Eric Hanneken's Library tagged "Federal Reserve" →  View Popular

Regulatory agencies exist to lean against the wind. But rather than looking for warning signs, the Fed had joined -- and at times defined -- the mainstream consensus among policymakers that financial innovations had made banking safer. Bernanke said the economy had entered an era of smaller and less frequent downturns, which he and others called "the great moderation."

The consequences of this miscalculation can be seen in the stories of three large banks the government ultimately rescued from collapse.

After less than a week of private negotiations
with the banks, the New York Fed instructed AIG to pay them par,
or 100 cents on the dollar. The content of its deliberations has
never been made public.

The New York Fed’s decision to pay the banks in full cost
AIG -- and thus American taxpayers -- at least $13 billion.
That’s 40 percent of the $32.5 billion AIG paid to retire the
swaps. Under the agreement, the government and its taxpayers
became owners of the dubious CDOs, whose face value was $62
billion and for which AIG paid the market price of $29.6
billion. The CDOs were shunted into a Fed-run entity called
Maiden Lane III.

The Fed's apologists suggest otherwise, of course. They note that the US spent nearly half the years between 1854 to 1913
in recession, as opposed to just 21 percent of the time since the Fed's establishment in 1913. Who would want to go back to
those bad old days?

But consider: the US economy has actually grown less rapidly since 1914 than it did before. And inflation has been much worse,
despite both the Civil War, which featured the nation's worst inflation, and the Great Depression, which featured its severest
deflation!

What's more, the frequent downturns before 1914 were due, not to the lack of a central bank, but to foolish government regulations.
Topping the list were bans on branch banking, initiated by state governments and then incorporated into federal banking law.
The bans propped up thousands of undercapitalized and under-diversified banks – banks unfit to survive major local shocks,
let alone macroeconomics ones. They also caused bank notes – competitively supplied counterparts of today's Federal Reserve
notes – to trade at discounts whenever they traveled far from the solitary offices of banks that issued them.

U.S. taxpayers may be on the hook
for as much as $23.7 trillion to bolster the economy and bail
out financial companies, said Neil Barofsky, special inspector
general for the Treasury’s Troubled Asset Relief Program.

The Treasury’s $700 billion bank-investment program
represents a fraction of all federal support to resuscitate the
U.S. financial system, including $6.8 trillion in aid offered by
the Federal Reserve, Barofsky said in a report released today.