The true total of Federal Reserve emergency lending to Wall Street is not $1.2 trillion, as Fed Chairman Ben Bernanke contends, nor the $7.7 trillion figure reported by Bloomberg News, which Bernanke publicly contests.
The real number, argues economist L. Randall Wray, is a staggering $29 trillion.
Wray writes that Bernanke’s recent defense of the lower figure is “misleading” and that the chairman’s claim that Fed bailouts do not constitute a form of spending is plain wrong.
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“If he really believes the last claim, then he apparently does not understand the true risks to which he exposed the Treasury as the Fed made the commitments,” writes Wray, a professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College, NY.
|Fed Chair Ben Bernanke
(Getty Images photo)
He uses data compiled by Ph.D. students under his direction to make the case of Bernanke’s “obfuscation” of the facts about Fed spending during and since the 2008 credit crisis.
Wray argues that the various means of calculating the exposure of the Fed does provide plenty of ways to argue about what “commitment” means but that it is hard to avoid the full number and its effects.
“Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken,” he writes.
“At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank.”
That means that Bernanke’s view of the total underestimates dramatically the effect of all that cash into the system, Wray argues.
“Bernanke would like us to believe that if the Fed newly lent a trillion bucks every day for 3 years to all our drunken bankers that we should total that as only a trillion greenbacks committed. Yes, that provides some useful information but it does not really measure the necessary intervention by the Fed into financial markets to save Wall Street.”
The public dispute about the totals is in contrast to a concerted effort by the Fed to communicate more, not less, about its policies. Bernanke has instituted regular press conferences after Fed actions in an attempt to make its decisions more transparent.
This week, the Fed might even begin to publish a forecast of its future rate decisions, reports The New York Times.
If it decides to do that, such a plan would not be announced any sooner than its next meeting in January, the newspaper reports.
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