And when this TARP goes up before Congress, there's an enormous amount of anger, and it doesn't even pass the first time. I mean, what does that say?
Well, you know, I think the anger is partly born out of the fact that here we are in this crisis, and now policy-makers are asking for a large blank check, having previously underscaled, undersized and really underrepresented the scale of the challenge that our financial system faced. I think that was the real problem with TARP. But I think it is interesting. TARP gets a lot of attention because it was the one piece of this that actually went through the deliberative legislative process.
But it was just the tip of the iceberg. TARP was $700 billion. And it was just a piece of what ended up being trillions of dollars of assistance to the financial sector, much of which was not known [to] or seen [by] the public at large.
... The Bloomberg article that came out a few weeks ago, about forget the TARP [Troubled Asset Relief Program], the reality is that there was $7.7 trillion that was lent or opened up to the banks in one way or another, low interest rate loans and everything else. Tell me what the conversation was, what the reaction of the administration was. ...
... Remember the bank bailout stretched out over a very long period of time. Data that's only become available more recently has revealed how deep the problems were.
The first clear symptom was the Bear Stearns bailout in March 2008. A lot of people were very worried after the breaking of the housing bubble. They were aware that banks had exposure. Many economists thought the likelihood that there would be severe consequences was very high.
[Federal Reserve Chairman Ben] Bernanke made a speech: Don't worry, the risks are contained. Those of us who listened to that really got even more worried, because it was clear that they didn't understand or that they were covering up.
The data that has come out since about lending in 2007 and '08 by the Fed shows that it was massive, that the financial system was going through tremors, and they must have known it. The Fed was lending not just to American banks but to banks all over the world, and in amounts that were really astonishing. ...
... Bloomberg made a big to-do a month ago when they reported that $7.7 trillion had been open to the banks and financial institutions through the Fed. Not that they were given that money, but over a period of time that amount of money flowed out. There's of course a lot of debate over the figures, but the bottom line that people eventually say is that trillions were certainly opened up and given at different points to different banks at different periods of time, all in secret. ... So put that into perspective for us.
What I was referring to a moment ago was essentially the TARP money, money that the Treasury controlled. The Congress appropriated $700 billion for the TARP program, most of which never got used.
From the time that President Obama took office, the money that we used from the TARP program didn't go into the big banks; it actually went into the smaller banks. It went into the other programs we've discussed, which were designed to open up the credit markets and to deal with the legacy asset problem. We allocated some of the money for housing programs and for the auto resolution, but not into the big banks. ...
The Fed was tremendously effective in what they do. I think Ben Bernanke and his team deserve a ton of credit for keeping us out of the second Great Depression, and I think it's unfortunate and unfair for people in hindsight to be attacking them.
This lending program was a very important component of what helped turn around the system. The figures I think were grossly distorted. If I lend you a dollar today for 24 hours, you repay it tomorrow, and I lend you another dollar, and you repay it, and I lend you another dollar. That's not $3; it's $1.
But if these loans were overnight loans, you're double, triple, quadruple counting. I don't know what the multiple is, but you're greatly exaggerating the numbers is the first thing.
The second thing is these were loans made against collateral. One of the Fed's roles is a lender of last resort, and they lent against good collateral; they didn't lose any money. They made a tremendous profit for the taxpayer.
I think I read a couple weeks ago they just sent a check to the Treasury Department for $74 billion, a lot of which was as a result of programs that they put in place to try and prevent the economy from going into the abyss. ...
The issue ... still remains that it was done behind closed doors. People didn't know the programs were that extensive and the number of loans that needed to keep on going out. What's your take on that?
I actually think the information was out there. I haven't gone back and looked at the website and things like that, but these programs I thought were public. The Fed's balance sheet is public, so the amount of loans that they have outstanding in any given time is freely available. ...
One of the things when we go back and we look at the record of what happened that does involve the Fed, is the stuff that Bloomberg reported about. In some cases as much as $1 trillion a day being loaned to the banks, and going back and forth there with all kinds of different facilities that were available. What was that about?
Well, first of all, it's not clear to me. Bloomberg was, that's a misleading report. There was lots of double counting and so on.
The point was that we do run a discount window. That's what central banks do. You lend against collateral. We do it all over the system. I make loans at the Dallas Fed -- I chair my loan committee like many of the bank presidents do -- for as low as $10,000 on an overnight basis.
