December 5, 2011

The Fed's $7 Trillion Secret Loan Program

Eliot Spitzer, writing for Slate:

“The total numbers are staggering: $7.7 trillion of credit—one-half of the GDP of the entire nation. $460 billion was lent to J.P. Morgan, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley alone—without anybody other than a few select officials at the Fed and the Treasury knowing. This was perhaps the single most massive allocation of capital from public to private hands in our history, and nobody was told.”

(Via DF.)

Never underestimate the willingness of a government, or an independent central bank, to do everything necessary to preserve its life. Or preserve the way of life of its nation.

This is going to boil over into a major scandal. There will be public hearings. There will be sworn testimony. Bank executives who claimed to shareholders that their institutions were solvent may be sued by those shareholders, and prosecuted by the Securities and Exchange Commission. But that’s about it.

The US Federal Reserve, our independent central bank, has a twin mandate: maintain price stability (fight inflation and deflation) and promote employment. There are few rules as to what that institution may not do to accomplish that mandate.

The Fed possesses the power to print money, unfettered by Congress. That’s generally considered to be a Good Thing, because otherwise a Congress exercising superior lawful powers could use the Fed to fund runaway spending in unlimited fashion, debasing the currency and causing hyperinflation.

So the Fed printed money and lent it at below-market rates to institutions that, should they have failed, would have caused the downfall of the US economic system, and the world’s. That they didn’t pause in that moment of crisis to condition the loans on firing this executive, or stopping that financial practice, seems beside the point of why they acted.