President Obama used the word “transparency” a thousand of times during his campaign to refer to his promise to create a sense of trust in his administration and restore trust in government in general. Somehow the Federal Reserve Board (The Fed) has not received the memo. In fairness to President Obama, The Fed is an independent commission in which the chairman is appointed by the president for a certain number of years. It was Mr. Bush who appointed Ben Bernanke the current chairman of The Fed. They both need to work together, but because The Fed is independent, it can shred that memo about transparency.
The Fed is supposed to be above partisan politics and removed from making political decisions which makes it even more perplexing that The Fed doesn’t embrace President Obama’s ideas about transparency in government.
My latest concerns about lack of transparency in government involve The Fed’s decision (as of yesterday) to keep confidential the results of the a “stress test” that it is currently conducting on approximately 20 U.S. banks to assess a worst case scenario in case the recession is extremely deep (code word for depression). The Fed’s decision to keep data confidential was supposedly made to protect the identity of the banks it is testing. I think it would be easy to protect their integrity and identity by simply redacting their names in the final report so concerned citizens and independent economists may better judge how wisely the administration is spending tax payer dollars to bail out the banking system which right now looks like a black hole.
I believe there are other reasons The Fed doesn’t want to reveal the report’s findings.
A reasonable person might think they want to keep their research secret so that the public won’t be panicked if the predictions are especially dire. If that is the case, I would argue that knowledge is power and every family and business in
More likely, The Fed doesn’t want the public to know that it is using potentially unrealistic assumptions to conduct the testing. I call that garbage in, garbage out.
For example, in the testing process, The Fed is using very optimistic variables that many mainstream economists disagree with which seems inconsistent with the idea of planning for the worst case scenario.
Projected unemployment rates are a big part of the stress test. The higher the unemployment predictions, the more stress will be placed on the banking system. The Fed’s assumptions for the stress test is that it will reach a level of 8.4% in 2009 and 8.8% next year, while a number of noted economists predict the rate could reach a high of 12% or more by 2010.
In recent days, the FDIC’s chairwoman has testified that the watch list of potentially troubled banks has grown substantially, from 171 in November to over 252 now. FDIC Chairman Sheila Bair warned that this number is likely to grow at a faster pace than originally anticipated. Many other signs are pointing to a recession that continues to accelerate its severity. The FDIC’s data should be considered by The Fed when it makes its assumptions used in its testing.
Another key variable of The Fed’s stress test involves economic growth. The Fed is assuming economic growth for 2010 to be a whopping 3.2%, with an average of 4% over the next three years.
If that happens I will stand on my head and whistle
It is certainly possible to have that strong of a beginning recovery, and I really hope it happens, but when you are conducting an analytical testing of worst case scenarios, why don’t you use worst case variables for your testing. Yes, it would make the theoretical testing results look worse, but it would also allow for the possibility and planning of a much worse 2010 and would allow citizens and policy makers to understand the real implications of spending so much money now pouring into the economy.
If this were the Pentagon simulating worst case warfare testing, I could understand the secrecy, but this is about our economy and banking system, not nuclear weapons.
Americans are smart and don’t trust what government bureaucrats and politicians say in general, in part because they’re not thinking like average educated people. Perhaps part of the reason many agencies and commissions come out with ridiculous findings is because they start with ridiculous assumptions.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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