UPDATE:  to read the Working Paper (“$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient”) click here

Since the global financial crisis began in 2007, Chairman Bernanke has striven to save Wall Street’s biggest banks while concealing his actions from Congress by a thick veil of secrecy. It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get him to finally release much of the information surrounding the Fed’s actions. Since that release, there have been several reports that tallied up the Fed’s largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion. On December 8, Bernanke struck back with a highly misleading and factually incorrect memo countering Bloomberg’s report. Bloomberg has—to my mind—completely vindicated its analysis; see here.

Any fair-minded reader would conclude that Bernanke’s memo to Senators Johnson and Shelby and Representatives Bachus and Frank is misleading. One could even conclude that it is not just a veil of secrecy, but rather a fog of deceit that the Fed is trying to throw over Congress.

He argues that the sum total of the Fed’s lending was a mere $1.2 trillion, and that it was spread across financial and nonfinancial institutions of all sizes. Further, he asserts that the Fed never tried to hide the bail-outs from Congress. Both of these assertions fly in the face of the facts available (as the Bloomberg response makes clear).

As Bernanke notes, highly credible analyses of the bailout variously put the total at $7.77 trillion (Bloomberg) to $16 trillion (GAO) or even $24 trillion (I think this is Senator Bernie Sanders’ figure). He argues that these reports make “egregious errors,” in particular because they sum lending over time. He also claims that these high figures likely include Fed facilities that were never utilized. Finally, he asserts that the Fed’s bailout bears no relation to government spending, such as that undertaken by Treasury.

All of these assertions are at best misleading. If he really believes the last claim, then he apparently does not understand the true risks to which he exposed the Treasury as the Fed made the commitments.

There are a number of issues that must be understood. First, the Fed quibbles about the differences among lending, guarantees, and spending. For the purposes of this blog I will accept these differences and call the sum across the three “commitments.” In spite of what Bernanke claims, these do commit “Uncle Sam” since Fed losses will be absorbed by the Treasury. (The Fed pays profits to Treasury, so if its profits are hurt by losses, payments to Treasury are reduced. If the Fed should go insolvent, the Treasury will almost certainly be forced to recapitalize it.) I do, however, agree with the Chairman that a tally should not include facilities that were created but not utilized (there were several of them, and the tally I present below does not include any facilities that were not used).

Second, there are (at least) three different ways to measure the Fed’s bailout. One way would be to find the day on which the maximum outstanding Fed commitments was reached. According to the Fed, that appears to have been about $1.5 trillion sometime in December 2008. I’m willing to take Bernanke at his word. Another way would be to take the total of commitments made over a short period of time—say, a week or a month. That would be a measure of systemic distress and would help to identify the worst periods of the GFC (global financial crisis). Obviously, this will be a bigger number and will depend on the rate of turnover of Fed loans. For example, many of the loans were very short-term but were renewed. Bernanke argues that it is misleading to add up across revolving loans. Let us say that a bank borrows $1 million over night each day for a week. The total would be $7 million for the week. In a period of particular distress, the peak weekly or monthly lending would spike as many institutions would be forced to continually borrow from the Fed. Bernanke argues we should look only at the lending at a peak instant of time.

Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank. Bernanke would like us to believe that if the Fed newly lent a trillion bucks every day for 3 years to all our drunken bankers that we should total that as only a trillion greenbacks committed. Yes, that provides some useful information but it does not really measure the necessary intervention by the Fed into financial markets to save Wall Street.

And that leads to the final way to measure the Fed’s commitments to propping up our drunks on Wall Street: add up every single damned loan, guarantee and asset purchase the Fed made to benefit banks, banksters, real Housewives on Wall Street, fraudsters, and their cousins, aunts and uncles. This gives us the cumulative Fed commitments.

The final important consideration is to separate “normal” Fed actions from the “extraordinary” or “emergency” interventions undertaken because of the crisis. That is easier than it sounds. After the crisis began, the Fed created a large alphabet soup of special facilities designed to deal with the crisis. We can thus take each facility and calculate the three measures of the Fed’s commitments for each, then sum up for all the special facilities.

And that is precisely what Nicola Matthews and James Felkerson have done. They are PhD students at the University of Missouri-Kansas City, working on a Ford Foundation grant under my direction, titled “A Research And Policy Dialogue Project On Improving Governance Of The Government Safety Net In Financial Crisis.” To my knowledge it is the most complete and accurate accounting of the Fed’s bailout. Their results will be reported in a series of Working Papers at the Levy Economics Institute. The first one is titled $29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient. Read it here.

