On Sunday evening, Bloomberg News published a
story that confirmed the worst suspicions of bailout critics.
The article revealed that trillions of dollars of emergency loans
the Federal Reserve disbursed during financial crisis went to the
biggest banks, ultimately providing firms then on the edge of
collapse with a $13 billion profit. According to Bloomberg, the
Federal Reserve’s total emergency commitments to big banks like
Goldman Sachs and Morgan Stanley number $7.7 trillion when the
previously unknown loans are taken into account.
Bloomberg’s expose makes it clear, three years afterward, that
the infamous Troubled Asset Relief Program (TARP), which divided
the country and ignited at least one mass protest movement (if not
two), was never more than a sideshow when compared to the bailouts
authorized by the Fed. TARP only allocated $700 billion for
bailouts, and a significant portion of those funds were never
used.
The Bloomberg story, reported by Bob Ivry, Bradley Keoun, and
Phil Kuntz, needs no editorializing, because the facts alone are
damning. The article notes that banks like Citigroup and Bank of
America would have had less success lobbying against regulations
limiting their rent-seeking activities had the public and Congress
known that only trillions of dollars in Fed loans kept them afloat.
There is little doubt that, as the authors conclude, “taxpayers
paid a price beyond dollars as the secret funding helped preserve a
broken status quo and enabled the biggest banks to grow even
bigger.”
The Fed’s various emergency lending programs, TARP, and the
other bailouts undertaken by the government, together, saved the
banking system but shortchanged the broader public. That was
apparent well before Bloomberg uncovered this latest information,
which only reveals the full scope of the swindle.
Perhaps the most amazing aspect of the story is that the
emergency loan data ever saw the light of day. It
wasn’t an easy process. Bloomberg originally
tried to obtain information pertaining to bailouts through a
Freedom of Information Act request. When the Federal Reserve and
banks fought against fulfilling the request, Bloomberg took the
matter all the way to the Supreme Court, which finally denied a
financial industry appeal to keep the relevant documents out of the
public eye earlier this year. Bloomberg then quietly began sifting
through the paperwork.
Bloomberg’s struggle to publish the data is merely the latest in
a longstanding debate over central bank transparency. Although the
Fed’s secrecy invites all sorts of conspiracy theorizing about the
motivations of its chairman and members, there is a simple, boring
reason the Fed doesn’t want its emergency lending made public. The
idea is that the Fed is supposed to serve as the “lender of last
resort” for firms that are solvent but are having liquidity
trouble. If word gets out that a bank is borrowing from the Fed’s
discount
window, that could lead to further runs on the bank,
exacerbating the liquidity problem the Fed was trying to solve.
The stigma that could accompany discount window lending is a
legitimate reason for Fed opaqueness, and one that the chairman and
board take seriously. Against it, though, must be weighed the costs
of secrecy. Concerns about the power of certain banks relative to
other institutions and rewarding failed executives don’t enter into
the Fed’s calculations, even though they are of increasing
importance to taxpayers and the public. There is a mismatch between
the priorities of taxpayers trying to guard against bailouts and
those of the Fed, which is obligated by law to focus on the
stability of the financial sector.
In light of all that we’ve learned since the financial crisis,
though, it seems obvious that the public was poorly served by
legislators knowing none of the information available to the bank
CEOs lobbying them when the regulation of the financial sector was
under review. The lesson contained in the Bloomberg story is that
the sooner and more fully the activities of the Fed are disclosed
to the public, the better.
In other words, the news that the Fed kept significant,
economy-altering bailouts secret largely vindicates the
much-derided outsider efforts to audit the Fed.
Auditing the Fed has been a hobbyhorse of, among others, Rep.
Ron Paul, who would like to see the Fed abolished outright. Over
the course of the past few years, the idea of auditing the Fed has
progressed from being perceived as wild-eyed crazy talk to becoming
a bipartisan platform plank, with respectable legislators from both
parties favoring a full accounting of the Fed’s lending. Eventually
a weak version of Ron Paul’s bill to audit the Fed was passed as
part of the Dodd-Frank financial regulation bill.
The General Accountability Office performed and wrote up the audit
mandated by Dodd-Frank in due course, and the report kicked up
significant media attention and provoked outrage over some of the
Fed’s more ethically dubious loans. Yet the GAO report only covered
certain of the Fed’s emergency lending programs, and not all the
lending authorized through the discount window, which is the oldest
and largest program of all.
In the meantime, Paul, who had ultimately criticized the audit
included in Dodd-Frank as ineffective, reintroduced his original
“audit the Fed” measure in the House, where it now has 183
cosponsors, and his son Rand Paul did the same in the Senate. Had
the original “audit the Fed” bill been in place prior to
Dodd-Frank, voters would have known about all of the loans banks
got from the Fed, and the outcome of that legislative battle would
have been far different.
As much as we hesitate to second-guess the warnings of experts
and veterans, this is an instance in which the outsider critique,
previously criticized as unrealistic, reactionary, and mob-like,
was in fact underappreciated. With the news that the full extent of
the government’s aid to troubled banks far exceeded what the public
understood it to be at a critical juncture, it’s worth reflecting
on the prescience of the outsiders’ warnings.
Update: Apologies for originally posting this with some
editing marks still included.
