, I realized the story was incomplete without covering complementary actions taken by the
Unlike Treasury, the Fed does not require Congressional approval for its actions. In fact, the Fed is structured to have considerable independence in hopes that its policies will not be politically motivated.
To see what the Fed has been doing to counter the credit freeze and global recession, it is useful to examine its balance sheet. Table 1 includes selected balance sheet items for two dates - before and after the credit freeze/global recession.
Bernanke has kept the printing presses rolling: Reserve Bank credit has increased by 168% or $1.4 trillion since 2007. How has this credit been used? The Fed has played a major role in keeping the Federal housing agencies afloat by purchasing $1.1 trillion of their mortgage-backed securities. AIG currently has a loan of more than $23 billion from the Fed. In addition, the Fed has purchased $95 billion of AIG's holdings.
The Asset-Backed Securities Loan Facility (TALF) was created on November 25, 2008. It functioned in a similar manner to the Treasury's PPIP program covered in
. From the outset, TARP was not popular with many economists, and it is being terminated. The Fed has also made sure that its branches and the Treasury had plenty of liquidity.
What should happen to the federal agency and AIG assets held by the Fed? Probably the best thing would be to wait a while. There is a real estate cycle, and at some point it will turn up again.
As indicated in my assessment of TARP in Part 3, I believe more use should have been made of the Fed's ability to make and guarantee loans at the outset of the banking crisis. Paulson only used the Fed to bail out AIG when the crisis hit. Three important weeks were then wasted as the credit crunch worsened before Congress authorized TARP.
Elliott Morss is an economic consultant and an individual investor in developing countries. He has taught at the University of Michigan, Harvard University, Boston University, among other schools. Morss worked at the International Monetary Fund and helped establish Development Alternatives Inc. He has co-written six books and published more than four dozen articles in professional journals.