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September 3, 2011

No One to Blame But Bernanke

James Stewart has a column in today’s New York Times defending Fed Chairman Ben Bernanke from his critics.  He makes the entirely uncontroversial comment that “No one in government, including the quasi-independent Federal Reserve chairman, should be above criticism. But if Mr. Bernanke is going to be the centerpiece of such a heated debate, it should be conducted on the facts.” 

Mr. Stewart is, of course, right, but that observation utterly misses the point:  critics and defenders should look at all the facts, something Mr. Stewart doesn’t do any more than the critics.

In particular, Mr. Stewart focuses on Fed monetary policy and it’s recent openness about what it is doing and discussing regarding that.  However, he never mentions that the Fed, with Bernanke in the lead, refused to provide virtually any meaningful information about the emergency actions it took during the financial meltdown in the Fall of 2008.  He/the Fed stonewalled the public, Congress, the media and everyone else.  

This continued throughout 2009 and 2010, long after the immediate crisis of 2008 was over.  The Dodd-Frank Act was considered by Congress during those years and signed into law by the President in July 2010 with a great deal of directly relevant information withheld by the Fed.  

There are two reasons the public has information about what the Fed did during those dark days:  a Freedom of Information Act (FOIA) lawsuit tenaciously pursued by Bloomberg news, which Bernanke fought to the bitter end (and some reports suggested beyond the bitter end) and specific provisions in the Dodd-Frank Act which required the Fed to disclose information.  

Discussing those facts would take a too much time here, but the indisputable bottom line is that the Fed poisoned the well early on by refusing to provide any information about its extraordinary actions.  Regardless of how anyone feels about what it did, whether they were inexcusable bailouts to favored and well-connected banks or imaginative but unavoidable emergency actions that literally saved the world’s economy, Bernanke and the Fed were ill-served by their reflex and instinct for secrecy.  

When billions of dollars are being handed out, it doesn’t take a conspiracy theorist to view those actions darkly.  As the economy continues to struggle, as tens of millions remain unemployed or under-employed, as millions of Americans continue to lose their homes, and other costs of the crisis continue to pile up, seeing the distant and difficult to understand Fed as the enemy isn’t difficult.

That isn’t to justify or excuse any of the over-the-top, baseless, irresponsible criticism of the Fed or Bernanke, but their defenders should respect the facts and context as much as they urge the critics to.  Much more importantly, Mr. Stewart and other Fed defenders miss an important opportunity to put the dispute in context and to take the Fed to task for its instinct for secrecy, even if it isn’t in all areas and even if it isn’t as bad as it used to be.

The Fed has to be much more open and disclose much more information in the future than it ever has in the past if financial reform is to ever work, about which I will comment on more in the future.  But, suffice it to say for now that without such disclosure there will not be meaningful market discipline, too-big-to-fail institutions will continue to grow, the risk of another financial calamity will increase and taxpayers will remain at unacceptable risk of having to fund another massive bailout.

That’s what’s at stake and that’s the point Mr. Stewart missed.  



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