More on those secret Federal Reserve loans to banks

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)




Date of


Net Portfolio CP Funding



Jan 21 2009


Term Auction Facility



Mar 4 2009


Term Asset-Backed Loan Facility



Mar 17 2010


Currency Swaps/Other Assets



Dec 17 2008





Sum of 1 through 5



Dec 17 2008


GSE Mortgage-Backed Securities



Jun 23 2010


GSE Debt Purchases



Mar 10 2010


Commitment to Buy Treasuries






Sum of 1 through 9


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.

The $7.77 trillion also includes $600 B for outright purchases of Fannie and Freddie debt (which turned out to be only $169 B), and another $300 B for Treasury debt. Buying Treasury debt is what the Federal Reserve has always been doing, and certainly the Fed is holding much more today than it did before the crisis. I have made no effort in the table above to quantify what the “actual” purchases of Treasury securities turned out to be, but wish to point out that, if it is the intention of anyone to talk about the magnitude of “Fed lending to the biggest banks”, it makes no sense to include purchases of Treasury bonds or either of the previous two categories in the total.

The remaining 14% of the $7.77 trillion comes from 12 other separate items whose details I have not tried to track down.

Now, as for the relevance of the observation that the sum of the “potential” amounts for the first 5 categories is almost 4 times the size of their actual combined amounts at any date, I return to Professor Wray’s discussion:

the Fed quibbles about the differences among lending, guarantees, and spending. For the purposes of this blog I will accept these differences and call the sum across the three “commitments.” In spite of what Bernanke claims, these do commit “Uncle Sam” since Fed losses will be absorbed by the Treasury.

But the discrepancies between the “potential” and “actual” columns in the table above cannot reasonably be described as “guarantees.” For example, the basis for the $1.8 trillion figure for CPFF is the following statement issued publicly by the Fed on Oct 14, 2008:

Limits per issuer

The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between January 1 and August 31, 2008.

The $1.8 trillion was calculated by assuming that every single institution that qualified would in fact issue new commercial paper that would then be purchased by the Fed up to this maximum amount. Notwithstanding, the same Fed statement continued:

The Federal Reserve reserves the right to review and make adjustments to these terms and conditions, including pricing and eligibility requirements.

I do not believe that “guarantees” is the correct term to use for this or most of the other items included in the Bloomberg tally.

A separate issue concerns whether it is appropriate to add together outstanding loan balances as of different points in time in order to generate a total, for example, adding MBS to items 1-5. Here Professor Wray reasons by analogy:

Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank. Bernanke would like us to believe that if the Fed newly lent a trillion bucks every day for 3 years to all our drunken bankers that we should total that as only a trillion greenbacks committed.

But here’s what’s wrong with that analogy. The omitted detail is that after each sailor takes a glass of whiskey, he returns the glass, filled with more whiskey than it originally held, to the bartender. In other words, the loans were always paid back with interest before a new loan was extended. If an individual sailor ended up consuming more than one glass, somebody other than the bartender must have paid for it, if the maximum tab with the bartender that any individual sailor ever had at a single point in time was a single glass.

If you take the position that each new loan should be added as a running contribution to some total, then you are led to maintain that when the Fed loans $1 B to Bank A in the form of a 30-day loan, and loans $1 B to Bank B in the form of an overnight loan that is repaid and renewed each day, then the Fed has 30 times the exposure to Bank B as it does to Bank A. You are further led to infer that the Fed could have lost $1 B in lending to Bank A but somehow could have lost $30 B lending to Bank B. And you are led to infer that it is 30 times safer to make a 1-month loan than it is to make a series of overnight loans in the same amount. Good luck managing your or anybody else’s finances, if that’s your way of thinking.

But Professor Wray goes on to speak admirably about an analysis by his student James Felkerson that does exactly that, and concludes that the Fed lent not $7.77 trillion but instead $29 trillion. For example, Felkerson takes the gross new lending under the Term Auction Facility each week from 2007 to 2010 and adds these numbers together to arrive at a cumulative total that comes to $3.8 trillion. To make the number sound big, of course you want to count only the money going out and pay no attention to the rate at which it is coming back in. If instead you were to take the net new lending under the TAF each week over this period– that is, subtract each week’s loan repayment from that week’s new loan issue– and add those net loan amounts together across all weeks, you would arrive at a cumulative total that equals exactly zero. The number is zero because every loan was repaid, and there are no loans currently outstanding under this program.

