Yesterday, Fed chairman Ben Bernanke sent a letter to members of Congress complaining about "egregious errors and mistakes" made in recent news accounts of the Fed's emergency loan programs. He didn't explicitly mention Bloomberg, which has run several important stories on the topic in the past few days, but almost certainly his letter referred to their reporting. Bernanke charged that, among other things, Bloomberg was wrong to describe certain Fed loans as "secret" and to claim that total lending was $7.7 trillion, when the real number was significantly lower.
Bloomberg responded by standing by their original story and publishing a note rebutting each of Bernanke's criticisms. It acknowledged that the amount loaned to banks by the Fed peaked at $1.2 trillion, as opposed to $7.7 trillion, which Bloomberg reported was the upper limit for funds that could have been committed but weren't. More significantly, Bloomberg stood by its assertion that the details of the Fed's emergency programs were not made known to members of Congress, referencing congressmen who insisted they hadn't been briefed on the loans.
Bloomberg's reporting is even more impressive in light of this back-and-forth. The key issue is not whether the programs totaled $1.2 or $7.7 trillion, but whether or not the Fed acted with undue secrecy in keeping big banks from facing bankruptcy. The answer is that it did -- not as part of some conspiracy or plot against the public, but merely as an honest mistake.
Because the Fed propped up banks like Citigroup and Goldman Sachs, those banks and their executives were able to shape the outcomes of the following battles over policies like the administration of TARP, the stimulus package, and financial regulation to their benefit. That the banks had to be given emergency assistance isn't the fault of the Fed officials making decisions in late 2008 -- the crisis, at that point, had been inevitable for a long time and a bailout of some kind was necessary to prevent a much worse scenario. Nevertheless, the public deserved to know why the financial market was being distorted to the advantage of the banks.
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