First let me apologize to all the supporters of Ron Paul who believe that the Federal Reserve and Ben Bernanke didn’t save the world in 2008 but rather just delayed the inevitable day of reckoning when our walls will be papered with worthless greenbacks and we’ll retreat to our bunkers to fight it out frontier-style. (I’ve never understood why delaying that day of reckoning is a bad thing, but if you’ve invested your hard-earned gold coins in a decade’s worth of MREs and water purification tablets I can see how you might disagree.)
Last week I drew attention to a Bloomberg analysis of documents obtained through the Freedom of Information Act that said that if you “add up guarantees and lending limits… the Fed had committed $7.77 trillion” to rescuing the financial system during the credit crisis in 2008.
It turns out Bloomberg and I were both unjustifiably gigging the Paulites’ collective dander, or at least that’s what the bunker-busting Bernanke says. In a Tuesday letter [pdf] to House and Senate banking and financial services committees, Bernanke wrote that the $7.7 trillion number is “wildly inaccurate.” The largest outlay was of about $1.5 trillion in December 2008. Says Bernanke:
To be sure, that is a very large amount, but it was a necessary response to ensure that the crucial mistake made during the Great Depression–failing to prevent the collapse of the financial system–was not repeated. Importantly, such lending helped support the continued flow of credit to American families and business… Although the articles do not stress this point, it is important to note that nearly all of the emergency assistance has, in fact, been fully repaid or is on track to be fully repaid… Federal Reserve lending is repaid, with interest, and the Federal Reserve has never suffered a credit loss.
Bernanke points out that American taxpayers have made $20 billion off the emergency lending program. “Moreover, in 2009 and 2010, the Federal Reserve returned to the taxpayers over $125 billion in excess earnings on its operations, including emergency lending.” Those loans, Bernanke says, supported “nearly 3 million auto loans, more than 1 million student loans, nearly 900,000 loans to small businesses, 150,000 other business loans, and millions of credit card loans.”
Bernanke also goes directly at Bloomberg (though not by name) over the issue of secret bank profits. The Bloomberg editors made much of $13 billion in supposed secret profits made by banks thanks to a Fed decision to let them pay debts with money borrowed from the Fed rather than by selling assets. That of course was the point of the loans, says Bernanke:
“During a financial panic, otherwise solvent banks and other financial institutions can be forced to sell assets at fire-sale prices in order to meet the demands of depositors and other sources of funding. Central bank liquidity lending is designed to stem the panic by giving financial institutions a source of financing that permits them to refrain from selling assets during the panic. Again, unmentioned in these articles–but a central point–all discount window loans extended during the crisis were fully repaid with interest, indicating that, with rare exceptions, recipients of these loans generally suffered from temporary liquidity problems rather than being fundamentally insolvent.”