In his latest blog post today, former ECB chief economist Willem Buiter lays heavily into Fed chief Ben Bernanke for his refusal to disclose vital data about the– now– trillions— of dollars’ worth of actual or potential liability the Fed is exposing US taxpayers to via its latest chummy financial bailout programs.
Buiter bases his criticism on Bernanke’s stonewalling response to a lawsuit Bloomberg News filed November 7 to gain information about the lending the Fed has made to private banks. Blooomberg, he writes, “wants to know the identities of the borrowing banks, how much each one borrowed, and the assets the Fed has accepted as collateral for these loans by the Fed.”
Bernanke has refused, claiming that such disclosure would be “counterproductive.” Buiter gives us this evaluation of what he describes as “Chairman Bernanke’s ‘nyet'”:
- Chairman Bernanke’s arguments for not releasing the requested information are 10 percent correct, 90 percent self-serving Fed-accountability-avoiding twaddle.
Let me start by noting that, even if it were true that revealing the requested information would violate commercial confidentiality, that such a violation would create stigma for the borrowing banks and that such stigma would result in material damage to the stability of the financial system, it would not automatically follow that the information in question should be kept secret. There are things that are even more important than commercial confidentiality, bank stigma and financial stability. Accountability for the use of public money could be one of these things. At the very least there would be a clash of competing public interests. This conflict should not be resolved through a unilateral decision by just one of the interested parties, the Fed.
It is correct that the immediate revelation of the identity of a borrowing bank could be so market-sensitive, because of stigmatisation effects, that confidentiality as regards the identity of the borrower makes sense for a limited period. But for a limited period only. After six months, nobody cares. After a year, nobody remembers. Once the loan has been repaid, the stigma issue is no longer relavant.
The key point is that, for democratic accountability for the use of public money to exist, there has to be certainty that at some point there will be full revelation of the identity of each borrowing institution, how much it borrowed, on what terms, and against what collateral. While there can be a finite (but short) delay in divulging the identity of the borrower, all other information – the amounts borrowed (collectively and by individual anonymous borrowers) should be in the public domain immediately. Even in the most paranoid of worlds, there is no reasonable argument, other than an unwillingness to be held accountable for possible mistakes, for not releasing, instantaneously, the terms on which the borrowing occurred and the nature and valuation of each specific item of collateral offered .
It should be obvious why it is essential that all information be in the public domain, that is required to assess the Fed’s valuation of the collateral at the time the loan was made. This is the information required to assess the magnitude of the ex-ante subsidy the Fed provided to the borrower – the quasi-fiscal subsidy, if any, provided by the Fed, based on the information available at the time the loan was made…
He notes that the pricing function performed by the central banks that are intervening in the current crisis can help to shore up confidence in the entire system– but that Bernanke, like the chiefs of the ECB and the Bank of England, won’t even reveal what models it uses to assign value to the assets it is scooping up (many of which may indeed be highly toxic.)
- As long as the models/methods used by the central banks to calculate the theoretical prices are not in the public domain, and as long as we are not provided with the detailed actual valuations/prices of each security accepted as collateral, I will not believe a word I am told. This form of Publikumsbeschimpfung [insulting the audience] by the central banks is simply not acceptable in a democratic society. It is not their money they are playing with. It is our money.
He also notes that as the crisis proceeds, the Fed will be acquiring assets that are ever riskier and riskier, concluding,
- Most of the internationally active US banks are dead banks walking, supported and held upright by a cast of Federal puppeteers with mixed track records. Even with the state support they are receiving or are expected to have access to should the need arise, the creditworthiness of these banks, as reflected in their credit default swap (CDS) spreads and their spreads over US Treasuries (which themselves now have rather larger CDS spreads than they used to have before the crisis) is poor indeed.
That leaves the Fed, and behind the Fed the US tax payer or the beneficiary of existing US public spending exposed to the credit risk on the collateral backing the loans…
I consider the Fed’s stonewalling of the Bloomberg News request for information – the refusal to provide any information because a small component of the requested information was deemed to be commercially confidential – to be outrageous and unacceptable. The same holds for the refusal of the ECB and the Bank of England to put in the public domain their models, methods and myths for pricing illiquid assets.
As regards the specific request of Bloomberg News, a short delay in making public the identities of the individual borrowers (sellers of securities to the Fed) may under certain conditions be justified. All other information (what collateral was offered, what securities were purchased, valuations, terms etc.) must be in the public domain immediately. Central banks have no immunity from accountability for the use of public resources. Congress, the Courts, the media, the tax payer and the public at large should reject Chairman Bernanke’s ‘nyet’ to a legitimate request for information.
Well, let’s see the extent to which the very badly “captured” (by the bankers’ brainwashing) US Congress, courts, and media will be prepared to challenge Bernanke… I am not holding my breath.