Bloomberg has a well-researched story out today based on a massive Freedom of Information Act inspection of the Fed’s lending during the financial crisis from August 2007 through April 2010. The headline-making numbers: In sum, the Fed gave the banks more than $7.7 trillion in loans, and banks may have made $13 billion in part thanks to those loans.
The piece spends a lot of time touting the amounts of money that went to different banks: Bank of American owed the Fed $86 billion on Nov. 26, 2008, the day then CEO Ken Lewis told shareholders his bank was strong and stable; Morgan Stanley took $107 billion loans in Sept. 2008. And the story seems to be in search of outrage: “This is an issue that can unite the Tea Party and Occupy Wall Street,” says Ohio Democratic Senator Sherrod Brown.
But the Fed saved the world economy through all this lending without losing a penny in the process. And after its initial heavy breathing, the article does give the Fed an opportunity to explain itself.
“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”
In other words, lending money to banks in a crisis is the whole point of the Fed: saving the world economy by flooding the system with money when it is about to freeze up is exactly what the central bank was created to do. If you don’t like it, then vote for Ron Paul and see what a world without the Fed looks like.
Buried beneath the attempts to tap public outrage is a larger point, which is that reforming Wall Street to avoid a similarly catastrophic crisis in the future would have been easier if all the information obtained, compiled and explained by Bloomberg’s reporters had been out there sooner.
Dodd-Frank mandates that borrowers at the Fed’s discount window be identified two years after they borrow, whereas they never needed to be identified before. The story’s authors, however, suggest that Dodd-Frank would have been tougher on banks if people had known the extent of the borrowing earlier.
Maybe. But the Bloomberg headline writers aren’t exactly helping their reporters’ hard work in clarifying the issues. Remember the $13 billion of extra earnings touted in the headline? If you make it all the way to the third to last of 22 sections, the article states that the number is actually a guess by Bloomberg based on estimates of how much the banks saved by using the Fed money “to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest.” Does anyone think forcing the banks to sell assets in the middle of a crisis would have stemmed the panic the Fed lending was designed to stop better than just letting them use the borrowed money?
One last note on the Fed. Last week I asked “Can the Fed Help Save Europe’s Banks?” and apparently missed one even more controversial and effective way it could do so: launching a massive quantitative easing effort for Europe by buying Euro Bonds that the European Central Bank refuses to purchase. The UK’s Daily Telegraph has an interesting story outlining that radical approach today, with endorsements from a few American liberal economists.