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Secret Fed Loans

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November 29, 2011 – Comments (7) | RELATED TICKERS: JPM , BAC , C

http://www.bloomberg.com/news/2011-11-28/secret-fed-loans......

 

An article that was published by Bloomberg two days ago is certainly raising some eyebrows with its detailing of the epic lengths the Federal Reserve went to in order to stave off financial calamity. Kudos to Bloomberg LP for pursuing a court case against the Federal Reserve and Clearing House Association LLC in order to pry this information from their hands and release it to the public. Two of the most astounding numbers:

 

$1.2 Trillion- The amount required by banks on their single neediest day, December 5, 2008.

$7.77 Trillion- The total amount the Federal Reserve committed to rescuing the financial system. Three 7's- a jackpot for the banks. 

 

Now, it should be mentioned that according to the Fed, almost all the loans have been repaid, they were backed by appropriate collateral to begin with, and there have been no losses. As  Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson, puts it, that the central bank didn't lose money should "lead to praise of the Fed, that they took this extraordinary step and they got it right." 

The fact that lawmakers knew of none of this obviously stirs up more anti-bank and anti-Fed sentiment, which is completely justified. People have even gone so far as to label the Fed as a "criminal enterprise," arguing that this was an abuse of taxpayer money. Understandably, taxpayers believe they should at the very least know where their taxpayer money is headed, and the simply incredulous number of $7.77 trillion initiates outrage and alarm among the general populace.

On the flip side, one could argue the secrecy of these loans was justified, for the fact that these funds weren't liable to political bickering and bureaucratic maneuvers was one of the main reasons it was so efficient. In other words, the medicine wouldn't be watered down and would be administered as quickly as possible to patients in dire need of the medicine. After all, we have all seen what happens when we leave economic affairs to our politicians (debt-ceiling, supercommittee, etc.) and the Federal Reserve definitely would have known that its $7.77 trillion commitment would have been taken hostage by politicians and outraged the public, complicating an intricate recovery process the Federal Reserve was trying to catalyze. Now, whether or not the sheer magnitude of these funds turned around the economy is another matter, but a part of me is somewhat consoled by the fact that at least some part of our government, especially an entity as vital as the Federal Reserve, isn't prone to constant Washingtonian politics and is instead committed to getting the job done. 

 

This is a classic case of a tradeoff between two entities that seem to have become increasingly antagonistic in our contemporary society: The tradeoff between efficiency and transparency. Obviously, the Federal Reserve veered toward the desire for efficiency, and, considering the dire economic problems at the time, I honestly can't blame it for its actions. The alternatives could have very easily been exponentially worse. Yet, the Federal Reserve shouldn't be congratulated either. The dealings were, simply put, shady. 

 

Thoughts? 



7 Comments – Post Your Own

#1) On November 29, 2011 at 11:26 PM, dbjella (< 20) wrote:

Where did the Fed get the 7.77?

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#2) On November 30, 2011 at 11:37 AM, 4everlost (29.61) wrote:

What happened to the 7.77 after it was repaid?

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#3) On November 30, 2011 at 1:10 PM, L0RDZ (78.57) wrote:

Just throw a billion my way and its all good...

sighs...

 

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#4) On November 30, 2011 at 3:40 PM, leohaas (31.21) wrote:

Be thankful the Federal Reserve did this. It was instrumental in avoiding a total collapse of the financial system. Had it not for this action, we'd be in the stone age right now, economically speaking. You are absolutely right to quote of Mr. Swagel on this: "...lead to praise of the Fed, that they took this extraordinary step and they got it right."

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#5) On November 30, 2011 at 4:04 PM, PeteysTired (< 20) wrote:

Be thankful the Federal Reserve did this. It was instrumental in avoiding a total collapse of the financial system. Had it not for this action, we'd be in the stone age right now, economically speaking.

How do you know this?

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#6) On November 30, 2011 at 5:12 PM, miteycasey (30.20) wrote:

@#3 just become CEO of a bank.

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#7) On November 30, 2011 at 5:37 PM, OneLegged (< 20) wrote:

Yep, be thankful for the Fed's actions.  Now everything is OK and we will all walk happily into the sunset.  Piling on debt to solve a problem of too much debt while robbing future generations.  Not gonna work.  Ever. 

 Next eventual stop:  The stone age.  All aboard!

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