Tuesday, March 19, 2019
Trillion
Dollar Wall Street Bailouts, Bernie Sanders, and the Washington Post
The newspaper's fact-checker might need to work on his own
understanding of the facts, because Sanders seems on pretty solid ground here
commondreams.org/views/2019/03/19/trillion-dollar-wall-street-bailouts-bernie-sanders-and-washington-post
Glenn
Kessler, the Washington Post Fact Checker gave Bernie Sanders two Pinocchios
yesterday for saying that the Wall Street banks got a trillion dollar bailout.
Kessler raises several points of contention. First, whether the Wall Street
banks actually got that much money. Second, whether it can really be called a
bailout, since the government made a profit on the loans. Third, that the bailout
was necessary to keep the financial system running.
Taking
these in turn, Kessler points out that the money that went from the TARP to the
Wall Street banks, the congressionally approved bailout, was in the low
hundreds of billions, far less than $1 trillion. He does note that a much
larger amount of loans went from the Federal Reserve Board to the banks,
however the piece points out both that the Fed is nominally independent of the
government and that many of these loans were short-term, so that rolling them
over would count twice. (If a bank got overnight loans for $1 billion for a
week, this would count as $7 billion.)
Sanders
seems on pretty solid ground here when including the Fed loans. First, the
reason the Fed has the power it does is because it is the central bank of the
United States. It is true, that when it was established in 1913 it was set up
as a mixed public-private entity, with the banks having a direct voice in
setting policy. However, its ability to print an essentially unlimited amount
of money is due to the fact that it is the central bank of the United States.
All the other major central banks (e.g. the European Central Bank, the Bank of
England, The Bank of Japan) are fully public institutions. The fact that the
United States allows private banks to have a voice in setting Fed policy
doesn't really change the fact that it is a government institution and
therefore loans from the Fed should be seen as coming from the
government.
The
fact that many of the loans made by the Fed were very short-term does make
adding them up more complicated, but there were many points at which the
outstanding loans and guarantees to the banks were well over $1 trillion. In
fact, it set up special lending facilities specifically for Bank of America and
Citigroup, each of which had well over $100 billion in loans and guarantees at
the peak of the crisis in 2009.
As far
as the government making a profit on the loans, this is a rather dubious claim.
The measure of profit here is the difference between what the banks repaid and
the government's cost of borrowing. The latter was of course quite low, since
the government was one of the few secure borrowers in the world at that point.
Anyhow,
the notion of this being a bailout stems from the fact that these loans were
granted at interest rates that were far below the market rate at the time. This
allowed banks like Bank of America and Citigroup to stay in business at a point
where they would have been pushed into bankruptcy if the market was allowed to
work its magic. In fact, then Federal Reserve Chair Ben Bernanke, argued at a
Brookings forum last fall that all 13 of the country's largest banks would have
gone into bankruptcy if the market had been allowed to run its course.
The
government quite explicitly acted to save the banks from the market. As then
Treasury Secretary Timothy Geithner says repeatedly in his autobiography, they
acted to ensure that there would be no more Lehmans. The fact that they charged
an interest rate that was above the rate paid on government borrowing is pretty
much irrelevant. The interest rate paid by the banks on their loans was far
less than the market rate they would have paid at the time in the absence of
government support, and for this reason can accurately be called a "bailout."
Finally,
there is the issue of whether the bailout was necessary. There seems unanimity
from the people who could not see the $8 trillion housing bubble whose collapse
led to the crisis that we would have faced a "Second Great
Depression" without the bailout. This is hard to see.
The
government has a long history of keeping a bank operating through a bankruptcy.
This is the reason the Federal Deposit Insurance Corporation (FDIC) exists. The
FDIC takes over a bank when it becomes insolvent and, for the most part, its
depositors never even know anything has changed until they get a note in the
mail. Having the country's largest banks implode would have been a huge burden
on the FDIC and there undoubtedly would have been glitches, but having these
glitches imply a Second Great Depression (ten years of double-digit
unemployment) involves some very serious hand waiving.
There
is little doubt that the initial downturn would have been worse if the market
was allowed to work its magic and put the Wall Street banks out of business,
but there is nothing that would have prevented a large government stimulus from
boosting the economy back to more normal levels of output. It is worth noting
on this issue that one of the main rationales for the TARP bailout, that the
commercial paper market was shutting down, was completely dishonest.
The
Fed single-handedly had the ability to support the commercial paper market. The
world discovered this fact the weekend after Congress approved the TARP when
the Fed announced the creation of a commercial paper
market lending facility. Anyhow, in the same way that the fear of a shutdown of
the commercial paper market was used to sell the TARP, saving us from a Second
Great Depression has repeatedly been used after the fact as a rationale for the
larger bailout. Neither is true.
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"The master class
has always declared the wars; the subject class has always fought the battles.
The master class has had all to gain and nothing to lose, while the subject
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