The Federal Reserve made money for the public on the $2 trillion loaned to failing banks in the last two years. As reported in Foreign Policy, the Fed earned $19bn in income from charging interest on its loans to the banks since august 2007. This is $14 billion more than it would have normally earned if it had left the funds in T-bills.
Professor Daniel Drezner said,
In essence, the U.S. Federal Reserve has acted like the Mother of All Sovereign Wealth Funds for the past two years. It placed a huge bet that most financial assets were being radically undervalued during the Great Panic last fall. That bet appears to have paid off handsomely. Oh, and the complete and utter collapse of the financial system was averted.
As of a July poll, the Fed has a 30% approval rating. No doubt it is lower now. As put by Prof. Drezner,
When your agency is less popular than the federal institutions responsible for torture enhanced interrogation techniques, tax audits, and the requirement that you take your shoes off at the airport, you know you have a public image problem.
The Fed has become a magnet for all the frustration and anger people feel, and rightly so, for bad bank behavior. Years of deregulation allowed banks to act like hedge funds, making risky investments with depositors' funds. These banks are still not making loans as they should. The truly scary thing is, as one commentator to yesterday's blog observed, its because they can't. They don't have the funds. They are still loaded up with toxic debt. Bashing the Fed won't solve that problem. Tomorrow I'll discuss what will.
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Photo: Federal Reserve Chairman Ben Bernanke (Credit: Getty Images)
Comments
Erm. Wisely invested? Trillions of dollars down the rate hole and you call that wisely invested?
How was the AIG 200 billion (so far) wisely invested?
How about Citigroup? This is the biggest transfer of wealth from poor to rich in history. Better to let the banks fail and give each American the bailout money. You’d have plenty of new, safe banks then.
We have effectively borrowed money from China to give to me to spend and make my daughter pay it back with interest. How does this make any sense at all?
Tim
Why can’t you understand that “too big to fail” is a stupid philosophy?
Why can’t you understand that secrecy in government leads to corruption?
Why can’t you understand that governments, like people must live within their means?
Why can’t you understand that rights come from intangible things like life, liberty, free speech, freedom of religion, etc. Rights which require the services of others, such as education, medical care, social security, etc are not rights, but government programs which require payment by the rest of us.
Why can’t you understand that people like Ted Kennedy who lived a life of luxury and debauchery leading to the death of a girl during a tryst while he was married, are not heroes. He used every expensive experimental drug and doctor to stay alive for his last 15 months – something that the Obama Health Care Bill will not provide for us, yet you want to use his name to push it through.
As I like to say, many people are educated beyond their intellect. Get some common sense. Audit the Fed. Audit Bernie Madoff – whoops, you honorable people squashed that attempt years ago, even in the face of several warnings from a whistle blower. He had common sense, but he was from the “unwashed” as you consider people like us.
But I do have a college degree in engineering from one of the top colleges in America and also a Masters Degree in Business from CMU. But I decided to retain my common sense.
Nice statistics, but is FED contributing to overcome financial crisis? Mr. Stieglitz (Nobel Prize in economics) suggest to fire Bernanke, I agree with him.
What do you think Kimberly?
Thanks for your answer!
If the Fed had not pumped liquidity into the financial system since August 2007, AIG certainly would have failed, causing bankruptcies of hundreds of companies globally who relied on the credit default swaps it sold. Many banks, large and small, probably would have folded as well.
We would certainly now be in another Great Depression without Fed intervention.
Kimberly