Now during the crisis, we were making very large loans. And this is a natural operation of any central bank, to make sure that banks can continue to operate as long as they don't become insolvent, in which case, under ordinary circumstances the FDIC steps in and liquidates an institution or arranges for an acquirer. Now with these mega institutions, there was no way that could be done. But we do run a discount window. We're the lender of last resort; we're the bankers' bank. And I don't find that to be unusual, and I don't quite understand --
What the hoo-ha is all about, right?
What the hoo-ha, as you put it, is all about. …
The question is, should we have known? Should Congress, should the American people have known that that was happening in the midst of all of it?
Well, we have increasingly moved down the path of transparency. I think it is very important that we be allowed to do what we do.
For example, if I make a loan in my district in the Dallas Federal Reserve, the 11th Federal Reserve District, to a small agricultural bank that just needs money to tie them over overnight. Nothing is wrong with the bank, but they have a mismatch in their book. If I were to report that publicly, immediately, what kind of stigma might it place on what is otherwise a very sound bank? That's an extreme example.
I think we have to be careful with our transparency now. The laws have required us now to report things with a time lag. You don't want things to be misinterpreted. And we've moved a great deal along the path of transparency. I would argue this: We're going to be 100 years old next year. And only half-jokingly I say that nothing that's 100 years old should ever give a full frontal view to anybody else. It's very important for a central bank to maintain a bit of its mystique.
At the same time, we are a public institution. We work on behalf of the American people. And it's important to us, since we have a faith-based currency -- we're not commodity-based as some people would like; it's not going to happen, by the way, and neither is the Swiss franc, neither is the euro, neither is the yen, neither is the British pound -- to conduct ourselves in a way that engenders public confidence. …
[Isn't there a contradiction] if Citi is in real trouble, and the federal government is pumping lots of money into a bank like Citi or Bank of America and we don't know about it, and Tim Geithner is stepping forward with stress tests and saying everything's good because he's worried about confidence and he's worried about what happens if people get a slightest hint that Citi is collapsing and it needs a trillion dollars a day or whatever?
This is why we should not be put in a position where a few institutions are so dominant that we run that risk in the first place. There's a blessing to having diversification in all portfolio management of whatever kind you can imagine. And concentrated risk will lead you to sometimes make decisions that are counterproductive in the long run.
Now, I am not naming any specific decisions made by a specific official, whether it's Tim or Chairman Bernanke, or anybody else. But this is why we can't allow these institutions to have this kind of stranglehold on our economy. And by the way, it's not just our economy, it's a global economy. We are primus inter pares. We are the leading economy in the world, and as we have seen most recently, our central bank is really the lead central bank for the world at large. We have to make sure that we don't allow this to happen again.
If we don't do something about "too big to fail," what happens?
If we don't do something about "too big to fail," first we lessen the efficiency of our economy. Monetary policy cannot operate with the efficiency with which we would like to operate. We place those that are of lesser size at a competitive disadvantage. We undermine the sense of confidence that people need to have to make capitalism work. And we exacerbate extreme views that are suspicious of whether or not the system is rigged. …
... Was there concern over what the reaction of Congress would be if they understood the numbers, the trillions and trillions of dollars that were actually going out?
So how Congress would have reacted, I think it's hard to know. I think Congress tends to not be completely rational about the Federal Reserve. I think we set up a central bank -- basically every country in the world sets up a central bank precisely because in a financial crisis, you need a lender of last resort, someone that can provide that kind of liquidity. And it's the appropriate thing to do. It's why you set up a central bank.
But in the heat of the moment, I don't have complete confidence that Congress would have said, "Oh, I understand." There would probably have been some fallout. But I'm sure that's not what the Fed was thinking about. I think they were absolutely thinking of this idea that secrecy is important, precisely because you don't want people to be taking as a sign of a problem that a bank is getting a loan.
... What's your overview of the extent to which the government and the Fed bailed out the banks at this point? If Bloomberg can be believed, the standing figure is $7.7 trillion.
I have tried to understand that number. I really can't figure out how the number could have been anything like, at any one time, $7.7 trillion. That's basically the entire right side of the balance sheet of the entire U.S. banking system. That is not to say that the number was not large; it was huge, whatever it was.
