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.
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