Today’s Washington Post article, “Secret, low-interest loans from Federal Reserve helped banks reap $13 billion in income,” is myopic and misleading.
Let’s travel back in time to fall of 2008. Top headlines were: “Stocks Drop Sharply and Credit Markets Seize Up,” (New York Times); “Dow Plunges 680 Points as Recession Is Declared,” (New York Times), and; “Economic Signs Point to Longer, Deeper Recession,” (Washington Post). Financial markets were under severe strain and liquidity was not readily available to nearly any commercial or government entity except the Treasury.
One of the critical functions of the Federal Reserve is to provide liquidity to the financial markets through banks. On December 1, 2008, Federal Reserve Chairman Bernanke announced to the world that, “to ensure that adequate liquidity is available, consistent with the central bank’s traditional role as the liquidity provider of last resort, the Federal Reserve has taken a number of extraordinary steps…. For instance, to provide banks and other depositories easier access to liquidity, we narrowed the spread of the primary credit rate (the rate at which banks borrow from the Fed’s discount window) over the target federal funds rate from 100 basis points to 25 basis points.” Emergency action was widely supported at the time. In December 2008, Obama said at a press conference that he won’t “second-guess” the Fed, adding that with “traditional ammunition” running low, “it is critical that the other branches of government step up.”
And it was far from secret. On December 16, 2008, Bloomberg itself reported, “the moves had swelled the Fed’s balance sheet to $2.26 trillion from $868 billion in July 2007, in addition to the $700 billion Troubled Asset Relief Program, which the U.S. Treasury has used since October to channel about $335 billion of capital injections into banks and other financial companies.”
Had the Fed not taken action, banks would have had to dramatically curtail lending/credit and sell high quality securities – most likely U.S. Treasuries. This would have further depressed the economy and disrupted the financial markets.
Thus, to say as Bloomberg did, that the Federal Reserve extended secret loans, or that the rescue remained secret as Congress doled out even more money, or that big banks unfairly profited from restoring liquidity to the system, is just plain false.
The levels of lending outlined in the article were extraordinary for extraordinary times. As markets stabilized and liquidity was returned, banks, along with other commercial enterprises and government entities, were able to finance their activities normally. And big banks paid back the funding at no loss to the taxpayers.