The claim that the Federal Reserve extended trillions of dollars in secret loans to banks continues to be spread. Here at Econbrowser we will continue to try to correct some of the misunderstanding that is out there.
Consider for example this item from the Levy Institute blog written by University of Missouri Professor L. Randall Wray, which begins:
It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get [Bernanke] to finally release much of the information surrounding the Fed's actions. Since that release, there have been several reports that tallied up the Fed's largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion.This is a common misunderstanding. As the reporters for the Bloomberg story verified to me personally, their $7.77 trillion figure did not come from the records that Bloomberg obtained under the FOIA. Instead, their figure came from this article published by Bloomberg on March 31, 2009. That original $7.77 trillion estimate in turn was based entirely on publicly available sources which were being quite widely discussed at the time.
Another key fact that seems to be underappreciated by those passing along these numbers is that the vast bulk of this $7.77 trillion figure was never lent at all. For example, $1.8 trillion of the total is attributed to the Commercial Paper Funding Facility. But the fact is that the maximum quantity of loans ever outstanding under this program only came to $351 B. The $7.77 trillion also includes $900 B for the Term Asset-Backed Securities Loan Facility, whose maximum outstanding balance was only $49 B, and includes $540 B for the Money Market Investor Funding Facility which never lent so much as a single dime. The table below breaks down the individual components of the $7.77 trillion and compares them with the actual maximum amount lent under each program. Numbers in the first column come from Bloomberg (2009) and numbers in the second column come from the Fed's weekly H.4.1 releases.
Theoretical and actual Federal Reserve lending by category (billions of dollars) Category Theoretical
1 Net Portfolio CP Funding 1,800 351 Jan 21 2009 2 Term Auction Facility 900 493 Mar 4 2009 3 Term Asset-Backed Loan Facility 900 49 Mar 17 2010 4 Currency Swaps/Other Assets 606 583 Dec 17 2008 5 MMIFF 540 0 Sum of 1 through 5 4,746 1,350 Dec 17 2008 6 GSE Mortgage-Backed Securities 1,000 1,129 Jun 23 2010 7 GSE Debt Purchases 600 169 Mar 10 2010 8 Commitment to Buy Treasuries 300 ? 9 Other 1,120 Sum of 1 through 9 7,766
The $7.77 trillion also includes $1 trillion for the Fed's purchases of mortgage-backed securities. These MBS were guaranteed by Fannie Mae and Freddie Mac. Since the U.S. Treasury had already taken over Fannie and Freddie before the Fed made any of these purchases, essentially the guarantor was the U.S. Treasury. It makes no sense to claim that the Fed's purchases of these securities in any way increased the net liabilities or commitments of the U.S. government. Moreover, at the date when the first 5 categories in the table reached their combined maximum (Dec 17, 2008), the Fed was not holding any MBS. The Fed's MBS holdings would not reach a trillion dollars until Feb 17, 2010, at which date the combined outstanding balance on the first 5 categories was down to $71 B....MORE