BERNANKE’S OBFUSCATION CONTINUES: The Fed’s $29 Trillion Bail-out of Wall Street
Since the global financial crisis began in 2007, Chairman Bernanke has striven to save Wall Street’s biggest banks while concealing his actions from Congress by a thick veil of secrecy. It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get him to finally release much of the information surrounding the Fed’s actions. Since that release, there have been several reports that tallied up the Fed’s largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion. On December 8, Bernanke struck back with a highly misleading and factually incorrect memo countering Bloomberg’s report. Bloomberg has—to my mind—completely vindicated its analysis; see here: http://www.bloomberg.com/news/2011-12-06/bloomberg-news-responds-to-bernanke-criticism.html.
Any fair-minded reader would conclude that Bernanke’s memo to Senators Johnson and Shelby and Representatives Bachus and Frank is misleading. One could even conclude that it is not just a veil of secrecy, but rather a fog of deceit that the Fed is trying to throw over Congress.
He argues that the sum total of the Fed’s lending was a mere $1.2 trillion, and that it was spread across financial and nonfinancial institutions of all sizes. Further, he asserts that the Fed never tried to hide the bail-outs from Congress. Both of these assertions fly in the face of the facts available (as the Bloomberg response makes clear).
As Bernanke notes, highly credible analyses of the bail-out variously put the total at $7.77 trillion (Bloomberg) to $16 trillion (GAO) or even $24 trillion (I think this is Senator Bernie Sanders’ figure). He argues that these reports make “egregious errors”, in particular because they sum lending over-time. He also claims that these high figures likely include Fed facilities that were never utilized. Finally, he asserts that the Fed’s bail-out bears no relation to government spending, such as that undertaken by Treasury.
All of these assertions are at best misleading. If he really believes the last claim, then he apparently does not understand the true risks to which he exposed the Treasury as the Fed made the commitments.
There are a number of issues that must be understood. First, the Fed quibbles about the differences among lending, guarantees, and spending. For the purposes of this blog I will accept these differences and call the sum across the three “commitments”. In spite of what Bernanke claims, these do commit “Uncle Sam” since Fed losses will be absorbed by the Treasury. (The Fed pays profits to Treasury, so if its profits are hurt by losses, payments to Treasury are reduced. If the Fed should go insolvent, the Treasury will almost certainly be forced to recapitalize it.) I do, however, agree with the Chairman that a tally should not include facilities that were created but not utilized (there were several of them, and the tally I present below does not include any facilities that were not used).
Second, there are (at least) three different ways to measure the Fed’s bail-out. One way would be to find the day on which the maximum outstanding Fed commitments was reached. According to the Fed, that appears to have been about $1.5 trillion sometime in December 2008. I’m willing to take Bernanke at his word. Another way would be to take the total of commitments made over a short period of time—say, a week or a month. That would be a measure of systemic distress and would help to identify the worst periods of the GFC (global financial crisis). Obviously, this will be a bigger number and will depend on the rate of turn-over of Fed loans. For example, many of the loans were very short-term but were renewed. Bernanke argues that it is misleading to add up across revolving loans. Let us say that a bank borrows $1 million over night each day for a week. The total would be $7 million for the week. In a period of particular distress, the peak weekly or monthly lending would spike as many institutions would be forced to continually borrow from the Fed. Bernanke argues we should look only at the lending at a peak instant of time.
Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank. Bernanke would like us to believe that if the Fed newly lent a trillion bucks every day for 3 years to all our drunken bankers that we should total that as only a trillion greenbacks committed. Yes, that provides some useful information but it does not really measure the necessary intervention by the Fed into financial markets to save Wall Street.
And that leads to the final way to measure the Fed’s commitments to propping up our drunks on Wall Street: add up every single damned loan, guarantee and asset purchase the Fed made to benefit banks, banksters, real Housewives on Wall Street, fraudsters, and their cousins, aunts and uncles. This gives us the cumulative Fed commitments.
The final important consideration is to separate “normal” Fed actions from the “extraordinary” or “emergency” interventions undertaken because of the crisis. That is easier than it sounds. After the crisis began, the Fed created a large alphabet soup of special facilities designed to deal with the crisis. We can thus take each facility and calculate the three measures of the Fed’s commitments for each, then sum up for all the special facilities.
And that is precisely what Nicola Matthews and James Felkerson have done. They are PhD students at the University of Missouri-Kansas City, working on a Ford Foundation grant under my direction, titled “A Research And Policy Dialogue Project On Improving Governance Of The Government Safety Net In Financial Crisis”. To my knowledge it is the most complete and accurate accounting of the Fed’s bail-out. Their results will be reported in a series of Working Papers at the Levy Economics Institute (www.levy.org). The first one will be posted soon, and is titled $29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient. Watch for it!
