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Home Publications Blogs Beat the Press The Fed Tries to Confuse the Record in Battle with Bloomberg

The Fed Tries to Confuse the Record in Battle with Bloomberg

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Wednesday, 07 December 2011 05:47

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.

Comments (8)Add Comment
Banks Submitted to Pressure of Loan Coercion or Be Nationalized, Low-rated comment [Show]
The Bailout
written by bakho, December 07, 2011 8:12
The Bailout had perverse incentives because it rewarded bad behavior on the part of the financial institutions. Those were the terms that Paulson, the Secretary of Treasury, gave to the Banks after Congress modified his original proposal which was even a worse deal for taxpayers.

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.
INEQUALITY SOLUTION
written by clarence achmed swinney, December 07, 2011 11:58
KISS= A B C
A. Fed fund election—6 months-3 primary 3 general
Free equal tv time—one debate Each week=12=adequate to evaluate candidates
candidates use no money or anything of value

B. Congress + White House can accept nothing of Value=O=Zero
bye bye K street—hello Main Street-welcome to your White House

C. Progressive Flat Tax—burn Tax Book-start anew—this gets an additional 2000B of Revenue and balances our books. Tax enough + Cut Spend enough-- to pay off our 15,.000B of Debt

KISS KEEP IT SIMPLE SWINNEY you dummy
clarence swinney political historian Lifeaholics Of America
CI. mad mad mad at Inequality in America
DEEP HOLE WHO DUG IT?
written by clarence achmed swinney, December 07, 2011 12:05
Clinton to Bush to Obama
Who Dug the Deep Hole? Who Fumbled the ball?
Numbers rounded

Clinton left Bush an 1800B Budget
Bush Left Obama a 3500 Budget

Clinton left Bush a 240B Surplus as far as the eye can see
Bush left Obama a 1400B Deficit as far as the eye can see

Clinton left Bush 5,700B of Debt
Bush left Obama 11,800B of Debt

Clinton left Bush a 237,000 net new jobs created per month
Bush left Obama a 31,000 lowest number since Hoover.

Clinton left Bush 17 Million Manufacturing Jobs
Bush left Obama 11 Million Manufacturing Jobs

Clinton left Bush a 10,800 Dow
Bush left Obama an 8028 Dow

Clinton left Bush Peace on Earth Good Will From Most Men
Bush left Obama Hell on Earth Two disastrous wars. Enmity of 1500 Million Muslims

Clinton left Bush a President most highly rated of any peacetime President in Asia, Africa, Europe.
Bush left Obama the most hated President in history
Bush left Obama an Housing Tsunami and Financial Volcano
Bush left Obama, in 2008, an 8500B Bail out commitment Yes! 8500 not just 700
Bush left Obama his Takeover of Fannie/Freddie, AIG, and first bailout of Chrysler
Bush increased maximum loan by Fannie/Freddie from $300,000 to $729,000
Bush increased FDIC maximum deposit coverage from $100,000 to $250,000
 clarence swinney--political historian--lifeaholics of america burlington nc
author-Lifeaholic--Life story of Workaholic failure to Lifeaholic success
Best seller list in haw river nc population 200 and growing
comments welcome at cswinney2@triad.rr.com facts -numbers not opinion
take deep breaths
written by frankenduf, December 07, 2011 1:54
yo clarence achmed swinney- i know that last post is probably intended to be somewhat humorous, but i gotta keep it real- clinton enacted nafta and dismantled glass-steagall- and obama's expansion of bombing brown people (especially despicably using drones) may earn him a nobel peace prize (truth more cynical than cynicism), but no score of points over w
...
written by Union Member, December 07, 2011 6:28
Bernanke's strenuous opposition to the release of data on the bailout programs and the government's unwillingness to impose a price on extending credit to the banks at below market rates might make it more difficult for the Fed's blissful tolerance of high unemployment and Washington's joyous austerity measures.

And, if Bernanke ran a more open (i. e. transparent) Fed, would it strip Mario Draghi of his excuses in Europe?
What's up with the 10 yr & Bloomberg?
written by bailey, December 08, 2011 10:48
Any idea why Bloomberg Web site has stopped displaying the UST 10 year yields? Are we no longer supposed to care about what investors think about our long term risk prospects? (DB, this one is not retorical.)
deep hole, past is prolog. Reread db, HE was there, and on the right side!
written by bailey, December 08, 2011 10:58
It takes the street a while to clean their book. Make no mistake, Clinton BURIED US! Boskin cpi adj., repeal of glass-steagall w/o updating regs., dot.com, media conglomeration - ALL DISASTROUS moves for all of us.

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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.

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