable to access funds simply because of a panic, not for any
underlying weakness in their balance sheets — the Fed is supposed
to lend out money when no one else is, to prevent an unnecessary
systemic crisis. In other words, it is tasked with providing
illiquid banks with the liquidity they need in order to survive a
brief market panic. One problem in fulfilling this task is that
other financial institutions might assume that any bank borrowing
from the Fed might really be in long-term trouble, and bet against
them or refuse them credit. To avoid that possibility, the Fed
prefers to keep its discount window loans hidden from the
public.
As Williamson writes, though, that excuse for Fed secrecy
doesn’t really apply to the events that transpired during the
financial crisis:
The three largest borrowers from the Fed during the crisis were
Citigroup, the Bank of America, and the Royal Bank of Scotland. It
seems widely recognized that the first two were essentially
insolvent during the financial crisis, if not now, and the last one
essentially failed during the crisis. Lending to these banks
certainly does not appear to have been simple liquidity-easing.
I think one could make a case that the details of all of the
Fed’s activities, including its lending, should be made public, at
the time these activities take place. Surely, there is stigma in
borrowing from the Fed only if the Fed lends to banks that are
essentially insolvent. If the Fed sticks to its appropriate
lender-of-last-resort role, then it is only correcting short-term
liquidity problems. Indeed, if the Fed is doing its job, then a Fed
loan should be a certificate of viability.
In other words, the Fed’s concerns about stigmatized banks are a
product of loans it’s made to insolvent banks that should have been
resolved, not given emergency liquidity. The public deserves to
know about such loans.
