How the Fed stole $9 trillion in 2008-2009
The Fed made a large number of short-term loans to banks in 2008-2009. All of them were backed by collateral and all of them were repaid, though at low rates of interest. That the Fed would make short term loans to banks at low rates of interest at the time is not new newsworthy because the Fed Overnight Rate (the rate for inter-bank lending) was at roughly 0% where it has been for the last several years.
The Fed does their accounting for such short-term lending to banks in a peculiar way where at the end of each business day any outstanding "overnight" loan is counted as repaid and re-loaned. So a loan of $100 for thirty days is counted as $3,000 of loans and $3,000 of repayments even though the actual loan was never more than $100.
Another way of expressing the same reality would be to say that banks paid the Fed more than $9 trillion. They did, by the logic that says they were loaned $9 trillion, but it ought to be obvious to everyone reading this that the banks did not pay the Fed $9 trillion 2008-2009. Where would they have gotten $9 trillion in cash during a banking crisis? It's impossible.
But banks did pay the Fed $9 trillion in the same warped sense that the Fed loaned them $9 trillion. It is an accounting thing.
During the crisis the Fed used the overnight bank loan system for emergency recapitalization. Since those loans are cleared on a daily basis the same $10 billion is counted as re-paid and re-loaned at end of each day. The bank hands the Fed the $10 billion back to repay the loan. The Fed then hands the same $10 billion that was just repaid back to the bank as a "new" loan. But it isn't a new loan in any real money sense. It is the same $10 billion.
Because of the peculiarity of clearing all the loans on a daily basis, at the end of 100 days the Fed has booked, on paper, $1 trillion of loans and the bank has booked $1 trillion of repayments.
But the Fed merely loaned $10 billion and the banks only repaid $10 billion. The total risk to the Fed was never more than $10 billion and the total of money to the bank was never more than $10 billion.
If somebody says, "the Fed loaned $9 trillion in overnight loans 2008-2009" they are technically telling the truth, using the daily accounting method the Fed uses for such loans. It is true in the way "Obama cut $700 billion from Medicare" is technically true. But since the Fed never had anything close to $9 trillion at risk it is a weird thing to say.
This is from 2010:
The loans were made through a special loan program set up by the Fed in the wake of the Bear Stearns collapse in March 2008 to keep the nation's bond markets trading normally.
The amount of cash being pumped out to the financial giants was not previously disclosed. All the loans were backed by collateral and all were paid back with a very low interest rate to the Fed -- an annual rate of between 0.5% to 3.5%.
...(Vermont Senator Bernie Sanders) said that even if the Fed was right to make the loans to keep the economy from toppling into a depression, it should have made stronger demands that the banks help American consumers and small businesses.
http://money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/index.htm
Why does Bernie Sanders accept the possibility that this supposed "theft" of $9 trillion" might have been the right thing to do?
Because he knows full well that the Fed lending out money x for a short term and being repaid all of money x is not the "theft" of $9 trillion."
"...even if the Fed was right to make the loans to keep the economy from toppling into a depression, it should have made stronger demands that the banks help American consumers and small businesses."
See, that is a reasonable statement. Yes, we should have cut much tougher deals with the banks throughout the rescue process. We should have made sure that banks would lend out more. We should have had more people-friendly priorities in everything we did.
But that is not the same thing as claiming that the Fed made a $9 trillion gift of tax dollars to banks. That is obviously false.
It would be nice if people did not claim that Bernie Sanders has said things that are stupid, false, and that he never said.
Bernie Sanders has said some very strong stuff about the recent GAO Fed audit, but he has not said this week that the Fed stole $16 trillion of tax dollars and gave it to foreign banks.
He knows it would be a flat lie to say anything like that.
He has not claimed that these short term loans were not repaid. They were.
He is making as strong an emotional/rhetorical case as he can within the facts. Since he is a politician his framing of the facts is sometimes forward-leaning in support of his overall thesis, but he certainly is not claiming that the Fed stole $16 trillion dollars and gave it away to banks, never to be seen again.
If someone wants to make outrageous and easily falsifiable claims about reality that's fine, but please do not claim that Bernie Sanders has said some of the dishonest and/or ignorant stuff that is being attributed to him.
There is a profound anti-bank argument to be made, by outlandish hyperbole is not the way to make it.
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