Trillion Dollar Bailouts Equal Crony Capitalism
The Federal Reserve was supposed to be a lender of last resort, not an ATM for Wall Street.
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TAF was designed so that commercial banks could borrow from the Fed anonymously and avoid the negative stigma that came with publicly borrowing from the “discount window” (the Fed’s traditional source of credit for banks). This amounts to a tacit devaluing of truth in the marketplace, favoring asymmetric information that misdirects the use of capital (I'll leave that discussion for a separate article). Over a 27-month period ending in March of 2010, the Fed lent out $3.8 trillion through TAF. This money was spread out over 4,000 different loans, with terms ranging from 13 days to 85 days, and with most institutions borrowing more than once from the program.
For 85 percent of program, the Fed lent at rates below the “discount window primary rate”—the market measure for what banks would normally borrow. If the Fed were charging a penalty, it would be charging at least the primary rate plus an additional amount.
Contrary to Bernanke’s statement that most were charged a penalty rate, most were actually underpriced loans. The ultimate result was the Federal Reserve lending to unsound institutions, against poor collateral, and with no penalty—i.e., giving money away for free to the Fed’s closest friends.
The Fed effectively put aside any concerns for moral hazard with its actions, and instead focused on short-term aims over long-term negative consequences. The result has been an outrageous carry trade, with some financial institutions taking in virtually free money, buying Treasuries that yield about 3 percent (lending it back to the government that just gave it to them), and banking the difference. Bloomberg estimates that banks have made about $13 billion from this, which those banks have then used to pay large compensation packages.
Lending to everyone, accepting whatever is available as collateral, subsidizing the entire operation, and ensuring that financial players suffer no consequences for their own foolish actions is not the free market at work. When the Occupy Wall Street crowd complains about illicit gains, this is the source of their anger. We have a crony capitalist system and the government is doing everything in its power to avoid changing it.
Anthony Randazzo is director of economic research at the Reason Foundation.
Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.
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"The Fed went ahead and also violated this tenant..."
Violating tenants is just another perk of being a landlord.
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Droit du seigneur FTW.
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Bernanke would do anything to not be remembered as the guy that caused or worsened the second Great Depression, especially as he made his name as a student of the first.
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If I were him, I'd be more worried about not being remembered as the asshole that got clubbed to death by a mob on the steps of the Fed!
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Which party fiddled while the world economy burned? Oh yeah the GOP.
NEVER FORGET-- This was GEORGE BUSH's bailout. Fannie, Freddie & the US auto makers were taken over by GEORGE BUSH's administration.
And we followed GEORGE BUSH with BARACK OBAMA who is the #1 recipient of Wall Street contributions ever and who stacked his adminstration with bigtime Wall St players.
Anyone with half a brain should come to the same conclusion -- ANY vote for ANY Republican or ANY Democrat is a vote FOR the status quo.
DOWN WITH ALL POLITICAL PARTIES
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What you said.
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Ya don't say.
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He said the Bernanke does ATM for Wall Street. Cool.
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"The Federal Reserve is supposed to be a lender"
I disagree.
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What a dishonest article.
The Fed relaxed its collateral from US Treasuries to investment grade corporate bonds - BFD.
And $13 billion in "penalty rate" lost opportunity? So what? Such are not actual losses, they are merely unrealized gains. The Fed poured $125 billion of its emergency profits into the Treasury during this time at no expense to the taxpayer.
Most of these loans were a duration of days - not weeks or months. and the story ignores the Commercial Paper facility which made McDonald' payroll - among others. The $2 trillion CP market vanished in Nov 2008.
The $7,7 trillion reported by Bloomberg is a joke. A billion dollar loan rolled over for a month is accrued as a $30 billion loan. The numbers are bogus.
LLR is a modern monetary policy - too bad the goldbugs of 1870 can't see that.
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What you say is accurate Shrike. Consider the metaphor, "When the tide goes out, you see who was swimming naked."
The Fed basicly loaned these insutions pants, until they could find more.
The problem is that the banks should have been punished by the market for swimming naked, and they weren't. With the Fed's help they are back to boom-times.
At the least, it is moral hazard. -
Don't talk sense to them, they might realize how little their precious Mises and Hayek have to do with modern finance theory. Seriously guys, whatever moral hazard you wish happened to the banks would have come at an even greater expense than what has already passed. At least the economy has a (small) chance now.
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There is no evidence to support that claptrap. NONE.
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Nuh-uh!
Mein Fuhrer Obama says it to be true so it must be so!
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Foretelling the past, Beavis?
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You mean to tell me that good business practices should never occur because we can always lend. Somehow this whole mess had to be planned by the oligarchs and their cohorts. No one with any business sense can say they did not see it coming!
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A Trillion here, a Trillion there, pretty soon you are talking about real money.
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Kinda of like how Stalin felt about people...
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You know, if we allow competing currencies to be used and are not forced to accept fed notes as "legal tender" it'd be interesting just to see how few people would use it. Then again, that's what you get when your currency is backed by magic and witchcraft.
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I thought it was voodoo and virgin sacrifice?
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Can we all at LEAST come together and agree that we all hate thread bots?
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Hey, it's PornBot 69000! Welcome back, PornBot.
You've told us about Valerie's long legs and beautiful features, but what we really need to know is whether she'll give us the Ben Bernanke treatment...
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The Ben Bernanke Special?
Even an old sea dog like me finds that level of "Ouchie Sex" to be disquieting...
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she will
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well
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Goody! Saturday morning funnies!
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Here is a similar article from the European perspective:
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Konata has come to us from what could be almost another world. We know of the Japanese tradition. The girl-woman seems so quiet and almost timid. Very eager to please and very submissive.
Get ready for a big surprise. Konata is all this but much more. This giggling girl with a fondness for fizzy sodas has her big secret and it's just come out.
Konata thinks about nothing but sex. Whatever way, whenever is her style. Most of all being in front of the camera - to show off her perfect breasts and milky skin - is what turns her on.
Right now she has a glorious black bush. Catch it now before she tries something new with that as well.
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Bernanke was doing what Milton Friedman argued the Federal Reserve should have done during the Great Depression. I don't like the idea of such bailouts because it doesn't solve the underlying problem and it doesn't punish those involved, however, even libertarian economists will agree that the Fed's action saved us from a great depression. Even the nobel winning libertarian experimental economist, Vernon Smith, agreed that the Fed's action saved us from another depression during his interview with Nick Gillespie.
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But in front of the camera there are no secrets. Everything is laid bare.
Those famous Ukrainian looks and figure come to perfection in Nicole. From her amazing long legs to her raven hair - and everywhere in between - she excels.
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I'm not sure that the first, rather delicate, way that this was pointed out made its message clear enough, so here goes.
The word you are looking for is "tenet" as in "tenets of belief." A "tenant" is one who rents or leases real property, typically housing or agricultural land. I hope this error didn't make it into print.
