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Too reserved

7 December 2011 By Agnes T. Crane

The U.S. Federal Reserve is working to improve its monetary policy communications. But its key role as a crisis lender is also now in the spotlight. Ben Bernanke’s Fed would get less flak if it managed this message better as well.

On monetary policy, the U.S. central bank has pledged to keep interest rates near zero for at least two years and is taking big policy steps aimed at getting the economy off the floor. The Fed’s public relations strategy has developed accordingly, with Bernanke now hosting press conferences after some interest rate decisions. Next year, the central bank is expected to reveal more about how it approaches its double-headed mandate to keep both inflation and unemployment down.

But the Fed also serves as the lender of last resort for the U.S. banking system – and, most recently, as the wingman for the European Central Bank and other monetary authorities when the dollar is in short supply in their jurisdictions. It’s a crucial role that keeps money flowing when the system would otherwise seize up.

Yet it took a court order in support of an effort pioneered by Bloomberg to get the Fed to divulge details of the emergency lending it conducted during the 2008 crisis. Even then, Bernanke left it up to the press and the public to interpret the data it eventually dumped.

A figure of $1.5 trillion actually measures the peak of Fed lending in December 2008. That’s hardly small change, but Bloomberg calculated a much higher total – $7.77 trillion – based on the aggregate of all the lending limits and guarantees the Fed provided during the financial crisis, many of which were only partly used. Other news outlets ran with the larger number, sometimes misrepresenting it as the cash actually lent out by the Fed. That would be a full order of magnitude more than the controversial $700 billion Troubled Asset Relief Program, which had required congressional approval.

The misunderstanding and the subsequent back-and-forth have left Bernanke on the defensive. Yet an independent central bank that can act as a lender of last resort when liquidity dries up is a vital safety net. The Fed needn’t be shy about making that case.


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