TOPICS > Economy

Fed Struggles with Perceptions of Transparency

July 30, 2009 at 12:00 AM EDT
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As the debate over the Federal Reserve's transparency heats up in Congress, Paul Solman looks at the agency's attempts to balance public disclosure and the secrecy it uses to protect financial markets.
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PAUL SOLMAN, NewsHour economics correspondent: As the Federal Reserve moved rapidly and radically last year to prevent what it feared was an economic meltdown, it bailed out some institutions, but not others, forced mergers, created hundreds of billions of dollars.

The net result, it seems: increased economic confidence and increased suspicion of the Fed itself.

It turns out that’s nothing new. It was in response to a financial crisis of a century ago — 1907 — that the Federal Reserve was created. The 1913 act of Congress that established America’s central bank was, from the start, a compromise between government — Democrat Woodrow Wilson was then president — and private banking interests, which owned the 12 regional Fed branches.

From the get-go to the present, some Americans have been suspicious of the Fed for operating above politics, too close to bankers, and behind closed doors.

Simply Google “Federal Reserve” today and you encounter everything from skepticism to fear of conspiracy.

INTERNET VIDEO NARRATOR: This nefarious cartel of tyrants is in a position to literally acquire control over the assets of the world.

INTERNET VIDEO NARRATOR: With the power to regulate the money supply is also the power to bring entire economies and societies to its knees.

PAUL SOLMAN: In response to the suspicion out there, Chairman Ben Bernanke is trying to make his a more open Fed, as his participation in the public forum that ran on the NewsHour this week suggests.

Alice Rivlin, vice chair in the ’90s, says it’s part of a trend.

ALICE RIVLIN, former White House budget director: They have been less and less secretive over the years. This started back in the Greenspan years. There was a time when the Fed didn’t tell anybody anything about what they were doing, even on monetary policy. They didn’t say what they had done. They allowed the markets to guess.

PAUL SOLMAN: Thirty-five-year Fed veteran, now vice chairman, Don Kohn, has been charged with making the Fed more intelligible to the public.

DONALD KOHN, Federal Reserve vice chairman: The Federal Reserve has become increasingly transparent about what it’s doing and why it’s doing it over the last, I would say, 15, 20 years. Twenty years ago, we weren’t even announcing our decisions when they were made; you had to infer them from our actions.

PAUL SOLMAN: But this March, the chairman of the Fed visited his hometown — Dillon, South Carolina — with cameras from “60 Minutes” and then, last weekend, the public TV forum dubbed “Bernanke On the Record” in Kansas City.

But, despite the new transparency, plenty at the Fed remains off the record. We could shoot the New York Fed getting its marching orders for the day, for instance, but absolutely no audio. A stray doubt about some banks, say, might tank its stock or the market as a whole.

The Board of Governors meetings in D.C. are even more secretive, for the same reason the New York meeting is, says Vice Chairman Kohn.

DONALD KOHN: We bring information to bear from the private sector, from foreign governments and foreign central banks that they tell us in confidence about what’s going on in their businesses. So it would inhibit the discussion, and it would be less — the policy coming out would be less good. We do make transcripts, and we release them after five years.

An insulated bank

WILLIAM GREIDER, author, "Secrets of the Temple": If they want to get transparent, you could start there, couldn't you?

PAUL SOLMAN: Journalist William Greider thinks the Fed isn't going nearly far enough.

WILLIAM GREIDER: You could say, "OK, we have to have our meetings in secret because things will be said that are national security secrets, but we'll vet the transcript and release it four weeks later." Why not do that?

PAUL SOLMAN: Though the Fed does publish minutes of its meetings within three weeks of the decisions it makes.

Author of a major book on the Fed, "Secrets of the Temple," Greider says the Fed began insulating itself back when it started, nearly a century ago.

WILLIAM GREIDER: This was the progressive era, which believed deeply in that good government depended on professionalizing the management of government. And that meant, in some degree, getting it out of the hands of people, the unruly public, with its passions and ignorance, et cetera. In many ways, it was created to make this volatile subject a secret, and it succeeded.

PAUL SOLMAN: It succeeded and continued to do so for nearly a century. Former Fed Vice Chairman Alan Blinder.

ALAN BLINDER, Princeton University: My first advice when I went there in '94 from the Fed's press officer was, I want to tell you: We don't talk about the economy. I looked at him. I said, "What would you like me to talk about?"

Risks of more openness

PAUL SOLMAN: But, then again, says Alice Rivlin, who succeeded Blinder as vice chair, there's always a risk of saying too much.

ALICE RIVLIN: I made a speech in Nebraska which was interpreted as talking down the dollar. I certainly didn't think I had, but somebody did, and the dollar actually fell. But that was the exception. Most of the time, I was really careful.

PAUL SOLMAN: But one person's caution can be another's shroud of secrecy, thus the debate over the Fed, its transparency, its accountability, a debate on full display in Congress at the moment.

REP. BILL POSEY, R-Fla.: I just don't see why there shouldn't be 100 percent crystal-clear transparency of every single function of the Fed after the fact.

BEN BERNANKE, Federal Reserve Chairman: Because we have to be extraordinarily careful that the markets and the public don't think that Congress is trying to influence monetary policy decisions.

PAUL SOLMAN: But if we don't know how, exactly, the Fed decides until long after, Congressman Bill Posey pressed...

REP. BILL POSEY: ... we don't know if they're the best decisions. We don't know who the Fed picked to be winners and losers. And I think the public really has a right to know that.

PAUL SOLMAN: The hot potato of the moment is a House bill sponsored by long-time Fed critic Ron Paul, to which more than half of the House has signed on. It would give the Government Accountability Office the right to audit the Fed's interest rate decisions. Chairman Bernanke opposes it as compromising the Fed's independence.

REP. RON PAUL, R-Texas: So is that your position, that this bill, if it were to be passed, would interfere directly with interest rates, setting interest rates?

BEN BERNANKE: If we were to raise interest rates at a meeting and someone in the Congress didn't like that and said, "I want the GAO to audit that decision," wouldn't that be viewed as an interference?

REP. RON PAUL: I wouldn't think so. This is just reviewing it. And you can do what you want.

PAUL SOLMAN: Former Fed Vice Chairman Alan Blinder, he admits that independence can lead to secrecy...

ALAN BLINDER: But it's very important, if the Fed is going to do some of, the quote, "nasty," unquote, work that it sometimes has to do to fight inflation, that the Fed have a lot of independence. Americans wouldn't think you should have politicians making the decisions for the Food and Drug Administration, right? You know, because that drug company might just be in that guy's district, and we'd rather have scientists and technicians making those decisions.

PAUL SOLMAN: But, despite the Fed's efforts to be more open, some still feel that the Fed's technicians, and the strategy-makers above them, remain too hidden from public scrutiny.

JIM LEHRER: A reminder: Paul Solman is taking your questions at his business desk on our Web site, newshour.pbs.org. There are also extended interviews with Alice Rivlin and Alan Blinder about the Fed's independence and attempts to be more transparent.