Has Federal Reserve Secrecy Become Untenable?

The most interesting aspect of the Fed's new 'quantitative easing' announcement (aka QE2 ) was not its $600,000,000,000 price tag.

Nor Fed Chairman Ben Bernanke's op-ed in the Washington Post which stated that a key benefit of QE2 is higher stock prices.

I believe the most interesting, and perhaps significant, questions relate to the impact on the Fed's ability to maintain secrecy in wake of the unprecedented media coverage of QE2.

A Well Telegraphed Event

Regular Fed watchers of course know that an oft used Fed strategy is to communicate upcoming policy shifts through speeches and leaks to the press well in advance of the actual vote and formal policy change announcement. The Fed's thinking here is that this strategy provides time for market participants to acclimate to an upcoming policy change, thereby avoiding a sudden (and perhaps unwelcome) monetary surprise.

Anyone following the general financial press was probably aware no later than September that QE2 was going to be announced at the November Fed meeting. Media coverage of QE2, including my first writeup, began appearing as early as June.


Using Google Trends we can see that searches for the term 'QE2' began picking up in July and August, and then spiked dramatically upwards in early September.

Source: Google Trends; Search Term: 'QE2'; Location & Timeframe: United States for last 12 months

(Note: Chart letters A-D mark the dates for other events with the same QE2 name (e.g., the ship Queen Elizabeth 2 is also referred to as QE2); letter E is a Business Week story which makes reference to the Fed's 'QE2')

For comparison, here is Google Trends for the term 'quantitative easing' for the same time period. Note the August spike around the time of the August 10th Fed meeting, and then the same sharp increase in early September.

Source: Google Trends; Search Term: 'quantitative easing'; Location & Timeframe: United States for last 12 months

Has QE2 Entered Main Street's Consciousness?

While Fed policy decisions have historically been largely overlooked by Main Street, QE2 was a sensation. It was treated to the full media smorgasbord of newspaper front pages, television talk shows, radio call in programs, blogs, op-eds, and even a music video.

Take radio and TV shock jock Glen Beck, for example, who spent approximately 30 minutes complete with a puppet show explaining QE2 to his millions of viewers. The breadth and depth of main street media coverage on QE2 has been unprecedented by modern Fed news standards.

Of course the big reason for all the media attention is because QE2 is controversial. There are claims that the Fed is taking monetary policy into unchartered territory. America's foreign creditors and trading partners have unanimously cried out in protest. And there are concerns about the Fed picking winners and losers.

Looking ahead, QE2 and quantitative easing are likely to remain hot media topics for months to come.

What Does Main Street Make of QE2?

I believe we may be on the cusp of a sea change in public awareness of the Federal Reserve and its policies. Increased public awareness could have profound implications for how monetary policy is conducted in the United States.

In addition to Ron Paul's plans to take Ben Bernanke to more frequent task, the broader public is already starting to ask more questions. What exactly is 'quantitative easing'? How does that differ from printing money? What makes the dollar worth something to begin with? Why is the Federal Reserve so secretive?

Historically, the vast majority of Americans have simply overlooked the Federal Reserve and monetary policy, and it's easy to understand why. For many Americans the Fed and its policies come across as complex, opaque and quite dull. While the economy was humming along, most people simply couldn't be bothered.

Well, as everyone knows today is a very different economic world than the Alan Greenspan as 'Maestro' era. People, quite understandably, are looking around for answers and taking more interest in what goes on inside the Fed.

To the Federal Reserve and Chairman Ben Bernanke's credit, there have been some recent efforts to become more transparent and connect with the broader public. Bernanke's rather candid 60 Minutes interview in June 2009 is one such example.





The End of Fed Secrecy?

Can the nearly 100-year old Federal Reserve and monetary policy as it is currently practiced remain unchanged in the face of the publicity and scrutiny of the modern media age? And what are the implications to Fed independence and policy if it must abide by greater openness and transparency?

The standard argument in favor of maintaining Fed secrecy is that it protects the reputation of the financial institutions which the Fed lends money. For example, if a bank's reputation suffers from word that it's borrowing 'emergency' money from the Fed, its customers may stop doing business with the bank and/or seek to withdraw their deposits en masse. This is what is referred to as a 'bank run', and it is a risk inherent to the current fractional reserve banking system structure.

Another argument, which was hinted at in the AIG bailout, is that maintaining Fed secrecy is a matter of national security. Regardless of whether such a justification could hold up, it could prove difficult (and pretty awkward) to try and explain to the public why Federal Reserves loans to Wall Street banks like Goldman Sachs are classified as matters of national security and therefore confidential.

Speculating on such questions may soon be a moot point. The Fed is currently engaged in litigation over its refusal to fully disclose its lending activities during the 2008 financial crisis. Increased Fed transparency and an end to secrecy may come about sooner rather than later.