But zero isn’t quite as fun a number with which to try to rouse the rabble.

61 thoughts on “More on those secret Federal Reserve loans to banks

  1. 2slugbaits

    JDH Nice analysis, but in one sense I guess I have something of a “who cares?” attitude about the correct number. Your argument that the $7.7T figure is a misrepresentation is convincing and clearheaded, but it also leaves me with that 800 pound gorilla in the room feeling. The relevant issue isn’t how much the Fed and Treasury backstopped the banks, but whether or not the Fed and Treasury (and taxpayers) were adequately compensated for the ex ante risk they absorbed. I always understood the proper role of the central bank to be willing to lend as much as needed but at a penalty. At a minimum the taxpayers should have at least recovered any bonuses that the Gang of 12 awarded themselves.

  2. Craig West

    As an economics graduate of the University of Missouri–Columbia I would like for you in the future to note that this moron (L Randall Wray) is on the faculty of the University of Missouri–Kansas City and not at the University of Missouri’s flagship campus at Columbia.

  3. LR Wray

    Author writes: “If instead you were to take the net new lending under the TAF each week over this period– that is, subtract each week’s loan repayment from that week’s new loan issue– and add those net loan amounts together across all weeks, you would arrive at a cumulative total that equals exactly zero. The number is zero because every loan was repaid, and there are no loans currently outstanding under this program.
    But zero isn’t quite as fun a number with which to try to rouse the rabble.”
    LRWray: and you reach the supremely silly conclusion that the Fed therefore did not intervene at all to save Wall Street!

  4. Ted K

    This is a humorous story to me in more ways than one. I think the truth is probably somewhere in the middle (between Professor Hamilton and the exaggerated Fed loan figures).
    Professor Hamilton has admitted to his at least semi-friendship with Chairman Bernanke (to his credit in terms of honesty and disclosure). And I do think Professor Hamilton is a little like “Mother Hen” in terms of Hamilton’s rush to defend the Fed sometimes. For example I would love to hear Professor Hamilton’s rationalization for this:
    Nonetheless, I do think L. Randall Wray and some of this MMT garbage is some of the absolute worst crap you will ever read from economists’ efforts, and it is an insult to the already much bastardized work of Keynes. Which is amazingly ironic when you consider how much blogger Yves Smith criticizes economists and then she turns around and quotes L. Randall Wray like the words of God.

  5. Phil Rothman

    Jim: Thanks so much for serially providing such clear and helpful analysis. It’s disappointing, at best, to see Prof. Wray violating an economist’s version of the Hippocratic Oath.

  6. Joseph

    I agree that this petty bickering over one trillion or seven trillion is just a distraction from the important point that the Fed gave the banks over a TRILLION dollars under very favorable terms. Is one trillion less shocking than seven trillion?
    Regardless of the number, the result is that the same incompetent bank managers are in charge, the financial industry is even more consolidated than before, and the bankers’ corrupt political influence is even more powerful.
    One trillion or seven trillion. Who cares, indeed?

  7. yuan

    i would have no problem with the fed lending unlimited funds at a true penalty rate. a penalty that should have included equity stakes and resolution of zombie banks; but that did not happen. and i believe its just a matter of months or years until we are faced with a new financial crisis and more extortion by those doing god’s work.

  8. MacCruiskeen

    While understanding the numbers is important, it does gloss over larger issues, such as why the Fed felt compelled to fight tooth-and-nail to keep us from getting this information in the first place. And no matter how you tote it up, it’s still a vastly larger amount than was publicly debated for the TARP. At least with TARP it was possible to see who was getting the money and who was paying it back.

  9. JDH

    LR Wray: My preferred measure is the outstanding loan balance. However, if you are going to add loan flows over different periods together, the only sensible way to do so is on a net rather than a gross basis. The sum of net flows between date t1 and date t2 has the interpretation as the change in the outstanding loan balance between t1 and t2. The sum of the gross flows between date t1 and date t2 has no economic meaning.

    MacCruiskeen: But this was one of my main points. No one had to fight tooth and nail to get this information. The Bloomberg estimate was based on the publicly available sources I identified. The summation of gross TAF flows conducted by Felkerson could be done from publicly available sources. The claim that this was all secret and hidden is a myth.

