There is currently a diary on the rec list of Congressman Alan Grayson pressing the Vice Governor of the Federal Reserve, Donald Kohn, to whom the Fed loaned to or spent on the $1.2 Trillion representing an increase in the size of its balance sheet since last September. Grayson argues that the taxpayer deserves to know exactly to whom and how much the money was loaned. How much went to Credit Suisse? How much was given to Citibank?
"If you put out $50 billion to Credit Suisse, the taxpayers need to know that," says Congressman Grayson.
"I think I would be very, very hesitant to give the names of the institutions, in fact I think it would be a very bad idea, I think it would undermine the utility of the loans we are giving..." by Mr. Kohn is not very good at explaining exactly why it would undermine that utility.
One commend in the diary reccomended 35 times was this one:
It would be why does the Fed feel it is necessary and wise to obscure how its various emergency measures are being spent?
I'm willing to give the benefit of the doubt that there might be good reasons to restrict information from the public domain for a finite period of time, but officials should have to go on record detailing precisely why such a move is beneficial, and when in the future the specifics will be released.
The answer was provided in a comment upthread by a Kossack in the same diary (but the main point in the comment was sidetracked over a discussion on mark-to-market accounting). Here is the comment:
The Fed also has a concern that if speculators know which banks are weakest (as shown by need to take TARP money), they will try to break the stock, as happened with Bear, Stearns and Lehman, probably using the financial ETFs. This is the distinction between taking money from one window or another--through the discount window vs the TARP or some other Fed facility. What kind of collateral has to be offered and what interest rate, plus whether it becomes public knowledge or not. That is a real concern.
Exactly correct. But it took a commenter here, rather than an official (Mr. Kohn), to explain this simple logic. Mr. Kohn tried to explain this by saying that if the names of the banks that used the Fed's facilities were made public, then the banks would not borrow from the Fed. But he did not explain the reasoning why this would happen.
And when Congressman Grayson further pressed him, "Has it ever occurred that a bank has refused to borrow from you?", Mr. Kohn could not come up with an example. In fact, Mr. Kohn could have brought up what happened during the Great Depression, as narrated by Milton Friedman and Anna Schwartz in A Monetary History:
The time of the availability of RFC (Reconstruction Finance Corporation) loans did not stem the rising tide of bank failures, partly because a provision of an act passed in July 1932 was interpreted as requiring publication of the names of banks to which the RFC had made loans in the preceding month, and such publication began in August. The inclusion of a bank's name ont he list was correctly interpreted as a sign of weakness, and hence frequently led to runs on the bank. In consequence, banks were fearful of borrowing from the RFC. The damage was further increased in January 1933 when, pursuant to a House resolution, the RFC made public all loans extended before August 1932.
Mr. Kohn could have answered Rep. Grayson's question by citing A Monetary History, but instead chose to dodge it, making himself look bad in the process. Why? Either Mr. Kohn knew the answer but deliberately chose not to bring it up, or the Vice Governor of the Federal Reserve is ignorant or forgetful of some basic facts about the Great Depression. My best guess is that Mr. Kohn knew the answer but was not sufficiently attuned to the politics involved to be sufficiently motivated to give a strong answer.
But the above passage illustrates why the Fed does not want the names of the banks to come out.
One further note, at the end of the video posted in that diary, Barney Frank, the current Chairman of the House Finance and Banking Committee, related that he had asked Ben Bernanke in September how much the Fed had as assets on its books, and Bernanke said "$800 billion", and Frank commented "Bernanke must have been lowballing it."
The reality is that the Fed's assets last September were $800 billion, and it has only been able to increase its assets by a further $1.2 trillion through joint action with the Treasury, by having the Treasury sell T-bills. The only upper limit is the limit on the demand for T-bills, but no one could possibly know the answer to this question.
Hopefully I am misinterpreting Rep. Frank, as I trust he understands these distinctions. If not, we are in a heap of trouble.
But as it is, I am already concerned that the people in charge at the Fed, however they are at finance and economics, are horrible at defending themselves in the realm of politics, and are deeply committed down a path to deal with the economic crisis that is both risky and carries no popular understanding, let alone support.