But after all, the essential feature of central banking, ever since the Bank of England was created, is that the central bank is supposed to provide short-term liquidity when the markets freeze up. This is exactly what the Reserve Bank was supposed to be. These loans have to be well-secured.
So the government was never at risk, or at de minimis risk, on these loans. There's a whole protocol for this type of lending. And there was deep concern, and I think legitimate concern, that unless the banks were liquid, they would just stop lending.
There wasn't an increase in lending, but what you don't know is how much of a decline in lending. Without the liquidity, there would have been no prospect of continuing to lend, which would further have exacerbated the crisis.
This is an area where I think it's easy to criticize, but I think when you understand what is the role of the central bank, they did what they were supposed to do.
But do you understand the anger that was out there from Congress and such, that they were not told the extensive nature of the amount of money that was flowing?
... Congress had the chance to debate this very issue in Dodd-Frank [Wall Street Reform and Consumer Protection Act], and what they decided was that it would be too dangerous, too risky to confidence in the marketplace for there to be immediate disclosure. So there's a one-year time lag.
From now on, this will be disclosed. This issue was fully debated in Congress, and that was the decision. So for certain Congressmen/women to say that we're terribly distraught about all this undercuts the exact bill that they approved.
There is understandable anger about the whole crisis, but this is one which I think has been blown out of proportion.
So trillions of dollars, in secret, flowed out of the coffers of the taxpayers' money, out of the coffers of the Fed to these banks in secret. Why, number one? And what is the lesson to be learned from that?
Well, what should be clear is, TARP was the tip of the iceberg and that the Fed did announce a whole series of lending programs along with others like the FDIC [Federal Deposit Insurance Corp.] to stabilize the financial markets. What I don't think people have fully understood until recently -- you can read our report; you can see other aspects -- is the breadth of what happened here. And, you know, no matter what they say about money coming back, this was risk money. This was money of the taxpayers of the United States put out with the risk of loss.
And we did pay a price for it, because, to the extent the political capital has been used to stabilize the financial system, I think there's no question that that's inhibited the ability to seek the kind of assistance to rebuild our economy, to help homeowners. There's no question -- you know, the popular argument is, "Well, TARP made us money," but it also precluded us from moving forward and asking the people of this country to make the kind of investments to stabilize the housing market, to help homeowners, to create jobs that [were] necessary in the wake of this crisis. So we paid a dear price for TARP and for all the associated lending that happened out of the Fed.
The Fed and Treasury were approving enormous amounts of money that was flowing into these banks, banks that, by the way, at the same point were saying, "Hey, we're healthy; we don't even need the TARP money." TARP money is nothing compared to these low-interest-rate loans that they were getting. What are your thoughts about why that was felt it needed to be done, and why it needed to be done basically in secret?
So I think the important thing is the Federal Reserve in the fall of 2008 was basically the institution that was holding the financial system together and, because it's so important, holding the American economy together. And you will get no criticism from me about what [Chairman] Ben Bernanke and the Federal Reserve did in that period. When he was named Time's Man of the Year in 2009, I was in the car clapping, because I firmly believe that he played a crucial role in taking -- all of the initial shocks, the decline in the value of houses, the crash of the stock market, all of those things we were at least as bad as we were at the start of the Great Depression. And the reason we did not go to the kinds of horrible depth that we went in the 1930s is I think in large part because the Federal Reserve took incredibly extraordinary actions.
So I think that's the important part. And the way you deal with a system that's in the middle of a financial panic is to flood it with liquidity. It's what you teach your students, that if everybody decides that they're nervous and is trying to get their cash out of the system, that's exactly when -- even a perfectly healthy bank, right, that has its loans out and things, if everybody comes at once and says, "We want our cash," they say, "Wow, I've got to liquidate some of these very long-term assets that I have at fire-sale prices; I'm going to be insolvent."
And that's exactly the situation where you -- it's why you set up a central bank, so that in that situation, somebody can say: "You don't have to do that. We're going to get you the liquidity you need to deal with your depositors that are getting nervous." So that's the appropriate thing to do. And they were doing it.
In terms of why you do it in secret is precisely because -- we actually had some experience of this in the 1930s, that if you announce "This bank just got a really big loan," their depositors say, "Ooh, I guess they really are in trouble," and they start to run on that bank, so that in fact, there's a legitimate reason for not making that information available immediately when it's going on.
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