  10. acerimusdux

    The balance at one point in time tells you one thing, but doesn’t tell you how you got there.

    But the proper way to measure that for this kind of recurring flow isn’t a sum, it’s an average balance for a period of time. So the interesting data here would be something like the average daily balance outstanding at the worst of the crisis, or maybe the average monthly balance outstanding would do.

  11. Dan Nile

    Why do you keep attacking these strawmen while ignoring Bloomberg’s effective counter-rebuttal?:
    They said the potential liability adding up all the guarantees was $7.7T, but that only $1.2T was actually lent. And the $1.2T was secret because it took months of FOIA and painstaking database work to get a picture of who got what at what subsidy interest rates. That’s all true.

  12. acerimusdux

    Correct me if I’m wrong, but the simplest way to look at this might be to take all factors supplying reserve balances per H.4.1, and subtract securities held outright, as this:

    That should include all non-traditional fed measures, loans, AIG bailout, etc. And it looks like that peaked at the very end of 2008 at just shy of $1.8T.

    But it looks like that was all paid off fairly quickly as well, as the total was back down to under $400M a year later.

  13. acerimusdux

    A revised version of my graph above. Start with Reserve Bank Credit, then back out Securities Held Outright, Other Federal Reserve Assets, and Central Bank Liquidity Swaps:

    I think that leaves you with all the things that are being counted here as loans to banks. And it peaks a little under $1.2T (looks more like $1.15T).
    The point is there was nothing secret about the totals. They are right there on the Fed’s balance sheet, released weekly. Yes, some of the recipients were secret at the time. But if the point is to prevent bank runs, would it make sense to announce at the time, in the midst of the crisis, exactly who the recipients are? Wouldn’t that defeat the purpose?

  14. ppcm

    Flow of Funds Summary Statistics First Quarter 2011
    At the end of the first quarter of 2011, the level of domestic non financial debt outstanding was $36.3 trillion; household debt was $13.3 trillion,non financial business debt was just under $11 trillion, and total government debt was $12 trillion.
    A Pareto distribution as applied to the above non financial outstanding amounts to 7.24 trillion usd.
    The table of allocation is more ambiguous as corporate bonds have shown attrition,the same for the non financial paper where most of the other discountable papers are either discountinued information or thinning in use.
    Causes or consequences the equity to total assets of the US Banks is improving in spite of a harsh economic environment.
    The Federal Reserve made provision for liquidities purpose but the banks have been able to nurture their assets impaired and not impaired,where is the bone of contention the Central Bank that did not prevent,the financial markets that had faith in the prophets,or the Banks Ceo s whom were dancing when asked to do so?
    One may beleive in Pareto distribution.

  15. Bkrasting

    You’ve been pounding the table on this. I’m not sure why. Are you just a Fed Defender?
    Thanks to you we understand that the full amount that was available under these programs was never lent out. Fine. Great. What difference does it make?
    The fact is the Fed was prepared to lend $7 trillion. They were prepared to lend $20 trillion if it came to it.
    But it proved not necessary. Bernanke got his bazooka out and scared the markets with only a few shots.
    The real story is not what they did, but what they were prepared to do. If you sat down with Ben B this morning he would tell you that he is still raring to go. Trillions are available, Ben just needs another excuse.
    Here’s the deal. He will get his excuse in the next twelve months. And we will get more Trillions.
    You don’t find that frightening? One guy with all that power? I do. So will you. It will just take you another year to figure it out.

  16. Anonymous

    Professor Hamilton,
    You are correct. The big numbers are probably miscalculated.
    However, this controversy is just a symptom of the bigger problem – that the Greenspan Bernanke Fed has lost all credibility due to the gross mismangement of the economy in the last 15 years. It has been a case of too loose monetary policy and too loose regulation causing bubbble after bubble leading to an inordinate amount of bad investments that have to be now paid for. Instead of admitting their mistakes, the Fed is adament it did nothing wrong and instead of reforming their ways, continue to pursue the same policies with disasterous results – ask the millions underwater and the millions out of work. And that does not count the billions across the world whose food prices Bernanke is raising to buy temporary gains in stock prices. The Fed has lost its way.

