Governments can keep secrets if they want

Writing about the takeover of Fannie and Freddie in his Infectious Greed blog, Paul Kedrosky says: “Apparently the government is better at keeping secrets than anyone else in the capital markets. I’m not sure if that’s reassuring, or frightening.”

Kedrosky has a point. If the stories in the New York Times (“As Crisis Grew, a Few Options Shrank to One”, September 8, 2008) and the Wall Street Journal (“Mounting Woes Left Officials With Little Room to Maneuver”, September 8, 2008) are right, the decision to take a drastic action was taken more than a week before the announcement. The New York Times says that Treasury Secretary Paulson briefed President Bush over secure video on August 26, while the Wall Street Journal reports that the decision on conservatorship was taken on August 30/31 (the Labor day weekend). Yet, the markets did not get even a whiff about it until the government informed Fannie and Freddie about the decision on Friday, September 5 and asked them to get their boards to accept the terms of the rescue. From that point onwards, the media knew the broad contours of the rescue package and the announcement on Sunday morning was largely a formality.

In India also, we observe that the government is able to keep secrets if it wants to. Budget proposals are a wonderful example. Sometimes, the budget speech reserves its sting for the tail and then one an observe that until the closing minutes of the speech, the market has no clue about what is to come. And then within seconds, the market tanks as the finance minister reads out the nasty proposal.

The private sector by contrast finds it very difficult to keep secrets. It is very difficult anywhere in the world to even begin a merger discussion without the news leaking to the media.

Evidently, the incentive structures that the government can bring to bear are far more severe than anything that the private sector can muster. To answer Kedrosky’s question, I personally find it more frightening than reassuring – it suggests that governments simply cannot be trusted because their secrecy processes allow them to get away with blatant lying if they choose.

Posted at 2:51 pm IST on Tue, 9 Sep 2008         permanent link

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