What Exactly Did the Fed Do with $2 Trillion?

To combat the financial crisis set off by the collapse of the housing bubble, the Federal Reserve Board
has lent out more than $2tn through various special lending facilities.
While the Fed discloses aggregate information on the loans made through
each of the facilities, it will not disclose how much money it lent to
specific banks or under what terms. By contrast, the Treasury puts this
information about its $700bn TARP bailout up on its website.

in response to this huge increase in the Fed's power (its secret
lending is equal to two-thirds of the federal budget), more than 270
representatives in Congress have co-sponsored a bill that would have
the Government Accountability Office audit the Fed. In principle, this
audit would examine the Fed's loans and report back to the relevant
congressional committees, which could decide to make this information

Most people might consider it perfectly reasonable to
have Congress's auditing arm review what the Fed has done with $2tn of
the taxpayers' money to ensure that everything is proper. After all, we
wouldn't let other government agencies spend one millionth of this
amount ($2m) without some sort of record that could be verified.

However, the Fed and its chairman Ben Bernanke, do not see it this way. Bernanke warned Congress
last month that such an audit could jeopardise the Fed's independence,
which in turn, "could raise fears about future inflation, leading to
higher long-term interest rates and reduced economic and financial

OK, Bernanke warned Congress that if the Fed had less
independence, it could lead to "reduced economic and financial
stability." We have just been through a year in which the Great
Depression was a more frequent topic of conversation than the
Superbowl, World Series, and Oscars combined. In fact, Bernanke is
given credit for preventing another Great Depression. The Congressional
Budget Office is now projecting that unemployment will average in the
double digits throughout 2010 and it will not be until 2014 that the
unemployment rate falls back to its normal level.

Did Bernanke
forget about the current state of the economy and the financial
collapse that he was frantically trying to head off when he warned
Congress that if the Fed were less independent, it could lead to
"reduced economic and financial stability"? After all, how do you get
less economic and financial stability than the Great Depression?

is not the first time that Bernanke's memory appears to have failed him
when addressing Congress about an important policy issue. Last
September, when he was telling Congress that the economy would collapse
if it did not approve the $700bn TARP bailout, he warned that the
commercial paper market was shutting down. This was hugely important
because most major companies rely on selling commercial paper to meet
their payrolls and pay other routine bills. If they could not sell
commercial paper, then millions of people would soon be laid off and
the economy would collapse.

What Bernanke apparently forgot to
tell Congress is that the Fed has the authority to directly buy
commercial paper from financial and non-financial companies. In other
words, the Fed has the power to prevent the sort of economic collapse
that Bernanke warned would happen if Congress did not quickly approve
the TARP. In fact, Bernanke announced that the Fed would create a
special lending facility to buy commercial paper the weekend after
Congress voted to approve the TARP.

Bernanke has taken
extraordinary measures in the last year that have been successful in
preventing a much worse downturn. Nonetheless, Congress should not
forget that it was incredible mismanagement by Bernanke and his
predecessor Alan Greenspan
that brought about this disaster in the first place. If Bernanke is
approved for another term, as seems likely, Congress should not
hesitate to use more oversight than it did in past years. And, it
certainly should not let the Fed send $2tn out the door without a
verifiable paper trail.

Given the track record for Bernanke's
version of bank independence, it is hard to imagine that greater
congressional oversight would lead to worse outcomes.

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