Political Animal


November 28, 2011 4:35 PM Making out like bandits

By Steve Benen

When the global financial industry was unraveling in late 2008, the Federal Reserve was bailing out institutions, some of which claimed to be fine at the time, at an incredible pace, and making all kinds of emergency secret loans. Bloomberg Markets reports that, in a detail unknown before now, some of those banks actually made a profit, reaping an estimated $13 billion of income “by taking advantage of the Fed’s below-market rates.”

Matt Yglesias has a great item fleshing out what is and isn’t scandalous about these revelations. As Matt explained, it’s not necessarily outrageous that the Fed would intervene during a global panic. So what’s the problem? This is:

If I had fully understood what the Fed was doing in the fall of 2008 and the winter of 2008-2009, the truth is that I would have defended it all. Things were falling apart, and the important thing was for monetary policymakers to be engaged in an all hands on deck effort to prevent demand from collapsing and a years-long spell of mass unemployment. If the operational aspects of that get messy a bit “unfair” then so much the worse for fairness and cleanliness.

The real scandal has only emerged with clarity in the subsequent years. Having ensured the basic stability of the banking system, monetary policymakers in America proceeded to forget all about their go-getter attitude and ability to reach deep into the practical and legal toolkit in order to get what they want. We’re heading into the winter of 2011, with three years of mass unemployment under our belt and no end in sight. That’s not happening because the Fed was too generous with the free money for banks at the height of the crisis. It’s because once the acute phase of the banking crisis ended, suddenly we returned to small thinking and small-c conservatism. But it can’t be both. If in a time of crisis, the right thing to do is to get “crazy” then there’s plenty more crazy stuff the Fed could be doing to boost overall spending in the American economy. Or if the right thing to do is to stay orthodox and ignore the human consequences, then there was no reason not to stay orthodox three years ago and refuse to lend at anything other than a penalty rate.

Paul Krugman is thinking along the same lines.

What’s unforgivable is the way policymakers, both at the Fed and elsewhere, basically declared Mission Accomplished as soon as the panic in financial markets subsided and stocks were up again. When spring rolls around, we’ll reach the third anniversary of Ben Bernanke’s declaration that “green shoots” were making an appearance — and there will still be 4 million Americans who have been out of work for more than a year. Yet there has been no sense of urgency about dealing with unemployment; indeed, most of the elite conversation has been about stuff like cutting Social Security payments a decade or two from now.

It’s not exactly a secret that the bank bailouts are widely hated by the vast majority of Americans, and for good reason. That said, I know policymakers couldn’t allow the U.S. banking system to simply collapse, and I can also appreciate how much worse the crisis could have been if the entire financial industry was left to implode. We’re talking about the difference between a crisis in which unemployment reached 10% and one in which it reached 20% or higher.

But there’s simply no denying the fact that those Occupy activists waving “Where’s my bailout?” signs are raising an entirely legitimate question. Indeed, it’s hardly even rhetorical.

Kevin Drum’s conclusion, contrasting how the financial industry was treated vs. how the rest of us were treated, rings true:

Things like principal write-downs, second waves of stimulus, aid to states, and mortgage cramdown all got a bit of idle chatter but were then left to die. For some reason, it would have been unfair to hand out money to profligate homeowners, state and local workers, and the millions who have been unemployed for more than a year.

And yes, in some cosmic sense, perhaps it would have been unfair. Massive financial crashes always produce some inherent unfairness. For some reason, though, we were willing to overlook that unfairness when it was Wall Street that came begging, but became obsessed with it when all the rest of us came begging.

Steve Benen is a contributing writer to the Washington Monthly, joining the publication in August, 2008 as chief blogger for the Washington Monthly blog, Political Animal.


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  • chi res on November 28, 2011 4:46 PM:

    Krugman: Yet there has been no sense of urgency about dealing with unemployment

    Really? Has he only been paying attention to republican conversations?

  • blondie on November 28, 2011 5:31 PM:

    Did you see the BIG number in the Bloomberg story?

    The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he �wasn�t aware of the magnitude.� It dwarfed the Treasury Department�s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

    I cannot begin to describe the depth of my anger ...