  17. Ricardo

    You do an excellent job in demonstrating that the sensational numbers reported in the press are bogus, but there is one aspect that you have not addressed. Does the FEDs charter give it the right to enter into TAF activities with foreign countries? Can you imagine the debate if in 1913 this was actually part of the bill that authorized the FED? The magnitude may be smaller and the money being lent may be paid back, but should the FED be lending to foreign banks.
    I am curious, even with all the help Benjamin Strong gave to Montegue Norman, is there any evidence that the NY FED ever gain the Bank of England a loan? Sure, congress did but did the FED?
    I actually believe that there is less horror over the size of the transaction than there is that we even have such a program administered by an unelected body that keeps its deliberations secret and at most releases scrubbed summaries of discussion and debate. Even with all the numbers released, the FED is still a shadow organization without public input.

  18. ppcm

    When looking through the genesis of the deluge in swaps amounts,legacies and their management may involve mismatches (currencies and interest rates).
    No One Telling Who Took $586B in Fed Swaps
    “Biggest Foreign Borrower
    The U.K.’s Royal Bank of Scotland Group Plc (RBS) was the biggest foreign borrower, drawing $84.5 billion in October 2008. UBS, based in Zurich, got $77.2 billion, while Frankfurt-based Deutsche Bank AG (DBK) took $66 billion and London-based Barclays Plc (BARC) borrowed $64.9 billion, according to the Bloomberg data.”
    That may change, suffice that the ECB lowers its overnight rates and supply for more liquidities and the legacies may be again funded in euro.
    A long,long program a legacy moreover when heirs could not and will notbe able to accept them under the benefit of the doubts.

  19. JDH

    2slugbaits, Joseph, Bkrasting, and others: That the Fed made over a trillion dollars in emergency lending is not disputed, and certainly the wisdom of that is worth discussing. That is exactly what we have been doing here at Econbrowser for years, both in real time as the programs were originally proposed and implemented, as well as ex post evaluations. But within the past few weeks there has been a widespread suggestion that there was something bigger and secretive that had been going on that none of us knew about at the time. That claim is completely inaccurate. What I have been trying to do is shine a bright light on exactly why it is inaccurate.

  20. Anonymous

    The problem is not that the Fed is corrupt. The problem is that by targeting asset prices and not the real economy, the Fed has fed the belief that they ONLY care about the bonuses at banks.

