Central bank to the world

December 3, 2010 01:25 PM

The Financial Times reported yesterday that non-U.S. banks were among the biggest users of the $3.3 trillion in emergency lending facilities and programs created to address the financial crisis that emerged in the summer of  2007.

We know this thanks to the Dodd-Frank Act, which requires the Federal Reserve to post transaction level details of the 13 facilities and programs instituted by the Fed to help alleviate the global credit crisis.

If you are one of those folks who, in hindsight, are doubting the seriousness of the situation perhaps you should read the opening graph in the Fed release. “The Federal Reserve Board on Wednesday posted detailed information on its public website about more than 21,000 individual credit and other transactions conducted to stabilize markets during the recent financial crisis… .”

Yes, they said more than 21,000 transactions. And $3.3 trillion is a lot of money, much more than the $700 billion allocated to TARP that served to distract people from the already ongoing efforts of the Fed to bailout global banking institutions. So the situation was and is serious but here is where the Fed goes off the tracks: “conducted to..., restore the flow of credit to American families and businesses, and support economic recovery and job creation in the aftermath of the crisis.”

See it is pretty clear that credit is not flowing to American families and businesses and economic recovery appears pretty far off as does job creation. American families and American businesses did not have access to these numerous facilities and programs, only large banks did and when they got the money they did not loan it out, they unloaded their toxic assets and bought Treasuries making a tidy profit. See when the government allows you to borrow money for free and then purchase U.S. Treasuries guaranteeing roughly 4%, why would you do anything else with that money? A point made here and in numerous veniews by commentor Sharp Pencil aka former CFTC Chairman Philip McBride Johnson.  

How can the Fed claim the operations were conducted to restore the flow of credit to American families and businesses? At least without acknowledging that it has failed if that was indeed its purpose. They are precise in their language when they want to be. Was there any provisions or conditions on these credit facilities to restore the flow of credit to American families and businesses? I couldn't find it in the report.

Since the anger regarding the bailout has grown, there has been a philosophical battle brewing between those who are worried the Fed has no accountability and those that say the Fed must be able to maintain its independence.

One result of the former’s argument is the fact that we have this report. As to the latter’s argument, you can understand the need that the Fed needs to be independent from short-term political expedience. But given the extent to which monies and credit were doled out to non U.S. institutions and individual investment banks, one has to ask the question “Independent from who?”

We have pointed out here on numerous occasions that the bailout is all about the massive credit facilities created by the Fed and long-term zero interest rate policy but many people still equate the bailout with TARP not the three-year and counting crisis management by the Federal Reserve.

The Dodd-Frank Act may be a success if for no other reason, it helps people to understand this.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.