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Financial experts fear transparency push could undermine the Federal Reserve

The Federal Reserve’s push to communicate directly with the public about its actions, coupled with a renewed push from critics for a closer look at the bank, is troubling some financial experts who fear that increased transparency at the central bank could ultimately do more harm than good.

The activities of the central bank, long shrouded in secrecy, have been in the spotlight in recent weeks. Republicans have criticized the Fed’s decision to buy $600 billion of Treasury bonds in an attempt to reduce long-term interest rates. Critics contend the effort, known as “quantitative easing,” will cause inflation and devalue the dollar.

Scrutiny of the Fed reached a fever pitch last week when the central bank disclosed thousands of documents that revealed, for the first time, the extensive lending by the bank during the height of the financial crisis. The documents revealed some 21,000 transactions that were taken to stabilize the economy, including loans to financial firms, corporations and foreign banks.

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Experts warn that too strong a move toward transparency risks undermining the central bank’s effectiveness. If the Fed pushes for, or is pushed into, more extensive disclosures of its actions, it could discourage firms from going to the Fed for help. 

“If we required the Fed to release this information in real time, it would put a lot of firms in a really tough position,” said Karen Dynan, vice president and co-director of economic studies at the Brookings Institution. “There’s a stigma associated with going to the lender of last resort and borrowing money.

“We’ve seen this when rumors have leaked out in the past. If a firm goes to the lender of last resort, then suddenly some investors take that as a signal that the firm really is in dire straits and then the firm’s situation becomes even worse,” Dynan said.

However, transparency should be expected from the Fed when it comes to justifying its monetary-policy decisions, she added.

Lawmakers from both sides of the aisle are calling for more transparency from the Fed.

On the right, Rep. Ron Paul (R-Texas), a longtime advocate of abolishing the central bank, is poised to take over the chairmanship of the House Financial Services subcommittee that oversees the Fed. If named to the position, he has promised to closely examine the Fed’s policies and has said he could issue subpoenas to bank officials.

On the left, meanwhile, Sen. Bernie SandersBernie SandersOVERNIGHT ENERGY:  EPA announces new clean air advisors after firing Trump appointees |  Senate confirms Biden pick for No. 2 role at Interior | Watchdog: Bureau of Land Management saw messaging failures, understaffing during pandemic Overnight Health Care: Takeaways on the Supreme Court's Obamacare decision | COVID-19 cost 5.5 million years of American life | Biden administration investing billions in antiviral pills for COVID-19 Democratic senators press PhRMA over COVID-19 lobbying efforts  MORE (I-Vt.) has vowed to take a “very extensive look” into the Fed’s policies after the disclosure of the financial crisis data. Sanders, who backed the provision in the Dodd-Frank financial reform law that mandated the disclosure, described the transactions as “backdoor bailouts” and called them “jaw-dropping.”

Given the mounting criticism and threats to pull back the curtain on the Fed, the bank has been looking for ways to improve its image.

Whereas investors once pored over statements from Fed chairmen for morsels of insight, they now need only turn to the press for details about the bank’s thinking. In November, after the Fed announced its $600 billion bond decision, Chairman Ben Bernanke penned an editorial in The Washington Post explaining the move.

This past weekend, Bernanke sat down for a nationally televised interview with CBS’s “60 Minutes” to defend the bond decision and lay out his views on the economy and federal budget deficit.

But greater transparency and openness may not be enough to quell the criticism of the Fed. After the financial crisis documents were released on Wednesday, critics blasted the bank for not releasing the information sooner.

“After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed’s multitrillion-dollar bailout of Wall Street and corporate America,” Sanders said.

The Fed’s ability to lend quickly and readily to institutions of all shapes and sizes during the crisis, which might have been stifled under a stronger transparency regime, allowed it to stave off “what could have been significantly worse,” Dynan said. 

“You would have seen more firms going under and much more job losses,” she said.

Phillip Swagel, a visiting professor at Georgetown University who was the Treasury Department’s assistant secretary for economic policy during the financial crisis, agreed that too much transparency could actually drive businesses away from the Fed in times of need.

Swagel pointed to the struggles by the Obama administration to get a small-business-lending program off the ground last year. Under the program, small community banks could receive government loans at extremely low interest rates, which in turn would be used to make private loans. However, as originally conceived, the program would be funded with money from the Troubled Asset Relief Program (TARP), and banks shied away from it to avoid the public stigma of being associated with the “bailout.”

“It never happened,” Swagel said. “That’s because the small businesses and small banks didn’t want to be involved in TARP, because of the spotlight.”

The program was re-imagined this summer as a $30 billion fund — free of any TARP association.