An Appraisal of the Bailout – Part II

Economics Without The B.S.**: An Appraisal of the Bailout – Part II

[**  Double entendre intended.]

An Appraisal of the Bailout – Part II

          If you want to get an idea of just how serious the Financial Crisis of 2008 was and what it cost us I know of no better source than the Federal Reserve’s Report of December 1, 2010.

http://www.federalreserve.gov/newsevents/press/monetary/20101201a.htm

News reports which summarize the Fed Report:

http://www.nytimes.com/2010/12/02/business/economy/02fed.html?_r=0

https://www.wsj.com/articles/SB10001424052748703865004575649160241029520
https://www.wsj.com/articles/SB10001424052748704594804575648683678596728.

          If you are as old as me you can recall experts saying that the Fed is limited in actions in what it can do in the economy – mainly setting short-term interest rates by utilizing the Fed window for bank borrowing and setting bank reserve requirements (e.g., the discount rate and Fed funds rate, etc.).  Stanley Fischer, who was nominated by President Obama to be the next Vice Chair of the Federal Reserve with Janet Yellen and was one of Ben Bernanke’s instructors, has a text book on Macro-Economics which he co-authored and released a revised edition in 2007 before the outbreak of the Financial Crisis in 2008.  It is a text book that is a standard at many universities and details the role of central banking in rescuing the financial industry during times of crisis.  He and his co-authors had to release a newly revised edition just a couple of months ago as a result of his student’s extraordinary actions in 2008 and 2009.  Fischer himself ran the Central Bank of Israel recently for over ten years and previously served with the IMF and World Bank.

          So let’s take a look at what actions the Fed took.  21,000 transactions in all from December 2007 to July 2010.  $9 Trillion – that is not a typo; TRILLION with a ‘T’ – in all with not just leaving the Fed discount window wide open but a whole host of other measures never contemplated by previous chairmen.  There were days when over $1 Trillion was being loaned out, with the biggest day being December 5^th, 2008 for a total of $1.2 Trillion.

          The Fed used a variety of emergency actions for the bailout.  There were over $9 Trillion in emergency short-term loans, mainly using the Fed discount window.  Goldman-Sachs and Morgan Stanley were converted to bank holding companies so they could tap the Fed discount window.  And my links show, tap it they did quite liberally.  As the Bloomberg link points out, these loans are like no interest loans to these largest of financial institutions so they earn the interest rate on the Government treasuries that are purchased with the loan – earning $13 Billion on the trillions of dollars of short-term loans.  Loans provided by the Term Auction and Primary Dealer Credit facilities alone totaled nearly $13 Trillion.

          In addition to banks getting bailed out by the Fed, were investors – Fidelity, Black Rock, Merrill Lynch, T. Rowe Price, Oppenheimer, PIMCO, and CalPERS among others.  Non-bank companies got Fed bailouts – GE, Harley-Davidson, Caterpillar, McDonald’s, Verizon, as well as pension funds and insurers.  Although it is legal for our Fed to have exchanges with foreign central banks, it is not legal for our Fed to bailout foreign companies.  But that didn’t stop our Fed.  The December 1, 2010 report shows that our Fed lent to the central banks of Britain, Japan, Sweden, South Korea, Australia, Denmark, Mexico, Norway,  Switzerland, and the European Central Bank, in some cases so the foreign central bank could make the loan available to companies within their country.

          All of these constitute the bailout by our Fed, monetary policy by the Central Bank.  None of this includes fiscal policy by our Federal Government.  Under Bush we had a $700 Billion TARP-I.  Under Obama we had TARP-II for another $700 Billion.  In addition to Fed actions, we had the FDIC guaranteeing bank debt during the take-over/restructuring of banks that failed (over 100 I believe) and the AIG bailout/rescue along with GM and Chrysler.  ProPublica has a bailout tracker at https://projects.propublica.org/bailout/list.
          And talking about fiscal policy, and remembering from a previous post on the blog that the object in a financial crisis is not to constrict economic activity but to flood the market with liquidity, many of our state and local governments were doing just the reverse and were cutting spending and payrolls and trying to keep their budgets balanced while the Federal Government deficit grew from $400+ Billion to $1.1 Trillion just under Bush before he left office in January 20^th, 2009, four months after Lehman Brothers failed setting off the Financial Crisis.

          So to put some kind of perspective on the extent of the Crisis and what it took to fix it, remember right now we have some opposed to extending Unemployment Benefits to the long-term unemployed because of the costs – something just over $200 Billion since it was initiated in 2007, SNAP cuts of about $17 Billion over 10 years, food stamp cuts of $8 Billion over 10 years, and cuts to Vets of about $6 Billion over 10 years.  And I don’t even want to mention what it would take to fix Social Security or MediCare for comparison sake.

          Neither do I want to get into compensation on Wall Street or in the financial sector, the bonuses that went out in 2009, especially for the extraordinary skills displayed in “managing” a company through “The Crisis”.  I will mention that when J.P. Morgan, the person not the bank, rescued a company in the 19^th Century he fired the president of the bank and replaced the Board of Directors, all without compensation (or green mail).

          So like I mentioned in a previous post, if you are a small business in Topeka, Kansas and you cannot get a loan today that you could have secured a few years ago…Tada, Tada, Tada!