Here’s the shocker. The Fed’s bailout was not $1.2 trillion, $7.77 trillion, $16 trillion, or even $24 trillion. It was $29 trillion. continue reading…

In his latest installment, C. J. Polychroniou surveys the slow motion collapse of the eurozone and the ongoing fragility of the US economy, and insists that underneath it all lies a deeper crisis.  What we are witnessing, he suggests, is not just the fallout from the latest banking panic or financial crisis, but a set of symptoms linked to a broader economic malaise:  a crisis of advanced global capitalism.

Advanced capitalism had been facing severe structural stresses, strains, and deformations for many years prior to the eruption of the financial crisis in 2007, including overproduction, growing trade deficits, lack of job growth, and elevated debt levels.

Private debt accumulation in the West, which has spiraled out of control, is largely the outcome of wage stagnation. In the United States, wages have remained stagnant since the mid to late 1970s, leading to a new Gilded Age, with renewed claims about the superiority of Darwinian capitalism. At the same time, the poor and working-class populations have come to be seen as a sort of nuisance in the galaxy the rich occupy, with attacks being launched by the rich on their wages and working conditions and the media often carrying out derogatory campaigns against working-class identity.

Read the one-pager here.

Policy coordination and information exchange are critical to resolving the eurozone crisis. With this in mind, the Levy Institute is making selected publications that address aspects of the crisis—including policy briefs, one-pagers, and working papers—available online in Greek translation. A list of our current titles is available at www.levyinstitute.org/greek/, and more will be added weekly.

As Dimitri Papadimitriou has said, the European Central Bank is one of the only institutions that can save the euro project.  The commitment alone to making unlimited purchases of member-state debt might do the trick.  But as we have seen, there is a lot of opposition to the ECB acting as lender of last resort.  Why?

Here are a couple more links on this question:

Paul De Grauwe (“Why the ECB refuses to be a Lender of Last Resort“):  it may not (just) be dogma holding the ECB back, but a rational (though, to De Grauwe’s mind, unfortunate) calculation.  His analysis suggests the ECB won’t act until the sovereign debt crisis turns into a banking crisis.

Noah Millman (“In the Long Run, We’re All German“):  the ECB is engaged in a game of chicken, attempting to secure as much of a commitment to fiscal rectitude and reform as it can before it steps in to stave off a eurozone collapse.  (Recent suggestions of a kind of quid pro quo in which a stronger fiscal pact would lay the groundwork for the ECB stepping up as lender of last resort lends some credence to this theory.  They should also plant doubts for those who think the ECB’s inaction on this front stems merely from good faith concerns about Article 123-type Treaty obstacles).

Update, Dec. 8:  Paraphrasing ECB chief Mario Draghi, today:  “Quid pro what?  Never heard of it.”  (Or more accurately, according to the FT “Mr Draghi made clear that the option of capping government bond yields had not been raised at the governing council meeting.”)

This is one of the questions Marshall Auerback tackles in a piece at Counterpunch.  His answer, as you might expect, is “no.”  He also addresses the concern that the ECB risks an impaired balance sheet if it steps up and plays a larger role in buying member-state debt:

… if the ECB bought the bonds then, by definition, the “profligates” do not default. In fact, as the monopoly provider of the euro, the ECB could easily set the rate at which it buys the bonds (say, 4% for Italy) and eventually it would replenish its capital via the profits it would receive from buying the distressed debt (not that the ECB requires capital in an operational sense; as usual with the euro zone, this is a political issue). At some point, Professor Paul de Grauwe is right :  convinced that the ECB was serious about resolving the solvency issue, the markets would begin to buy the bonds again and effectively do the ECB’s heavy lifting for them. The bonds would not be trading at these distressed levels if not for the solvency issue, which the ECB can easily address if it chooses to do so.  But this is a question of political will, not operational “sustainability.”

So the grand irony of the day remains this: while there is nothing the ECB can do to cause monetary inflation, even if it wanted to, the ECB, fearing inflation, holds back on the bond buying that would eliminate the national [government] solvency risk but not halt the deflationary monetary forces currently in place.

While the latest figures show the unemployment rate dipping below 9 percent, a lot of this decrease has to do with individuals giving up and leaving the labor force.  As for additional stimulus, Congress is currently negotiating an extension, and possible expansion, of the payroll tax cut.  But Republicans are insisting that it be “paid for,” so it’s not yet clear what effect this would have if passed.  That leaves the Federal Reserve as the only US institution to turn to.  Zero Hedge tries to provide some (small) reason for optimism on this front, suggesting that the composition of the FOMC may become more “dovish” in 2012 when the next group of voting members is rotated in (Fisher, Kocherlakota, Evans, and Prosser out; Pianalto, Lacker, Lockhart, and Williams in).