  21. Brad Keoun

    Hi, this is Brad Keoun from Bloomberg News.
    Professor Hamilton accurately reminds readers that we (in the second paragraph of our story) specifically stated that direct lending by the Fed peaked at $1.2 trillion. This occurred on Dec. 5, 2008, and included the following seven programs: the CPFF, TAF, AMLF, PDCF, TSLF, single-tranche repurchase agreements and discount window.
    We chose these programs because they were designed to benefit a broad range of market participants, thus excluding the tailored facilities that were targeted to single companies included as Bear Stearns, AIG, Citigroup and Bank of America, partly because they were disclosed at the time they were established. We also excluded the Fed’s dollar swaps with foreign central banks, because the counterparties were the central banks and the ultimate beneficiaries (the banks that got funds in the foreign central-bank dollar auctions) weren’t disclosed. (For more on that, please see our story from today:
    In the eighth paragraph of our Nov. 28 story, we write: “Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system.” When we wrote this story, we didn’t expect readers to confuse this figure with actual lending, because we had explicitly stated much higher in the story that the Fed loaned $1.2 trillion. This $7.77 trillion figure, as Professor Hamilton points out, was drawn from a Bloomberg News article originally published on March 31, 2009. We were extremely transparent in that story on how the $7.77 trillion was derived, and in the Bloomberg terminal version of our Nov. 28 story, we linked to the March 2009 article.
    The $7.77 trillion, according to the March 2009 article, was the total amount of the Fed had, as of that date, “lent, spent or committed.” So it would include the maximum potential amount that the Fed might conceivably lend if all programs reached the maximum specified by the Fed or calculated from guidelines for the programs. We never said or meant to imply that the Fed’s actual lending would come anywhere near that figure. Several other news sources, including the Wall Street Journal and New York Times, have produced similar articles with numbers in the same ballpark.
    What Professor Hamilton gets wrong is applying his sailor/whiskey/Bank A/Bank B analysis to the $7.77 trillion. The Fed used a similar analysis to argue that the Government Accounting Office’s $16 trillion estimate of Fed lending overstates the scope of the efforts, because it counts cumulative loans rather than the highest amount outstanding at any one time. We agreed with the Fed’s criticisms of the GAO methodology, which is why we spent months crunching the Fed data to come up with the $1.2 trillion figure for the peak amount of outstanding loans under the programs we examined, with a corresponding peak for every bank that borrowed. (The GAO, for what it’s worth, acknowledged the deficiencies of its methodology and included an alternate methodology that produced an estimate for peak Fed lending that was much closer in scope to the one we obtained by crunching the numbers.)
    To grasp the meaning of the $7.77 trillion, we offer an alternative to Professor Hamilton’s analogy. Say in October 2008 you got a credit card from Bank A with a limit of $20,000. Then in November 2008 you got another credit card from Bank A of $20,000. Bank A has thus committed to loan you $40,000, at your discretion. Fast-forward to March 2009. Assuming the bank has not canceled your credit card or reduced your line, what is your spending limit? $40,000. Your current balance doesn’t matter. Nor does it matter whether you have been increasing or paying off your balance recently, or whether you never intend to charge more than $5,000 on the combined credit cards, or whether you never intend to use the cards at all. The fact remains that the bank has committed to lend you $40,000. It is not a theoretical threshold; it is an actual threshold based on the bank’s commitments.
    Another thing that’s missing from Professor Hamilton’s analysis is any examination of the substance of our exclusive reporting: showing exactly what each bank borrowed from the Fed, and when. He allows himself to be distracted by a debate that we didn’t stir, and misses the trees for the forest, so to speak. What does he think about the fact that Morgan Stanley borrowed $107 billion? What does he think about Citigroup’s $99.5 billion of loans? What about Bank of America’s $91.4 billion? Royal Bank of Scotland’s $84.5 billion?
    Our interactive Fed-lending analyzer is here:
    So far we have been unable to engage the Fed on a discussion of what lessons should be drawn from the details of our examination of Fed lending. We would be very interested in more analysis of these details from scholars like Professor Hamilton.

  22. Adam2

    The dollar is a public monopoly. Randy Wray knows this. MMT is based on this. Their writings, maybe a dozen at most economists, have made it clear where JDHs writings, the mainstream, are obfuscation of this fact. Has he ever mentioned this? Why isn’t this a given starting point?
    The money as dollar currency is always there for bailouts. It is also always there for fiscal stimulus.
    JDH- If no loans were even made to the banks, net would be zero. That zero is significantly different from “loans getting paid back” zero. Therefore gross matters also.

  23. JDH

    Adam2: No, the correct measure is the outstanding balance at a given point in time. If instead you insist on adding loan quantities extended at different points in time, the entry to be summed must be the net, not the gross.

  24. Ekim

    The rabble is upset because they have to pay higher CPI prices at the store to subsidize these gifts to banks. The rabble does not get repaid, the rabble only gets to take home less product per hour worked.
    IOW, the financial sector standard of living goes up when banks are bailed out by the printing press, but the rest of the population loses ground to inflation. Printing bank bailouts is exacerbating inequality in our nation.

  25. the objective view?

    JDH, correct measure for what? Isn’t the answer “risk exposure”?
    But why is the inherent goal risk exposure?
    To capture the whole story as it progressed through time, don’t you need all dates, all outflows from the Fed, and all inflows from borrowers?
    You’re choosing to illuminate the largest delta between summed inflows and summed outflows at some point in time (or how this picture evolved over time).
    Someone who chooses to emphasize all dates and all outflows from the Fed is simply trying to illuminate that component of the story.
    But if that someone didn’t state his or her goal was to illuminate risk exposure, then why is that inherently wrong? Why is it even inherently meaningless? It simply just is.
    If I make 5 separate loans of $10 at different points in time during a year, why is it inherently wrong to say I lent out a gross total of $50 during that year, with the qualifier, for those concerned that I am trying to mislead, that I was never exposed to losing $50 but only $10 at any point in time?

  26. acerimusdux

    The Central Bank Liquidity Swaps have no risk at all. There’s not even any exchange rate risk there, as the agreements call for the swaps to be unwound at the same rates they were made.

