The Real Issue Behind Fed Secrecy: Lying

08-28-2009 • The Market Ticker

The Fed is supporting institutionalized lying - that is, the intentional mis-marking of assets. If The Fed was an honest regulator and monitor of market risk it would insist that no bank carry an asset at a value materially higher than its "haircut" off par at the window. After all, the penalty rate for discount window use already discourages banks from coming there; the "haircuts" must (and I argue do) reflect what The Fed actually believes about the quality of these alleged "baskets" of asset classifications. If The Fed believes that these asset classes have this sort of haircut from face value in the market how does it justify allowing any bank under its jurisdiction holding such "assets" at a higher value on their balance sheet? The claim that people shouldn't worry about a bank that needs an emergency loan at a penalty rate and with a haircut that in some cases is 30% or more below declared "balance sheet value" is crim