Thursday, September 24, 2009

The Alvarez Failed Defense for Fed Secrecy

I have already linked below to prepared remarks by Federal Reserve General Counsel Scott Alvarez. The prepared remarks are for hearings tomorrow, by the House Financial Services committee, on the 'Audit the Fed' bill.

There are two things that stand out in his comments. The first being the considerable time he spends discussing how H.R. 1207 would be damaging to Federal Reserve monetary policy. His prepared remarks state:
Permitting GAO audits of monetary policy also would likely cast a chill on monetary policy deliberations if policymakers believed that GAO audits would result in early publication and analyses of their policy discussions.
But, Representative Ron Paul, the sponsor of the bill, has stated that H.R. 1207 has nothing to do with auditing day to day monetary policy:

The only thing that we [Barney Frank and I] have talked about, that we want to clarify, and I’ve agreed to, is that this bill in itself is not the bill to take over monetary policy and day-to-day management of monetary policy. He and I have agreed to that. The bill doesn’t do that.

Thus, Mr. Alvarez seems to be creating a gigantic straw man to be blown over in front of Congress.

The second area of focus by Mr. Alvarez seems to be with an audit of Fed transactions with what he identifies as "foreign central banks, foreign governments, and public international financing organizations."

A good starting point of disclosure for the Federal Reserve would be to identify what exactly the Fed considers a "public international financing organization". Does it mean the IMF, the World Bank or something else?

Aside from this, one has to be shocked that the Fed wants to hide its dealings with not only foreign central banks, but judging from Mr. Alvarez's testimony, direct dealings with foreign governments. One must ask, what kinds of dealings in totality are being conducted, and with which governments?

His prepared statement reads:
Adoption of H.R. 1207 also could disrupt the nation's relationships with foreign central banks and governments, relationships which are helpful in supporting the Federal Reserve's efforts to fulfill its statutory missions, and erect barriers to official cooperation among central banks and governments. Foreign central banks and governments likely would be less willing to engage in financial transactions with the Federal Reserve if these transactions were subject to policy review by the GAO, as H.R. 1207 would allow. These transactions, such as the deposit of international reserves and bilateral currency swap arrangements, help support the role of the dollar as a worldwide reserve currency and alleviate stresses in U.S. financial markets. For example, the temporary liquidity swaps entered into by the Federal Reserve with other central banks are designed to improve liquidity conditions in both domestic and international financial markets, guard against the spillover of volatility in foreign trading to U.S. money markets, and thereby reduce funding pressures in U.S. financial markets.
But it could just as easily be argued that the secrecy that the Federal Reserve desires to maintain around international transactions can fuel international nervousness about the dollar.

More then one currency crisis has been started by rumors that a central bank has had to step in to defend its currency. A reporting of true facts could not do as much damage as never ending secrecy that leads to outlandish rumors.

As Congressmen Paul has stated, a period of time, perhaps six months, before releasing international transactions could be agreed to, but certainly eternal secrecy will only spur rumors of behind the scenes manipulations. Rumors, I might add, that now exist whenever the stock market goes up after a prolonged decline. Because we are not privy to the minutes or activities of the President’s Working Group on Financial Markets, all kinds of rumors fly on about it. The Washington Post has even dubbed it the Plunge Protection Team.

This hampers markets by eroding confidence. Investors see an up market and wonder if it is a true up move or the Plunge Protection Team up to monkey business.

Thus, with the United States finding itself with huge debt being held by foreigners, and the prospect of much more debt needed to be raised in the very near future, panic rumors that will erode international confidence could occur at any time. Rumors, such as, what central banks had to do to stem panic in the dollar, or Treasury debt markets. The proper disclosure of the truth of what activities the Federal Reserve, with perhaps a six month time lag, could not possibly be as damaging as unchecked rumors in a panic period.

Disclosure of the more than $150 billion that was provided to AIG did not cause more panic in the markets, indeed, it turned out to result in a quieting effect on the markets, though justifiable anger ensued as to whether such money should have been poured into AIG and others. Thus, one has to wonder if there is some fear on the part of the Federal Reserve about anger that may ensue if the types of transactions that have occurred are disclosed. What kinds of transactions have been conducted, and with what central banks, what foreign governments and what public international financing organizations?

Maintaining secrecy to these questions is exponentially more dangerous than the concerns of disclosure raised by Mr. Alvarez


  1. Your blog looks wonderful. it was nice going through your blog. Keep it up the good work.

  2. Democracy is bs to begin with but for anyone who likes democracy, you may want to ask yourself how the voting public can make an informed decision about their government when their government knowingly and willingly hides information about its operation from them?

    There's a major agent-owner problem here. Imagine legal counsel that hides its actions concerning the treatment of the client's estate from the client, for the client's own good. Who would tolerate such a relationship?

  3. Great blog, loved the article, thanks!