The Vault
Fed Loans to Foreign Central Banks Justified
Friday, December 3, 2010 - 1:47pm
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Well, now we know how much the Federal Reserve loaned under 10 different programs during the depth of the financial crisis, and to whom. Fed critics such as Independent Sen. Bernie Sanders, a self-proclaimed socialist from Vermont, called the information "incredible and jaw-dropping" and wants an investigation.

Actually, it is incredible and jaw-dropping. At various points between Dec. 1, 2007 and July 21 of this year, the Fed had loaned--or purchased assets--worth $3.3 trillion to try to stabilize financial markets on the verge of collapse. Not only was the effort remarkably successful, so far the central bank hasn't lost a dime.

Yes, billions of dollars were loaned to key foreign central banks, such as the European Central Bank and the Bank of England, so they could in turn lend dollars to banks in their jurisdictions. Some loans went directly to foreign banks that active in U.S. markets. However, with the interbank lending market frozen, and those foreign banks unable to borrow dollars, they could have been forced to dump many U.S. assets and do severe damage to American institutions.

That's evidence of the broad interconnectedness of world financial markets, not an indication of malfeasance on the part of the Fed--as Sanders implies.

As the Fed said in a statement, most of the loans were fully secured and short-term. Most of the loan facilities were phased out as markets stabilized. There were no credit losses on those and the Fed said it expects none on the few remaining programs.

The data were made public under a requirement of the Dodd-Frank financial reform act, and details of future lending activity will be released with a two-year lag.

The Fed had resisted demands that details of all its lending be made public with little delay because it feared investors and companies dealing with a bank borrowing from the Fed must be in trouble. That was the response, for instance, in the late 1980s when many institutions faced mounting loan losses. This time around, the Fed statement said, the borrowing was due to the severe market disruptions "and generally did not reflect participants' financial weakness."

In other words, in the midst of a panic, the Fed didn't want to make things worse. That's a key problem with so much of the after-the-fact carping about the emergency measures taken to halt the panic. The Fed should have insisted on better terms, or forced banks to make more small business loans or funded more mortgages.
 
What they had to do was what they did. Save the financial system. If it had cost the Fed, and therefore the taxpayers, hundreds of billions of dollars, it would have been worth it. Boy, instead it has been a true bargain.

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covered the Federal Reserve and the economy for 25 years at the Washington Post before joining Bloomberg News in 2004. In 2009 he began writing freelance pieces for, among others, Thomson Reuters, and is widely recognized for his ability to interpret the Fed.