August 24, 2011
Gooses, Ganders, and the Many Facets of Monetary Policy
Bloomberg reports that the Fed gave $1.2 trillion in "secret loans" to the largest banks in the United States and around the world. Bloomberg provides a cool liquidity chart here, that allows comparisons of the borrowers and their peak amounts borrowed.
I share frustration that, during the crisis, massive loans were available to the largest borrowers, while small businesses and individuals who posed reasonable credit risks were shut out of the loan market. And just because the Fed's massive loan program appears to have served its purpose without any significant harm to taxpayers, it doesn't mean that it was a risk-free endeavor. Still, I'm of a mixed mind as to whether its a good idea to ensure the Fed can't make such loans.
Adding to the current sense of foreboding, at least for me, is the fact that the Federal Reserve, which rode to the rescue last time, is legally constrained by provisions of Dodd-Frank legislation little recognized outside the world of regulators and financial techies. Back in 2007, the Fed could invent programs to bail out solvent but illiquid institutions. It could also turn investment banks like Goldman Sachs and Morgan Stanley (MS) into bank holding companies with access to unlimited Fed funding -- and even infuse cash into nonbank basket case AIG (AIG) directly and indirectly to forestall an uncontrolled collapse, which could have made the Lehman Brothers disaster look like a mere rounding error.
Sometimes, banks, businesses, and individuals are solvent, but not liquid, and access to credit is the only thing that can keep the banks, businesses, or individuals from going under. We see this at the largest banks, as the Fed program seems to demonstrate, and we see it at the individual consumer level, where there is some indication that restricted access to expensive payday lending can have a negative impact on consumers. (Zinman, 2008)
At a minimum, this is another instance where it is not clear to me whether the large government bailout (or bailout-like) program is the problem, though I remain skeptical of the bailout programs. What is clear to me is that the implementation of the program for only the largest and most powerful among us again creates an inequity that warrants questioning. As the Bloomberg report explains: "$1.2 trillion of public money [is] about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages."
There is clearly some interest in shutting down the Fed's (and government's) ability to make large loans and expenditures. Maybe that's right, but I happen to like the idea that the government can choose to help in the face of disasters, whether they are financial or natural disasters. (Note that I maintain my view that government does a terrible job of planning for and mitgating such diasasters, but that's a different matter.) I just want government to make good choices and to recognize that's what's good for the very wealthy goose, may also be good for the very modest gander.