Here’s the shocker. The Fed’s bail-out was not $1.2 trillion, $7.77 trillion, $16 trillion, or even $24 trillion. It was $29 trillion. That is, of course, the cumulative total. But even the peak outstanding numbers are bigger than previously reported. I do not want to take any of their fire away—interested readers must read the full account. However, I will use their study as the source for a brief summary of total Fed commitments.
Here I am only going to focus on the final measure of the size of the bail-out: the cumulative total. This is not directly comparable to the Fed’s $1.2 trillion estimate, which is peak lending. It is closest to the $24 trillion figure that I believe Senator Sanders is using. The difference from that number is probably attributable to choice of facilities to include.
I will post more on the important research done as part of this Ford Foundation grant; in coming blogs I will also explain why all Americans should be horrified at the Fed’s actions, and by Bernanke’s continued attempt to cover-up what the Fed has done.
Summary of Total Cumulative Fed Commitments
When all individual transactions are summed across all facilities created to deal with the crisis, the Fed committed a total of $29,616.4 billion dollars. This includes direct lending plus asset purchases. Table 1 depicts the cumulative amounts for all facilities; any amount outstanding as of November 10, 2011 is in parentheses below the total in Table 1. Three facilities—CBLS, PDCF, and TAF—overshadow all other facilities, and make up 71.1 percent ($22,826.8 billion) of all assistance.
Table 1: Cumulative facility totals, in billions
Source: Federal Reserve
|Facility||Total||Percent of total|
|Term Auction Facility||$3,818.41||12.89%|
|Central Bank Liquidity Swaps||10,057.4(1.96)||33.96|
|Single Tranche Open Market Operation||855||2.89|
|Terms Securities Lending Facility and Term Options Program||2,005.7||6.77|
|Bear Stearns Bridge Loan||12.9||0.04|
|Maiden Lane I||28.82(12.98)||0.10|
|Primary Dealer Credit Facility||8,950.99||30.22|
|Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility||217.45||0.73|
|Commercial Paper Funding Facility||737.07||2.49|
|Term Asset-Backed Securities Loan Facility||71.09(.794)||0.24|
|Agency Mortgage-Backed Security Purchase Program||1,850.14(849.26)||6.25|
|AIG Revolving Credit Facility||140.316||0.47|
|AIG Securities Borrowing Facility||802.316||2.71|
|Maiden Lane II||19.5(9.33)||0.07|
|Maiden Lane III||24.3(18.15)||0.08|
Source: “$29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient” by James Felkerson, forthcoming, Levy Economics Institute, based on data analysis conducted with Nicola Matthews for the Ford Foundation project “A Research And Policy Dialogue Project On Improving Governance Of The Government Safety Net In Financial Crisis”.
50 Responses to “BERNANKE’S OBFUSCATION CONTINUES: The Fed’s $29 Trillion Bail-out of Wall Street”
Has anyone tallied up the cost to seniors and other investers who depend on making a decent return on their retirement savings to survive? The Fed has reduced interest rates to near zero to buy time for banks to get out from under their bad investments and continue their big bonuses, all at the expense of people who are forgoing the retirement income they need to live.
This is awesome.
So, the balance sheets are all interrelated and the banks don't trust each other.
Was it like throwing pasta against a wall to see what sticks? But here, instead, the Fed would just "back" or buy all the pasta upon request? Indiscriminately?
If they knew that little bank X didn't have systemic exposure (highly linked with many other banks) would they not lend or back?
Did the Fed learn anything about the books/liabilities of the institutions helped out like they might at the discount window or was this more inspection free and involuntary like?
You know, I'll just wait for the paper. Sorry for being a pest. Looking forward to the paper and upcoming posts. Thanks.
Where did Bernanke get all that gold to turn into money and then pay the banks with? (sorry, really bad joke, but I am cryin' at how dumb that is) … wait, I forgot he has a keyboard and always has and despite the $29T keyboarding jag still no perceptible inflation … just the continued artificially high priced asset and commodity levels … hmmm … and the game goes on … (maybe I'm wrong there though)
Exactly. The Fed has embarked on a program best described as "starve granny, feed the banks". I wonder if Perry wasn't closer to right than wrong when he accused Bernanke of treason.
