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Transparency and the Federal Reserve

The Federal Reserve Bank has played an important role in the American economy over the past hundred years; it should continue to operate for the next century, but it must also adapt to this century’s challenges and expectations. One of the biggest concerns of the twenty-first century is transparency. There are mixed opinions about the merits of being transparent. Many argue that public institutions must become more transparent in order to properly serve an ever-more-informed citizenry, while others contend that we are already buried under a deluge of unhelpful and confusing information. In order to successfully operate for the next hundred years, the Federal Reserve must find a way to manage its dissemination of information in a way that is both honest and helpful; this is the challenge posed by the advent of the Information Age.

A common argument in favor of transparency is that, without transparent institutions, we have no way of knowing whether the government is going behind our backs to conduct unsavory or illegal business. The less transparent an institution, the less the informed and invested public is inclined to trust it. When institutions are revealed to have been conducting secret, controversial operations, scandal can erupt, as occurred when former National Security Association contractor Edward Snowden revealed that the NSA was monitoring American citizens at previously unimagined levels (Bailey).

The Federal Reserve came perilously close to having a similar sort of scandal when the Freedom of Information Act compelled it to reveal that it had made secret loans to many Wall Street banks during the 2008 financial crisis (Irvy, Keoun, and Knutz). These loans amounted to trillions of dollars, including some money that went to banks that the Federal Reserve did not consider stable (Irvy, Keoun, and Knutz). Congress was not informed about these loans during discussions of the TARP bailout (Irvy, Keoun, and Knutz). When the Federal Reserve released information about the loans two years later, as per legal requirement, many lawmakers and policy analysts felt that they had not had enough information at the time that TARP was being discussed and that the bank bailout may have gone differently had more people known about the extensive loan program that the Federal Reserve was conducting (Irvy, Keoun, and Knutz).

Some people hold that concealing the loans made the financial situation appear more stable than it was, helping keep confidence high (Irvy, Keoun, and Knutz). Maintaining confidence in banks during financial crises is important in order to avoid bank runs, and bank runs were in fact avoided. However, the Freedom of Information Act guaranteed that the loans would be revealed eventually (Irvy, Keoun, and Knutz). Now that the information is available, the Federal Reserve Bank appears to be in cahoots with Wall Street, even to the point of withholding important information about Wall Street’s instability from legislators. With Wall Street’s approval rating at only 14% nationwide (“Wall Street”), this appearance of collusion poses a risk to the Federal Reserve’s credibility. Especially in the current Information Age, with nearly a third of the country approving of Edward Snowden’s illegal leaks of information about the government’s potentially illegal surveillance programs (Maeda), it is important for government institutions to appear trustworthy and transparent rather than seeming to be in collusion with much-maligned “special interests” such as Wall Street. While avoiding bank runs is important, it is worth wondering whether the Federal Reserve could tell Congress what it needs to know in order to do its job while simultaneously refraining from telling the public information that would cause a panic.

Obviously, transparency must be handled carefully. In an article in Forbes, Sy Harding laments what he sees as the Federal Reserve’s--and particularly former Federal Reserve Chair Ben Bernanke’s--wanton distribution of information. Harding argues that it is better for the Federal Reserve to keep silent or speak in unintelligible jargon while attempting to stabilize the economy, as opposed to telling everyone in plain English what is actually happening (Harding). In Harding’s view, Bernanke’s statements during the financial crisis concerning his worries about America’s short-term economic future and his doubts about the Federal Reserve’s power to fix problems in the economy did nothing but cause confidence to plummet (Harding). Since confidence is a determinant of aggregate demand, Bernanke’s statements exacerbated the nation’s economic woes.

It is possible that both of these opinions about transparency have merit and can co-exist. The Federal Reserve does not necessarily need more or less transparency, but rather better transparency. The Federal Reserve currently reports twice annually to Congress, as it has been doing since 1978 (“History”). This is good; though it is important for the Federal Reserve to be mostly politically independent in order to avoid becoming yet another partisan battleground (Koba), it is also important that the Federal Reserve be accountable, so some degree of interaction with the rest of the government is positive. In the past decade, the Federal Reserve has also begun releasing minutes from its meetings and holding conferences to answer questions about its attitude toward the state of the economy (Harding). This is going too far; knowing that the Federal Reserve Chair is uncomfortable with the most recent economic data and what they mean for the future is not helpful, as it provides no possible recourse and only serves to lessen confidence. Meanwhile, when Congress is considering taking action and its decision would impacted by information about the Federal Reserve’s latest activities, it makes sense to inform Congress about what the Federal Reserve has done or is doing.

Going forward into the next century, the Federal Reserve must carefully consider the impacts of the information that it chooses to release or to withhold. In the issue of transparency, as elsewhere in its mission, the Federal Reserve faces a “dual mandate”: It must both appear confident, potentially at the expense of honesty and transparency, and it must be honest and transparent enough to avoid scandals and maintain credibility. The Federal Reserve should disclose specific information on its operations in order to keep Congress and the public informed, but it should keep its expressions of abstract unease to a minimum.



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