The Real Issue Behind Fed Secrecy: Lying
by ilene - August 28th, 2009 9:36 pm
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Karl, on the Fed’s quest for secrecy – a few legal arguments…
The Real Issue Behind Fed Secrecy: Lying
Courtesy of Karl Denninger at The Market Ticker
Henry Blodget writes an interesting piece over at Businessinsider in which he cites Paul Kasriel of Northern Trust:
Today, we have federal deposit insurance Therefore, the probabilities and magnitude of depositor runs on banks are much reduced compared with 1933. Yet, we can see “runs” by stockholders and other creditors of banks if there is a suspicion of financial problems. If the Fed is required to publish the names of financial institutions to which it has extended credit and this publication induces financial institutions to refrain from borrowing from the Fed, one can only speculate if this would be the tinder for another liquidity conflagration in the coming months.
How about a little honesty from commentators in the mainstream media?
"Liquidity conflagrations" happen when people discover they have been lied to.
Anyone remember Bear Stearns? "We’re well capitalized" on CNBC? "Everything is fine"? Cramer’s pumping of them on his show as "safe"?
Market participants in fact knew everything was not fine. There were statements flying around (that turned out to be true) that some counter-parties had begun refusing to novate deals with Bear.
It was the discovery of the lie that caused the run on Bear Stearns and its ultimate collapse.
Likewise with Lehman. Remember Dick Fuld’s "I’m gonna burn the shorts" comment, again, on CNBC and elsewhere in the National Media?
The truth got out: they were having liquidity problems. Once again, as soon as people discerned that they were being lied to, Lehman’s fate was sealed.
The problem The Fed has is that as the supposed "risk regulator" for the American Banking System it has absolutely refused to do its job of prudential regulation and still is. Instead of demanding that its member banks hold capital against all unsecured lending it has "blessed" models rather than markets. But at the same time it has declared "haircuts" against collateral that make clear that so-called "face value", or "par", is a farce.
The Fed is supporting institutionalized lying – that is, the intentional…