A recent study by the Government Accountability Office shows that directorships at Federal Reserve Bank Districts are disproportionately held by bankers in contravention of the Fed's own policies which state that directors are to be selected from a wide range of industries as shown here:
With half of the FRB directors having experience at the helm of commercial banks, perhaps their allegiances are more closely aligned with their employers than with those who live on Main Street.
“Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze.”
"Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze."
This is a particularly ridiculous analogy since the loans are paid back before being rolled over, unlike the whiskey shots. In addition the GAO report has a table (9) providing "term adjusted" loan data that is much closer to the peak lending figure of over $1 trillion (first paragraph of the GAO report).
It seems you can now be a Professor of Economics without understanding basic concepts like the difference between “Not Term Adjusted” and “Term Adjusted”.
Both tables there: http://alea.tumblr.com/post/13925227129/fed-secre…
I don't agree with any absolutist analysis. $26tn would include commitments made that were never acted upon. $1 tn isn't a big enough liquidity number to have effected the 2008 crisis.
A better issue to examine is the role of a lender of last resort. Lending freely on good collateral is the central banker's job in a money panic. If there is a need for $100tn and good collateral can be provided, let the Fed lend.
Here is the problem: the Fed claims a 'penalty rate' for emergency funds lent, I don't think 0.05% is a penalty in the Bagehot sense of the term. What happened to 8%?
Another issue is that of banks borrowing discount window cash without being in need, along with the conversion of speculative entities such as Goldman into 'instant commercial bank holding companies' in order to borrow cheaply as well as non-bank businesses like Harley Davidson borrowing from the Fed.
Either all can borrow from the Fed — which means commitments in amounts far greater than $100 tn — or only banks chartered as such that are solvent can present good collateral.
Right now, there isn't $29 tn in good collateral anywhere in the world, that is the real story, not the number.
I am not convinced by the drunken sailor analogy. It seems to reflect the fundamental confusion between stocks and flows that was discussed by James Hamilton in his post on this site Dec. 7 . Here is the analogy I would use: Suppose I have a month-to-month lease on a 1,000 square foot apartment while my cousin pays annually to lease a 6,000 square foot villa. Does that mean I consume twice as much housing as she does (1,000 X 12 = 12,000 vs. 1 X 6,000 = 6,000)? Nonsense.
The Bloomberg article makes some interesting points in rejoinder to the Fed, some of which support Wray's arguments. However, Bloomberg does not fall into the drunken sailor fallacy:
"Bloomberg built its database to show amounts outstanding, while the GAO tallied cumulative loans. For example, if a bank borrowed $1 billion overnight for 100 nights, Bloomberg would say the bank had a $1 billion balance at the Fed for 100 days; the GAO would say the bank borrowed $100 billion. The former is a more useful economic measurement."
the real issue here is TRANPARENCY within the financial universe, corporate and governmental, period.
I am certainly no fan of the Fed. It is fraudulent from start to finish. However, tallying amounts lent, repaid and lent again, while dramatic, is somewhat misleading. If my slug brother-in-law borrowed $20 on Friday, paid it back on Monday and then borrowed $20 again next Friday we might say he has borrowed $40 but I have only lent $20 at any given time. Trying to come up with any kind of meaningful number for this is a fool's errand.
It would seem to me that however you torture the accounting, the real lesson to be learned is that there is no effective limit on the amount of reckless behavior the Fed is willing to backstop for well connected firms and individuals and that it will come at the expense of the purposely misinformed majority as long as it is allowed.
L. Randall, this is a very misleading analysis.
"There are a number of issues that must be understood. First, the Fed quibbles about the differences among lending, guarantees, and spending. For the purposes of this blog I will accept these differences and call the sum across the three “commitments”. "
You call the difference between a loan and spending a mere "quibble"?
If so, we would merely be quibbling with your drunken sailor analogy that completely misses the point. To use your own analogy, the Fed would be in the position of the bartender, and would be "committed" for only 6 drinks at a time, total, ever – a quibblesome "loan". Regardless of how drunk the sailors become, the "commitment" remains 6 drinks.
8th grade algebra teaches us:
debt = debt
debt x time = debt x time
debt x time ≠ debt
But why quibble over math fundamentals?
Not a good article. Too much baggage. Randall should pay more attention to conciseness, with accuracy. His failure to state, in every example, the important point that "overnight" loans are paid before they are taken out the next day leads to confusion.
I believe it would still be useful to know the total amount lent-say you were lending $100 each week, then over a year's time you would have given the sluggard $5200-should you not start charging interest? I know of a mutual fund that invests only in Treasury bonds that saw its value go up %34 last year-
Or what would a banker charge a high risk borrower-18-22%? More?