    So the Fed is dealing with the ECB, the Bank of Japan, the Swiss National Bank, and the Bank of England. Why should we care what those central banks do with their dollar reserves? Are we really worried that Europe, Japan, England, or Switzerland will no longer exist in a couple of months time? There’s just zero risk there to taxpayers if the Fed is holding pounds, yen, or euros, at guaranteed prices.

  27. acerimusdux

    I think an even bigger problem than these distractions is the general ignorance of the fundamentals of monetary policy. For example, several commentators seem to believe that loose monetary policy is the cause of rising asset and commodity prices. This is completely backwards.

    “Loose” money means one thing and one thing alone; wages are too high. If you don’t believe wages have been increasing too rapidly, you shouldn’t be arguing that monetary policy is too “loose”. End of story.

    Too many seem to be mislead by an emphasis on commodity prices. But inanimate objects are not profiting at our expense through high prices. So why should we care what price levels are there, when they can have no impact, positive or negative, on aggregate economic well being or growth?

    Between the three factors of production, labor, capital investment, and raw materials, the price of the last is the one we ought to allow to “float”. The best price for raw materials is whatever prices happen to be when our labor and capital resources are fully employed and we are maximizing economic growth. Otherwise, why should we care about commodity prices?

    Further, while those commodities which are actually used in production will tend to thus have prices that move alongside wages, it should also be observed that there are some non-perishable commodities, especially gold, which are held not for their value as raw materials in current production or consumption, but which are held as a store of value. Such assets will tend to move in a counter cyclical fashion. Their prices will rise when current output, and wages, are falling.

    Thus, gold prices will tend to be high when wages are (inflation is) low. This means that monetary policy is tight. It makes no sense to try to manage the price level of gold and other long term assets by depressing wages and economic activity (as the Austrian school would have us do).

  28. JDH

    objective view: I do not believe there is any coherent story that could be given for adding together loans of different terms. If I lend $1 B overnight for 30 days and lend $1 B for a single 1-month term, the total $31 B is not a sensible measure of anything.

  29. objective view

    JDH, I might be taking you too literally, but does it matter if they are loans of the same term? So if you make 30 overnight loans for $1M and say the total is $30M?
    I realize $30M or $31M is not a measure of loan exposure. But it is a measure of gross outflows. Why isn’t that a sensible measure of… gross outflows?
    If I create a story, where I lend my friend $10 for the month of January, July, and November, and my friend pays the $10 back at the end of each month, I think it is interesting and informative to note I lent $10 3 times that year, also known as $30 gross.
    Where am I wrong about this? Is that really useless information?

  30. 2slugbaits

    JDH 2slugbaits, Joseph, Bkrasting, and others: That the Fed made over a trillion dollars in emergency lending is not disputed, and certainly the wisdom of that is worth discussing.
    Just to be clear, I don’t have a problem with the Fed making very large loans to backstop the banks. You make a good case that the correct number is $1.8T rather than $7.7T, but I would have been fine with $7.7T as well if that’s what would have been required. My gripe is with the free ride that the banks got; viz., virtually penalty free, big bonuses, and then fighting financial reform, which strikes me as a kick in the teeth to the taxpayer.

  31. Silas Barta

    @JDH: I do not believe there is any coherent story that could be given for adding together loans of different terms. If I lend $1 B overnight for 30 days and lend $1 B for a single 1-month term, the total $31 B is not a sensible measure of anything.
    Except, perhaps, the one I gave you in the last discussion on this: each one-day loan involved the Fed providing something of essentially infinite value to the the borrower (as no one else was willing to lend to them at any price). Thus, each individual loan, each time it was renewed, provided significant value to the bank, for which the Fed did not receive market compensation.
    The total value provided to the banks by this emergency lending, while maybe not as large as 30B, is certainly much larger than 1B, given what is being provided, the discount at which it is being provided, and the complete inability of the banks to secure loans on any terms from anyone else in any way that would preserve their profitability.

  32. spragus

    I wonder what would have happened had MS, CITI, RBS or BofA separately or together suffered LEH’s fate. What would we all be doing today?
    People seem concerned about what if the Fed had had to fund everyone at the max on a given day, and for an extended period. Oh yes, and let’s name names and we can take them out and lynch them one at a time, or maybe all together. There wouldn’t be enough rope.
    Time to grow up.

