The Fed's 'Secret' $1.2 Trillion Bailout of Wall Street

More

It's a bad time to be a central banker. The Federal Reserve faces heat from the left for printing too little money, while members of the right float treason accusations for the printing of too much money. Meanwhile in Europe, the ECB stands charged of dithering on Greece's debt crisis and allowing a contagion of declining confidence to spread all the way to French and German banks.

For perspective, it's worth remembering that in the darkest days of the Great Recession, the U.S. central bank had perhaps its finest hour. By increasing its balance sheet to more than 25 times its previous record, the Federal Reserve was the first and last resort for liquidity for national and international banks when the mortgage crisis all but shut down private lending.

Bloomberg reporters Bradley Keoun and Phil Kuntz catalog the Fed's $1.2 trillion in "secret loans" to banks, including Bank of America, JPMorgan, and Goldman Sachs. Morgan Stanley accepted as much as $107 billion, with Citigroup and Bank of America taking more than $90 billion each in public money to finance their operations amid the private lending freeze. A beautiful interactive chart provided by Bloomberg lets you watch the bank's loans pile up in the nadir of the credit crunch, September 2008, and wind down through 2009.

bloomberg comparison.png
The juiciest nugget you're most likely to hear from cable news tonight is that the Fed's secret bailout comes out to the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The progressive take on this story will be that the Fed has preferenced Wall Street over Main Street by using its exceptional authority to extend trillions in loans to banks without offering similar guarantees to underwater home owners.

The Fed might respond by pointing out the difference between solvency and liquidity. Liquidity is about cash flow. Solvency is about the ability to pay back debts. In 2008, the banks had no access to private lending. This was a liquidity crisis. The Fed guessed that with access to federal lending, they would survive. So far, the bet paid off. The Fed claims their emergency programs yielded "no credit losses."

Meanwhile, millions of homeowners have lost their source of income. They've seen their wages decline, as they fall behind on their mortgage payments. This doesn't offer a similar opportunity for the Federal Reserve to recoup loans -- and certainly not over a 24-month time frame. It's more like a solvency problem. If homeowners' salaries don't match their debts, they don't need another loan so much as a cash transfer. The Fed's only option is to seek higher inflation to reduce the value of their debts.

Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

What's the Number One Thing We Could Do to Improve City Life?

A group of journalists, professors, and non-profit leaders predict the future of livable, walkable cities


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In