Fed Forced to Reveal Recipients of Loans

Have you ever wondered which banks were actually in trouble during the 2008 financial crisis?  Well, now we will know.  Using the argument that TARP (Troubled Asset Relief Program) recipients had to be kept secret in order to keep the public from staging a bank run on the weak ones, the Federal Reserve refused to reveal them.  That is, until now, when the Supreme Court left intact a court order for the Fed to comply within five days.  That means Friday.

Only Congress has the power to coin money.  Its delegation to the Fed of this powerful tool implies that the Fed is accountable to Congress, and thus indirectly to us.  The Fed has the ability to create money out of thin air, among other magical powers.  The particulars are fascinating, if for no other reason than that no sane person would think it a good idea.  That is, unless he/she were a beneficiary of the Fed’s policy.

All along the rocky road to recovery, which we still seem to be negotiating, the Fed has told us that they prevented another Great Depression.  I have had my doubts since the whole thing transpired.  Being an advocate of free markets, I believe that failure is a good thing.  It purges inefficiency and ineptitude.  So why not let the banks that participated in questionable lending practices like liar loans and daisy-chain derivatives experience the consequences of their decisions?

Turns out they are special.  “Too big to fail,” specifically.  The Fed essentially said, “Yes, you screwed up big time, but we’ll fix things up for you.”  Never mind that some banks did not need bailing out because they had not been imprudent in their practices.  Never mind the fact that taxpayers were now on the hook for billions.  It all works out, and by the way, no need to see what we actually did in detail.  That’s our business.

There are two lessons to be gleaned from this.  First, markets cannot function when a governmental power overrides them.  Banks have absolutely no incentive to rein in their questionable risk-taking when they know they will be bailed out.  Rewarding poor performers and punishing good ones is logical only in the strange world of government oversight.  Second, no business could possibly get “too big to fail” under true free market capitalism.  Businesses, including banks, that had to compete honestly would find it near-impossible to attain the size we see in these institutions today.

Last, why might the Fed be embarrassed about which banks received help?  The Fed is neutral concerning players in the market, right?  I would be shocked (SHOCKED!) to find that they had favored some over others.  Guess we’ll see on Friday.

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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