  • bubba on November 28, 2011 5:36 PM:

    A few of us joked at the time that the fed/government would be better off simply giving all homeowners $xx,xxx to reduce their mortgages, if they had mortgages, or spend/reduce other debt. We joked because we did not know what the full cost of the bailout was. Apparently it was $7.8 trillion. Which means the crisis could have been helped by simply having the government give free money to the people, instead of the banks, to pay down their mortgages. Incredible.

    I also often wonder whether the fed would have done more if a Dem was appointed when Bernanke's term was up. Who knows.

  • Vince on November 28, 2011 5:54 PM:

    It sure would be nice if one of the 2 major political parties in this country talked more about bailing out the rest of us.

  • Gregory on November 28, 2011 6:03 PM:

    Let's not forget that when revelations that employees of the failing intitutions were still being paid lavish bonuses were met with justifiable cries of outrage, the conservative media's spin was that these "contracts" were sacred and couldn't be revised. Now this same conservative media presumes as a matter of course that "overly generous" pensions -- not to mention entitlements like Social Security and Medicare -- ought to be scaled back to preserve tax cuts for the rich -- you know, the ones who got those big bonuses in the first place.

  • Josef K on November 28, 2011 6:06 PM:

    Isn't this the sort of thing that leads to revolutions and Reigns of Terror?

  • c u n d gulag on November 28, 2011 6:13 PM:

    Anyone who took a bonus for this fiasco deserves to be gutted with a rusty fishing knife, have their private parts hacked off, strangled with their own intestines, which are then burned in front of then, hung, and then, while they're still barely alive, have their limbs torn in four different directions.
    The we stick their heads on pikes along our turnpikes and highways as a warning to the rest of the greedy assholes.

    And after we do that, we outlaw torture for ever and ever.
    But until then, we need to see these greedy motherf*ckers suffer slow and long, slow and long, the slower and longer, the better...

  • Joe Buck on November 28, 2011 6:54 PM:

    The Fed could have imposed any conditions they liked as a price for bailing out the banks. For example, management could have been fired, or they could have been required to use the free money to make loans, or the banks could have been broken up. But there were no conditions at all.

  • coralsea on November 28, 2011 7:35 PM:

    Off now to open my torch & pitchfork concession..

  • Doug on November 28, 2011 7:39 PM:

    My view:

    The bail-out of the banks was done when the political, economic and media worlds were in "panic mode". Either shore up the banks or watch the entire US, and probably global, economy blow up. No-one, including politicians who should know better, works at their best while in a panic, thus the lack of foresight concerning banksters' recidivism or need for strong regulations AT THAT TIME.
    Once the panic is over all the usual drags on making changes come into play and once it was seen that the economy WASN'T going to implode, one of the requirements to ensure that the economy returned to "normal" was to, quickly as possible, restore the banks to their previous positions of sanctity and near-omnipotence. Otherwise the Republicans and MSM would have to admit that the regulatory and economic policies advanced by ONE party for more than three decades were to blame and report that.
    Thern there's the reluctance of the MSM to aggressively report on the fraudulent and illegal banking activities of the banks that led to the housing crisis (can't pick on someone when they're down?). Most people understand that many foreclosures occur because the person taking out the mortgage simply doesn't handle their money intelligently. They then go on to presume, at first, that's what happened with the "housing bubble". At least until THEY are the ones being foreclosed on knowing damned well THEY haven't been spendthifts or reckless.
    By then, of course, we're where we are now...

  • Rick Massimo on November 29, 2011 12:22 PM:

    One of the most pernicious and intelligent-SOUNDING (without actually being intelligent) arguments that comes up here is "But that's penalizing all those people who ..." In this case, opponents of mortgage aid and alleviation of foreclosures screeched, with highly religious overtones, "But that's penalizing all those people who are PAYING their mortgages!" (The cosseted "reporter" Rick Santelli is the first to come to mind, but hardly the last.)

    Well, first of all, no it isn't - the terms of your mortgage are what they were yesterday. Secondly, if you continue to wail that you're being victimized, well, frankly, tough s*#&. Everything is "unfair" to someone if you look at it that way. Hell, a tax cut is unfair to people who gave away gobs of money last year to get the deduction. Grow the f*ck up.