This time, by the Federal Reserve Bank. As most of you already know, the Fed runs “stress tests” to determine whether financial institutions can survive an economic dislocation of the magnitude of the Panic of 2008. Among other things, if the institution fails the stress, the Fed dictates to the institution the dividends it will be allowed to pay until the conditions leading to the alleged failure are corrected.
That’s a serious overreach; it is a government entity presuming to intrude itself into a private enterprise decision, a decision that the free market is fully capable of sanctioning or accepting without Big Government involvement.
It’s worse than that, though. Fed Board of Governors member Daniel Tarullo has exposed the more massive overreach.
Even though we do not publicly release the models, we have put systems in place to ensure oversight and accountability[.]
The Fed uses non-peer reviewed, secret models to make its assessments. Because of that secretiveness, we have no way of assessing the adequacy of the Fed’s “oversight and accountability” of those models. We also have no way of assessing the accuracy—even the legitimacy—of those models.
…disclosing the models could give banks an opportunity to game them….
Because the financial institutions don’t already game the system. Like nobody ever games any system. No, of course we do. It’s what competition does. Gaming—free market competition—is innovation, prosperity production. And, yes, the instability of creative destruction, which leads to breakout innovation and prosperity production.
It’s a disingenuous excuse for a disingenuous practice. The deliberate lack of transparency of this arm of the Big Government is of a piece with the general secretiveness of this Big Government.
It’s necessary secretiveness, however. If the public knew more about these models, knew something of how they work (or fail to work), we might do more than force corrections to them. We might do away with the Fed’s interference in private business decisions altogether, and that would reduce the power of the men in Big Government.