Allegations that Timothy Geithner, then head of the New York Federal Reserve, may have told banks ahead of time about a surprise policy move in 2007 underscores the pressing case for reform to safeguard the integrity and independence of the central bank.
Specifically Congress needs to act to make the lines between the banking industry and the governance of the regional Federal Reserve banks cleaner, guarding against a "we are all boys in this together" attitude and ensuring a diversity of views from outside the financial services industry.
As revealed in transcripts released last week of Fed meetings from 2007, Richmond Fed President Jeffrey Lacker said Geithner, now the outgoing Secretary of the Treasury, discussed with banks an upcoming change in the discount rate, a move which proved highly price sensitive when it was publicly announced.
"From conversations I had prior to the video conference call on August 16, 2007, I was aware of discussions among a few large banks about borrowing from their discount windows to support the asset backed commercial paper market," Lacker said in the statement.
"My understanding was that President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives."
Qualified banks can borrow from the Fed at the so-called discount window at the discount rate.
The Treasury has declined to comment beyond the transcripts, in which Geithner replied at the time about his discussions with banks:
"The only thing I've done is to try to help them understand - and I'm sure that's been true across the system - what the scope of that is because these people generally don't use the window and they don't really understand in some sense what it's about."
Clearly a bit of sunlight is needed on this particular episode, and doubtless some Congressional committee will take a look at it. While the President of the New York Fed, which has and should have deep links with banks and markets, will always have need of discussions with bankers, tipping a rate move in advance is highly improper, especially in times of financial market dislocation.
Moreover, seeing as how Geithner, both at