In an article in last night’s Bloomberg, the staff blew the lid off the story of the Federal Reserve bank lending $7.7 trillion dollars to the big six banks in order to keep them solvent during the worst of the financial crisis in 2008.
Felix Salmon praised the Fed’s actions:
On September 16, 2008, Morgan Stanley owed $21.5 billion to the Fed. The next day, that number doubled, to $40.5 billion. And eight working days later, on the 29th, the bank’s total borrowings from the Fed reached $107 billion. The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.
People who work closer than I do with the Fed will likely disagree vehemently with my position that the Fed was totally right to infuse as much cheap cash as it had available to the Banks. Granted, we can all get on board with what happened after the crisis started to die down, and the banks took advantage of how the system worked fort hem, but that does not negate the positive impact that the Fed had on averting a complete and total breakdown of the financial system.
I would go so far as to say that it was also the right thing for the Fed to keep what they had done secret-at least in the short term. Markets would have been too wary from the amount of money that was spent in that little of a time; it would have likely made trading more scarce. Who was hurt by the Fed not disclosing its cash funds for the short term? Would markets have jumped up? Would politicians look better? The answer to both is an emphatic no.
We can all argue how we got to where we are in this crisis but it doesn’t change the fact we have to make some uncomfortable decisions that don’t always fit inside neat ideological boxes or are in any way easy. If it was easy, we would have a plan for that. Central banks need plans. That is one of the great lessons of the financial crisis.
When it works best, the central bank does the dirty tasks that private firms won’t handle and othergroups won’t touch. I refute what the English banking head Mervyn King, that ‘lender of last resort’ has been bandied about too much. Instead, the bankers at the Fed were handling a once in a century crisis with the best tools they had. And in a central bank, your best tool is cash.
There are a lot of criticisms of other things the Fed did not do correctly. Many of them are legitimate. They may have not charged the correct pricing for the cash etc., but these are different matters entirely. They are the type of things that the Fed can learn from, get back later, or absorb as a cost of doing business.
The core issue here is how the central bank of the United States reacted when the financial industry was on the verge of collapsing. I agree with Felix that we should be proud of how the fed acted, and would go further to say that it is a great teachable moment for the Fed.
It showed that despite the warring factions within the regulatory environment, at least some people were willing to step up and make the hard decuisions that needed to be made in a time of hard choices.