  33. JKH

    Excellent analysis.
    Thanks for injecting some much needed intellectual honesty into a fiasco of politically driven financial ‘interpretation’.

  34. ACG

    Thank you once again for your tireless efforts to set the record straight on these issues Prof. Hamilton
    Why does the Fed not have some aggressive PR going on? I watched the Republican debate on Saturday and was shocked to see not only Ron Paul ranting about the Fed but Rick Perry jump on the band wagon. Ron Paul is saying these things because he actually believes them. But Rick Perry is just doing it to pick up some votes which goes to show you how poorly the American public think of the Federal Reserve.
    The Fed needs to embark on a massive effort to educate the public about what exactly it does and why it does it.

  35. Phil Rothman

    @ACG: If you Google, “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas,” and condition on this being said by Rick Perry back in August, you might not be so shocked to see him riding along in the Ron Paul anti-Fed bandwagon.

  36. river

    “The Fed needs to embark on a massive effort to educate the public about what exactly it does and why it does it.”
    I think I seen that back in the Spring of 2009 when Bernanke went on 60 minutes and showed us his boyhood home to let all of us know that he is just one of us from modest upbringings, talked about the green shoots that he was seeing sprouting up in the economy and how the quantitative easing was essentially printing money.
    Oh wait . . .

  37. Jon

    JDH – First thank you for shedding light on this issue. It’s admirable that you are taking the time to explain simple concepts like stock and flow variables. to Bloomberg et al. You deserve an award for patience.
    I see two issues raised in the comments:
    1) Some people question whether the Fed should serve as a lender of last resort
    2) Some people don’t understand math.

  38. JDH

    Brad Keoun: Thanks for taking the time to comment and contribute.

    Note that the story of the whisky-drinking sailors came from Professor Wray, not me. But its relevance for the $7.77 trillion number concerns whether it is appropriate to add loan balances outstanding as of two different dates together to form a single total. Specifically, at the date when items 1-5 were at their max, the MBS was zero, and at the date when MBS first reached $1 trillion, items 1-5 were almost entirely paid off. If we are talking about your $1.2 trillion figure, you are correct that this is not a criticism of that number. But if we are talking about what this $7.77 trillion number might conceivably measure, I believe it is quite relevant.

    You are also correct that I have said nothing about what was in fact the actual new content of your November 27 story. That is because my concern was with the way that your story has been misunderstood or misrepresented by so many people. Specifically, my core mission has been to clarify that the claim that “the Federal reserve made $7.77 trillion in secret loans to banks” is outrageously inaccurate. I hope you would join me in helping communicate that message to everyone.

    You invite me also to comment on your latest piece on the currency swaps. The most important detail that anyone should know about this story is the observation you state in your above remarks here at Econbrowser, which I quote: “the counterparties were the central banks”.

  39. JDH

    Silas Barta at December 12, 2011 03:35 PM: Sorry, I do not accept your argument that extending a $1 B overnight loan is equivalent to a subsidy of infinite value, nor that if the loan is repaid and relent each day for a month, the resulting infinite subsidy is 30 times as great as the subsidy associated with a single 1-month loan.

  40. Silas Barta

    @JDH: I agree that “infinite” is too high. At most, it’s bounded by the value of the loan or the value of the company lent to.
    Nevertheless, while we can bicker over whether the appropriate valuation of the benefit provided by the Fed (at the expense of other Americans) is 15x or 30x or 45x the size of the daily outstanding value, it’s surely worth more than the 1x you claim.
    To put it another way, if — totally hypothetically — your career was tenuously predicated on some event happening, and one day you found out that it wasn’t going to happen unless you made a payment of $X, which you did not have enough money (sorry, “liquidity”) to cover, and no regular lender was willing to loan you the money, then how much future money (as valued in present dollars) would you promise the one potential lender to get them to loan you $X?
    That is the appropriate way to value such a benefit, and the one the Fed provided to the banks.
    You really think the aggregate number for the banks is below $1 trillion?

  41. studentee

    “The most important detail that anyone should know about this story is the observation you state in your above remarks here at Econbrowser, which I quote: ‘the counterparties were the central banks'”
    the swaps were secured in euros?

