Posted on 08/21/2014 6:58:15 AM PDT by mgist
So this guy from (let's say) Morgan Stanley walks into a bar.
He orders drink after drink. Downs a dozen or so high-quality glasses of Scotch. Does a few shots of tequila. Maybe grabs a beer at the end of the night.
The bar manager sees the condition the guy is in, takes a look at his tab. Sees the total amount of drinks he’s been served. Grabs the bartender aside and asks him a question.
“Bartender Ben, how many drinks did you serve that guy?”
“Just one,” Bartender Ben says.
“Ben! Be straight with me. I’m looking at his tab. Scotches. Shots of Jurado Tequila. A pint of Six Point. You served him a lot more than one drink,” the manager says.
“You’re looking at it wrong, my friend. You are adding up all the drinks I served him over the whole night. But at any one time, I only served him one drink,” Bartender Ben explains.
Just then the guy from Morgan Stanley looks up. His glass is empty again. “Bartender,” he says. “I’ll have a another.”
“See,” says bartender Ben. “Just one at a time.”
Quite obviously Bartender Ben’s position is absurd.
But something like this position was on display last week when the Federal Reserve criticized reports claiming that the total size of its emergency facilities was $7.77 trillion. The Fed argued that these reports overstated the size of the facilities because they added up all the loans extended despite the fact that many were short term loans that we simply rolled over. According to the Fed, the best thing to do is look at the total amount outstanding at one one time, which was just $1.7 trillion.
Just like the guy who only had one drink…at a time.
The counter to this is that the need to keep borrowing under what are supposed to be short term facilities shows just how badly financial institutions were faring during the financial crisis.
“The amount of overnight lending reflects how broken our financial system really is. A well capitalized, moderately leveraged system does not require this massive liquidity from a central bank — interbank lending should be sufficient. What the data reveals is that the financial sector remains dangerously under-capitalized and overleveraged,” Barry Ritholz writes at the Big Picture.
Recently, a pair of PhD students at the University of Missouri-Kansas City tried to assess the total size of the Fed’s commitments—not just loans made, but asset purchases as well. The bottom line: a Federal Reserve bailout commitment in excess of $29 trillion.
That figure has, in turn, been criticized by economist James Hamilton who argued, incredibly, that the Fed’s bailout commitment under one facility was zero because all the money was paid back.
From an email sent to monetary theorist and Fed critic Randall Wray:
“Felkerson [one of the UM-KC students] 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.” Just like our drunk guy from Morgan Stanley. He never drank a drop. Because at the end of the night his glass was empty.
Wray on why this is nonsense.
But in fact, the Fed lent “overnight” on a chronic basis to our liquidity chugging banks because they could not fund themselves in markets at the interest rate they desired. So the Fed “accommodated” by pouring the cheap whiskey over and over and over—for weeks, months, even years on end. To get a measure of this chronic abuse of overnight lender-of-last-resort facilities it does make sense to add up across the loans. That is a far better measure of the extent of the Fed’s efforts to bail out troubled banks—who should be expected to fund themselves in markets, not at the lender-of-last-resort!
In other words, these big numbers are real and they really matter.
It’s not just rabble rousing populism to point out that the Fed went far beyond its role as a lender of last resort or a provider of short term liquidity. And the only way to really show this is to show the cumulative totals.
In other words, to show the bar tab.
Even if the hypothetical drunk guy pays his bill in total, he still got served all those drinks.
Of course the money was paid back.
> Just like our drunk guy from Morgan Stanley. He never drank a drop. Because at the end of the night his glass was empty.
It seems that the true answer would be to determine how much money (like alcohol in the drunk) is left over in the system after the night is done. Money not backed by physical assets is just an accounting creation.
What a racket they have going there.
The bailout goes on every single day. It goes on in the form of inflation, and zero percent interest rates. If someone had 100,000 in savings then they have lost 5 thousand a year since about 2007. That is 35 thousand dollars stolen- not counting compounding. Just one person.
You said it!
I'm, perhaps, foolish enough to consider myself better informed than average about the goings on in the world, but I, frankly, am subject to precisely the same "Glaze Factor" (i.e., "MEGO," as in "My Eyes Glaze Over") when it comes to the off-the-books finances of the federal government.
