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.
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.