  42. Frank in midtown

    Oh, they only needed roughly a month’s GDP in cash and 6 months’ GDP in availabilities for a couple of days. My bad, I thought it was a big deal. Thanks for clearing that all up. It’s not like they made a lot of money with those loans, since they repaid them and all. I’m sure it was all so unpleasant for them that they will never let that happen to each other again.

  43. Anonymous

    The fact that the Fed kept policy rates below wha the economy required between 2002-2006 is well documented.
    The link between low rates and house price appreciation has been demonstrated by OECD.
    So, it is NOT a stretch to pin some of the blame on the Fed for fueling the housing bubble. If the Fed refuses to see it, it is just intellectual dishonesty on their part.

  44. Hitchhiker

    To be fair, it is no different than a congress person saying that going from a 4% increase in spending to a 2% increase in spending represents a 2% cut in spending. Each side uses whatever numbers best convey their point of view. Craig West is embarrassed by the math but, I am inclined to forgive the error because I agree with the overall conservative position implied. Keep em straight James!

  45. acerimusdux


    Yes the currency swaps mean dollars were traded for euros. Or mostly euros, in some cases it was pounds, yen, or Swiss francs. The currencies are traded, with an agreement to reverse the trade later at the same exchange rate (so there is no exchange rate risk either.)

    The details are in the Bloomberg article, but some may be mislead by the headline and first couple of paragraphs, which treat these as “loans”, though they are in fact just trading cash for cash.

  46. acerimusdux


    No one is taking out an overnight mortgage to buy a house. What matters for home buyers is long term rates, 10 years or more. And those are only low when monetary policy is tight.

    If the Fed had simply allowed inflation to occur, long term rates would have risen naturally, on their own, and banks would have adjusted by reducing lending. This is the way markets normally adjust when left on their own. Banks don’t want to be paid back in the future in less valuable dollars, so they will begin to curtail lending some as wage pressures start to cause inflation.

    The Fed, by premature tightening, consistently prevented this adjustment from occurring, and suppressed wages while causing first the stock market bubble, and then the housing bubble.

  47. fresno dan

    Pretty much an analysis completely beside the point. Pretty much the same as if Hell’s Angels had invaded an orphanage, molested and killed all the childred, and an economist concludes there is minimal economic impact.
    You must believe that every debt is somebody’s asset – so when everybody on earth owes Goldman Sachs their entire future income, we will all be much better off, cause the interest is compounding and GDP is going up!!!
    And yes, the FED is suppose to regulate banks – it just doesn’t like too.

  48. V.Allen315

    Why would the Fed loan out money when we are in a financial recession? Does this 7.7 trillion loaned out put us more in a financial hole?

  49. markg

    If the banks were paying off the loans, why did they have to keep coming back for more? Wray is correct to say the backs had to keep comong back for more loans that totalled $29 trillion over the time period. The question is why. If the sailors had enough whiskey to repay the bartender, why did the sailors keep coming back for more?
    My opinion: this was a sneaky way to GIVE the banks billions. Lend to them short term at various times to make the total look small (if you can call 1.2 trillion small). The short term loan rate is .25%. The banks buy long term treasuries earning 3%. Only problem is if long term rates go up the banks would lose. The Fed takes care of this problem with QE1&2. Banks make billions on the interest rate difference without any risk.
    JDH, why do you think the banks had to keep coming back for more if they had the money to pay off the original loans?

  50. JDH

    markg: I borrow $100 overnight from you on Jan 1. On Jan 2 I pay you back the $100, and borrow $100 from you again overnight. On Jan 3 I pay you back the $100 that I borrowed on Jan 3, and borrow $100. On Jan 4 I pay you back the $100 and I’m done. The most you have ever lent me is $100, and the most I have ever borrowed is $100. This is the situation we’re talking about. It’s not that I keep “coming back for more.” It’s that this was an overnight loan, and, as it turned out, I needed to borrow for longer than just one night. $300 is a completely silly and inappropriate measure of how much I borrowed from you. What happened was I needed a 3-day rather than a 1-day loan.

  51. AS

    Perhaps another related way to think about the loans. If over a 12 month period 12 loans are made for $1 million each and are paid back at the end of the month, legally there may be 12 loans, but the average loan balance for the year is 12 months x $1 million x 1/12month which is $1 million average balance outstanding for the year.

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