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Bloomberg has done some outstanding reporting over the last few years on the Federal Reserve Board's bailout of the financial sector. Much more money went through the Fed's special lending facilities than went through the TARP program that was approved by Congress.
Bloomberg's reporters have taken the lead both in pressing the Fed to release data on its bailout programs and also in publicizing the numbers when they were released. They even sued the Fed (successfully) to force it to release data on the beneficiaries of lending through the discount window. The Fed has resisted the release of information about its programs, claiming that it would make it more difficult for it carry through bailout programs and monetary policy.
Yesterday Fed chairman Ben Bernanke attacked Bloomberg claiming that its reporting was misleading. It looks like the Fed missed the mark on just about every issue.
Perhaps the most important issue is the Fed's claim that it did not lend at a below-market rate to banks, thereby effectively giving them a subsidy. In fact, it is almost definitional that the rate did provide a subsidy.
No one forced the banks to borrow from the Fed. If they had better options, they would have borrowed elsewhere. Instead the Fed made large amounts of money available to banks at a time when liquidity carried an enormous premium. This meant that the banks could relend the government's money to others and earn a substantial profit.
This lending may have been justified to stem the financial crisis, but in principle the government could have imposed conditions (e.g. real caps on executive pay, downsizing the too-big-to-fail banks, modifying mortgages) on the banks as the price of getting access to credit at below-market rates. Bernanke and Congress did not seek to impose such conditions.
Given Bernanke's strenuous opposition to the release of data on the bailout programs it would be interesting to know if he now feels that it is more difficult for the Fed to conduct monetary policy.
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That said, there ARE errors in the Bloomberg report. James Hamilton actually talked to Bloomberg Reporters and gets at some of the source of their error:
"Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system.
I contacted the reporters who prepared the Bloomberg story to try to learn some more details. They communicated to me that those who claim that the Fed provided $7.77 trillion in secret loans to banks have misinterpreted their article. Specifically, they clarified that the $7.77 trillion number was not intended to represent loans the Fed actually made, but instead refers to loans it potentially might have made, that the number refers not to loans to banks but to the broader financial sector, and that Bloomberg's use of the term "secret" in describing these loans refers not to the total amount but instead to the specific identities of the recipients."
Hamilton points out the fallacy in Bloomberg accounting:
"Let me begin with some accounting basics. Suppose that at the start of January I make a 3-month loan of $100 to person A and a 1-month loan of $100 to person B. At the start of February, person B rolls it over into a new 1-month loan, and does so again at the beginning of March. On the first day of April, person A and person B both repay me the original $100. So, students, here's your question: how much did I lend to person A, and how much did I lend to person B?"
http://www.econbrowser.com/archives/2011/12/777_trillion_in.html
The problem is NOT the AMOUNT of money that the Fed committed. The problem was the details of how it was committed and the perverse incentives that were passed along. Bloomberg got the amounts wrong, but we should still be incensed by the terms of the deal, not its total amount.