Michael Hudson has an article appearing in the Frankfurter Allgemeine Zeitung on the history of debt and democracy.  For those who can’t read German, Hudson has produced an abbreviated English version.  An excerpt:

The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations.

Read the English version here.

A great series of videos at INET collecting clips from Robert Johnson’s interview of Steve Keen, who is among those (few) credited with seeing the financial crisis coming.  Hyman Minsky’s work has played a large role in Keen’s own thinking on this.  In this particular clip, Keen talks about the ways in which economists have been taught to assume an unhelpful story about the way in which banks operate and touches on the basic idea of endogenous money.

Along similar lines:  this working paper by Randall Wray looks at what banks actually do (and what role the financial sector should ideally play in an economy) in the context of examining Minsky’s later work at the Levy Institute on restructuring the American financial system.  (Policy brief version here).

Also, take a look at the last video in which Keen talks about developing a monetary model of capitalism.  For non-economists, this has to be among the more confusing claims to theoretical advancement.  (“Wait … you mean there are economic models that don’t include money?  Wh…”)

Yanis Varoufakis has an interesting exchange with Warren Mosler and Philip Pilkington, responding to their thoughts on the ideal path for a nation intending on breaking away from the euro.  The Mosler-Pilkington “plan” (clearly gunning for the Wolfson Prize) is basically this:  (1) the government in question starts using the new national currency as a means of payment (paying public salaries, etc.); (2) the government announces that tax payments must be made in that currency.  The merit of this approach, they say, is that it is “hands off”:

Should the government of a given country announce an exit from the Eurozone and then freeze bank accounts and force conversion there would be chaos. The citizens of the country would run on the banks and desperately try to hold as many euro cash notes as possible in anticipation that they would be more valuable than the new currency. Under the above plan, however, citizens’ bank accounts would be left alone. It would be up to them to convert their euros into the new currency at a floating exchange rate set by the market. They would, of course, have to seek out the currency any time they have to pay taxes and so would sell goods and services denominated in the new currency. This ‘monetises’ the economy in the new currency while at the same time helping to establish the market value of said currency.

Varoufakis, with a nod to his Levy Institute policy note “A Modest Proposal,” suggests that it’s not too late to save the eurozone project.  Although jumping ship in the manner they describe might end up being necessary at some point, says Varoufakis, Mosler and Pilkington are underestimating the severity of the fallout from a euro exit (for the country jumping ship, and for the countries remaining in the boat).  Here’s a taste, from Varoufakis:  continue reading…

In its continuing series on the Fed’s bail-out of Wall Street, Bloomberg estimates that the banks got a $13 billion hand-out from the Fed’s easy lending terms.

Using the excuse of the crisis, the Fed lent funds at near-zero interest to the banks. This was supposed to encourage them to begin lending to firms and households, to spark economic growth and recovery. Of course, the problem with that scheme is that households were already underwater with debt (hence, the recession), firms had no sales hence no reason to borrow to increase production, and banks were loathe to lend to households and firms that face a bleak future on account of Wall Street’s crashing of the economy. So instead, banks mostly bought Treasuries and played the yield curve—earning more on Treasuries than they had to pay the Fed. The $13 billion subsidy directly created by the ZIRP (Fed’s zero interest rate policy) directly created $13 billion of extra profits that Wall Street could then use to reward the same genius CEOs that created the crisis. Nice synergy.

The same Bloomberg article reports that the bail-out itself cost $7.77 trillion—a lucky string of sevens if you happen to be in the top 1% and work on Wall Street. This is based on the secret Fed documents that Senator Sanders managed to force Bernanke to release—25,000 pages worth. I do not know how Bloomberg came up with that number. The true number is almost four times bigger–$29 trillion based on careful analysis done at UMKC. In any event, 7 trillion is a big enough number to raise eyebrows. It is more than 10 times the Treasury department’s $700 billion TARP program that Paulson managed to get out of Congress (after holding a loaded gun to his head and threatening to blow his brains out if Congress didn’t give him the money with no strings attached; Congress wouldn’t blink so he had to come back on hands and knees). But it is not just the size that is shocking—it is that the measly little $700 billion was subject to Congressional approval and oversight, while the Fed’s bail-out (whether $7.77 trillion or the more likely figure of $29 trillion) not only was never approved, nor overseen by Congress, but it actually took an act of Congress to get the Fed to fess up to its largess.

(Read the rest here)