We all know about the controversial Troubled Asset Relief Program (TARP) which was worth $700 billion. This massive amount of money went to the big banks that were at risk for declaring bankruptcy, and some claim it was responsible for stopping a global economic catastrophe. On Monday, however, it was revealed that this program is dwarfed by the size of a separate government bailout that was run by the Federal Reserve. The program was called the TAF, or Term Auction Facility, that allowed the Federal Reserve to loan as much money as they wanted to needy banks at lower-than-market rates. Although the Federal Reserve is in existence for the purpose of being the “lender of last resort,” this program bears two huge distinctions from previous Federal Reserve emergency loans. No one had to know about it, and it was worth over $7.7 trillion, making it the largest bailout in history.
That’s right, while bank presidents were saying how stable their firms were, they were at the same time taking out massive loans from the Federal Reserve and neither the Federal Reserve nor the public had any knowledge of it. At one point, over $1.2 trillion in loans were outstanding at the same time. And they were all kept secret.
Understandably, people are getting upset. There seems to be a disconnect between the crowd that is outraged that the government had to shell out such a massive amount of money to bailout Wall Street and the Federal Reserve. The Federal Reserve has called the TAF program a monumental success since almost all of the loans have been repaid and there will likely be little to no cost to taxpayers. And they’re absolutely correct. The program was a success, yes, but it leaves me with a couple questions.
First, I’d ask how the Federal Government got their hands on over $7.7 trillion. This amount is so massive it is roughly equal to half of the country’s entire economic output. Since there’s no bank in existence with $7.7 trillion available to loan out, the Federal Reserve must have taken advantage of their ability to print money. This could exacerbate inflation, bringing on a whole new set of problems.
Secondly, this new information makes me increasingly worried about whether this crisis is over yet. The fact that banks even needed over $8 trillion (when TAF and TARP are considered together) to cover their toxic assets tells me that the size of this crisis was much larger than we originally thought. The issues behind the financial crisis of 2009 may not have been resolved and were much more serious than we previously thought.
Could it happen again? Considering how little has actually changed in financial regulations when compared to the enormity of the bailouts the banks needed, I would say it’s quite possible.