Financial Times: The Fed Foreign Bank Gifting

From the Financial Times:

“In other words, the Fed’s new data show it was well aware of the crisis, and had the ability to lend tens of billions of dollars, but it opted to lend primarily to non-US banks. It lent a lot to Bear Stearns, and not as much to Lehman. This is not to say the Fed should have rescued Lehman, too, but rather that the data do not support claims about its own timing and impotence.

“An even more troubling conclusion from the data is that – given who the borrowers were, what collateral they posted, and what interest rates they paid – it is now apparent that the Fed took on far more risk, on less favourable terms, than most people have realised….

“The Fed charged low rates, often almost zero per cent. It says these rates were justified because loans were “fully secured”. However, unlike some Fed disclosures, the data include only the face amount of the collateral, and vague categorical labels. The Fed admits some collateral was inadequate. But without more details we can’t know whether the loans were fully secured, or whether the Fed, by lending at low rates without adequate collateral, was effectively gifting money to borrowers around the world.”

 These loans may have been, effectively, the beginning of the Fed’s policy of money printing.

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