CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Fed Loans: Who Didn't Get Them?

Fed Loans: Who Didn't Get Them?

Thursday, 02 December 2010 04:56

The NYT and other papers reporting on the Fed's disclosure of information on the beneficiaries from loans in its special facilities includes the Fed's justification that the loans required collateral and the taxpayers were well protected. It would have been worth including some context here.

At the time the special facilities were at their peak, liquidity carried an enormous premium. The Fed was giving out money to banks, non-financial companies, and foreign central banks at interest rates far lower than those available in the private market at the time. This allowed the recipients to make large profits with this money at the time and in many cases kept the companies in business.

It is not surprising that the vast majority of this money was paid back, since the economy did not collapse. However, this does not mean that the loans did not involve a large public subsidy. It is comparable to giving water to people in the middle of a drought. When it rains again, we can easily get the water back with interest, but that doesn't change the fact that providing water in the drought to the folks like Citigroup and Morgan Stanley who got large amounts of it. 

Comments (5)Add Comment
written by izzatzo, December 02, 2010 8:44
However, this does not mean that the loans did not involve a large public subsidy.

Utter nonsense. It was not a subsidy. Any economist knows the standard game theory explanation.

The inter-bank loan rate shot up to force a high premium on liquidity because the banks did not trust each other. They could not determine the value of each other's collateral and thus required a very high risk premium before loaning to each other.

The Fed realized that collectively, the collateral was worth much more than the market valued it individually, and intervened to provide liquidity with low interest loans that rescued the economy by keeping credit flowing.

The banks knew that if they cooperated and refused to lend to each other, they would get a heavy discount from the Fed, and since no single bank defected, it worked. The Fed knew that if no bank defected, it - not the banks - would be blamed for economic disaster, so it caved in.

It's no different than a standard payday loan operation which doesn't depend on subsidies either. Borrowers pay back what they owe and not a penny more. Read Econ 101.
who didn't get them
written by ts, December 02, 2010 8:50
It's also worth noting that TARP loans and Fed emergency funding would have accomplished the same thing had they instead been provided to underwater homeowners to pay their mortgages while they were unemployed (TARP) and to cram down their mortgage balances to affordable levels (Fed).

This would have greatly sped up the adjustment from the bursting of the housing bubble and kept millions of people in their homes. Instead, the money went to banks who cut those borrowers off, threw them out of their homes and subsequently paid billions in bonuses to their employees.
written by Xelcho, December 02, 2010 10:07
While your comments seem to be on point your assertion that it was not a subsidy seems in congruent with the "game". The banks gamed the fed. The larger questions are why was this not debated in the media to aid the fed? Was the fed part of the game? It seems the only group who was gamed as the tax payers.
What about the Junk-level Collateral, i.e., the Fraud?
written by klepisch, December 02, 2010 10:15
Looking at the audit it looks these banks, in addition to receiving a public subsidy, were engaging in fraud. When they put up BB-level and CCC-level collateral--i.e., JUNK--to the tune of more than $4 trillion--to get our taxpayer dollars, at rates no citizen and few corporations would enjoy, something is seriously wrong. I mean, I can't claim that houses I don't own, or multiple Brooklyn Bridges I claim to hold title to, or my car that died 10 years ago are worth millions, just because I say so, to secure me loans I don't deserve, but these banks get to do this? On top of this, several of these banks--Merrill Lynch, Goldman Sachs, etc.--set up a London branch so that they could double-dip daily. Where is the outrage at this gaming of the system? And they got to give themselves billions of dollars in bonuses on top of this? A windfall profits tax, such as Senator Jim Webb proposed, should only be the starting point. Several of the people at the top of this fraud--Paulson, Geithner, Blankfein, Dimon, etc.--also need to be "frogmarched" right into a courthouse and indicted for theft, racketeering, and other crimes.
written by Jill, December 02, 2010 10:29
Mr. Baker,

Why did McDonalds and Harley Davidson get bailout money from the FED? It was said they needed to make payrolls but so did a million other companies, especially many small businesses. Will anyone explain that to me. Where they some kind of financial conduit like AIG?

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.