Federal Reserve secrecy will conceal incompetence and corruption

February 28, 2010

I have been discussing with Prof. David Andolfatto (a VP at the St. Louis Fed) the “idiocy” of a few accusations recently made by Ron Paul and the risks of transparency, however for some reason I am unable to post my latest response to this site. I won’t accuse him of blocking my IP (maybe there is a glitch with blogspot) but let it be known I could very easily use a different connection or a proxy to get around such a pathetic attempt at censorship. Instead I will just post it here, you should read the entire discussion on his site for this to make sense.

Update: David has confirmed he did not attempt to block my IP, I have been able to submit comments to his blog since this post. I look forward to his follow up post on this topic.

[1] There are many other allegations not related to the discount window that Congress would like to pursue, is secrecy also justified in those cases? Even questions regarding 30 year old events? Why doesn’t the Fed respond to access to information requests?

[2] No it shouldn’t be given the benefit of the doubt because I don’t know what Bernanke and Obama will do to prevent the Fed from ever losing a penny if conditions deteriorate in the future. I won’t speculate here, but there is precedent:

“Because of the slowdown, Federal Reserve district banks were transacting less business with member banks and hence earning so little funds it was feared that some banks would not meet their expenses. So, Fed banks purchased government securities at a great pace through the first half of 1922 to improve their earnings positions.”

http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3826

I don’t want to draw inappropriate conclusions, but I will simply say the 1920s didn’t end well. My point regarding MBS was that things can happen for the first time, open market operations didn’t begin until 1922. Also, the quote below is not particularly comforting for obvious reasons.

“Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae”

http://www.newyorkfed.org/markets/mbs_FAQ.HTML

[3] I haven’t read your entire paper but I read parts of it, and for what it’s worth I find it strangely reminiscent of a partially discredited concept in Engineering often practiced by the Soviet Union:

http://en.wikipedia.org/wiki/Security_through_obscurity

From wikipedia:

“Operators and developers/vendors of systems that rely on security by obscurity may keep the fact that their system is broken secret to avoid destroying confidence in their service or product and thus its marketability, and this may amount to fraudulent misrepresentation of the security of their products. Instances have been known, from at least the 1960s, of companies delaying release of fixes or patches to suit their corporate priorities rather than customer concerns or risks.”

Sound familiar? There are well documented risks with this approach, I’m willing to bet many of them translate.

From your paper:

“In competitive economies, the disclosure of high-frequency information unrelated to an asset’s “long-run fundamentals” may be detrimental to economic welfare when claims to such assets serve as high-velocity payment instruments.”

Who determines which information is related to an asset’s long-run fundamentals? How do I determine whether this information is a catalyst for insider trading if it never becomes public? You said you weren’t asking me to trust Bernanke, unless I missed something, your paper infers otherwise.

[4] As a matter of fact I do. If they take the gold then people can use silver. If they take the silver then people can use tally sticks. If they take the tally sticks then people can use seashells. If they take the seashells then people can use feathers. Obviously that’s a little tongue-in-cheek, but the point is clear — multiple circulating competing private currencies. The government can’t steal them all.