BLOG VIEW: The Federal Reserve's questionable policies were the subject of a pair of recent news items. One story presented the central bank playing Santa Claus to the world's largest financial institutions, while the other story found a presidential candidate insisting that the Fed leader was a potential traitor. In both cases, however, the Fed's policies have raised concerns that are not being adequately addressed.
Last week, Bloomberg offered a fairly startling report that detailed how the Federal Reserve extended $1.2 trillion to the largest financial services institutions between August 2007 and April 2010. The Fed wasn't exactly eager to share this information – Bloomberg's reporters had to file Freedom of Information Act requests to get the data.
It is no surprise that the Fed went out of its way to pump hundreds of billions of dollars into the coffers of Morgan Stanley, Citigroup and Bank of America during the darkest period of the September 2008 financial crisis – after all, those were the alleged ‘too-big-to-fail’ institutions. It is also no surprise that these institutions pretended they were in perfect health while they were taking the Fed's money – on Sept. 29, 2008, Morgan Stanley boasted a press release that it had ‘strong capital and liquidity positions’ while it was simultaneously receiving $107.3 billion from the Fed.
The real surprise, however, is that half of the financial services companies receiving the Fed's support – courtesy of the U.S. taxpayers – were not headquartered in the U.S. The Royal Bank of Scotland led the world parade, receiving $84.5 billion from the Fed, while France's Societe Generale SA, Switzerland's UBS AG, England's Barclays PLC, Germany's Hypo Real Estate Holding AG, Japan's Norinchunkin Bank, Canada's Bank of Nova Scotia and Bahrain's Arab Banking Corp. were among the international entities that somehow found their way to Uncle Ben's checkbook.
Stop and think about it. Banks headquartered in Great Britain, France, Switzerland, Japan, Germany, Canada and Bahrain – not exactly the world's poor countries – had to ask our country's central bank for money. Of course, the logic behind this generosity was to stave off a global financial meltdown. But anyone who is even casually aware of the world's financial markets will recognize that strategy was not as successful as intended.
The Bloomberg report also included a rerun of an incredulous comment from Rep. Walter B. Jones, R-N.C., who compared the Fed's generosity with the too-big-to-fail institutions and the world's major banks with its hostility to the U.S. business community.
‘Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?’ Jones asked during a June 1 congressional hearing on the Fed's lending activities. ‘They get help when the average businessperson down in eastern North Carolina, and probably across America, can't even go to a bank they've been banking with for 15 or 20 years and get a loan.’
A week prior to this news, the Fed was in the headlines as the object of loathing and veiled threats of violence by Texas Gov. Rick Perry, who is seeking the Republican nomination for president.
‘Printing more money to play politics at this particular time in American history is almost treasonous, in my opinion,’ Perry said. ‘We already tried this. All it's going to be doing is devaluing the dollar in your pocket, and we cannot afford that. We have to learn the lessons of the past three years. They've been devastating.’
In speaking at an Iowa campaign rally, Perry did not mention Bernanke's name when he mused on how the Fed chairman would be greeted in the Lone Star State.
‘I don't know what you all would do to him in Iowa, but we would treat him pretty ugly down in Texas,’ Perry told his audience.
Overlooking Perry's tactless command of the language, it is easy to understand the governor's agitation with Bernanke's actions. The Fed's policies during the Bernanke years have not helped the economy. If anything, they've taken a bad situation and made it worse. And the news that the Fed freely loaned billions to banks from Switzerland and Bahrain when the U.S. economy was tanking is equally disturbing.
But then again, we are talking about a Fed chairman who, when confronted by the growing problems in the subprime mortgage market during summer 2007, blithely assured the public by saying, ‘The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.’ I'll say this for Bernanke – if anything, he is consistent.
Editor's Note: Next Monday is Labor Day, and MortgageOrb will not be published. Also happening next week on MortgageOrb is something different: Beginning on Sept. 6, we will depart from our usual From The Orb editorial schedule to present a special four-part series titled ‘The Fall And Rise Of The Housing Market.’ This series will trace the circumstances that brought about the downfall of the U.S. housing market and the challenges that, to date, have prevented the market's rebound.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
