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Wednesday, June 10, 2009

Federal Reserve Transparency: the Next Great Libertarian Populist Cause

When I attended the Chicago Tea Party, one of the groups promoting their activist cause was a group promoting a bill known as H.R. 1207. This bill seeks to provide more transparency of the Fed. It would change the way in which the Comptroller General of the U.S. audits the Federal Reserve. When speaking to this group, I was shocked to learn that the Federal Reserve has never actually opened up its books. No one outside the Reserve actually knows just how much it has in assets, liabilities and capital. Many people have a good idea, but no one knows for sure.

I have been following the Fed closely for over ten years. It has always remained an institution with both an enormous amount of power and also one that is totally misunderstood. Yet, never have I seen as much scrutiny of this body as in the last six months. Much of this has to do with the enormous analysis of the dynamics that lead to the crisis to begin with. I am not the only person to blame the Fed for causing much of this crisis and so invariably it has received significant scrutiny.

As more people delve into the activities of the Fed, we also find out that most of what the Fed does to manipulate the economy is done under the radar so to speak. The main reason for this is that the Fed is totally without transparency. On any given day, the Federal Reserve could buy or sell billions worth of bonds and no one would know it. Their books aren't open to the public.

As the public begins to connect the dots between the Fed's role in managing our economy, their enormous power, and their enormous secrecy, more and more people will begin to use that magic word, transparency.

Just try and put this into perspective. If you were to buy a home, you are going to be expected to sign more than a hundred different documents. The Fed is required to disclose less than that in any given year even though your transaction is in the hundreds of thousands and theirs are in the trillions.

This has not gone unnoticed by the powers that be at the Fed. Over the last couple months they have begun to pay lip service to transparency.

The Fed's new report, which will be issued monthly, comes as lawmakers have demanded more information about the bailouts, and a slew of other programs intended to spur lending and stabilize the banking system.

The monthly report provides some details beyond the Fed's weekly snapshot of loan and debt-buying programs on its balance sheet. Those details include collateral pledged by borrowers, ratings on collateral, and the number of borrowers for some programs.

However, the Fed did not budge on lawmakers' requests that it identify borrowers for emergency and other loans.

Don't buy it. The Federal Reserve is giving the public bread crumbs of transparency in hopes that the growing public outcry over their lack of transparency. How bad is it? Just today, here's what one analyst said would happen if there was full transparency.

The Federal Reserve's balance sheet is so out of whack that the central bank would be shut down if subjected to a conventional audit, Jim Grant, editor of Grant's Interest Rate Observer, told CNBC.

With $45 billion in capital and $2.1 trillion in assets, the central bank would not withstand the scrutiny normally afforded other institutions, Grant said in a live interview.

"If the Fed examiners were set upon the Fed's own documents—unlabeled documents—to pass judgment on the Fed's capacity to survive the difficulties it faces in credit, it would shut this institution down," he said. "The Fed is undercapitalized in a way that Citicorp is undercapitalized

Of course, unlike all other banks, the Federal Reserve is able to do one thing to make itself fully capitalized, they can simply create money. This is one of many things that the public doesn't know about unless the Fed tells us. We don't know how much money they create and more importantly, where it goes, and in what quantities, once it is created. Full transparency would answer those questions.

True libertarians see the Federal Reserve as the anti thesis of everything they believe in, economically. That's because the Fed manipulates that which libertarians believe the free market should set naturally, currencies and interest rates. As such, the Federal Reserve perverts the free market with each manipulation.

An astute politician would get ahead of the curve and champion Federal Reserve transparency because this is an issue that in the current climate is ripe to gain a populist libertarian audience. The current astute champion is Congressman Ron Paul. To be fair, on this issue he isn't only astute but he believes this philosophically. I believe that in the weeks and months to come his bill and others like it will get an audience. I believe that Federal Reserve transparency is on the brink of having a public airing and debate. Frankly, it's long past due.

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