Hmm, I'd say you've lost out anyway we look at it and the total lent does matter
I think the point that needs to be made is that there IS NO opportunity cost to the Fed. Only PR or political cost.
It isn't as if the trillions they create and lend today will be that many trillions less they will have to lend in the future. They can create trillions at will.
So, any number you care to compile is meaningless when compared to the denominator in the equation, which is infinity.
The only real question is; When will the riots start?
I agree. The real question is not, "Did they keep borrowing?" but rather, "Did they keep increasing the amount of debt?" sort of like the argument between debt and deficit. If the Fed kept lending in deficit mode to $27T, then okay. If they loaned money of $1T, got it paid back, and then loaned it again, that is still only $1T that the country (in effect) was on the hook for. So…which one was it? Did banks keep on borrowing while retaining previous balances (i.e. keep on adding to the credit card) or did they simply pay off the credit card by moving the balance to another card?
I'm pro riots. Please name a place and time…
[...] EconoMonitor : Great Leap Forward » BERNANKE’S OBFUSCATION CONTINUES: The Fed’s $29 Tri… [...]
Remove Obama IMMEDIATELY, then REINSTATE the Glass-Steagall Act H.R. 1489 to eliminate the FRAUDULENT DEBT. It's NOT our debt!
[...] EconoMonitor : Great Leap Forward » BERNANKE’S OBFUSCATION CONTINUES: The Fed’s $… [...]
Ed, Alea and Greg, doesn't matter whether you pay monthly or annually, or whether their are six sailors or 60
The barman has as much whiskey as his customers can consume. It doesn't concern him that the sailors have large or small glasses, that they are metric or imperial, that one or all pours the drink into his flask and immediately lines up for a refill, that they request clean glasses, that they spill their drinks, throw up in between shots, collapse, or promise to pay before the next hit (don't think payment was mentioned). This simple analogy implies unending supply for unquenchable demand. Bravo!
[...] on Those Secret Federal Reserve Loans to Banks Consider for example this item written by University of Missouri Professor L. Randall Wray, which begins: It literally took an act [...]
[...] = "000000"; google_color_bg = "FFFFFF"; google_color_url = "008000"; Consider for example this item written by University of Missouri Professor L. Randall Wray, which begins: It literally took an act [...]
Summing total loans over time makes no sense. A $1 billion nightly loan rolled over every day for a year is not the same as a $365 billion loan.
Steady folks. Transactional analysis is meaningless without context. The Federal Reserve has $50 billion in capital. It's balance sheet is currently at $2.8 trillion. Thus the Fed is leveraged about 56 to 1. As you remember, the crisis of 2008 was triggered by some financial institutions (AIG, etc) being leveraged 30 to 1. The Fed is, essentially, insolvent at this time. Have a good day.
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nonsense. Interest is made by banks who reloan and make profit on their loans, the money of the seniors. If the economy contracts there are not enough companies to loan and pay a high interest. YOU OLD PEOPLE HAVE TO UNDERSTAND THAT YOU DO NOT HAVE AN AUTOMATIC RIGHT TO HIGH INTEREST RATES, You spoiled rotten generation of babyboomers. The economy has to be able to generate these high interest rates. If it wasn't for the government with all their lending you probably wouldn't even get 1%. These pensions are all a scam, soon they will fail and you will turn to the government to 'do something', because you 'have a right', Babyboomers… very bad generation,.
Excellent post. Thank you.
Can I ask, as an enthusiastic follower of your MMT primer how the flow of loans would be book kept? Second, I can see how in one respect you would not treat a rolled over loan as the same loan when viewed from the point of view of risk. Each loan would have its own risk, and like a throw of dice, could be understood as completely separate from the risks that belong to the next loan(as would be the bext throw of dice). In practical terms, an overnight loan of $1bil might not be paid back. The next night a new loan of $1bil may be requested and this not paid back. Hence risk grows over time. Hence Big Ben had far more skin in the game than he’d like us to think.
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Then they implement one of two things.
[...] BERNANKE’S OBFUSCATION CONTINUES: The Fed’s $29 Trillion Bail-out of Wall Street By L. Randall Wray – Economonitor.com Since the global financial crisis began in 2007, Chairman Bernanke has striven to save Wall Street’s biggest banks while concealing his actions from Congress by a thick veil of secrecy. It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get him to finally release much of the information surrounding the Fed’s actions. Since that release, there have been several reports that tallied up the Fed’s largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion. On December 8, Bernanke struck back with a highly misleading and factually incorrect memo countering Bloomberg’s report. Bloomberg has—to my mind—completely vindicated its analysis; [...]
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