Author: L. Randall Wray
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
||Percent of total
|Term Auction Facility
|Central Bank Liquidity Swaps
|Single Tranche Open Market Operation
|Terms Securities Lending Facility and Term Options Program
|Bear Stearns Bridge Loan
|Maiden Lane I
|Primary Dealer Credit Facility
|Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
|Commercial Paper Funding Facility
|Term Asset-Backed Securities Loan Facility
|Agency Mortgage-Backed Security Purchase Program
|AIG Revolving Credit Facility
|AIG Securities Borrowing Facility
|Maiden Lane II
|Maiden Lane III
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”.