Posts Tagged ‘Federal Reserve Board bailout’

The secret $1.2 trillion bank bailout

August 23, 2011

The prevailing wisdom in Washington and on Wall Street is that creating jobs, rebuilding the nation’s infrastructure and even maintaining basic government services is unaffordable.  Yet the Federal Reserve System was able to come up with $1.2 trillion to bail out failing banks and financial institutions.

This information was kept secret until Bloomberg Business News pried it loose a few days ago.  To get the information, Bloomberg needed the Freedom of Information Act, lawsuits that went to the Supreme Court and an act of Congress.

The size of the bailout boggles the mind.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages.  … …

The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.

via Bloomberg.

The Federal Reserve Board’s justification for the bailout, according to Bloomberg, is that the bailout was necessary to prevent the collapse of the financial system, that the loans were (mostly but not always) at above-market interest rates, that they were (mostly but not always) backed by adequate collateral, and that the loans were paid back.

I agree it was necessary for the Fed to act to prevent the banking and financial industry from collapsing.  There would have been a domino effect that would have spread through the whole economy, as in the bank failures of earlier eras.  But the rescue should have been like the rescue of General Motors and Chrysler.

In the auto industry rescue, government help was conditioned on getting rid of the incompetent managers who’d caused the problem, letting the stockholders and bondholders take a loss and restructuring the companies so they will be on a sounder footing in the future.

In contrast, the bank bailouts protected the jobs and bonuses of top management, shielded stockholders from loss and allowed a continuation of everything that led to the problem in the first place.