I get the alcoholic analogy, but isn't the bartender at all concerned about his tip?
This story was originally published in 2011.
Apparently this writer isn’t familiar with the concept of revolving credit. Just how much credit card money have you borrowed over the years—on just one card?
Was the money paid back? How? In what form?
I am just a down to earth smuck, I have 4 apples and I eat one apple and I have 3 apples left.
I give you 2 apples, you eat those 2 apples you have to then purchase or trade someone with apples to pay me back those 2 apples plus interest.
Who ended up with the $29 trillion? Was a real $29 trillion dollars (apples) or was it debt erased?
I read articles like this and I am more confused about the FED than before reading it.
Yes. In the same form it was borrowed, dollars.
Who ended up with the $29 trillion?
The Fed lent money overnight. It was repaid the next day and relent. If you borrow $1000 and repay it and we repeat the loan/repayment for 100 days, did I lend you $1000 or $100,000?
Just the fact that the numbers have never been reported or tracked in a clear manner is an indication that something is amiss.
The inititial “bailout” approved by Congress was intended to be $700 BILLION.
The Federal Reserve paid out the rest of the money, with $3 TRILLION going overseas.
according to this article the bail outs are ongoing.
” $29 Trillion is around twice the size of America’s GDP.
The Federal Reserve claims they only lent $1.7 Trillion to the big banks.
Why the huge difference in totals? Because the Fed only counts the most outstanding at any one time.
Here’s a quick list of the Fed borrowers:
Citigroup - $2.513 trillion
Morgan Stanley - $2.041 trillion
Merrill Lynch - $1.949 trillion
Bank of America - $1.344 trillion
Barclays PLC - $868 billion
Bear Sterns - $853 billion
Goldman Sachs - $814 billion
Royal Bank of Scotland - $541 billion
JP Morgan Chase - $391 billion
Deutsche Bank - $354 billion
UBS - $287 billion
Credit Suisse - $262 billion
Lehman Brothers - $183 billion
Bank of Scotland - $181 billion
BNP Paribas - $175 billion
Wells Fargo - $159 billion
Dexia - $159 billion
Wachovia - $142 billion
Dresdner Bank - $135 billion
Societe Generale - $124 billion
“All Other Borrowers” - $2.639 trillion
Do you have a quick list of the payments made back to the FED?
But they have been.
The inititial “bailout” approved by Congress was intended to be $700 BILLION.
Yes, for TARP. The Fed lending is separate.
according to this article the bail outs are ongoing.
It's 3 years old.
Because the Fed only counts the most outstanding at any one time.
How should they count it? You borrow $1000...pay it back, borrow $1000 more. How much did you borrow?
Take the same numbers, add a bit of interest, that's the payments made back to the Fed.
I pretty much figured that. The credit card analogy seems pretty good here. I pay mine off every month. $200 give or take for 12 months doesn’t mean I went $2400 in debt last year because I start at zero every month.
Exactly!
In that scenario you lent me a total of $100,000 and I paid you back $100,000 but never was more than a $1000 outstanding.
What is the purpose of borrowing money overnight if the FED knows they have that money the next day?
Who profits off of these loans and how do they profit?
At the end of a business day, banks need a certain amount of reserves to support their loan books. If they're short, they can borrow Fed Funds overnight from another bank. During the crisis, all the banks were short, so they borrowed overnight from the Federal Reserve Discount Window.
Who profits off of these loans and how do they profit?
The lender (Federal Reserve) profits by charging interest on the loan.
Sorry but where I come from this is called Cleptocracy, looting, white collar crime,.....
The Fed’s $16 Trillion Bailouts Under-Reported
The media’s inscrutable brush-off of the Government Accounting Office’s recently released audit of the Federal Reserve has raised many questions about the Fed’s goings-on since the financial crisis began in 2008.
The audit of the Fed’s emergency lending programs was scarcely reported by mainstream media – albeit the results are undoubtedly newsworthy. It is the first audit of the Fed in United States history since its beginnings in 1913. The findings verify that over $16 trillion was allocated to corporations and banks internationally, purportedly for “financial assistance” during and after the 2008 fiscal crisis.
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